Investing Q&A with Chris Hogan

Life on the road doesn’t give me much time to respond to the questions people ask me online. Fortunately, things slow down a little bit during the summer. It seemed like the perfect time to stop, take a breath, and answer some of the most common questions I get asked.

Q: Does my spouse need a R:IQ too?

A: The R:IQ (Retire Inspired Quotient) figures what the household will need per month in retirement, so when I tell you to invest 15% of your income, that’s your salary and your spouse’s salary together. If you take the R:IQ assessment and it estimates that you’ll need $4,500 a month in retirement, that amount is for both of you. That’s why it’s so critical to talk about your retirement dreams together. If the two of you know the goal and you’re both committed to reaching it, you’ll be working together instead of against each other.

Q: What are your thoughts on adding a whole life insurance policy to our retirement portfolio to give us an alternative distribution strategy?

My husband and I are investing 15% toward retirement, and we are also debt-free. We currently have term life insurance, so the whole life insurance would be used to give us flexibility to not receive mutual fund distributions during negative market returns.

A: No! Whole life insurance is trying to do too many things. It’s trying to be insurance; it’s trying to be a savings account; and it’s trying to be an investment. The fees associated with this kind of insurance are astronomical. And that’s just one of the problems with whole life.

If you’re looking for a revenue stream that is not associated with your workplace retirement plan, I would look at two options. First, you could invest in mutual funds outside of work, which won’t have any age restrictions or required minimum distributions. The only drawback there is that you’ll pay taxes on the money you earn.

The second option is to use cash to purchase real estate, which would serve as another income stream, and that stream won’t be affected by a downward turn in the market. There are taxes associated with real estate, too, so talk to a financial advisor and crunch the numbers to see which option is more financially advantageous.

Q: With mortgage interest rates being so low right now, why should I try to pay off my mortgage early?

Why shouldn’t I invest that money instead since my return rates would be higher than the interest I’d be paying on my mortgage?

A: Great question! I understand how tempting it can be to throw everything at investing while the mortgage rate is low. But there are a few reasons why I want you to stick with investing 15% of your household income until you pay off the house.

  1. Control. Interest rates are determined by a small group of people in Washington, D.C., and I don’t want to leave my financial future in their hands. I want to control the things that are controllable, and I can control how I budget and spend my money. I want you to remain in control, too, so that means making decisions that keep you in the driver’s seat. Invest 15% first, then put money away in a college fund if you need to, and then throw anything extra toward paying off the house early. That way you’re not at the mercy of someone else’s decisions about interest rates.
  2. The unknown. In a perfect world, you could invest a boatload of money instead of paying off your house early. You could make the house payment every month and have nothing go wrong. But we don’t live in a perfect world. You could lose your job. Or you could get sick. Or, heaven forbid, what if you got hurt and couldn’t work anymore? Then you’d be stuck with a mortgage payment you can’t pay because you put your money somewhere else. On the other hand, let’s say you pay off the mortgage early. You own the house free and clear, which is a huge chunk of money you don’t have to worry about if something should happen to you or your income. No matter what happens, you have your home.
  3. Peace of mind versus risk. I want you to have peace of mind, and I want you to eliminate as much risk as possible. Let’s think about it this way: Say you have a 4% interest rate on your home and you think you’ll get an 8% return on your investments. All things being equal, you’d be up by 4%. Again, all things are rarely equal. That’s the nature of life.

The question you need to ask is whether that 4% you’d theoretically earn is worth your peace of mind—and your spouse’s peace of mind. You can’t just calculate the math; you also have to acknowledge the risks you’re taking and the peace of mind you’re giving up in order to invest more.

Personally, a paid-for house gives me peace of mind and lets me invest the money I used to give to the mortgage company. Win-win.

You’ll notice that I didn’t offer answers to detailed, individual investment and finance questions. That’s because I don’t know all the nuances of your financial picture. I don’t think I could give you the best options based on my very limited knowledge of your unique financial situation. If you’re not sure how much to invest, where to invest, or how to stay on track, talk to a financial advisor. If you don’t know where to start, talk to a SmartVestor Pro. They’re the folks I trust for my own investment portfolio. They can answer your specific questions now and in the future.