Q. My wife and I are considering paying off our mortgage and would like your opinion. Here are the stats: I am 54. My wife is 57. Our combined income is $330,000. My wife will likely retire in three years with a small federal pension. I will probably work another six to eight years. We have no debt other than the mortgage.
Our daughter is living on her own. We have about $2 million in savings. We max out our IRAs, my 401(k), and her Thrift Savings Plan. On top of that, we put $3,500 in a Vanguard account every month.
We owe $100,000 on our mortgage. It is a 15-year mortgage that we took out four years ago. The payment is $1,600 per month but we add $1,000 to principal reduction every month. Our interest deduction is about $3,300 a year and the interest rate is 3.25 percent. Our property taxes are about $9,000 a year.
We just liquidated a non-performing brokerage account, so we now have about $100,000 in cash. We also have $33,000 in a savings account. It earns nothing, of course. Your thoughts? —J.B., by email
A. Unless you have unusual medical expenses or make significant charitable donations, it’s safe to say that your mortgage interest deduction isn’t providing you with any tax benefit. In addition, the mortgage payoff amount, $100,000, is small relative to both your annual income and your current savings rate. It’s also a tiny relative to your accumulated savings.
So paying it off will increase your cash flow, have little or no effect on your tax bill and provide you with a significant peace of mind dividend. Meanwhile, paying off the mortgage will provide you with an effective “yield” on your non-interest payment that is greater than the 3.05 percent yield on a 30-year U.S. Treasury bond.
You have every reason to pay it off, and no reason not to.
Q. I need a suggestion from you, knowing that there are no guarantees in investing. My wife and I have our IRA money in a PNC Capital Directions account. With a 1.4 percent fee they are charging more than $4,000 a year for a fund of about $315,000. After fee withdrawal we get almost no gain for our risk.
My wife is in a nursing home. Paying for that means I need to do the best I can with our money. Can you suggest one or more lower fee funds that would have the approximate balance and risk of Capital Directions? —R.B., Cuyahoga Falls, Ohio
Q. Capital Directions is an investment advisory program from PNC Bank so you are paying 1.4 percent for the portfolio advice. This does not include the expenses of the mutual funds or ETFs that are used to build your portfolio. As a consequence, your total cost is higher than 1.4 percent a year. I can’t tell you how much a comparable risk portfolio would cost since you didn’t mention the asset allocation of your portfolio with Capital Directions.
Here are some options for you to consider:
• If you feel comfortable with investing via the Internet and phone conversations: Invest in a single mutual fund that is balanced and managed. Vanguard Wellington Admiral Shares (ticker: VWENX) is a traditional balanced fund with 60 percent equities and an expense ratio of 0.18 percent. That 0.18 percent would be your only cost. It has provided top returns for many years. Vanguard Wellesley Admiral Shares, (ticker: VWIAX) is a more conservative balanced fund with 40 percent in equities and the same expense ratio as Wellington fund. Like Wellington, it has been a top performer for many years. Morningstar rates both 5 stars. If you are taking more than 5 percent a year from your investments, it would probably be better to take the more conservative fund. This would save you at least 1.4 percent a year.
• If you want to speak with a person to start your account: Make a trip to the Schwab office in nearby Akron and inquire about having one of their “Intelligent Portfolios,” a new service from Schwab that does automated portfolio management using low-cost exchange traded funds. There is no direct fee for this service. In a call to Schwab I was told that the typical average expense ratio of their portfolios was 0.28 percent.