Morningstar expert says mortgage payoffs and cash holdings are fine

Christine Benz, director of personal finance and retirement planning at Morningstar, stated on Tuesday that she is not worried about three specific financial behaviors often criticized by peers. Benz, who also co-hosts The Long View podcast, published an article through the Associated Press outlining why these decisions are acceptable for many households.

Benz identified paying off a mortgage early as the first behavior she finds unproblematic. While she acknowledged that current interest rates on certificates of deposit and high-yield savings accounts are higher than rates on mortgages secured years ago, she noted that younger people with long time horizons should generally invest in higher-risk assets like stocks. However, she explained that most people who prepay their mortgages have their other financial bases covered. She described the payoff as a peace-of-mind allocation rather than a sign of financial distress.

The second behavior Benz addressed is holding extra cash. She admitted that cash has underperformed bonds and stocks over long periods and has only slightly edged out inflation in modern U.S. market history. Benz observed that heavy cash stakes are common among investors over 50 who have ample portfolios. She argued that these individuals often prefer the liquidity and stability of cash over bonds, even if it means forgoing some returns. She cited author Bill Bernstein, who said, If you’ve won the game, stop playing.

The third area of focus is the choice between traditional tax-deferred contributions and Roth contributions. Benz said investors are getting the big picture right by saving for retirement in the first place. She explained that the correct type of contribution is a guess because people do not know if their tax bracket in retirement will be higher or lower than their current bracket. She also noted uncertainty regarding secular tax rate changes.

Benz advised readers to save as much as they can afford and make their best guess on the contribution type. She pointed out a timing issue where investors often realize Roth contributions would have been better only after their tax-deferred accounts have grown or their tax bracket has increased. At that point, she said, it is usually not a great life stage to make Roth contributions.

Benz is a strong believer in using traditional tax-deferred, Roth, and taxable contributions during accumulation years. She said this strategy allows individuals to strategize which accounts to spend from during retirement. This approach helps limit the tax burden as retirement unfolds.

Benz noted that she has mentioned her own preference for cash as a failure on paper. She emphasized that if a person’s financial plans are otherwise in solid shape, a little extra cash is not something she will fret about. She added that she has yet to meet anyone who told her that paying off their mortgage kept them from other important financial goals.