How is your financial survival ability?

In this deal-or-no-deal, your challenge is to make it to Retirement Village with enough funds to support yourself for at least your life expectancy. Caution: the path can be tricky.

To start you on your journey, you have been provided a lump sum of $40,000 and a $1,327/month allowance to pay your mortgage.

The deal: Use a guide instead of braving it alone.

Your first step is to purchase a $200,000 home; before you are two paths. Path A is 15-year fixed mortgage at 6.38% and path B is a 30-year interest-only at 7.42%. At first glance, the lower rate is attractive. Beware of false assumptions! On path A you put all $40K down on the house and qualify for a monthly payment of $1,227. On path B you only have to put $10K down, so the rest goes into savings. You have $1,327 a month so on path A you put an extra $100/month toward paying off the loan faster, but on path B you put the extra $100/mo into savings.

Your guide recommends path B, and you reluctantly agree.

You receive $40,000 and $1,227 per month to allow you to buy a $200,000 house.
Path A		Path B
15-year fixed	loan type	30-year interest-only
6.38% APR	interest rate	7.42% APR
$40,000	downpayment	$10,000
$0	leftover to save	$30,000
$1227 to loan $0 to savings	monthly payment	$799 to loan $428 to savings
to pay off the loan faster	$100 extra every month	to build savings faster

 

Where would you be five years down the road?

If you had chosen path A, you would have received $14K in tax deductions on the interest on your loan; unfortunately you'd have nothing saved for a rainy day. Because you chose path B, you will have received $22K in tax deductions on the interest on your loan, and you will also have $83K in savings. Good guide, eh?

But what would happen if the monthly allowance of $1,327 stopped coming in? If you were on path A you would have loads of troubles, but if you had chosen path B you would have enough in reserve to live until you found a new source of income. Luckily the allowance didn't stop, but it easily could have. It happens every day.

Using a guide was a wise choice!

Your situation after five years…
Path A		Path B
15-year fixed	loan type	30-year interest-only
$14,216	tax deductions	$22,557
$0	savings & investments	$83,513
…but what if you lost your job? (luckily you don't but you could have)
Path A		Path B
you have no savings to live on until you get another job	how will you make it?	you have plenty of savings to live on until you find another job
you can't get a loan to make it through this crisis, even though you have $74,320 in equity in your home	a new loan	you don't need a loan because you have savings
you have to sell the house or face foreclosure because you can't make your payments	the mortgage	you can easily make your payments
you sell the house at a crazy discount just to be back in the black	the house	you keep your house

 

Where will you be fifteen years down the road?

If you had chosen path A like you wanted to, your house would be paid for, and because you were putting an extra $100/mo to the loan, you'd also have $30K in savings.

But since you decided to listen to a guide, your savings has grown to $282K, but you still owe $190K on your home loan. Your guide recommends you keep the loan, but you decide to pay it off, leaving you with $92K in savings. Hey, that's still $60,000 more than path A! This guide thing is really paying off!

Your situation after 15 years…
Path A		Path B
15-year fixed	loan type	30-year interest-only
$25,080	tax deductions	$67,670
it's all paid for	the house	you still owe $190,000 on the loan, so you pay it off with part of your savings
you have $30,421	savings & investments	you have $92,019

 

Before you know it you reach the retirement village 30 years later. But wait, both paths ended up in the same place at the same time...same diff, right? Let's see.

If you arrived via path A, you have a home that is paid for, and you have $613K in savings. This may sound like a lot, but it will only provide a poverty-level income of $36,000/year (adjusted for inflation) for six years. Then you're broke!

If you arrived via path B, you also have a home that is paid for, but you have over $1 million in savings. It also sounds like a lot, but thanks to inflation everything costs more. Your cool million only provides the same $36,000/year lifestyle for 13 years before you're broke. At least it's better than path A. Thanks, guide.

Your situation after 30 years…
Path A		Path B
15-year fixed	loan type	30-year interest-only
$25,080	tax deductions	$107,826
you have $613,858	savings & investments	you have $1,115,425
6 years	how long will this last in a poverty-level retirement?	13 years

 

But your guide shows you on the map where there was one more path where you didn't follow his advice. Half-way down path B, at the 15-year mark, there is a fork in the road where path C starts.

On path C, you didn't pay off your loan in year 15, but instead kept the entire $282K growing using compound interest to your advantage. On path C you would have over $2.2 million, enough to provide you $50,000/year (adjusted for inflation) that would last 20 years!

There is good news. Even if you're currently on path A, if you get a guide you may be able to jump over to path C and still arrive at retirement village with more in your pocket than you would have.

The deal: Use a guide instead of braving it alone. Deal or no deal?

But that's not the whole story--there is a fork in the road a few years down path C. You've seen where one side of the fork leads ($2.2 million), but the other side of the fork leads to an even better income, one that is guaranteed for life! But you need a guide.

To explore which path is right for you, click here to contact me.