The Hidden Risk in Playing it Safe

When market volatility rises, many of us instinctively pull back, stick to cash, and play it completely safe.

But what if the conservative approach is actually the one putting your long-term goals in jeopardy?

In our latest video, The Hidden Risk in Playing it Safe, we review why trying to avoid all risk can potentially cost you more in the long run, and how to find the right balance.

Watch the video!

Transcript

A client called us a few years back. They were a few years out from retirement, and they said they wanted to take risk off the table. So they sold all of their investments and paid off every debt they had, including the mortgage.

When it was done, almost every dollar they owned was sitting in a house they couldn’t spend. We told them we thought it was a mistake. They went ahead with it anyway.

Hi, I’m Mike McCarthy from Consulate Wealth. I spend most of my time working with people nearing retirement, and here’s the order this client went in. Sold the investments, cleared the debt, then paid off the house.

Is Paying Off All Your Debt Before Retirement Always a Good Idea?

I understand why it felt right. On paper, it looks like the safest plan you could build, but here’s what didn’t get counted. They had no way to reach their money and nothing left to keep pace with what things would cost 20 years from now.

So today I want to talk to you about what happens when you remove risk all at once.

The Risks of Having Too Much of Your Retirement Savings in Home Equity

The first problem is that equity in a house isn’t real wealth. It’s not spendable wealth. Getting it back means selling the house, borrowing against it, or getting a reverse mortgage. Remember, borrowing after you’ve stopped working isn’t easy. Lenders don’t look at retirement income the way they look at traditional paychecks.

There’s a timing problem too. You usually need cash exactly when something has gone wrong, which is the worst moment to be listing a house or applying for a loan. There’s a tax cost as well.

What Are the Tax Consequences of Selling Investments to Pay Off Your Mortgage?

Selling investments or pulling from a retirement account to pay off a mortgage adds to that year’s income, and the bill can show up the following April. The second problem is slower to hit. It does just as much damage.

How Inflation Can Affect Your Retirement Savings and Purchasing Power

Someone retiring in their early 60s may need this money to last three decades, and what groceries and insurance cost today isn’t what they could cost in 20 years. Cash and the home equity don’t grow to keep pace with that. Getting out of the market removed one kind of risk, but it also introduced a slower one that compounds for the rest of a person’s life.

What Should You Consider Before Paying Off Your Mortgage in Retirement?

Here’s a question to ask yourself before you make this move. If you needed a significant amount of money in the next few months, where would it come from? What would it cost you to get it?

Paying off a mortgage can be a perfectly reasonable decision on its own. What determines whether it’s the right one is what you sell to do it, and what the coming tax bill looks like next year.

Why Tax Planning and Investment Planning Matter When Preparing for Retirement

It comes down to what you have left once it’s finished. This is exactly the kind of decision we walk through in the Financial Physical®, since it’s a tax question and an investment question happening at the same time. Everything that the client owned ended up in a house and a checking account.

It felt like the safest place to be, and in a lot of ways it was, but money wasn’t growing or keeping up with inflation. I’m telling you this because decisions like this can get made quickly, and they’re hard to undo once they’re done. Are you getting close to retirement and leaning toward a move like this? Get a second set of eyes on what it does to the rest of your plan.

You can reach our team at 410-823-7283 or at consulatewealth.com.