Benz dismisses common criticisms of mortgage prepayment and cash holdings

Christine Benz, director of personal finance and retirement planning at Morningstar, contends that financial advisers often overreact to three common money management decisions: paying off mortgages early, holding excess cash, and selecting the wrong type of retirement account. In a column published by Morningstar, Benz argues that these choices are typically made by financially stable individuals who prioritize security over maximum returns.

Benz acknowledges that current economic conditions may make paying down a mortgage less efficient than investing. With interest rates on certificates of deposit and high-yield savings accounts currently higher than the rates on mortgages secured years ago, the mathematical return on capital might favor investing. She notes that younger investors with long time horizons generally should allocate most of their capital to stocks, which offer higher potential returns. However, she observes that most people who prepay their mortgages have already secured adequate emergency funds and retirement savings. For them, the payoff serves as a peace-of-mind allocation rather than a mistake.

The second decision Benz defends is holding large amounts of cash. While cash has historically underperformed bonds and stocks and has only marginally outpaced inflation, Benz finds this choice less alarming in specific demographics. She frequently sees heavy cash positions in the portfolios of individuals over 50 who possess ample assets. These investors often prefer the liquidity and stability of cash over the volatility of bonds. Benz cites author Bill Bernstein’s advice to stop playing the market once one has won the game, suggesting that if an investor’s overall plan includes sufficient stock exposure for growth, extra cash is a reasonable safety measure.

Benz’s final point addresses the choice between traditional tax-deferred and Roth retirement contributions. She states that determining the optimal account type is essentially a guess because investors cannot predict their future tax brackets or legislative changes to tax rates. Her recommendation is to maximize total contributions regardless of the account type. She suggests using a mix of traditional, Roth, and taxable accounts during the accumulation years. This strategy allows retirees to manage their tax burden by strategically drawing from different accounts as they withdraw funds.

Benz concludes that these three behaviors are not signs of financial distress but rather reflections of individual risk tolerance. She maintains that as long as investors are contributing to retirement and maintaining a diversified portfolio, their specific choices regarding mortgage prepayment, cash reserves, and account types are acceptable. The goal, she writes, is to save as much as one can afford and make a best-guess decision on the structural details of that saving.

This perspective aligns with a growing sentiment among financial planners that there is no single correct path for every investor. Benz’s analysis, distributed through the Associated Press by Morningstar, aims to reduce the anxiety that many savers feel when they deviate from standard investment advice. The column appears on the Morningstar website, where it is available alongside Benz’s other personal finance content.