Math Or Emotion? It’s Debatable.

A great debate is underway, whether you’re aware of it or not. The subject is artificial intelligence, or AI for short. AI is the intelligence exhibited by machines or software and is also the name of the academic field of study, which studies how to create computers and computer software that are capable of intelligent behavior. The debate is focused on the morality of whether the machines will ultimately become more powerful than the humans who create them, and what to do about it.

What was once science fiction has now come front-and-center, with consequences that are very real. While I won’t dive too deeply into the debate here, I would like to suggest that we consider a similar question as it relates to retirement and financial planning:

Is it best to choose the path that is based purely on mathematics or is it best to follow the path which feels best, the emotional choice. The path you choose has very real consequences.

Let’s consider an example: Is it best to pay off your mortgage before retirement or is it more advantageous to maintain a mortgage in retirement because of the tax deduction of the mortgage interest , thus the availability of “cheap” money to use for other purposes? Ah, math or emotion? Let’s consider both sides of the argument, shall we?

Math

If one chooses to maintain a mortgage in retirement, the assumption is that there is a better use for the money that would otherwise be paid to the bank. If the interest rate being paid to service the mortgage is 5% and income being used to pay that 5% to the bank is taxed at 25%, then the net “cost” of the use of the money is 3.75% (5% X 1-.25). If the money used to pay off the mortgage was invested at a guaranteed rate that exceeds 3.75% after tax, wouldn’t it make mathematical sense to use the bank’s money forever and not pay off the mortgage? Mathematically, it would.

Emotion

Is there a person alive who enjoys owing money to others? Seriously, why would you want to shoulder the burden of debt for the rest of your life when you can choose to simply make it go away? Some will say having a paid-for home makes the grass feel better under your feet. Emotionally, then, paying off the mortgage makes perfect sense, when considered from an emotional perspective. Isn’t that why people used to have mortgage burning parties? “We’re free, it’s ours and it can’t be taken away!” Try to top that, math!

The problems I see with this existential debate occur when two spouses are trying to decide who they are, financially: math people or emotional people (Remember, opposites attract.). Oftentimes, the spouse who chooses math and wishes to continue using the bank’s cheap money gets handed the checkbook and told: “Here, you pay the bills because I’ll just pay it off if I’m in charge.”

As you can imagine, retirement planning is ripe with these types of decisions: mortgage or not, guaranteed income plan or risk-based income plan, maximize our available spending or leave money to the kids as an inheritance, and on and on. While there’s no perfect answer for any of these questions, the right answer is often somewhere in-between. That’s right, some math, some emotion, hers and his, yin and yang.

The key to the great debates, whether math or emotion, or increasing advancement toward AI versus shutting the machines down, is to engage in the conversation. By learning to embrace the tension of the question, we can ultimately arrive at solutions that satisfy all parties. These are solutions that work not because they’re perfect but because they’re intentional and reasonable. Oh, and keeping things flexible helps too; you never know when the math or your emotions will change.

All the best,

Adam Cufr, RICP®