I love a good debate. Not many get people as riled up as they do for the debate on whether you should invest extra cash, or use it to pay down your mortgage early. In fact, I wrote about this debate and the change in our strategy earlier this year. However, with experts now projecting much lower future market returns, I’m wondering… is it now time to pay down the mortgage?
While reconsidering this debate, it also seemed like it’s also a good time to provide an update our own mortgage vs. investing experiment that was laid out in my original article.
Related Post: Should You Pay Down the Mortgage or Invest Extra Cash?
Reminder: I’m not a expert. This blog reflects my own personal views and investment strategies, and should not be taken as investment advice.
What are future returns expected to look like?
Vanguard’s most recent stock market projections show that nominal, annualized returns, over the next 10 years are expected to be much lower than historical returns.
Here are Vanguard’s 10-year, annualized, nominal return projections by asset class:
| Equities | Return projection |
| U.S. equities | 2.3%–4.3% |
| U.S. value | 2.9%–4.9% |
| U.S. growth | –0.6%–1.4% |
| U.S. large-cap | 2.2%–4.2% |
| U.S. small-cap | 2.1%–4.1% |
| U.S. real estate investment trusts | 2.2%–4.2% |
| Global equities ex-U.S. (unhedged) | 5.1%–7.1% |
| Fixed income | Return projection |
| U.S. aggregate bonds | 1.3%–2.3% |
| U.S. Treasury bonds | 1.1%–2.1% |
| U.S. credit bonds | 1.5%–2.5% |
| U.S. high-yield corporate bonds | 1.9%–2.9% |
| U.S. Treasury Inflation-Protected Securities | 0.9%–1.9% |
| U.S. cash | 1.2%–2.2% |
| Global bonds ex-U.S. (hedged) | 1.2%–2.2% |
| Emerging markets sovereign | 1.9%–2.9% |
| U.S. inflation | 1.4%–2.4% |
Of course, these are just the estimates of one brokerage house (albeit a big one).
As I’ve mentioned before, no one can predict the future of the markets. That said, the majority of “expert” projections I’ve seen floating around the internet also show lower expected returns than those we’ve historically experienced, at least for some period of time.
Other than global equities, which are inherently more volatile and risky, Vanguard doesn’t expect any asset class to perform over 5% in this timeframe! Market returns include both appreciation and dividends, but are not adjusted for inflation, which is projected to be between 1.4% and 2.4%.
These returns are a bit lower than those we’ve used in our personal forecasting spreadsheets, although our timeline is much longer than 10 years. They are also much lower than the 10%+ returns you’ll see used all over social media (you can read my rant on this topic in the post below).
Related Post: What's a Good Estimated Market Return (Growth Rate) to use?
Reminder: Projections don’t equal reality any more than historical returns should.
However, let’s consider the data in this report anyways, as it relates to the mortgage vs. investing debate… just to have a little nerdy fun.
How do lower market returns change our initial “invest or pay down the mortgage” analysis?
Before we calculate how lower future market returns might change our initial conclusions as to whether to invest or pay down the mortgage, let’s first take a look at how our experiment is going so far using actual investments and returns this year.
An update on our experiment…
The market has been booming this year, so as you might expect, our decision to invest our excess cash has been paid off thus far.
Our hypothetical experiment began on January 1st, with a mortgage balance of $200,000 and an interest rate of 2.5%. In order to calculate which strategy was better, and by how much, I used the actual amount of investments we made to our brokerage accounts each month. This is theoretically the extra money that we could have used to pay down the mortgage if we’d chosen that strategy instead. Although we have many investments, we primarily invest in total market index funds, so I used Vanguard Total Stock Market ETF (VTI) in the calculation below for simplicity.
Based on this analysis, the investing strategy increased our net worth by $2,743 more than the mortgage pay down strategy would have through September.
| September 30, 2021 | “Invest” | “Pay Mortgage” | Difference |
| Mortgage Balance | $(193,587) | $(127,825) | |
| Investment Portfolio | $68,505 | – | |
| Net | $(125,082) | $(127,825) | $2,743 |
What returns should we expect over the next 10 years?
The experiment results above are not necessarily indicative of future returns. In fact, it now seems most experts are projecting market returns far less rosy over the next 10 years.
Timeline is important to consider when performing an assessment like this, so if you have 20 -25 years left on your mortgage, you might tackle this analysis differently. We have 14 years left on our mortgage; however, and plan to sell our home within the next 5 years, so the shorter timeline works for us.
When I performed our initial analysis, the breakeven rates of market return (after refinancing our mortgage) were between 2% and 3%. That means if returns were above 3%, we’d be better off investing. Otherwise, paying down the mortgage would be better or the results would be similar. This felt quite comfortable at the time, given historical returns.
Let’s now take a look at our projected investment portfolio returns using Vanguard’s more pessimistic view of the next 10 years.
I calculated a weighted average expected rate of return using our expected portfolio allocations and the mid-range of Vanguard’s projected rates above.
| Asset Class | Expected Return | Portfolio Allocation | Weighted Average |
| US Equities | 3.3% | 77% | 2.54% |
| US REITS | 3.2% | 5% | 0.16% |
| US Bonds | 1.8% | 13% | 0.23% |
| US High Yield Bonds | 2.4% | 2% | 0.05% |
| Cash | 1.7% | 3% | 0.05% |
| 3.03% |
If Vanguard is correct, our weighted average rate of return is projected to be between 2.09% and 3.94%, with a mid-range of 3.03%. Additionally, any dividends we receive or capital gains we make when selling our investments will be taxed, thus lowering the actual returns.
This rate is much closer to our breakeven point than I’d like, and really close to our mortgage rate of 2.5%.
So, do lower market returns mean we should now pay down the mortgage?
Maybe. I’ll admit that the “pay down the mortgage” option is looking better and better now. I’m already pretty risk adverse, so it takes a lot for me to get comfortable passing up a guaranteed return in hopes for a better one with projections this dim.
That said, one of the biggest dangers to a retirement portfolio is inflation. Although inflation is currently running hot, experts expect it to fall back in line with the Federal Reserve’s targeted range soon. If you’re worried about inflation, equities still remain one of your best chances at beating it. It’s also one of the best chances we have of not running out of money in retirement.
Given the recent projections, I’m inclined to tweak our strategy, in favor of using a greater portion of our excess cash to pay down the mortgage. By splitting the difference, we can hedge our bets over the next few years. While this means we wouldn’t achieve the greatest returns, we also wouldn’t earn the lowest. That might be the key to reducing stress and preventing any feelings of regret in the future.
Plus, after seeing how great it felt to pay off my student loans, I’ve got debt payoff fever!
However… since we are so close to achieving Financial Independence, I think we’ll wait until after passing that milestone before slowing down our investing.
Are you considering a change to your mortgage pay down strategy due to lower projected future market returns?
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Allen @ freedomJarFIRE
Nice writeup! After hemming and hawing (and taking some of your advice) earlier in the year, we recently settled on “pay no extra on the investment house @ 1.75%” and “shovel money into the primary @ 3%.” Between the higher rate and the “I don’t want this debt looming” feeling, we decided to just double up on the mortgage payment. I like the confirmation bias this post provides, so thanks for that 😀
Related…just moved ~50% of my VTSAX into VTWAX, kind of blindly but based on what you opened this post with, I feel a little more confident about it. I should probably pay more attention to these things but your blog is the only thing going directly into my mailbox so if you want to run any very small control-group experiments…you’re essentially my primary financial news source ATM
Mrs. RichFrugalLife
Thank you, Allen! You’re always so kind. Glad to hear that you came up with a strategy for your two mortgages, and sounds like something I would have chosen as well if we had two mortgages looming over our heads.
I was surprised by how much higher projected returns were for global stocks in the Vanguard’s reports. We own some VTWAX in our retirement accounts as well. Currently, that fund still holds 59% of it’s investments in US companies, but you do get some good exposure to other countries as well. Our portfolio definitely reflects some home country bias, with only ~12% in foreign investments, which may be short-sighted on our end in the long run. I may try to bump this up a little more over time to spread the risk.