Dear Quentin,

My wife and I have done very well working in healthcare the past 25 years. We’ve always taken advantage of 401(k) and 403(b) to the max, and have additional savings in an IRA and almost no revolving credit debt. We currently have $1.8 million in these savings accounts.

However, at 52, we decided to move to Florida — now that our kids are both grown and on their own — rather than wait until retirement. We both still work and together make over $400,000 a year. We plan to work until 65 at minimum and have never had serious health problems.

At issue: We bought a house at the very top of our desired range and have a 20-year mortgage (2.5% interest) with a monthly payment of over $4,100. We have always paid extra on our mortgages, and my goal was to do the same with this house so that by the time we hit retirement at 65, it is paid off.

However, my wife says we will have plenty of money once we hit retirement age to maintain the house payment for the first five to six years of retirement, and that we shouldn’t “penny pinch” now that we have time to travel, even before we fully retire.

I understand that we are blessed to have such a nice nest egg, but I worry that stretching that house payment into our first five years of retirement will eat a huge chunk out of the retirement funds that could jeopardize longer-term planning. We also plan on this house being the bulk of the “inheritance” for our two children, so don’t plan on selling and moving once we finally make the retirement plunge.

Thoughts on how to approach this mortgage conundrum?

Two Pharmacists in Florida

You can email The Moneyist with any financial and ethical questions related to coronavirus at [email protected], and follow Quentin Fottrell on Twitter.

Dear Pharmacists,

This is a win-win. You’re charmed if you do, and you’re charmed if you don’t. And you are charmed. Not only do you both earn good livings, but you have a mortgage at 2.5%. That puts you in a very comfortable decision to rest easy for now.

This column often leaves readers flabbergasted. “I can’t believe this crazy situation!” readers say as they try to process some letter writers’ misdeeds or familial shenanigans. “Who would do something like that?”

It’s a pleasure to read a letter where people have actually done so much right. You’re in a financially secure position and, in a worst-case scenario, you could always downsize from your current home.

Your dilemma is partly subjective, partly math. There is an argument to be made that we don’t know whether any of us will be here by the time our mortgages are paid off, so why not fulfill our obligations and enjoy all that life has to offer.

Given the interest you will undoubtedly save by paying off your mortgage early, even at 2.5% interest. Overpay some if you can, especially early on in the lifetime of the loan when the interest-rate payments are higher.

Your retirement savings will be doing a lot of the heavy lifting for you, especially given the size of your 401(k) and your high salaries.

Depending on the terms of your mortgage, you may be limited on the amount in overpayments you can make (10% in some cases), and as frustrating and galling as it seems, there may also be a penalty for overpaying. In your case, that’s a good thing.

If you don’t overpay? Your tax-advantaged retirement savings will be doing a lot of the heavy lifting for you, especially given the size of your 401(k) — far above the national average for your age — and your high six-figure salaries.

The size of your remaining mortgage, the rate of return on your retirement savings, and the value of the house will obviously all play a role. An adviser could help you forensically draw up two separate scenarios, so you can better choose.

In the words of one reader who advocates shoring up your retirement funds: “I don’t think it is likely that inflation will stay below 2% as it has for a couple of decades; it is more likely to go a bit higher. At 3%, the mortgage is printing money.”

Even taking an average return of 6% on your 401(k), plus each of your Social Security payments, and inflation, you would still have enough to live comfortably and pay down your mortgage and/or downsize if you wish.

Given your high expected retirement savings, and substantial Social Security, your house will seem less burdensome by retirement.

Given your high expected retirement savings of close to $5 million by the time you retire, and an annual income of more than $190,000, not to mention your substantial Social Security, your house won’t seem as burdensome as it does today.

Marc Stormes, a CPA in Strafford, Pa. has another suggestion. His preference is to select seven high quality ETFs that average at least a 3.4% dividend yield with an average historical dividend increase of approximately 6% per year.  

With a tax on dividends of 15%, at your income, if you earned anything more than 1.92% in dividends, you would be ahead, he said. “So my suggestion would be to invest any extra mortgage payments in high quality dividend ETFs.” 

This could suit you both, Stormes said. “Of course there is market risk, but with over 13 years the fund will likely increase so that at retirement it would equal or exceed the remaining mortgage balance,” he added.  

Millions of Americans face such a balancing act. “Building a fund to pay off the mortgage and not penny pinching to avoid enjoying life,” he added. “And believe me, the enjoying life part is important — you don’t know how long you have.”

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