Restructure home-mortgage debt

Feb. 1, 1999
One way to build a bigger retirement nest egg is to restructure debt to increase cash flow. Take out a 30-year, rather than a 15-year, home mortgage. The advantage: You will have more money to invest. You can put the amount you save on monthly payments into a tax-deferred account - e.g. a qualified plan, IRA, etc. The biggest danger with this strategy is that you might be tempted to spend these new-found monies.

Hugh F. Doherty, DDS, CFP

One way to build a bigger retirement nest egg is to restructure debt to increase cash flow. Take out a 30-year, rather than a 15-year, home mortgage. The advantage: You will have more money to invest. You can put the amount you save on monthly payments into a tax-deferred account - e.g. a qualified plan, IRA, etc. The biggest danger with this strategy is that you might be tempted to spend these new-found monies.

Imagine two doctors who are home-buyers with $150,000 mortgages. Both were in the 39 percent combined federal and state income-tax bracket. One doctor took out a 15-year mortgage at 7.5 percent interest. Annual payments cost him about $17,000. Then, during the 15 years after he had paid off the mortgage, he invested about $25,000 a year in a tax-deferred account earning 10 percent annually. He was able to invest sums larger than his previous mortgage payments because he used pretax dollars.

The other doctor had a 30-year mortgage charging 8 percent interest. Each year throughout its term, he invested the amounts he saved by opting for the longer mortgage`s lower payments. Like the other doctor, he put his money into a tax-deferred account earning 10 percent annually.

After three decades, the doctor with the 30-year mortgage had accumulated $1.17 million, while the doctor with the 15-year loan had amassed $791,000 (about $379,000 less). After paying income taxes, the 30-year mortgage-holder still was ahead by nearly $254,000. The advantage of a 30-year mortgage increases with the size of the loan and the tax bracket of the homeowner. Someone in the combined 41 percent tax bracket holding a $200,000 mortgage would accumulate an additional $639,999 with a 30-year loan - again based on investing the difference in monthly payments into a tax-deferred account and earning 10 percent annually. One of the best companies to help you restructure debt is The Matsco Company, (800) 326-0376.

Don`t wait - do it now!

You will gain a significant advantage by making plan contributions at the beginning of each year, rather than waiting until tax deadline of the following year. For example, a 40-year-old doctor puts away $25,000 a year for 25 years. If you assume an annual growth of 8 percent, the result will become nearly $2 million - that is, if the contribution is made on January 1 of each year. But if the doctor always waits until the last filing extension (which might be in the fall of the following year), he/she will have about $300,000 less after 25 years.

Qualified plan administration

Work only with an actuarial firm whose sole function is to devise and administer qualified retirement plans totally independent of any relationship with a money manager. Retirement-planning administration is an annual process that needs special attention. Otherwise, it could cause you to lose out on many future retirement dollars.

How safe is your life insurer?

It is very important now to check on an insurer`s soundness before signing up for a new life-insurance policy. This should be done also to assure yourself about an existing policy. What`s at risk? In the early 1990s, about two million U.S. policyholders couldn`t get their money out of life-insurance policies written by failed companies, and they ended up having to accept 50 cents on the dollar for inferior policies.

Two of the warning signs:

(1) Check to see if the insurer is heavily invested in junk bonds

(2) Is the insurer heavily in debt?

Ask your agent to verify that the insurer is top-rated by at least two rating services.

The five largest, top-rated life insurers:

(1) Northwestern Mutual - A+

(2) State Farm Life Insurance - A+

(3) New York Life Insurance - A

(4) Teachers Insurance and Annuity Association of America - A (limited to education-sector employees and their families)

(5) Metropolitan Life Insurance - A-

Best bet: Use A.M. Best Company`s Web site, which rates insurance companies: www.ambest.com.

Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, contact him at (800) 544-9653. E-mail: [email protected]. Web site: www.dr.hughdoherty.com.

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