I am 55 and my wife is 53. I still work making $50k a year and my wife is an out-of-work realtor who is waiting for the market to get better. We just inherited some money that's all in the stock market. Since the market is in a slump which may get a lot worse, would it a good idea to pay off the $135,000 mortgage (5.95 interest rate)? That would leave me with a nice amount to keep in the market or put in CDs. We also have a car loan at 7% of $16,000.
I originally had the idea that I'd put my money in the market and it would pay me enough to only work part time, but that hasn't worked out. I want to make the right decision, can you help?
Thanks
RS & BS
Paying off debts is a great way to improve your cash flow - which is just as good as creating an income stream. It also feels very safe and secure to have no debts and own your home free and clear.
However, sinking all your inheritance into your home leaves you with no leverage*, little diversification**, and possibly too little liquidity***. I would definitely pay off the car loan, but I wouldn't rush to pay off the mortgage. Instead, I'd recommend creating a plan to pay it off over the next five years or so. I would also recommend allocating a good portion of your cash to investments other than CDs. A good financial professional, such as a certified public accountant or a certified financial planner, can help you create a well-rounded portfolio with a comfortable risk level and better returns.
In your situation, I recommend a professional that charges an hourly or flat fee, not a commission-based salesperson. The amount you spend getting good advice will be worth it - the right advice right now can make the difference between working full-time longer or being able to work fewer hours when you choose.
* Leverage: Borrowing money so you can invest in a larger asset. For example, when you buy real estate with a mortgage, you make more money when values rise than you would if you bought a much smaller property you could afford without the loan. (Of course, when you use leverage and the prices go down, you can lose your entire investment.)
** Diversification: Investing in a range of investments that react differently to economic conditions. Diversification is a hallmark of safe investing with maximum return.
*** Liquidity: The ability to get ahold of your money when you need to. The most liquid investment is cash.