Reply To: Paying your mortgage off early
I’d encourage you to play around with this tool: http://www.moneychimp.com/features/market_cagr.htm
It’ll give you the compound annual growth rate (what you’d actually earn) of the S&P 500, which can be easily and cheaply invested in with an S&P 500 index fund from someone like Vanguard or Fidelity. For example…
Investing 5 years ago, your investment would’ve grown at 17.28% per year.
Investing 10 years ago, your investment would’ve grown at 7.93% per year.
Investing 30 years ago, your investment would’ve grown at 11.22% per year.
Investing 60 years ago, your investment would’ve grown at 11.00% per year.
Since we’re only interested in the long-term averages, and not what the market did over a short period of time, 8% is a conservative estimate.
But yes, even with a 3% return, you’re still better off putting extra money in your retirement account than pre-paying your mortgage given the example I outlined above.
Of course, you do have to hold your investments for that period of time. If you sold them all when the market was down and bought back after it’d gone up, that would eat into your net worth. Similarly, if you sold your house at the bottom of the market and bought another at the top, you’d experience a loss there, too. But those are terrible investment practices, and trying to time the market is rarely going to work out.
For the purposes of this example, we’re assuming that the investor is not bungling their investments, but regularly buying in as they would by regularly paying a mortgage so that we can determine which plan offers a better outcome mathematically when comparing the two on even ground.