You can’t fix the problems with insecure jobs, lack of steady pay arises, and absence of company pensions. The structural problems are too deep. You can, however, devote less of your career to interest expense and more toward build a retirement account of your own. In other words, the question is not how to fix the Old Normal or budget your salary but how to allocate your career?
Instead of spending your entire career on mortgage payments, the new allocation is to save the last 15 years for a retirement account! Money that previously went to mortgage payments, in particular, becomes investment capital, which earns compound income.
Between capital and compound earnings, the retirement account can pay half of living expenses for 20 years in retirement. With Social Security and other other retirement income paying the other half. Millennials and Gen Z can retire with financial peace of mind.
Simply put, the solution is not to save more money but more time to invest in yourself!
Pay Mortgage Off by Age 50-55: Allocate no more than 20-25 years to mortgage payments, leaving the last 15 years for a retirement account. Which means the mortgage must be paid off by age 50-55 in the New Normal, thus liberating former mortgage payments to be investment capital.
Former mortgage payments are the ideal capital to build a retirement account because they reflect the homeowner’s income and standard of living. Convert them from expense to investment capital and natural result be a retirement account that likewise reflects their standard of living.
Not Difficult: Paying off the mortgage by age 50-55 may seem impossible, given the price of homes and paltry pay raises, but it’s not as difficult as it seems. That’s because it doesn’t take much to eliminate the first 10 years of payments on a 30-year mortgage.
Since the first 10 years is almost all interest expense, very little principal, you can turn lemons into lemonade by repaying a small amount of principal sooner than scheduled and recapture a good many of those 10 years. In other words, you can “buy-back” time for very little money. (See Strategic Repayment tab.)
When you move, simply pick up on a new mortgage where you left off on the old one. If there’s 20 years left on the old mortgage, for example, start with a new 20-year mortgage. Never go back and start all over again.
Many Paths: In lieu of Strategic Repayment, you can also recapture that time by refinancing for shorter term, instead of lower payment. Or start with a 20-year mortgage on your next house, which has a payment closer to a 30-year but the interest closer to a 15-year. There are many paths to the mountain top.
Illusions: Many will argue against repaying principal sooner than scheduled. Keep a “low” interest rate, for instance. They mistakenly think a 5 percent annual interest rate means that interest is five cents on the dollar. on a cash basis, however, it’s actually $6.97 of interest per $1 of principal repayment during the first five years on a 30-year repayment schedule, a true cost of 697 percent! Very hard to get ahead in life paying that kind of expense.
Invest: Strategic Repayment is one of the best investment you could possibly make. In addition to eliminating $6.97 of interest for every $1 of principal, recapturing 10 years of your career is worth more than money.
Reallocate Career: People who “work for a living” cannot afford to make mortgage payments until they’re 65-70 years old. They must reallocate their careers in the New Normal. Saving time, 15 years for a retirement account, is more constructive than all the financial whiz-bang and quantitative tools in the world.
Indeed, the best solution for a complex problem is usually the simplest solution. Solving the retirement puzzle by reallocating your career is one of those simple ideas!
Even so, Human Nature is to resist “change.” Making mortgage payments for an entire career has worked so well for so long that people will try every other possibility before accepting the idea that they must reallocate their careers in the New Normal. Pray that you’re not one of them.
