Ep 26: Mortgage Management

Ep 26: Mortgage Management

The Smart Take:

Most financial people only focus on your assets. Listen to Kevin share four examples of clients where better incorporating a holistic view of their finances — assets and liabilities included — made a significant financial improvements in each of their lives.

Prefer to read? See below for the transcript of the show.

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The Host:

Kevin Kroskey – AboutContact

Introduction:                     00:03                     Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.

Walter Storholt:                00:16                     Thanks for being with us once again on Retire Smarter back for another podcast. Are you? Walter Storholt here alongside Kevin Kroskey. Kevin, what’s going on in your world this week?

Kevin Kroskey:                  00:24                     Well, this week I had one heck of a week, Walter. Oh,

Kevin Kroskey:                  00:27                     Briefly kind of share something that my family went through, but, and my dog, my oldest, we have two dogs. We have two dogs. Yeah. So, we had Sir Pickwick Bear of Royalton who we affectionately called boogie and my wife and I got boogie in 2005 just after we bought our first home together. And he was nearly one month of my shy of 14. And for a big dog that typically those 10 to 12 you know, he was, he was definitely up there and he wasn’t just a dog when he was, I would try trying to do this without tearing up, but he was just fantastic. If we could clone this dog, we totally would have. And you know, we have another dog, Hardy. And I love Hardy. Don’t get me, wrong man. Let’s just say I love boogie just a little bit more

Walter Storholt:                01:13                     You can say that about not about kids, right?

Kevin Kroskey:                  01:15                     I’ve heard it about both quite frankly, but so 14 and he’s, he’s probably been gone now for a couple of weeks in the sense that you still walking around but going through the motions and man, I mean, we obviously knew what was coming and I didn’t think I was going to have a difficult time doing it, but we had to take him in and we got them to the point where he was going to be able to be okay and we were going to be able to take them home. And my knee jerk reaction was when the vet asked me if I’m going to take him home or we’re going to euthanize. And I immediately said, we’re going to take them home and whew. And so, my wife and I were in the exam room and they came back to kind of wrap us up.

Kevin Kroskey:                  01:59                     And my wife, I just had a heart to heart and we feel like we did the toughest thing but the right thing and the main thing and, and we let them go and we did euthanize them and we were there for a few hours that night. And as you can probably tell by me, I’m choking up a little bit right now. I mean I cry like a baby while he did it, but oh my gosh, it was so hard, so hard to make that decision and, and to do it in the, let them go. And I don’t know, thank you for, I guess this is my podcast, but I appreciate whoever’s listening to this to give me a few minutes to go ahead and just share it. But you know, nobody ever likes to lose a loved one, be it a four-legged variety, or somebody else that’s important to them.

Kevin Kroskey:                  02:43                     But it was a much tougher decision than what I could have imagined doing and to actually make that decision. And like, obviously we can do that with our animals. We can’t do it with our two-legged loved ones. But it was incredibly tough. And I always will say whenever we go through the estate planning process, when you’re picking your healthcare power of attorney that you need somebody with a little bit of hair on their behind so they can make a tough decision. And well, not to be crass, but I thought I was one of those that had some hair on his behind and it was way tougher than what I could imagine. So, for whatever that’s worth a for anybody else that’s gone through that, whether, you know, make it an end of life decision for anybody that they cared about, it’s tough. I definitely have some perspective now.

Walter Storholt:                03:29                     Yeah. Pets become a major part of our lives and I know any pet lover out there certainly can identify with you at this moment. I’m sure Kevin, I remember watching my parents had to put their longtime dog and the one that they’d got while I was in high school, but they were much closer to the dog just because they lived with it for another many, many years after, you know, I moved off to go to college and whatnot. And actually it, Minnie was her name and passed away while we were visiting them and getting ready to get married. My now-wife, we were touring venues and whatnot for our you know, a ceremony that we were planning out for a few months from then and she passed away while we were there. So it’s a tough thing to see somebody go through and to go through yourself and if it’s that hard and that emotional for a pet, imagine when it is a loved one.

Walter Storholt:                04:14                     And so you bring up a great point, a loved one of the two-legged variety. And like you mentioned, imagine how tough it is to move past something like that to deal with the issues. I know we’ve got some family members right now who are planning in advance for when that day comes and those tough conversations are happening on the front end and although it’s tough, it’s helpful to communicate on those kinds of things. And I know part of what makes it tough with pets is that inability to communicate, right? Isn’t that the hardest part? Not being able to kind of say what you really want to say and be able to get some sort of response back in the moment.

Kevin Kroskey:                  04:48                     Well, yeah, I mean, so they, I’m not sure if I follow it, but you’re just saying that they can’t talk. Is that what you mean?

Walter Storholt:                04:53                     Yeah, that’s all I’m saying. Yeah, it makes it goodbye even harder.

Kevin Kroskey:                  05:00                     Sure. You know, I was recording this in my office and you know, family pictures and pictures of my dogs throughout the office. And I probably should’ve mentioned this during our last podcast episode, Walter, we were actually talking about estate planning and it may have been a better lead-in, but I just saw a picture of Boogie and just wanted to share. So I appreciate everybody for, for listening, I guess to make the transition less awkward. A, well, we’re going to talk about today.

Walter Storholt:                05:31                     See I, I was trying, I was trying to ramble for a couple of moments there, Kevin, to give you a chance to, you know, take a deep breath, but then I threw it back in your lap so you can blame this one on the host. I threw it right back in your lap when I should have turned the page for you. So I appreciate your telling this story though.

Mortgage Mismanagement Discussion

Kevin Kroskey:                  05:46                     Yeah, thank you. Thank you, Walter. So we’ll, we’re going to talk about today our, I’ll call it mortgage mismanagement or proper mortgage management or I don’t know what the working title is yet, but it’s about mortgages or a four-letter word called debt specifically mortgage yet. And we’ve had a lot of clients, they just coincidentally over the last couple of weeks, I’ve had a lot of client meetings where we were dealing with a mortgage and there was, you know, Hey, here’s what I’m thinking about doing and you know, what do you think? And literally in all four, we did something different than what the client was thinking. So, and all of them are a little bit different in how they were applied and who they were applied to. So, you know, a lot of smart people make bad decisions with debt, particularly because it is an emotional thing for many, many people. A lot of people don’t like being in debt. Some religions preclude being in debt or borrowing. So I figured we can talk about those stories today, Walter.

Walter Storholt:                06:40                     My ears are perked up because you talk about, you know, mortgage mismanagement and I’m kind of saying what is there to manage? The deal is done. I’m just paying the monthly mortgage so my ears are perked up. I’m interested to hear the stories of what’s going on.

Kevin Kroskey:                  06:55                     Well, let me use an example of saying a company. So, you know, I mean, I am a business owner here and you know, we, we earn money and then we have profits and we can do some different things with these profits. But even think about it, maybe a better example, like a big company, Goodyear here in Northeast Ohio or Babcock and Wilcox or something like that. And when you look at the company CFO, they can basically do a few different things with the profits that they make. They could go ahead and invest in a new project or buy another business, mergers, and acquisitions. They could pay down debt, they can buy back their stock, buy back shares, or they could pay dividends to shareholders. So there’s only about a handful of things that they can do. But what that CFO, the company is doing is basically managing the company’s balance sheet.

Kevin Kroskey:                  07:42                     You know, they’re looking not only at their assets, which quite frankly is what most financial advisors do. They just typically look at one part of the balance sheet, but they’re not looking necessarily at the liabilities and managing that part as well. And it’s really important in the mortgage aspect of it. You know, the same thing for our clients. If you look at their total balance sheet or what is maybe more commonly known as their net worth statement, you’re going to have assets. Some of those assets are liquid, like your investment accounts and the cash at the bank. Some of them are not liquid like real estate that you may own or maybe equity that’s, you know, within your primary residence or in a rental property or commercial property that you may own. Or maybe there are some other illiquid assets, like a collectible car artwork or, whatever it may be.

Examples of Debt Management that is Contrary to what the Client was thinking.

Kevin Kroskey:                  08:32                     But you get the idea. But some of those assets may have liabilities leaned against them or you could potentially have an unsecured loan that’s out there. And frankly, we do have some doctors that have bought into different practices that are, where they can get really favorable rates from these banks and actually have this unsecured debt. So particularly in cases like that, we’re always at the debt and managing the debt as well as the assets. So you’re really kind of managing the overall balance sheet of a client. But most people don’t think about it that way. But let me just kind of rattle off a few different examples that we have here. So, the first one was for the husband and wife in their mid-forties so really just starting to get, you know, more serious about retirement. I mean accumulated a good chunk of money, you know, about a half a million dollars already in their forties but they were worried about really just having some more time with the kids having a shorter commute, balancing, you know, kind of climbing the corporate ladder versus having some, you know, time for themselves at times for the family.

Kevin Kroskey:                  09:33                     But they were looking at refinancing for a couple of different reasons, but there was a home equity line of credit that they used for some different reasons and we said, well, hey, that’s a higher rate. Let’s go ahead and consolidate that. And you know, basically, the house that appreciated enough and they paid down the primary mortgage enough where they could do it at an 80% loan to value. So when you can do it, at least at that percentage, at 80% of the home’s value, then you can get the more favorable interest rates. So what they thought they wanted to do, they said, well, hey, let’s just take a 15-year mortgage. The payment’s about the same that we’re currently making between our two current mortgages and 15 years down the road, you know what that’s going to coincide with when our kids are going to school, you know we’ll have more money for their college is going to be perfect.

Kevin Kroskey:                  10:18                     You know, Kevin, what do you think? And I said, you could do that, but you know something else that you could do as well for them they’re doing pretty well. They’re making you know about $250,000 a year in income. They were in a fairly decently high tax bracket. I said you could go ahead and take this refinance and rather than do a 15 year, you could just go ahead and do a 30 year and presuming that you are financially responsible and not going to spend that payment difference because obviously you’re going to save money if you pay over 30 years for 15 even though you take a higher interest rate on the 30-year mortgage and say that we put that in your 401k because that was really the key here Walter, they weren’t, I’d say two things. One, they had plenty of room in their 401k to put money into it.

Kevin Kroskey:                  11:04                     And two they were 45 so they have plenty of time for compounding to work in their favor. And so the decision was really, hey, do we want to prepay on a 15-year mortgage or do we want to go ahead and take the smaller monthly payment over 30 years and invest in the 401k? And basically I just told them in the meeting cause this was something that just came up on the fly. I said look, I’ll put the numbers in black and white on this spreadsheet for you and let me provide some context, but I can tell you that net net you’re going to build a lot more wealth if you take the 30-year and put those payment savings into the 401k. And for them, it would basically the rates were, you know, mid three’s for a 15-year mortgage and right around a half a percent more for a 30-year mortgage.

Kevin Kroskey:                  11:46                     So you know, we’re still talking low rates on both. But when I did the analysis, we were at a 5% assumed return. So again, now they’re putting money in the 401k. Not only are they getting more of a tax benefit on the 30-year mortgage because more money is going towards interest and principal compared to a 15 year, but also they’re getting a tax deduction on the pretax 401k contributions, so they’re kind of doubling up in that regard. The money’s grown tax-deferred in the 401k, and then when you look at 15 years down the road, because they’re borrowing somewhere around 4% let’s presume that they can earn a little bit more than that at 5%. Then what they ended up doing after a 15-year period is creating an incremental $105,000 of wealth of pretax wealth in their 401k. If that goes to 6% it’s $135,000 more than if they went ahead and took the 15-year mortgage and didn’t invest in the 401k. They can kind of pay for some college with that. I would say.

Walter Storholt:                12:45                     Yeah, just a little bit. Yeah. Yeah. A couple of tuitions maybe.

Kevin Kroskey:                  12:48                     Yeah. So if you were going to go ahead and spend the money, if you, you know, obviously you’re going to be, you’re worse off and maybe kind of the forced mechanism of a higher payment over 15 years is better, but it’s easy enough to go ahead and change your 401k contribution to be out of sight, out of mind. It’s just going to show up on your pay stub details, but it’s not going to hit your bank account so you don’t have to take any action. The only thing that we had to do was log into their 401K accounts during the meeting to change their contribution rates. So cashflow wise, they were equivalent but they had a lot more money going into 401k and it just makes a lot of sense. And so if we would have played that out even further, frankly the numbers would become even more favorable because now they have much more of an asset built up and then they get some benefits of leverage by having that within their 401k and being able to earn even more dollars over time.

Balancing the Emotional and Financial Benefits in Decision Making.

Kevin Kroskey:                  13:37                     So I told them, I’m like, look, you know, you can definitely do the 15 year, but just realize that you’re prioritizing emotional benefits of paying down debt versus financial benefits that you are very likely to accrue if you go ahead and put the money in the 401k and invest and so we’ll see what they come back with. I would certainly garner that they’re going to go ahead and take the investing approach, but everybody’s different. I always like to say that we like to do the math first, but then we can talk about the emotional considerations so you can make a fully informed decision where people go wrong. A lot of times it’s prioritizing the emotional over the financial without really doing the math on the financial.

Walter Storholt:                14:17                     I feel like that’s where, especially for some reason with the mortgage actually get a, I guess it’s sort of that, is it an endorphin boost or what do they call it, dopamine boost and maybe I’m saying the wrong things here. I like paying extra on the mortgage, but I know that I’m probably, I don’t know in some way, shape or form committing a financial sin because that money could probably be put to better use elsewhere. But yet there’s still that emotional reaction that it feels good to watch that debt number go down and to feel responsible for paying over and above and paying down that principle.

Kevin Kroskey:                  14:48                     Yeah, it’s very normal. So again, it is just, just be cognizant over the emotional aspect of things, but certainly, do the math on the other things that you could do with the money, you know, so what are your opportunity costs? You know, if your opportunity cost is, Hey, I was just going to leave the money in the bank account and just, you know, earn maybe a percent or two, well, Hey, not a big deal to go ahead and put it against the mortgage because that’s a better thing to do. So that opportunity cost really does come into play. And I think that’ll be kind of a good segue into the next example. So, the next example we had, the client was very near retirement, late fifties getting ready to retire. And they had a big chunk of their 401k money, which is where most of the money was.

Kevin Kroskey:                  15:30                     It was in the husband’s 401k sitting in a stable value fund in the 401k. And a lot of 401ks have this, basically, it’s a very conservative bond investment that just pays a stated rate of interest. And so, this client specifically had a stable value that was paying like a, about 2.2% or so in the stable value. So, the state of an interest rate, we may move just like, you know, a money market account or something like that. But the principal value is not going to change. That’s thus the name stable value. So, about half of their money was in the stable value and we showed them that, Hey, you know, you’re pretty much going to be in the same tax bracket over the next several years. So, taxes weren’t necessarily a big consideration here. And for them, they had some money on the mortgage and the mortgage rate was only about 4%, but even at 4% you know, their stable value rate was 2.2%.

Kevin Kroskey:                  16:23                     So it was substantially less. So, if we just ignore the tax deductibility of the mortgage, which frankly was going to be going away here in the next year after they retired because they were just going to get a standard deduction. So there really was no difference in terms of the after-tax mortgage rate. But if you’re paying 4% and you’re earning 2.2%, then when you do the math, it tends to be fairly self-evident that I, Hey, maybe I shouldn’t invest at 2.2%, but pay down debt at 4%. Now that may seem very logical, particularly how I’m trying to use my budding a podcasting skill here, Walter, and use some inflection. But you can kind of see how that plays out. So certainly you got to consider taxes, but for this client, there’s really no more benefit from having the mortgage payment and the interest write off because the standard deduction was higher.

Kevin Kroskey:                  17:14                     They are going to be in the same tax bracket. And so what we did for them was basically go ahead and take some distributions out of the 401k plan and chunk it out over a period of a couple of years and completely extinguished the mortgage because we didn’t want to necessarily push them into a higher bracket, but we just did a little bit of bracket management, pulled it out at the same rate with up to an existing amount that they had in that bracket and then we’re going to chunk that and pay it out over like a three year period. So it just made sense to allocate their capital just like a CFO would. In this case, the decision was, Hey, you know, we don’t necessarily want to increase our risk and invest. Our opportunity cost, frankly, is more on our debt than what we’re earning over in the stable value fund. Therefore, let’s go ahead and make this strategic decision to pay off the debt. So very different from the prior example, but you know, you got to look at every situation differently, run the math as it applies to that client, then show that to them in a straightforward manner. Talk about the emotional considerations and then make the call.

Walter Storholt:                18:17                     I liked the stories. I also like seeing that, you know, when you say financial planning or you know, the retirement planning, we’re not just talking about what investments to be and I mean this is really illustrating how it goes beyond that. I would never have even really thought, you know, about getting advice on the mortgage. I would’ve been so focused on thinking, all right, well let’s talk about investments or the IRAs and the 401k is, but it all does interconnect. And this is, you know, a couple of great examples of how that’s indeed the case. I think you mentioned you got a couple more examples that have all happened kind of recently here.

Kevin Kroskey:                  18:47                     Yeah, I do. I do. And the, I guess the other thing I would mention too is, you know, so not only is it assets are a liability, but it also impacts cash flow. So, particularly when you’re getting, you know, close and into retirement, cashflow obviously matters a lot more because you’re going to turn off your paycheck, right? And so now you have to go ahead and use your assets that you have to go ahead and recreate that paycheck. Well, we’ve talked about some bad timing events or stress tests in prior podcast episodes. And so, the higher the cash flow, whenever you’re going through a stress test, basically the outcomes can be worse. And so if you’re going to extinguish cashflow in the sense of a mortgage payment is this example, then literally you’re, you’re not only going ahead and maybe making a smart decision in terms of, Hey, I was paying 4% and interest and only earning 2.2% but you’re also de-risking your overall plan because you’re reducing your cashflow.

Kevin Kroskey:                  19:40                     So if things went bad in the market and your assets went down, well, you know, because you have a lower cash flow requirement, the more the money can stay in there and then rebound when the market does. So this all comes into play. I don’t know, it’s just been something that I like about a, frankly, a very high probability way to add value. So, you know, the first example was literally six figures that we could add in terms of wealth creation to that client. You know, I didn’t do the math here, but you know, if you’re simplistically talking about say a difference of 4% or 2% and, we’re talking about say you know, $100,000 mortgage, well ballpark, you’re talking about, you know, 2% differential, right? So about $2,000 per year. So, we’re saving the client a few thousand dollars. So not, you know, $100,000 of wealth creation, but we’re going to save a few thousand dollars and we’re going to go ahead and de-risk the plan a little bit in the event of a bad timing event does present itself.

Third Example of Mortgage Management.

Kevin Kroskey:                  20:32                     So for the third example, so this client had had about $70,000 sitting in cash and really it was just had too much sitting in cash given, you know, their own personal plan. And so, we said, look, you know, why don’t we just take some of this rather than investing right now? They were already maxing out their pretax accounts. They still working. And so basically for them, our choice was we’ll do we want to invest in say like a joint account and a taxable account or do we maybe want to just go ahead and pay down the mortgage? And so they had a pretty low rate, 4.375% on a 30-year mortgage, only about 18 years remaining because they were also making like biweekly payments, which you know, if you’re getting a nice dopamine rush from making a little bit of an extra payment, Walter, oh my goodness, would you get a big dopamine rush from doing biweeklies?

Kevin Kroskey:                  21:20                     But that’s another conversation for another day. So, 4.375% pretty low. So, you know, the husband said, well, Hey, you know, why don’t I just go ahead and put $50,000 on in the current mortgage? I said, yeah, that’s a great idea. And we could do that. It’d be really easy. But let me throw this out there. I said, you know, if we go ahead and put $50,000 down on it, you’re going to save interest that your payment’s going to stay the same each and every month now rather than, you know, finishing in the remaining 18 years, it’s going to take, you know, less time for the mortgage to wrap up, but you’re still kind of locked into this amortization. Basically, this relationship of the principal and interest payments being higher compared to maybe a better structure. And so what I was able to show clearly on a spreadsheet was, look, you know, if you put the $50,000 down against the current mortgage, you’re going to save probably, I forget what the number was exactly, but it was somewhere around $30,000 or $40,000 in interest.

Kevin Kroskey:                  22:19                     And again, given us a 4.375% rate. It was just, you know, that rate, you know, over those 18 years that they were basically kind of shortening the payments. But what we did and what the client was really happy with was we actually have them refinance with their current lender bank here, local in Northeast Ohio is Third Federal. So, we said, look, you know, just say that you’re saying a bank, we can do a 10-year rate refinance, it’s fixed for those 10 years, your rate is going to come down more than a percent. So now you’re going to be in the low threes. They also had a particular program where you know you only need to pay $295 in closing costs and basically your payment, the monthly payment was going to be the same. So, the monthly payment was going to be the same that they had been previously making on a 30-year mortgage.

Kevin Kroskey:                  23:03                     Because again, this 30-year mortgage started out much higher, you know, several years ago, you know, it was the North of $200,000 when the mortgage started. So literally their payment was the same within a dollar. We brought it down to you and the rate came down by about a percent. But we shorten the structure to a 10-year term. And so more of that initial monthly payment went towards principal versus interest. And so, for them, we were able to save them $8,000 by again, you know, rather than just putting $50,000 down against the current mortgage, which was going to save them $30,000 or $40,000 and interest. We said, you know, that’s good, but something better would be let’s just actually go ahead and refinance, get a better structure or get more going towards principal. Your payment’s going be the same and then that’s going to save you an additional $8,000 on top of it.

Kevin Kroskey:                  23:49                     Yeah, I think this is, you know, just one clarification here. I don’t get the dopamine hit from paying the mortgage. That’s not that fun. It’s just the extra, you know, paying the interest isn’t the fun part. It’s the, it’s additional that you know is not going to interest. That’s the fun part.

Fourth Example of Mortgage Management, Paying Cash Versus Financing.

Kevin Kroskey:                  24:06                     Gotcha. Gotcha. I’ve got one more for you Walter, one more story. So the last one. So the client also in his mid-forties recently sold a business. So pretty much financially independent. He’s very, and we will position to be in and has a net worth of approaching 10 figures. So, a nice place to be in, you know, buying a new house after sold his business, a nice house. And I said, you know, I’m just going to pay cash. I said, well yeah, you can do that. And yeah, that’s fine.

Kevin Kroskey:                  24:31                     You know, I said the similar thing about prioritizing the emotional benefit over the financial, I said, but your financial independence, so certainly have much more flexibility in your case. And then when I said that, and he’s like, well, what do you mean I’m prioritizing the emotional over the financial? I said, well, you know, I can show you the math if you want to. So, he did want to see it. And so here the concept is a little bit different. So, the mortgage was going to be about $750,000 in this case. So, he had the cash go ahead and just pay the mortgage so he could go ahead and do that. But if he does that, then that’s 750,000 again, doesn’t have the opportunity to grow. And so depending on what his opportunity cost is in terms of a rate, you know, if he could expect to be at 4% or 5%, 6% or something more than that, then that’s really going to go ahead and dictate really what its true opportunity costs is for going ahead and paying cash versus, you know, basically just using a mortgage.

Kevin Kroskey:                  25:24                     And in his case, who would be paying like $3,500 a month, $3,600 a month rather than zero. And so, the concept of leverage is simply, hey, I can pay $3,600 per month for a mortgage for $750,000 mortgage, but I can have that $750,000 working for me. So again, he’s financially independent. We weren’t putting, you know, kind of going too far in on a cash flow or a mortgage payment, but if he was just able to earn something a little bit higher than his mortgage rates, you know, his mortgage rates, the, just say it’s 4% for example, but if he could earn 5% or 6% that’s what banks do every day. You know, banks go ahead and collect your money. They’ll give you a very nominal interest rate on your savings, maybe a little bit higher on a CD, but then they’re going to turn around and lend it back out.

Kevin Kroskey:                  26:16                     You know, for auto loans, for home loans, for personal loans. I had a banker friend and he said, oh yeah, he said that three, six, three and three six three is we would pay the deposit or 3% on their savings. We would lend it out at 6% we would be on the golf course every day at 3:00 PM

Walter Storholt:                26:35                     I like that plan. That’s catchy.

Kevin Kroskey:                  26:37                     All right, well that sounds funny or my head than yours. And apparently most of the people, Walter, because I haven’t been getting much laughter when I’m telling that, but nonetheless, I’m going to keep laughing to myself. So, the numbers don’t exactly work out that way today. Certainly, rates are a little bit lower than getting 3% on our savings, but you get the idea that banks making what you know, financial fancy terms called arbitrage. But if you’re getting something a little bit higher than what you’re paying, then you’re going to create some wealth.

Kevin Kroskey:                  27:00                     And the other thing too is, let’s just use this example. Let’s say that if you’re going to go ahead and invest that technically it’s $3,580 per month is what his payment would be at 4% for $750,000 mortgage. So, if he were to go ahead and just earn 4% and I’m just going to ignore taxes for simplicity right now, or he invests that $750,000 and earns 4% then basically it creates, you know, the same amount of wealth over time. However, because of the concept of leverage, if he has that $750,000 earning something higher, say a 5% or we’ll use a 6% rate. Again, these are all just examples. Here is kind of hypothetical’s, but 6% isn’t, you know it’s well less than the historical average for the stock market. So let’s just say it’s 6% well if he does that compare to investing the $3,580 each and every month and earning 6% each and every month over a 30 year period I just used here, basically he’s going to create an additional 26% in wealth.

Kevin Kroskey:                  28:00                     Or in this case it’s basically another $920,000 so not only does the rate matter, but the concept of leverage is playing in here because again, he’s getting a full $750,000 working for him while he servicing the debt with a much smaller $3,580 per month payment. Now, one caveat here is again, this works and it works really well. Certainly, you have to have good behaviors to execute something like this. It also doesn’t necessarily work in the short term because who knows what returns are going to be in one or three years, five years. But when you have a little bit more time on your side, if you can compound returns over at least 10 but preferably, you know, 15, 20 or 30 years, it’s a phenomenal way to go ahead and create some additional wealth compared to just prepaying the debt, prepaying this preferential asset. In terms of a preferential liability, why do I say preferential one?

Kevin Kroskey:                  28:55                     Typically you, it’s the only doubt that you can get a fixed rate for as long as 30 years. It’s the only time that you get tax benefits as an individual. It’s good debt as what I would call it. It’s not like you’re going out and you’re just borrowing on a credit card or something like that. So you know, when you look at all of these, these are all four different examples where frankly, we came to four different conclusions for every single one of them. But if every single one of them just goes ahead and executes as we strategize, they’re going to create some additional wealth to varying degrees. You know, some cases that are maybe going to take a little bit more risk, but heck, you know, they’re in their mid-forties and they got plenty of time for that to go ahead and play out in their favor.

Kevin Kroskey:                  29:31                     And the short-term gyrations of the market can be pretty severe in the short term, but they are short term in nature. When you go out over a longer period of time, the more likely you’re going to get close to that return expectation, whether it’s 5%, 6% or something, you know, different from that. And then for the people that are in retirement or close to it, you know, to go ahead and actually pay off the debt and maybe take some money out of their portfolio, specifically from the bond portion of the portfolio. And that’s what a mortgage is. You know you can invest in mortgage bonds and I guess you could even go ahead and take that one step further and say like, Hey, you know, if it’s my house and I go ahead and have this mortgage liability, I’m kind of de facto investing in a mortgage bond in my house, but let me just go ahead and take the money out of the account and pay off the mortgage. And so, you have to look at every client’s situation differently in different clients have different levels of tax benefits, have different levels of liquidity, cash flow needs, time horizon, you name it. But you need to take a whole balance sheet approach. You need to look at your assets as well as your liabilities as well as your cash flow as well as your risk. Do the math and then have that more qualitative discussion about really what’s right for you.

Walter Storholt:                30:39                     Well this podcast is all about education and love it when we get the opportunity to also tell some stories about how people got educated through their financial obstacles and how they’re in a better position now. And you know at least a clearer position than where they were before. To understand why you’re making certain moves in your financial life, Kevin and his team walking people through those conversations each and every day in the office and each and every time we joined together here on the podcast. If you want to learn more about anything that we’ve talked about or you want to ask Kevin and the team some questions, there’s a really easy way to do that. You can go to truewealthdesign.com click on the “are we right for you” button to schedule a 15-minute call with an experienced Financial Advisor on the True Wealth team.

Walter Storholt:                31:22                     That’s truewealthdesign.com you can also click on the events tab on truewealthdesign.com and you’re going to see details of some of the workshops that Kevin and the crew offer. Things like retirement rules gone awry. We’ve done a series on that here on the podcast, but there’s also a workshop version of it in Northeast Ohio. If you want to come and attend in 90 minutes, you can learn what rules to break to retire early, spend more and ensure your money lasts. Women in retirement wealth, a very common topic of these workshops as well. It’s a woman only workshop designed to empower women to be prepared financially and emotionally as well for retirement and there are other workshops offered as well. For all the details, click on the events tab on truewealthdesign.com and as usual, we’ll put a link to that in the description of today’s show. Kevin, thanks for all the stories, lots to unpack there, lots to absorb. This might be one of those kinds of podcasts that you go back and listen to again to kind of let all those stories sink in, see the different moving parts and the different examples, but kind of cool that you had all these folks just kind of come in over the last couple of weeks, all with similar issues in terms of being related to retirement or and if mortgages but different in that they were, you know, all sorts of different nuances in there.

Kevin Kroskey:                  32:33                     Yeah, you got to look at more than the assets. You certainly got to look more than like what sort of product you should buy. It’s really about looking at everything and making sure, understanding the person and your own reality where they’re at, where they want to go, and then aligning everything that they have financially to help them get there better, faster, smarter. So in a nutshell, that’s what we do.

Walter Storholt:                32:54                     Well, thanks for all the stories and enlightening us today and we’ll look forward to another podcast with you soon. We appreciate it for Kevin Kroskey I’m Walter Shorholt. Thanks so much for joining us. Hope you learned something today. We’ll talk to you next time on Retire Smarter.

Disclaimer:                          33:03                     The information provided is for informational purposes only and does not constitute investment, tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.