Personal Finance: Benz Says Mortgage Payoffs and Cash Stacks Are Fine

Financial pundits often spend considerable energy criticizing specific money moves, but Christine Benz of Morningstar says she is not worried about them. Benz, the director of personal finance and retirement planning at Morningstar, identifies three common behaviors that critics frequently attack. She argues that these choices usually signal financial stability rather than poor planning.

The first behavior is paying off a mortgage early. Benz acknowledges that this strategy may not offer the best return on capital. Current interest rates on certificates of deposit and high-yield savings accounts are higher than the rates on mortgages secured years ago. She agrees that younger investors with long time horizons should focus on higher-risk, higher-returning investments like stocks. However, she notes that most people who prepay their mortgages have their other financial bases covered. For them, the payoff serves as a peace-of-mind allocation.

Benz states she has yet to meet anyone who said paying off their mortgage prevented them from achieving other important financial goals. She describes this choice as a valid allocation for those with adequate emergency reserves and retirement accounts.

The second behavior is holding extra cash. Benz admits that cash has underperformed bonds and stocks over long periods. In modern U.S. market history, cash has only barely edged out inflation. She warns that younger people sitting on large piles of cash while lacking exposure to longer-term securities are making a mistake. However, she frequently sees heavy cash stakes in the portfolios of people over 50. These individuals often prefer the liquidity and stability of cash over bonds. Benz cites author Bill Bernstein, who said, “If you’ve won the game, stop playing.” She argues that this allocation to safety is beneficial if the investor still maintains a decent allocation to stocks for long-term growth.

The third behavior is choosing traditional tax-deferred retirement contributions instead of Roth accounts, or vice versa. Benz notes that the investor is getting the big picture right by making contributions at all. She explains that the correct type of IRA or 401(k) contribution is always a guess. Investors do not know if their tax bracket in retirement will be higher or lower than it is now. They also do not know what will happen to tax rates over the long term.

Benz advises saving as much as one can afford and making a best guess on the contribution type. She points out a timing issue: by the time investors realize Roth contributions would have been better because their tax-deferred accounts grew or their tax bracket increased, it is often not a great life stage to make those contributions. She believes in using traditional, Roth, and taxable accounts during accumulation years. This strategy allows retirees to strategize which accounts to spend from to limit their tax burden.

Benz says she is a co-host of The Long View podcast. She also writes a free newsletter called Improving Your Finances. The article was provided to The Associated Press by Morningstar.