Ask Paul: We've paid off our house in our 40s, what now?

Mortgage-free in his 40s with $300,000 super and $300,000 invested, should Aaron take on debt again?

Reader question

Hi Paul, I've been reading Money since I was a uni student with a hundred dollars to my name. I learn something from every issue and it keeps me focused on my finances, so thanks to you and the Money team.

I'm now in my 40s and my wife and I have paid off our home.

With no mortgage to pay anymore, we have been investing our surplus cash into broad-based index funds and have accumulated a portfolio of about $300,000 outside super (our combined super balance is also about $300,000). We have two children and live a modest lifestyle to maximise savings.

We would like the option to 'retire' in about 10 years and will likely become carers for elderly parents. We are torn between the best option for us financially. Would it make more sense to:
1.  Stop investing in shares outside super and buy an investment property?
2.  Access some of the equity in our family home to buy additional shares/index funds?
3.  Continue to do what we are doing and build our share portfolio?

I know our current path is the least risky, as we have no debt, but part of me thinks I should be leveraged a little more with a 10-year timeframe ahead. - Aaron

Paul's response

I'm feeling very old, Aaron. But also honoured that you have been following Money for so long.

This is the second letter, recently, from a Money reader who has also paid off their house at 40 (Paul's Verdict, February issue).

Some of my favourite moments come from those who have followed my key advice to pay extra into their mortgage. I was saying this on radio in the early 1980s, my Money TV show in the 1990s and Money magazine from 1999.

In particular in the '80s, few really understood compound interest and the value of just a few extra dollars into a mortgage each week.

I feel really pleased when someone tells me they paid their mortgage off years or decades early due to this advice. Paying a house off is such a simple idea, but where I hope we have helped a bit with Money is to constantly reinforce the principles of wealth creation.

Paying off a home is a 'genius' strategy. It literally locks in a path to financial independence, as you are demonstrating. Once achieved this allows you to make life choices, such as early retirement, and in your case the ability to play a vital and loving role as careers for your parents. So what's next for you?

I agree that at age 40, with a strong savings history, your $300,000 in super and $300,000 invested outside of super, some gearing is a good idea with your 10-year view. You have already noted your current path is the least risky. I support being "leveraged a little more", as you say.

In your situation, you can manage risk with time. It is hard to move away from the historical fact that in a world with growing population numbers, good quality assets such as property and shares are likely to show good long-term returns.

Yes, we will get downturns and these can be large. Our friend history shows, though, that prices recover.

Those who lose through gearing are forced to sell in bad times, usually at a big loss. If you choose to gear, we must eliminate the forced sale risk. This means you do not borrow money where you cannot afford to service the repayments.

Obviously, you also have your safety pot of investments outside super. In terms of shares or property, I am neutral. You own property in your home and shares inside and outside super.

Let's look at these asset classes through the 'sleep at night' lens. In a downturn, which asset are you more comfortable with, property or shares?

Technically, shares are a much easier option and after all costs, a higher performing investment. The problem, of course, is when our property goes backwards, we would struggle to sell in a downturn and we don't see or know its value every day.

In summary, I agree with a 10-year gearing strategy into quality shares or a well-located property. The scale of gearing should reflect your situation. Don't over-gear. I think it is sensible to go with either of these proven asset classes, based on your preference.

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