Paying Extra towards Mortgage Early

[Dragon]

No, it isn't. Before the refund you had a receivable on your balance sheet. Afterwards, you credit the receivable and debit an equal amount of cash. No net economic gain; the only change is in the liquidity of the asset. The same is true if you take cash and use it pay down debt. On a stand alone basis, no net gain on your personal balance sheet.

 

Now you get it.

 

 

The difference lies in the fact that you've just permanently reduced your obligation to pay interest in the future. An amount over withheld during the year from your paycheck offers no corollary economic benefit. That's why its a bad analogy.

 

You almost had it - the similarity is the opportunity cost, or the lost interest income on the held funds. It is akin to the lost ROI on the difference between the mortgage interest rate and the interest income one could have made had they choosen to invest instead. The other part of my point was that it was an analogy (similar but not necessarily identical) Also, part of the analogy is that it is addressing the "mindset" or approach for those that may not trust themselves to leave the asset in place (which is why I wrote the part of about having little fiscal discipline). I have encountered numerous clients in the past that have stated something along the lines of "this is the only way I know I'll stick to it".

 

You said you were a CFO?

 

Yep, and a pretty damn good one - and I also stated that it does not make me any more or less qualified to speak on the subject and that I was only offering my opinion. Maybe you don't get the analogy I was trying to make. Maybe that's why I don't write articles for the WSJ or IBD. That's why I don't give a rat's tail what you do for a living, or what you do with your money - but the numbers, pure numbers, support an investment other than paying off your mortgage early. You want to rip apart the analogy cause you don't get it - have at it. You want to stray from the point of the discussion - have at it. You want to take a cheap shot at me being a CFO - knock yourself out. I don't know who you are, and don't really ever care to. Don't want to agree with my opinion - then don't. But I would listen to muck and wiegie - I'm pretty sure they are more knowledgeable on the matter.

Edited December 15, 2007 by Dragon

[yo mama]

the similarity is the opportunity cost, or the lost interest income on the held funds. It is akin to the lost ROI on the difference between the mortgage interest rate and the interest income one could have made had they choosen to invest instead.

Which could be negative if you fail to beat the interest rate on the mortgage. For some reason you don't seem to want to acknowledge that there is downside risk of that happening. There is a 100% chance of a positive ROI if you just pay down the mortgage, which is why its not fair to analogize to over-withholding taxes: that provides a 0% chance of any ROI whatsoever.

 

Look, you can obviously do whatever you feel is appropriate with your own investments. Sounds like you understand your own situation very well. But I take issue with you categorically advising people that they are making a mistake by just paying down their mortgage. It may be a conservative approach in your opinion. However, its a approach that is guaranteed to increase a one's personal net worth. There's certainly upside to be had if you are willing to incur more risk. But you've basically told people they're making a mistake if they don't go for it. That's really a subjective matter of personal risk tolerance.

 

That's all I've got left to say here.

[Dragon]

That's all I've got left to say here.

 

Now that is something we can agree on.

 

On the rest, we will just have to agree to disagree.

[Caveman_Nick]

Isn't the refund itself an economic benefit.

 

 

I have always been advised that the best thing to happen at tax time is to pay out no money and to get back no money. That means you had your money in your pocket the whole time, and the Gubment didn't get to hold it for you. for upwards of 18 months.

[Caveman_Nick]

On the rest, we will just have to agree to disagree.

 

 

I am not sure what you find so disagreeable. It's a financial fact that you have to do better than your guaranteed mortgage interest rate, numbers adjusted for allowable tax deduction, in order for investing your money otherwise to work for you.

 

I agree with you that it is not the most aggressive of investments, but it has a calculable, compounding return over time Very few investments guarantee this. And as someone that invests and believes in portfolio diversion into different markets, but also into some safer and some riskier investments, this is easily the safest investment you can make. It seems that you are ignoring the gains realized over time by the decelerated compounding of the mortgage interest. That makes every mortgage payment you make more effective towards paying the debt down.

 

I'm fine with agreeing to disagree, I just don't want folks reading this to think that paying down the mortgage is no net gain on your balance sheet. That's a simplistic analysis that isn't true. The net gain is both in the interest you save over the life of your debt and the greater equity in the property that can be realized on sale of that property. These are significant gains that can be realized.

[Chavez]

I wouldn't put all my surplus funds towards paying down my mortgage anymore than I'd put all my discretionary investment funds into the stock market. That's me, though.

Chiming in late, and some of you guys have it FAR more together than I do...

 

...but I'd essentially agree with this - fund your retirement/education first; and if you have the desire and ability to pay down your mortgage faster without killing yourself to do so, I don't see why someone WOULDN'T do so.

 

I'd recommend against putting all your eggs in the "pay down the mortgage" basket, however.

[Chavez]

I have always been advised that the best thing to happen at tax time is to pay out no money and to get back no money. That means you had your money in your pocket the whole time, and the Gubment didn't get to hold it for you. for upwards of 18 months.

Yep. What person DOESN'T like getting a big, fat check that they feel they didn't have to work for? Heck, I love 'em.

 

But a tax refund ISN'T that - it's an interest-free loan to Uncle Sam.

[Ursa Majoris]

But a tax refund ISN'T that - it's an interest-free loan to Uncle Sam.

That's exactly right but to the terminally undisciplined, it can come as a handy lump sum to pay off e.g. a significant piece of a CC. If the gubment wasn't holding it, most people would have pissed it away over the year without noticing.

[Chavez]

That's exactly right but to the terminally undisciplined, it can come as a handy lump sum to pay off e.g. a significant piece of a CC. If the gubment wasn't holding it, most people would have pissed it away over the year without noticing.

Well, I COMPLETELY notice when I piss away my funds... "I spend 90% of my money on booze and women; the rest I just waste"

[Dragon]

I am not sure what you find so disagreeable. It's a financial fact that you have to do better than your guaranteed mortgage interest rate, numbers adjusted for allowable tax deduction, in order for investing your money otherwise to work for you.

 

I'm fine with agreeing to disagree, I just don't want folks reading this to think that paying down the mortgage is no net gain on your balance sheet. That's a simplistic analysis that isn't true. The net gain is both in the interest you save over the life of your debt and the greater equity in the property that can be realized on sale of that property. These are significant gains that can be realized.

 

What I respectfully disagree with is that one can't create an investment portfolio that net's far better than a post tax 5.0% rate of return over time. I'm saying that, while there is some risk involved, a balanced portfolio should far, far exceed that over 10+ years. The added benefit is that the portfolio is liquid, and far more controllable which if managed properly should only increase the profitability of the investment. Paying down your mortgage is, in my view, a method of debt reduction and not part of creating a balanced investment portfolio. I agree it has a similar effect on your net worth, but to a much lesser degree (in my opinion). I think one apporach (paying the mtg early) is "reducing debt" where the other (investing) is "building wealth". Much like there is no guarantee that your investment portfolio will net a 15% ROI, there is NO guarantee that you can sell or refi your house for future cash needs (i.e. todays housing market in most of the country). What happens in the "pay down your mortgage" theory when 3 years from now the housing market is stagnant and someone goes out and finances a vehicle at 6.99%, or God forbid, has substantial medical bills and needs to keep balances on credit cards for 12-18 months at 14+%? In my opinion, liquidity and return are being sacrificed - which may be critical in the future.

 

I've stated before, paying down a mortgage is better than nothing, and I acknowledge that it does provide financial benefits - but I believe it is best left for the fiscally undisciplined. All, and I do mean ALL, of the really wealthy people I know (of which I am NOT one) carry a significant amount of debt, primarily because they are earning far more on their investments than they could save by paying off their debt early.

[muck]

...your best answer yet, Dragon...

 

Paying down the mortgage:

+ Guaranteed positive return (vs. unknown and potentially significantly negative return in other investments)

- Decreased liquidity (vs. easy liquidity with other investments, regardless of what happens in the housing market)

 

...at the end of the day, paying down your mortgage is a bit like investing in bonds (without the mark-to-market risk, credit risk, or access to liquidity) ... and the only real negative of paying down your mortgage (vs. buying bonds) is decreased liquidity ... but, that can be (at least partially) offset by establishing a HELOC that you can tap if/when you need to for emergencies.

 

So, if you're advocating a "balanced portfolio" Dragon, most definitions of "balanced portfolio" include money in bonds and money in stocks ... consider the mortgage paydown the fixed income portion of the portfolio.

 

PS -- Putting all your money in "buy and hope it goes up" is a silly and irresponsible way to invest. If you make money, it's easy to delude yourself into thinking you're some kind of genius ... and if you lose money, it was the markets' fault. For most "buy and hope it goes up" investors, losing money was never their fault.

[Ursa Majoris]

.PS -- Putting all your money in "buy and hope it goes up" is a silly and irresponsible way to invest. If you make money, it's easy to delude yourself into thinking you're some kind of genius ... and if you lose money, it was the markets' fault. For most "buy and hope it goes up" investors, losing money was never their fault.

You're right, which is why I personally would rather pay down the house than speculate that a complete market know-nothing like me can end up making money. I have a nearly maxed-out 401k that's doing OK, some very minor separate incomes, a separate investment plan through my company and a few other bits and pieces but all cobbled together they don't attain the status of "portfolio" per se.

 

The bottom line is that I long ago acknowledged that I'm never going to be rich or even wealthy so I have settled for reasonably well off and comfortable in retirement, thus paying down the house looks good to me. My retirement wishes really revolve around simply not having to go to work any more and a couple or three vacations a year.

[Azazello1313]

You're right, which is why I personally would rather pay down the house than speculate that a complete market know-nothing like me can end up making money. I have a nearly maxed-out 401k that's doing OK, some very minor separate incomes, a separate investment plan through my company and a few other bits and pieces but all cobbled together they don't attain the status of "portfolio" per se.

 

The bottom line is that I long ago acknowledged that I'm never going to be rich or even wealthy so I have settled for reasonably well off and comfortable in retirement, thus paying down the house looks good to me. My retirement wishes really revolve around simply not having to go to work any more and a couple or three vacations a year.

 

i think that's the bottom line for most of us.

 

really, i think the priorities should be:

1) contribute at least enough 401k to maximize your employer match

2) get rid of any and all high-interest consumer debt (credit cards, car loans, etc), highest rate first

3) sock away about 3-4 months worth of income in a rainy day fund in a high interest savings account

4) max out your 401k and roth/IRA contributions

THEN all this other stuff becomes a priority, because with very few exceptions all the stuff listed above should come first.

[muck]

You're right, which is why I personally would rather pay down the house than speculate that a complete market know-nothing like me can end up making money. I have a nearly maxed-out 401k that's doing OK, some very minor separate incomes, a separate investment plan through my company and a few other bits and pieces but all cobbled together they don't attain the status of "portfolio" per se.

 

NOTE: What is to follow isn't directed at Ursa ... but, a comment to all, using his comment above as the starting point for what follows.

 

Ahh...but you do have a portfolio. If all you have is the ten bucks in your wallet, you have a portfolio; not a very big one, but a portfolio nonetheless.

 

It's just spread out all over the place ...which doesn't necessarily mean it's diversified, though... To make my point, hypothesize that you have brokerage accounts at five different firms. And each account owns six mutual funds for thirty total 'line items'. Are you diversified? Not necessarily. Not if 10 of the 30 funds are "buy and hope it goes up" US equities, 10 are "buy and hope it goes up" non-US equities and 10 US government and corporate bond funds...

 

Regardless of your net worth, your assets are your portfolio. To think about it any differently short-changes what you are responsible for today and what you'll be responsible for in the future. Take the bull by the horns and do something great with the opportunity you've been given (no matter how great or how small the starting place).

 

Oh, and be willing to thing about your money in ways that are a bit different than what you are force-fed by the majority of the financial media...

[yo mama]

You're right, which is why I personally would rather pay down the house than speculate that a complete market know-nothing like me can end up making money. I have a nearly maxed-out 401k that's doing OK, some very minor separate incomes, a separate investment plan through my company and a few other bits and pieces but all cobbled together they don't attain the status of "portfolio" per se.

 

The bottom line is that I long ago acknowledged that I'm never going to be rich or even wealthy so I have settled for reasonably well off and comfortable in retirement, thus paying down the house looks good to me. My retirement wishes really revolve around simply not having to go to work any more and a couple or three vacations a year.

I also seem to recall that you've got some life insurance, too. That should also rightfully be counted in your portfolio of assets. I'd also add life insurance to Az' list of things that most folks "ought" to obtain. How much and what kind is dependent upon one's situation. But chances are, if you've got substantial mortgage debt and a family that would have trouble paying it off if you kicked the bucket tomorrow, then at least some simple term insurance may be appropriate.

[Ursa Majoris]

I also seem to recall that you've got some life insurance, too. That should also rightfully be counted in your portfolio of assets. I'd also add life insurance to Az' list of things that most folks "ought" to obtain. How much and what kind is dependent upon one's situation. But chances are, if you've got substantial mortgage debt and a family that would have trouble paying it off if you kicked the bucket tomorrow, then at least some simple term insurance may be appropriate.

I'm cool for insurance until I retire, at which time there will be no mortgage, so I'm in good shape. Mortgage is only just north of $100k anyway so it's not like it's that big a deal - assets far outweigh it if I snuff it.

[Sugar Magnolia]

In the early 90's we had a 7.5 % fixed rate and chose to pay it down-also made more than 150K a year.

 

Made not have been a wise move, but when we went to buy a house three years ago, we were competing with another couple and got the house, even though we bid lower, because it was a cash deal.

[I Like Soup]

In the early 90's we had a 7.5 % fixed rate and chose to pay it down-also made more than 150K a year.

 

Made not have been a wise move, but when we went to buy a house three years ago, we were competing with another couple and got the house, even though we bid lower, because it was a cash deal.

Cash is King.

[TheShiznit]

1. Your Option A assumes your after-tax ROI beats the interest rate, net of tax benefits. No guarantee that will work, as discussed above. But someone who knows what they are doing could do well here, assuming they have a tolerance for risk.

 

2. not a bad hedge strategy against the worst case scenario... one that I have used for myself, in fact.

 

3. Great strategy, except for the fact that the individual now has to pay for the underlying insurance policy in addition to overfunding the investment function of the policy. Not everyone has that kind of extra cash flow, and the permanent insurance within a variable universal policy ain't cheap (especially if you have health problems, or are old). Plus, you can't generally pull out more than the appreciation from the investment component without incurring income tax effects. This means two things: (i) you're still subject to market risk (but at least its tempered by less onerous tax effects); and (ii) unlike a stand alone investment within a brokerage account, you can't get to the principal portion of the investment tax-free.

 

Bottom-line: just paying down the mortgage is a risk-free, hassle-free, expense-free was to make productive use of surplus cash. It's the floor from which you can't fall off of, if you want to be conservative. Plus, if you're in a state that allows home equity lines of credit (or to a lesser extent, home equity loans), you'll still have access to the funds if need be. It just isn't as liquid. You're leaving some potential upside on the table, for sure. But you can't lose anything. Period.

 

I forgot to add the last one you stipulated in to my scenario...but I usually add a term insurance policy for the time period in which they plan to pay off the house. However, option 3 is not exactly how you purpot it to be. The cost of the life insurance in a VUL policy is substantially less expensive than if you bought a twenty year term policy. As a matter of return the longer you hold the policies the better the ROE looks as compared to non-qualified muties. However, one would only look to utilize a VUL for this purpose after investing in virtually everything else and one would have to have a need for more life insurance to boot. However, I bet if you ran a scenario where someone bought term and invested the difference in non-qual muties or bought a VUL, you would have more money in the VUL after20 years..substantially....all things being equal and someone who isn't trying to be a hater on permanent insurance doing the comparison.

[Yukon Cornelius]

In the early 90's we had a 7.5 % fixed rate and chose to pay it down-also made more than 150K a year.

 

Made not have been a wise move, but when we went to buy a house three years ago, we were competing with another couple and got the house, even though we bid lower, because it was a cash deal.

except my first house, everything i buy is cash.... even my CC's are all paid off at the end of the month...

 

and we have had the same thing happen with our second house and our hunting land .. we had the cash.. low balled and got what we wanted...

Edited December 17, 2007 by Yukon Cornelius

[Big Country]

Another interesting article from Yahoo

 

The portion on prepaying the mortgage or not touches on a lot of the points made in earlier posts.

 

As you invest your money, shop for a home or tackle any one of the many financial decisions you have to make over your lifetime, do you sometimes wish you'd paid more attention in math class? Do you find yourself having to "run the numbers" and wondering how?

 

To help, we've taken six common financial quandaries and done the math for you. As you'll see, the solution isn't always black and white, and the "right" answer may depend on things that you can never know for sure, like your tax bracket in 2020 or how much your investments will grow.

 

Plus, at times emotional considerations may tip the balance. Even if the math favors buying stocks over prepaying your mortgage, say, you may simply sleep better being out of debt. So this guide will walk you through the caveats as well as the calculations. Use it to navigate some of your financial life's trickiest questions and come up with your best call.

 

Pay off a credit card OR fund your 401(k)

You should do both. If you can't, pay off the plastic first.

 

In an ideal world, you'd wipe out your costly debts and save for retirement. But in the real world, you may not have enough cash to do both at the same time. Of course, you must pay at least the minimum on your credit card every month. So the question is, Do you put the rest of your available cash in your 401(k) or devote it all to your credit card?

 

Strictly by the numbers: By paying off credit-card debt, you get a guaranteed rate of return equal to your interest rate (the average is 14 percent today). But if your employer matches your 401(k) contributions, that's a 50 percent return (assuming the typical 50¢-to-the-dollar match on the first 6 percent of your salary).

 

Hard to beat. Or is it? The 50 percent match is a one-time gift; the 14 percent interest will compound every year. At some point the cost of that interest will overtake 50 percent. So if you have a big credit-card balance, attack that first.

 

Here's how that could play out if you're deciding what to do with $250 a month. With a $5,000 credit-card balance at a 14 percent rate, your minimum payment is $125 a month.

 

Suppose you put the rest in your 401(k). Because you don't pay taxes on that contribution, you can actually invest $174 a month (assuming a 28 percent tax rate). Keep paying $125 a month on your credit-card balance, and you'll need 55 months to wipe it out. During that time if you earn 8 percent annual returns and get the standard 50 percent match you'll amass $17,271 in your 401(k).

 

If you ignore the 401(k) for a while and instead plow your entire $250 toward the credit card, you'll pay it off in just 23 months. Then you could devote all your spare cash to your 401(k). By the end of the original 55 months, you'd have $18,515 in your plan. The one-at-a-time approach beats splitting your money because 55 months of paying 14 percent interest outweighs the 50 percent match.

 

But wait. Suppose your credit-card debt isn't that big, and you can pay it off in just a couple of years even if you split your cash. Great. Go ahead and fund both goals. You'll get the benefit of the 50 percent match.

 

You do the math: To see how long it would take you to pay off your credit cards, use the calculator at Bankrate.com.

 

Beyond the math: Good savings habits are important too. If by putting off funding your 401(k) you'll never get around to it, work on both goals at once.

 

The bottom line: If you have a big credit-card balance, wipe it out before you open a 401(k).

 

Save in a Roth 401(k) OR a regular 401(k)

Don't miss this new chance to lock in tax-free retirement income.

 

Wish you could forever shelter your retirement savings from taxes, but you make too much to contribute to a Roth IRA? With the recent arrival of the Roth 401(k), you may have, or may soon be getting, a second chance at tax-free income.

 

Grab it. With a traditional 401(k) you invest pretax dollars and pay taxes when you withdraw your money; with the Roth version you pay taxes on what you put in but nothing on your withdrawals.

 

About a quarter of employers have rolled out this option, and a majority of plans will likely offer it by 2009. Unlike a Roth IRA, which is off limits in 2008 once your modified adjusted gross income hits $169,000 (as a couple), a Roth 401(k) has no income caps.

 

Strictly by the numbers: Let's say that you contribute the maximum of $15,500 to your 401(k) and you're in the 28 percent tax bracket. Assuming an 8 percent annual return, you'll end up with $72,245 tax-free in 20 years with a Roth.

 

If you go with the traditional 401(k) instead, you'll also end up with $72,245 in 20 years, but you'll pay taxes on the withdrawals. At the same 28 percent tax rate, you'd be left with $52,016 you could actually spend.

 

When you fund the traditional 401(k), however, you shelter $15,500 from taxes. But even if you invest that $4,340 tax savings outside your plan, you'd have to earn well in excess of 8 percent a year to equal your Roth total after taxes.

 

But wait. Won't your tax bracket drop once you're no longer working? Don't count on it. If you're just starting your career, you'll almost certainly be earning more in 40 years. Even if you're mid-career, you can't assume your tax bracket will plummet.With federal tax rates currently at their lowest levels in decades and the federal deficit growing, it's not hard to imagine Congress raising taxes between now and your retirement. Assume a lower bracket only if you're near retirement and know your tax rate will fall.

 

You do the math: Use the Roth 401(k) calculator at Dinkytown.net.

 

Beyond the math: A regular 401(k) has one thing going for it: the up-front tax break. That's why you'll see your disposable income shrink if you switch to a Roth. But for the regular 401(k) even to come close to the Roth as a savings vehicle, you'd have to invest the extra cash that it put in your pocket. Would you?

 

The bottom line: Unless you are on the verge of retiring and know your income will drop, the Roth wins.

 

Lease a car OR buy a car

Buying costs less if you own your car till it drops.

 

With leasing, you always drive a shiny new car, and your monthly payments are lower. So why would you buy?

 

Strictly by the numbers: A 2008 Toyota Camry will run you just under $27,000 (including taxes and fees). Buy one and finance it with a no-money-down, five-year loan at 6.9 percent (today's average), and your monthly payments will be $526. Over five years, you'll spend $31,560. Say you instead pay $1,000 up front for a five-year lease. Your monthly payment will be $415. At the end of five years, you'll have spent $25,900.

 

So leasing wins? That's not the full story. If you buy a car, it'll be worth something once you've paid off the loan. Your Camry would fetch about $10,000 after five years, according to estimates by Edmunds.com. That cuts the out-of-pocket cost to $21,560.

 

But wait. What if you really want a new car? In that case, the gap narrows. Take out a three-year loan on the Camry and your monthly payments would spike to $821, for a total of $29,556. If your three-year-old Camry sells for $14,000, your net cost drops to $15,556.

 

If you leased, though, your payment would be $485 a month, putting an extra $336 in your pocket compared with the loan. Invest that $336 in a money-market fund paying 4.5 percent, and you'd earn $589 after taxes in three years, assuming a 28 percent tax bracket. Factoring that in, your total lease cost would be $17,871.

 

Also, the Camry holds its value well. With models that don't, the manufacturer often sweetens the deal by inflating the car's assumed value at the end of the lease term. If you buy the same car, you won't make that much when you sell it, which could tilt the scales in favor of leasing.

 

You do the math: Use the calculator at Edmunds.com.

 

Beyond the math:. Leases come with mileage restrictions, typically 12,000 miles a year. Plus, if you ding a leased car, you'll get dinged with fees.

 

The bottom line: Over the long term, buying costs you less.

 

Prepay your mortgage OR invest

 

The feel-good choice isn't necessarily the smart choice.

 

When some extra cash comes your way, it's tempting to put it toward your mortgage. You'll save on interest and pay off your house earlier. Buying stocks, on the other hand, feels like a risky leap into the unknown, especially now.

 

Strictly by the numbers: Paying off your mortgage or any loan is an investment, and your return is essentially the interest rate on the loan. If you have 25 years left on a 30-year mortgage with a fixed rate of 6.2 percent and you deduct your interest payments on your taxes, you'll earn 4.5 percent by prepaying the loan (assuming you're in the 28 percent tax bracket).

 

Now let's say you invest your spare cash in stocks instead. You'll pay a 15 percent tax rate on your long-term capital gains and dividends. So to beat the 4.5 percent return you'd get from prepaying your mortgage, you'd have to earn just 5.3 percent a year on your stocks before taxes.

 

The odds of your doing that over the 25-year remaining term of your mortgage are excellent: Historically, a portfolio of 80 percent stocks and 20 percent bonds has returned 7.5 percent a year after taxes.

 

But wait. Paying down the mortgage earns you a risk-free 4.5 percent. That's as good as you'll do with Treasury bonds. True, and if you are investing for a near-term goal and don't want to take any risk, you can make a stronger case for prepaying your mortgage. But if you are investing for a goal that's more than a decade away, you can and should take more risk for a chance at a higher return.

 

You do the math: To run the numbers on how much money you could end up with by investing, use the savings calculator at CNNMoney.com. To see how much interest you'd save by prepaying your mortgage, use the payoff calculator at Dinkytown.net.

 

Beyond the math: Of course, all that mortgage debt may be keeping you awake at night, especially if you are worried about losing your job or you're approaching retirement and hope to live on less. You'd be grateful to be rid of that major monthly bill sooner. In that case, prepaying your mortgage starts looking better.

 

Remember, though, that by prepaying your mortgage, you are reducing your liquid assets. If you suddenly need money, it's easier to sell a mutual fund than it is to pull cash from your home, and you can always pay off your mortgage later with the money you invest now.

 

The bottom line: Investing wins.

 

Buy a home OR rent a home

 

Even in today's crummy market, buying can beat renting if you're in for the long term.

 

You're relocating, or you're downsizing so you can harvest some real estate wealth. Do you buy right away or rent and wait out the housing bust? To get your answer, consider your monthly expenses, what you'd do with the profits from your old home if you didn't buy and your time horizon.

 

Strictly by the numbers: If you plan to stay put for at least a decade, buying wins, even if your monthly cash flow is more flush with renting. Over time, rising prices reward home ownership.

 

Let's say you're 65 and own a $350,000 home in Edison, N.J., mortgage-free. You're moving to the warmer climes of Albuquerque, where similar homes go for $175,000. After commissions and closing costs on both sales, you'll net $152,000. Buy a fixed immediate annuity with that money, and you and your spouse will get $10,500 a year for life.

 

What if you instead decided to rent in Albuquerque? With the $329,000 you'd clear on the sale of your New Jersey home, you could buy an annuity that pays about $23,000 a year. Even after spending $6,500 a year more in rent than you'd pay in property taxes and upkeep, you'd be ahead by $4,250 a year after taxes.

 

But if you had bought a home, you can cash in on any future price gains. If you stayed in the new house for 10 years, the price would have to increase by 3.3 percent a year for buying to beat renting (assuming you invest the extra money you would have spent on rent). That's a low bar considering that home prices nationally increased by an average of 6.4 percent a year between 1963 and 2005, according to the research firm Winans International.

 

But wait. What if housing prices keep tanking? No question, that could happen. That's why you need a long time horizon to ride out the ups and downs. Between 1963 and 2005, the worst 10-year home-price return was 2.5 percent.

 

You do the math: Use the Rent vs. Buy calculator at Finance.cch.com.

 

Beyond the math: Owning has other benefits: the comfort of knowing that you'll never be forced to move by your landlord; the freedom to redo your kitchen in any way that strikes your fancy. On the other hand, renting can spare you the onerous upkeep that comes with maintaining a home.

 

The bottom line: Buying is best as long as you're confident you'll be staying put for several years.

 

Take Social Security early OR late

 

Most retirees should hold off four years for the bigger payout.

 

Collecting Social Security at age 62 cuts your annual benefit by about 25 percent compared with what you'd get if you waited until full retirement age that's 66 if you were born from 1943 to 1959, or 67 if you were born in 1960 or later. To do the math, you need to consider whether you expect to live a long life.

 

Strictly by the numbers: Say you've just turned 62 and qualify for $17,280 a year now or $23,772 at 66 (in today's dollars). Start early and you'll have collected $69,120 by the time you reach 66. Wait, and higher payments will make up for those missed years in 10½ years.

 

If you live until at least 76½, postponing your benefits was worthwhile. The odds are in your favor: According to the Social Security Administration, the typical 62-year-old man should live until 80½, while the life expectancy for a 62-year-old woman is 83½.

 

But wait: When you collect a Social Security check at 62, that's $17,280 you won't have to withdraw from your IRA. Add in the extra tax-deferred growth (assuming 5 percent returns), and your break-even point moves out by three years to age 79½. Even then, odds are you'll live that long.

 

The math can get even more complicated if you're married. According to new research from Boston College's Center for Retirement Research, the best strategy for many couples is for the wife to take Social Security at 62 and the husband to wait. The reason is that men, on average, earn more and die younger. In this scenario, a wife would take her benefit at 62 and inherit her husband's larger check later.

 

Finally, waiting to take Social Security assumes you can. Surveys show that 40 percent of retirees are forced into early retirement, through either downsizing or health issues.<

 

You do the math: Get a more precise handle on your break-even age with the Social Security Administration's Quick Benefits calculator at ssa.gov/OACT/quickcalc/.

 

The bottom line: If you're healthy and don't need the cash, wait.