Most of the Financial Entertainers that you hear on the radio today have a common message. (I reference “financial entertainer because virtually all of them are not licensed as an advisor.)
These financial entertainers fall into the trap of using deductive reasoning to come to their conclusions. Deductive reasoning is based on one or more premises that are generally assumed to be true. Many pre-retirees and the financial entertainers on the radio deduce that they will be in a lower tax bracket / pay less taxes when they retire.
Most of the Financial Entertainer’s on the air waves today are constantly telling their audience to pay off their mortgages as quickly as possible. To most people this sounds logical until you stop and look at the math for your individual situation. Why, your individual situation? Because, your financial life is different from everyone else’s. When these financial entertainers make blanket statements that all people should pay off their mortgages – that is gross neglect.
Here is something that you can sink your teeth into. Most people that I meet with today believe that they will be in a lower tax bracket once they retire. The problem with that deductive reasoning is that the day that you retire, all of your current tax deductions disappear – right when you need them the most. 1 – Your mortgage is paid off. 2 – If you were a business owner, it is now sold. 3 – Your kids are (hopefully) out of the house so you cannot deduct them. 4 – You are no longer making retirement plan contributions. 5 – You are no longer making large contributions to the charities that you support but are instead giving your time. These 5 tax deductions can easily add up to $60,000 or $70,000 per year. Once all of these are gone, you are left with the standard deduction and your personal exemptions which may total $20,000. So by default your tax rate may not go up, but the amount of tax dollars that you pay to the government will due to a massive decrease in your tax deductions.
Many of my clients have heard me say “Money is Not Math, and Math is Not Money”. Simply put, prepaying your mortgage does not equal you paying less in the long run.