A new debate on paying off the mortgage (or not).

[cute fuzzy bunny]

Last time I checked, this is the early retirement forum, not the I'm still working and making a wage adjusted income forum.

But as I've said a hundred times...if you are still working and your company is paying a wage adjustment in excess of inflation, you ought to have a mortgage. As long as the rate is good.

Unless of course you're a nervous accumulator and have a bunch of bonds paying 3.5% while paying 6% on your mortgage, as Nords pointed out. Thats stupid.

And also for the hundredth time, this isnt about the numbers, this is about risk tolerance and a bunch of financial hairballs designed to provide data for the predetermined answer...90% of the time...

[slazenger]

Quote:

Originally Posted by cute fuzzy bunny Last time I checked, this is the early retirement forum, not the I'm still working and making a wage adjusted income forum.

Wow, is everyone here as polite as you? Your rudeness aside, I guess I probably should ask if I'm the only one that's still working here and only aspiring to retire early.

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But as I've said a hundred times...if you are still working and your company is paying a wage adjustment in excess of inflation, you ought to have a mortgage. As long as the rate is good.

Ok i'm going to break it to you and Nords what apparently isn't evident by my profile; I'm not aware of what's been said 1000 times, or what you've said 100 times.

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Unless of course you're a nervous accumulator and have a bunch of bonds paying 3.5% while paying 6% on your mortgage, as Nords pointed out. Thats stupid.

If i was under the belief that the long term return on my long term bonds over the rest of my career was only going to be 3.5% or anything even close to that, I assure you I'd liquidate every one of them immediately.

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And also for the hundredth time, this isnt about the numbers, this is about risk tolerance and a bunch of financial hairballs designed to provide data for the predetermined answer...90% of the time...

Then why are we discussing something else?

[cute fuzzy bunny]

Should I have put three "winkies" at the end to avoid the lack of politeness comment?

We DID put together an entire section on frequently asked questions, and this item has about 20 threads with a few thousand posts attached. But frankly I dont expect people to read them before asking questions. Its inconvenient.

In the meanwhile, your return from your long term bonds, adjusted for inflation, will be far less than 6%. You'll be lucky to get 3.5%. In fact, at that price point I'd buy them. Otherwise I wouldnt touch long term bonds with a 42' custom made pole. I'm not even thrilled with intermediate term bonds in the sort of market we've had for the last 8 years or will have for the next 10-15.

[slazenger]

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Originally Posted by cute fuzzy bunny Should I have put three "winkies" at the end to avoid the lack of politeness comment?

Sorry, it just reminded me of those situations where someone jabs you then they say "just kidding" to make it all better. I was trying to honestly point out where my situation was a bit different than what you described and it was no attack on you.

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We DID put together an entire section on frequently asked questions, and this item has about 20 threads with a few thousand posts attached. But frankly I dont expect people to read them before asking questions. Its inconvenient.

Fair enough, .... just saying I wasn't debating/discussing with myself. I could have just been told that initially if the real objective is to thwart repeated discussions. Also, I didn't really have a question

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In the meanwhile, your return from your long term bonds, adjusted for inflation, will be far less than 6%. You'll be lucky to get 3.5%. In fact, at that price point I'd buy them. Otherwise I wouldnt touch long term bonds with a 42' custom made pole. I'm not even thrilled with intermediate term bonds in the sort of market we've had for the last 8 years or will have for the next 10-15.

This is a null though, right? Inflation applies to the effectual return I get on paying off a 6% note early, so it just brings us back to where we were.

Ok so lets rap this up because I agree, it's not what the OP was talking about.

[cute fuzzy bunny]

Inflation for a non wage earner is a null effect. It applies to your debts and your investments equally. Wages are generally better offset than inflation...just not for the last 7-8 years :

Other than that, I accept your apology and I love you man!!!

I'm not even remotely interested in thwarting repeated discussions if theres new and interesting elements to them.

For what its worth, I get my ass kicked on a bunch of other discussion forums on a regular basis for not reading all 524,285 posts that went before. Its cultural.

[cute fuzzy bunny]

Actually the 4% scenario doesnt specify maintaining your cash balance, it just specifies not going to zero during the period of time being tested. In many instances of trial runs a portfolio may become extremely depleted during or towards the end of a 'run'.

The strategy sounds terrific if you get a fixed rate of return, but returns are variable and multi year periods of negative returns are very common. If you took out your mortgage in late 99 or 2000 with this strategy, I'm thinking it hasnt worked out very well for you over the last 8-9 years. I'd have been chugging down antacid pills by late 2002.

You could have taken on a whole lot more risk, or done a whole lot more diversification than most people and maybe pulled a positive return. But thats a whole different ball of wax.

Once you risk adjust and take into consideration the odds of having a failure to produce a positive return for these less than ten year periods, you find there are no free lunches.

[Nords]

Quote:

Originally Posted by cute fuzzy bunny If you took out your mortgage in late 99 or 2000 with this strategy, I'm thinking it hasnt worked out very well for you over the last 8-9 years.

Didn't we conclude at some point that the bigger portfolio could handle the sustained downturn more easily?

Admittedly the math gets a little hairier if the mortgage money went to Adelphia, Enron, Worldcom, & Global Crossing...

[cute fuzzy bunny]

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Originally Posted by Nords Didn't we conclude at some point that the bigger portfolio could handle the sustained downturn more easily?

Depends on how it was invested and if the investor blinked at any point and changed allocation or pulled their money out. I didnt have to face that decision but based on all the posts about running for the exits over the last few months, it'd have been a real problem for a fair number of people.

Further, resiliency depends more on the spending side than the investment side when things turn south. Someone with no debt isnt required to spend a penny they dont want to, short of anything that gets their home or freedom revoked. Market goes down 80%, that mortgage payment still needs to be made.

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Admittedly the math gets a little hairier if the mortgage money went to Adelphia, Enron, Worldcom, & Global Crossing...

Or the S&P 500, or the Nasdaq 100, or the Total Stock Market.

Havent we heard enough about how those havent gone anywhere (or are still underwater as in the case of the nasdaq) over the last ~10 years?

If you were in REITS, certain high bond/low equity balanced funds, emerging markets or one of another handful of "right place at the right time with absolutely no way of foreseeing that they'd perform the way they did" asset classes, then you did well. In most cases, those asset classes are at the upper end of the risk spectrum.

[jclarksnakes]

It seems to me that we can drive ourselves nuts running the numbers on this but what it really comes down to is our own personal feelings about debt. Many here think any debt including a mortgage a mistake. To many others a mortgage is okay and all other debt a mistake. Many others here are generally comfortable with consumer debt. When we made our last mortgage payment in 2002 we considered that a mortgage had done good for us overall and contemplated the possibility of moving into a larger and nicer house with a new mortgage or even a new mortgage on this house so that we could invest the money. In the end our strict "any debt is bad debt" mentality won out and we have lived debt free since then. It seems like the right way to me but may not seem so right to someone with a different outlook on debt.
Jeff

[CitricAcid]

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Originally Posted by jclarksnakes It seems to me that we can drive ourselves nuts running the numbers on this but what it really comes down to is our own personal feelings about debt. Many here think any debt including a mortgage a mistake. To many others a mortgage is okay and all other debt a mistake. Many others here are generally comfortable with consumer debt. When we made our last mortgage payment in 2002 we considered that a mortgage had done good for us overall and contemplated the possibility of moving into a larger and nicer house with a new mortgage or even a new mortgage on this house so that we could invest the money. In the end our strict "any debt is bad debt" mentality won out and we have lived debt free since then. It seems like the right way to me but may not seem so right to someone with a different outlook on debt. Jeff

This is definitely a major point and place of reasoning for many on this board and in this country, but am just wondering why that is. I think ziggy put it very well about the mortgage versus the home equity loan, but also find myself in the situation where I would carry a mortgage, but not take out money to put in the market. Also, to the person who mentioned that the tax break isn't that important (that you would take $10,000 and give back $3,000 anyday), it is true that it is perhaps overstated. But if you pay $10,000 on a $160,000 loan (6.25%) and get back $2,500, you only paid $7,500 of interest, which turns out to be 4.6875%. So, the actual interest percentage is lower than the stated amount, if you include tax benefits.

To CFB, while it is true that it only guarantees that it doesn't go to zero, if you make safer assumptions regarding a shorter time period (like I did in my example with 7 years and 7%), it is safe to say that the actual value of the fixed payment is a lot less than $350,000. Moreover, the $350,000 4% rule is designed so that it could grow and shouldn't fail over time periods involved. It could go down, but it could also go up in a similar manner. The idea being that the amount taken out is generally good enough to keep up with inflation and that you have money leftover when these payments are done.

[cute fuzzy bunny]

Another fallacy. You have to deduct the standard deduction from the interest deduction calculation, since you'd probably be using that without a mortgage.

That $10,700 for a married couple filing jointly is a big initial hurdle to jump over and it'd be a pretty big mortgage to get significantly over that much interest. Plus in the later half of a mortgage, the interest "benefit" would decline significantly.

Then theres the part about how this works as a retiree living off of portfolio withdrawals. You have to withdraw the money and pay taxes on it to then get the net deduction of the standard deduction minus actual interest paid. So you'd be paying more in taxes to withdraw the money to pay the loan than you'd be "getting back".

Like I said, works great for an accumulating worker or a retiree with a big inflation adjusted pension. Takes a lot of bad math to make it "work" for an early retiree. Which is probably why 80-something percent of ER's dont have a mortgage.

Not sure where you're going with the firecalc thing. The point is that many runs produce an increased result, many produce a decreased result, and some end up in the same place at the end as the start. To get a 7% return you'd have to take some risk. The level of risk determines the potential for gain and loss. The 4% SWR is not a principal maintenance plan, its a "can I get to the finish line without going broke" plan.

The problem with a fixed calculation is that it doesnt measure the sale of depreciated shares during market down periods. Those shares are no longer there to participate in any ensuing recovery.

You dont need calculators, percentages or any in depth thinking to take a good look at how this can work in real life. Average fixed mortgage rates over the last ten years have been running between 5 and 6%. Yeah, I know, some people got a rate better than that. It wasnt available to 99.7% of the rest of the population.

Looking at vanguards 10 year annualized returns, the only funds that cleanly exceeded the mortgage costs are in the aggressive domestic equities, sector, and the more aggressive international categories like emerging markets and the international explorer fund.

So by taking on a substantial risk, you could have made money. No surprise there. You also enjoyed a ton of volatility and had to stick with those funds through the ten year period.

A few of the balanced funds made it into the 6-7% range. If you had chosen those funds you'd have eked out maybe a percent or two after taxes.

Then you look at the yearly returns for all the funds through that ten year period. There were a ton of negative numbers across almost all the funds from 2000-2003, and there'll be some more this year. Did you sit pat for 3-4 years while seeing 5-25% drops and stay with your plan or did you eat the loss for a year or two and then bail, only to miss the 2003-2005 recovery?

Basically if you picked a lower volatility, safer set of investments, you really wouldnt have gotten much out of it. If you went higher on the risk scale you'd have felt like an idiot and kicked yourself from 2000-2003, felt like a genius from 2003-2005, and you feel like an idiot again this year.

I hate plans like that.

[CitricAcid]

For the tax deductibility of mortgage interest, what you said is true, but if you itemize other taxes such as property tax (which you will probably have since you are paying mortgage on a house), state tax and sales tax, then it may not deduct the entire mortgage amount, but it will still decrease the effective rate on the mortgage.

I think you are misrepresenting what I am saying. I am not suggesting that you should take out money and invest it in the market, or that it is a guarantee to pay off in the long run or anything similar to that. I am just saying that the suggestion of the $1160 a month payment needing $350,000 to be misleading and false. The $350,000 4% SWR is intended to last over a long period of time and maintain principle (not maintain principle in the sense that you will have $350,000 every year but maintain principle such that you will still have money leftover... which is the idea, if you don't then your plan fails). It also is meant to keep up with inflation payments, maybe depleting the principle over time as inflation outpaces investment returns, or your personal rate of inflation increases, or many other unforeseen circumstances. This is not the case with a fixed payment on a mortgage. All I am saying is that to produce that $1160 a month and be left over with $0 (like what is being suggested with paying off the mortgage) would require a lot less than $350,000. It could be less than $70k, which would make the investment a good choice, or it could be greater than 70k, which would make the investment a poor choice. I am not suggesting one way or the other.

[cjking]

I currently have Excel set up so that the value of my home and any mortgage on it are included in my asset allocation. (Yes I did track down some figures for correlations between house prices and equities, bonds, REITs etc.) I currently have no mortgage, but if I change the Excel Solver constraints to allow a 75% mortgage, it tells me to borrow as much as possible and invest it all in commodities.

This illustrates why common sense should always be allowed to override Modern Portfolio Theory.

[cjking]

Actually this thread has given me an idea. Maybe I should include my future minimum spending needs in my asset allocation, as a negative holding in cash equivalent to the cost of an inflation-linked annuity?

[cute fuzzy bunny]

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Originally Posted by cjking This illustrates why common sense should always be allowed to override Modern Portfolio Theory.

Indeed. A portfolio of half small cap value and half commodities can throw off a 6.something percent safe withdrawal rate, if you have the guts and future returns are similar to the past.

Enjoy the ride, and bring plenty of pepto bismol and dramamine.

It certainly isnt quite as simple as saying "Why, my mortgage is only 6% and I can make 8% annual returns, so I can make 2%!!!"... :

[cjking]

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It certainly isnt quite as simple as saying "Why, my mortgage is only 6% and I can make 8% annual returns, so I can make 2%!!!"... :

Funnily enough, I have the option to do something like that. I could borrow at 6.1% to invest in a very safe REIT that's paying dividends of 7.8%.

If I didn't take into account the utility of money, I might be tempted. The fact is that the extra income I would earn would make no difference to my life. Since the extra income is of negligible value, it's not worth taking even a small risk of a significant loss to make it.

[cute fuzzy bunny]

At 30 years you need 350,000 to maintain a 95%+ failure rate.

At 15 years, $240k @ 95%

At 7 years, $170k @95%

Do note that in all of those cases, 5% of the time you ran out of money before the end of the run. In each instance you nearly ran out of money or at least went below the 70k principal amount a fair number of times. See 7 year chart below with enough principal to assure a success.

So the 350k number is actually a little low for a 30 year mortgage holding period. You'd need 170k invested for a 7 year period to maintain a non zero balance and the monthly cash flow required. But you'd generally end up losing some of that principal in most instances, not maintain or grow it.

[cute fuzzy bunny]

I'd like the ticker of the very safe reit that pays out 7.8% because I would invest about two million in it.

Thats if it was safe and paid 7.8% that wasnt severely reduced by taxes or other fees/costs.

Heck I might put $3m into anything very safe that produced almost 8%.

[cjking]

It won't help you, as it's British. (Technically it's not a REIT either, even though it is an Investment Trust that invests in Commercial Property.)

If you are curious, Google Foreign & Colonial Commercial Property Trust, ticker FCPT.

If you look at figures over the last year, it won't look that safe. However I would say the current yield should make it safe. Mind you I would have said the same thing at the beginning of June, and the sector fell another 20% in the last two weeks of June.

It has relatively little borrowing and the dividend income is covered by rental income from leases that extend several years, on average.

(Actually the dividend yield is currently 8%, for my decision making purposes I like to use a slightly different figure, calculated from the accounts, which is where I got 7.8%.)

The following link shows the share price is down 52% on a year ago. (As I write I realise you might be starting to doubt my grasp of the meaning of the word "safe." Well it's safer at the current price than at its previous one!)

Details for F&C COMMERCIAL (FCPT) / Market data / Selftrade

The following link contains more information. (You can also use it to link to a list of other funds in the sector, which should demonstrate it's the sector as a whole that's fallen out of favour, the share price fall isn't a result of any particular problem with this fund.)

http://www.trustnet.com/it/funds/?fund=67920

[cute fuzzy bunny]

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Originally Posted by cjking I realise you might be starting to doubt my grasp of the meaning of the word "safe."

Quite perceptive of you. Not exactly US treasuries...

Dont feel bad, you're doing better than the guy that thinks a fund of commodities and foreign bonds is secure from loss and as safe as a money market acct.

Sounds like it has plenty of potential for loss and/or volatility but you think its all wrung out. I dont keep up with real estate in britain that much but I did see an article just a short while that said the RE bubble there in both residential and commercial RE was bigger than the US bubble and still potentially had a good ways to drop.