Our Advisor Is Advising Us Not To Pay Off Our Home

Summary

Ramsey Everyday Millionaires

Episode: Our Advisor Is Advising Us Not To Pay Off Our Home
Release Date: February 12, 2025
Host/Author: Ramsey Network
Description: Explore how ordinary individuals have achieved extraordinary wealth by living below their means, avoiding debt, and making disciplined financial decisions. Join hosts Dave Ramsey, Ken Coleman, Rachel Cruze, George Kamel, Jade Warshaw, and Dr. John Delony as they delve into real-life millionaire stories and actionable financial strategies.

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Introduction

In this compelling episode of Ramsey Everyday Millionaires, Dave Ramsey and his co-hosts tackle a pressing financial dilemma presented by a caller, Carol from New York City. The discussion centers around the contentious advice Carol has received from her financial advisor regarding paying off her mortgage early versus maintaining her investment strategy.

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Caller’s Financial Dilemma

Caller Introduction: Carol reaches out with a concern about her husband's impending retirement and their desire to pay off their $800,000 mortgage within the next year.

• Carol: “I have a husband who's retiring within the next 12 months and we'd like to finish paying off the mortgage on the house.”
  [00:25]

Advisor’s Advice: Contrary to Carol’s intentions, her financial advisor recommends against paying off the mortgage. The advisor argues that with an interest rate below 3% on the mortgage and investments yielding higher returns, it financially makes more sense to continue paying the mortgage while investing the surplus funds.

• Dave Ramsey: “I like his advice on that basis.”
  [02:21]

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Dave Ramsey’s Analysis and Advice

Dave Ramsey delves into the specifics of Carol’s situation, providing a critical analysis of her advisor’s recommendations.

• Mortgage vs. Investments: Ramsey questions the viability of cashing out investments to pay off a low-interest mortgage, highlighting potential losses due to bond devaluations in a rising interest rate environment.

  • Dave Ramsey: “You probably got no gain on your bonds. Their probably value is down even though the coupon rate stayed the same. And so my guess is that you bought them during a lower interest rate environment, so they're probably not even worth what you paid for them today.”
    [01:34]

• Asset Allocation Critique: He criticizes the traditional asset allocation methodology that suggests shifting from equities to bonds as one ages, labeling it as flawed advice that can lead to substantial financial losses over time.

  • Dave Ramsey: “...the amount of money I've lost during that 30 years is millions. So it's bad advice, this asset allocation methodology. It's bad advice.”
    [04:42]

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Critique of Financial Advisor’s Approach

Ramsey expresses significant dissatisfaction with Carol’s financial advisor, pointing out two main issues:

1. Advising Against Paying Off the Mortgage: He disagrees with the recommendation to keep the mortgage open based solely on low-interest rates and higher investment returns.

   • Dave Ramsey: “One is he told you not to pay off your mortgage.”
     [03:22]

2. Investment in Bonds: Ramsey argues that bonds are underperforming and not necessarily safer than stocks, especially in the current interest rate environment where rising rates devalue existing bonds.

   • Dave Ramsey: “...you have a fourth of your money tied up in something that's substantially underperforming because of this guy.”
     [03:48]

He further elaborates on the risks associated with bonds, emphasizing their inverse relationship with interest rates and questioning their safety compared to equities.

• Dave Ramsey: “Bond prices are exactly inverse to the prevailing interest rate market...you never would buy bonds in an...a rising interest rate environment.”
  [06:00]

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Discussion on Bonds and Asset Allocation

Ramsey provides an in-depth explanation of why bonds may not be the optimal investment choice in certain economic climates and critiques the widely accepted asset allocation strategy.

• Interest Rate Impact on Bonds: He explains how bonds lose value when interest rates rise, which is currently a concern given the unprecedented low-interest rate environment over the past decade.

  • Dave Ramsey: “...we had a record low in the last 100 years, we had a unprecedented 3% interest rate environment for a decade...where is he gonna go from the lowest in interest rate environment in history up?”
    [06:00]

• Volatility Comparison: Ramsey challenges the notion that bonds are less volatile than stocks, stating that their price movements are similarly unpredictable.

  • Dave Ramsey: “...they are not legitimately safer than stocks or mutual funds. Okay. Because when you track the volatility of bonds values versus the volatility of mutual fund stock values, they're very similar.”
    [04:20]

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Insight on Selecting Financial Advisors

Highlighting the importance of choosing the right financial advisor, Ramsey advises listeners to seek professionals who prioritize their clients' goals over standardized financial theories.

• Alignment with Goals: He emphasizes that a good advisor should listen to and respect the clients’ financial objectives rather than impose their own agenda.

  • Dave Ramsey: “His job is to say, okay, what are your goals and how can I help you accomplish them.”
    [02:42]

• Red Flags: Ramsey points out signs of ineffective or arrogant advising, such as dismissing clients’ plans without consideration and adhering rigidly to flawed financial models.

  • Dave Ramsey: “He puts everything away from equities because as you get older you should limit risk. Cause that's horse crap.”
    [04:42]

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Importance of Aligning Financial Goals

The discussion underscores the necessity for financial strategies to align with personal goals and circumstances rather than following generic advice.

• Client-Centric Approach: Ramsey advocates for a personalized approach to financial planning, where advisors tailor their strategies to fit the unique needs and objectives of each client.

  • Dave Ramsey: “Listen to the wise financial advisor because bull crap. His job is to say, okay, what are your goals and how can I help you accomplish them?”
    [02:42]

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Key Takeaways

• Evaluate Advisor’s Advice Critically: Not all financial advice suits every individual; assess recommendations based on personal financial goals and current market conditions.

• Understand Investment Vehicles: Recognize the risks and benefits of different investment types, such as bonds versus equities, especially in varying interest rate environments.

• Prioritize Personal Financial Goals: Ensure that financial strategies, including mortgage repayment and investment decisions, align with long-term objectives and comfort levels.

• Choose the Right Financial Advisor: Select advisors who listen and adapt to your unique financial situation rather than adhering strictly to standardized models.

• Question Traditional Financial Theories: Be open to questioning widely accepted financial strategies and consider alternative approaches that may better serve your financial well-being.

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Conclusion

In this episode, Dave Ramsey provides valuable insights into the complexities of mortgage repayment and investment strategies. He encourages listeners to critically evaluate their financial advisors' recommendations and prioritize strategies that align with their personal financial goals. By understanding the intricacies of bonds, asset allocation, and the importance of a client-centric approach, listeners are empowered to make informed decisions that pave the way to financial success.

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Notable Quotes:

• Dave Ramsey: “The problem is everybody just accepted this as if it's a fact. It's not a fact, it's a theory, it's an idea.”
  [04:02]

• Dave Ramsey: “It's bad advice, this asset allocation methodology. It's bad advice.”
  [04:42]

• Dave Ramsey: “Bond prices are exactly inverse to the prevailing interest rate market.”
  [06:00]

• Dave Ramsey: “Listen to the wise financial advisor because bull crap.”
  [02:42]

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By dissecting Carol’s situation and providing a robust analysis, this episode equips listeners with the knowledge to navigate complex financial decisions and advocate for their own financial well-being.

Transcript

[Caller]

Foreign.

[Announcer]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor Carol is with us.

[Dave Ramsey]

Carol is in New York City. Hi, Carol. Welcome to the Ramsey Show.

[Caller]

Hello. Thank you so much for taking my call. It's a real to talk to y'all.

[Dave Ramsey]

You too. What's up?

[Caller]

I have a husband who's retiring within the next 12 months and we'd like to finish paying off the mortgage on the house.

[Dave Ramsey]

Good.

[Caller]

Yes, but per your advice, and our financial advisor is advising us not to because the mortgage is at under 3% and our investments are doing well above that. However, that doesn't matter to us. We want to plow ahead and get this done. And our next question to him is how can we best divest of our investments and pull the money out, make the cash available to do this? And his next tier of advice is to pull from our bonds that are earning at tax free rates as opposed to pulling from our mutual funds that we'll have to pay capital gains taxes on. What do you suggest we do?

[Dave Ramsey]

You probably got no gain on your bonds. Their probably value is down even though the coupon rate stayed the same. But as interest rates rise, bond values go down. And so my guess is that you bought them during a lower interest rate environment, so they're probably not even worth what you paid for them today. Is that right?

[Caller]

I'm not sure that that's a good question.

[Dave Ramsey]

I don't think you're going to have any gain to amount to anything. So I like his advice on that basis.

[Caller]

Okay.

[Dave Ramsey]

And what is your total nest egg?

[Caller]

Four million.

[Dave Ramsey]

Okay. And how much is the mortgage?

[Caller]

800,000.

[Dave Ramsey]

Okay, good, good. And you guys are how old?

[Caller]

69 and 67.

[Dave Ramsey]

Cool. And how much have you got in these bonds?

[Caller]

That I don't know. That's a good question.

[Dave Ramsey]

Is about 800 is enough to do this or.

[Caller]

I think so. Yes, yes. By the way he was talking about it, I was not, not that specific with him.

[Dave Ramsey]

Okay.

[Co-host]

Is he the one that puts you guys in the bonds, Carol, to begin with or was that something that you had?

[Caller]

Yes. No, he's, he's been, we've been with him for our entire working career.

[Co-host]

Okay.

[Dave Ramsey]

Okay. Yes, I agree with his advice on that. I would use the bonds first to answer your question. Okay. This guy, you need to be aware of a couple things here with this guy. I'm not quite ready to fire him, but I'm close.

[Caller]

Right.

[Dave Ramsey]

Okay, I hear you. Number one, because he, his job is not to take his glasses on the end of his nose and speak down to you little people who have $4 million and you shouldn't be paying off your mortgage. Listen to the wise financial advisor because bull crap. His job is to say, okay, what are your goals and how can I help you accomplish them?

[Caller]

Yes.

[Dave Ramsey]

So I don't like his approach to this. And it's very typical in the financial advising world, this level of arrogance. It's just below the. It's not overt arrogance, but it's a subversive arrogance.

[Co-host]

But this advice is very prominent among the people.

[Dave Ramsey]

Yeah, it's a standard. It's a standard. That's the second problem I've got with him, is he did two very standard things in the financial world that I completely disagree with. One is he told you not to pay off your mortgage. And the second is he put you in bonds.

[Caller]

Right?

[Dave Ramsey]

And so these bonds, you know, you have a fourth of your money tied up in something that's substantially underperforming because of this guy.

[Caller]

Right, Gotcha. Okay.

[Dave Ramsey]

And that's these bonds. So I'm. And. Cause here's the thing again, the simple thing to remember about bonds is this. In the financial advising world, we have been taught and everyone for some reason decided to agree with it rather than actually making their own decisions. But the people like me and him that are trained in this stuff, we've been taught that as you get older, we use what's called the asset allocation methodology or theory, and that as you get older, you should be in less and less and less risk. And so that by the time your age, you should largely be in bonds and money markets and have very little in equities. Okay? The problem is that everybody just accepted this as if it's a fact. It's not a fact, it's a theory. It's an idea. And I disagree with it. I'm 64, I have 0 in bonds and almost the same amount in money markets. I got a little bit in money markets just because I like some cash. But I'm not sitting in. I'm not. Haven't moved everything away from equities because as you get older you should limit risk. Cause that's horse crap. If I live to 94 and I'm 64 and I've been in an instrument making 8% instead of an instrument making 12 or 14, the amount of money I've lost during that 30 years is millions. So it's bad advice, this asset allocation methodology. It's bad advice. And so he puts you in these bonds. The second thing you need to know about bonds is that they are not legitimately safer than stocks or mutual funds. Okay. Because when you track the volatility of bonds values versus the volatility of mutual fund stock values, they're very similar. It's not safer. It's really not. And the reason is the third thing. And then I'll let you go. Okay. Is this thing. I love it, but I mean, it's teaching for everybody out there. Oh, it's good.

[Co-host]

It's good.

[Dave Ramsey]

It's everybody out there.

[Caller]

Thank you.

[Dave Ramsey]

Bonds. The thing you remember about bonds is there's a set interest rate on the bond. So when interest rates rise, in order to achieve that same a higher. Let's say you got a 4% rate and interest rates are 7. And so people are expecting 7, but your bond is only paying 4. So the value of your bond goes down as interest rates rise. It goes up as interest rates fall. Bond prices are exactly inverse to the prevailing interest rate market. So in a. In a rise, in a record low in the last 100 years, we had a unprecedented 3% interest rate environment for a decade, right? Yes. And in the middle of the lowest interest rate environment in known history, this guy puts you in bonds. And where is he gonna go from the lowest in interest rate environment in history up? As interest rates go up, your bond values go down. And so I'm afraid you may have actually lost money on these bonds when you get into them, But I'm hoping you at least broke even. That's what I'm hoping. So interest rates, folks, bond prices. The value of a bond goes down as interest rates rise. So you never would buy bonds in an. In a rising interest rate environment. You would buy them in a falling interest rate environment if you were going to buy bonds at all. And that's because of the yield on the bond has to approximate the prevailing rate, and yet the coupon rate is fixed.

[Co-host]

Yeah. And I think one of the most important things we've learned with the financial advisor is exactly what you said at the top of this is that here are my goals, and if they're not respecting or hearing that they're going to. They're going to do the inverse of that.

[Dave Ramsey]

Right. Where else have I got to figure out that you're giving me bad numbers?

[Co-host]

That's right.

[Dave Ramsey]

You know, yeah. So I'm not ready to fire this guy, but I really dislike bonds for him from him. And I dislike his mortgage advice, and I dislike that he's kind of telling you what to do instead of asking you what you want to do.

[Announcer]

Thanks for tuning in to Ramsey Everyday millionaires. Need help with your investments? Connect with a smartvestor [e-mail] com smartvestor or click the link in the show notes Ramsay Solutions is a paid non client promoter of participating pros. Learn more at ramseysolutions. Com smartvestor.