Analyzing the mortgage payoff option

[sgeeeee]

A person interested in seeing the odds of beating a mortgage payoff by investing can easily determine their own historical odds using FIRECALC. The answer will be different depending on at least all of the following factors:

1) Total years remaining on loan. The longer you have to pay off the loan, the higher the probability is that you can beat the payoff option.

2) Tax situation before and in retirement. Your taxes in retirement are likely to rise if you have to increase your withdrawals to make house payments. This reduces your net earnings on your investments and must be accounted for in your calculations. Other people may be in a tax situation where only part or none of the extra withdrawal results in any tax penalty.

3) Equity/bond ratio of your investments. If you believe that your house is the same as a bond so you will only invest your payoff nest egg in bonds (equity/bond=0), then you reduce the odds that you can beat the payoff option significantly. A high equity/bond ratio improves the odds over a long enough period, but adds risk that you may not feel comfortable with.

4) Mortgage rate. Obviously the lower the rate, the better the odds of beating the payoff option.

To use FIRECALC to look at this problem, you have to look over a time period equal to the payoff period. Make the initial portfolio value equal to your mortgage payoff amount. You begin using an additional fixed withdrawal not adjusted for inflation that is equal to your annual payment plus tax burden. You can approximate the value of the tax deduction value by averaging the deduction amount over each of three periods over the life of the loan and subtracting the appropriate amount (include an additional income) using a fixed value at each interval period. For example, for a 30 year fixed mortgage, compute the average deduction in years 1-10, 11-20 and 21-30. Include the appropriate additional income starting at the beginning of the loan period, then reduce it at each 10 year interval. You should use the appropriate equity/bond ratios that you would anticipate investing in. You can then look at the probability of success and average terminal values. The probability of success tells you the percentage of years since 1872 that keeping the mortgage would have been financially profitable. The detailed results show you exactly when the failure years were. And the terminal values show you how much money you would have made over payoff. Notice that a failure does not mean you lose your house. It simply means that the house will cost you more than it would have cost you had you paid it off at the beginning.

In reality, the above simulations underestimate your odds of beating the payoff historicaly by a small amount. This is due to the additional safety and investment value that the payoff investments bring to your overall portfolio. A more detailed simulation can be run that looks at your overall situation (including all investments) and then running a comparison with a detailed simulation that incudes payoff.

[sgeeeee]

Some FIRECALC mortgage results:
First ignoring taxes, assuming CPI inflation correction, a 50/50 equity/bond split, and a 30 year fixed mortgage:

Mortgage rate. . . . . . . 5.50% | 5.25% | 5.0% | 4.5%
Prob of beating payoff . . 85.6% | 91.7% | 93.9% | 96.2%
Yr of most recent failure. 1937 | 1937 | 1937 | 1937
The final increase in average terminal value for these situations varies from between 1.5x and 2x the mortgage value. These simulations are applicable to someone who is managing their taxes through other channels and will not be impacted by the need for additional withdrawals. For these mortgage rates, paying off the mortgage has historically been the riskier financial decision.

Next you can add 15% tax to every mortgage payment dollar. This calcualtion overestimates the tax situation of someone in the 15% tax bracket since it applies the tax burden without including the tax deduction. The actual results you might expect fall in between these two cases if you remain in the 15% tax bracket. The results are:

Mortgage rate. . . . . . . 5.50% | 5.25% | 5.0% | 4.5%
Prob of beating payoff . . 59.1% | 64.4% | 66.7% | 79.5%
Yr of most recent failure. 1940 | 1940 | 1939 | 1937

Odds of beating the payoff if you pay tax on every mortgage dollar are not as good and the 5.5% rate is very marginal -- barely better than half. Still, since 1940, a person selecting these mortgages is clearly a winner financially every time.

Next, take the specific case of the 5.25% mortgage and include a three piece approximation of the tax deduction value. In order to complete this computation, I've used a $150,000 mortgage and computed the tax deductible amount for each year, then averaged that over the three 10 year periods. The resulting probability of beating the payoff is 76.5% and the average amount of money made by investing rather than paying off is $195,057. The most recent year of failure to beat the payoff was 1937. So since 1937, someone keeping their 30 year 5.25% mortgage, paying tax on every dollar in the 15% tax bracket, would come out ahead of someone choosing to payoff such a mortgage every time.

An additional concern of some is that you may not keep the house you are making payments on for the full term of the loan. This decreases the odds of beating the payoff option but can also be explored using FIRECALC. To do this, simply take the detailed results of the above simulation, and look at the results in any given column. Subtract the payoff amount from the value in the column. If it is a positive number, you are ahead at that year (column number), if it is negative you are behind. For the 5.25% example including tax and deductions described above, the probability of being ahead after 5 years is 56.4% -- better than half, but barely. The average terminal value at 5 years varies from between $248,000 (corresponding to a gain of $98,000) and $76,000 (corresponding to a loss of $74,000). The risk of losing money is diminished the longer you keep the house.

Of course, these are only sample cases. Each person is in a different situation. You can find your own odds only by running the simulations and doing the calculations. And, of course, you have to do what you feel comfortable with. Some people find the idea of making house payments in retirement to be risky. It makes no sense for someone who feels that way to keep a mortgage.

[cute fuzzy bunny]

You just cant stay out of these, can you?

Pay your mortgage off, move your portfolio balance to an 80/20 equity/bond and have a higher terminal portfolio than any of SG's extensive analyses above.* After all, you can take the higher risk, you dont have any debt payments to make.

Or after paying it off, move to a 35/65 wellesley portfolio and live comfortably off your dividends, and have almost no volatility.* Income and terminal portfolio size are lower, but who cares, you dont have to make a mortgage payment.

In either case, you can probably work yourself into a zero or very low income tax situation.

In either case, if you lose all of your portfolio, you can live comfortably working part time at almost any job paying slightly north of minimum wage.

Or you can mortgage the house, invest it at todays high valuations, lose 20-40% of your money, then watch your overinflated house value drop another 20-30%.* Good choice.

In the meanwhile, if you're invested in any bonds that are paying less than current high yield rates and you're carrying a mortgage with a rate higher than your bonds pay after all the tax implications are factored in, you're an idiot that cant do simple math.* No complex calculations required.

Or, you can mortgage yourself, put the money into any of SG's formulations, stay in the house for 30 years (because thats the term his calcs use), and except in times of starting high valuations, you might make a few percentage points a year.* Considering we're in a time of high valuation, and every other period of high valuations has had disappointing returns following, good luck to you.

If you use a term of 7-10 years staying in the home, as the vast, vast majority of worldwide homeowners do, your odds of losing money by investing your mortgage money is about even steven. Why not drop by the local casino and put it all on red and get it over with quick?

I would also take this moment to point out that had you tried the mortgage route over the last 5 years, any investments short of high risk asset classes like reits and energy returned less than the standard mortgage rate.* You would have lost an average of 3-5% per year starting in 2000 until today.

[sgeeeee]

Originally Posted by Notth

You just cant stay out of these, can you?

As opposed to you? I offer people an approach to analyze the mortgage payoff decision. I offer numbers and probabilities. The numbers can favor payoff and they can favor keeping the mortgage. For some reason that threatens you. I really don't get it. The reason people keep asking about mortgage payoff is because the answer is not clear-cut for many. The simulations are one tool that can be used to analyze the decision.

All I have ever offered on this topic is methods of analysis, TH. You can analyze the situations you mention too, using the same approach I describe. If the numbers look good and you are comfortable with the investment profile, then go for it. I'm not as aggressive an investor as some of your suggestions, but they can be analyzed.

Pay your mortgage off, move your portfolio balance to an 80/20 equity/bond and have a higher terminal portfolio than any of SG's extensive analyses above.* After all, you can take the higher risk, you dont have any debt payments to make.

You assume that paying off a mortgage is without risk. One of the points that all the analysis shows is that the risk is greater historically if you pay off that sub 5.25% mortgage. The risk is inflation. You choose to ignore it and that's okay if you want to do that. The FIRECALC simulations include it and that seems like a good thing to me. I'm not making these numbers up. Historically, inflation, rate of return and mortgage rates determined what was the better result. And sometimes they favor payoff. The simulations will show that.

Or after paying it off, move to a 35/65 wellesley portfolio and live comfortably off your dividends, and have almost no volatility.* Income and terminal portfolio size are lower, but who cares, you dont have to make a mortgage payment.

You, of course ignore inflation volatility in your statements. FIRECALC takes this into account. You also seem to assume something about wellesley performance that I don't have any actual data on. A complete analysis of wellesley investment at the mix you suggest against various mortgage rates would be interesing, but I don't know how to do that. Do you? I would reccommend that those considering your advice look at inflation too. You can also increase volatilaty of your portfolio by reducing the overall size of your portfolio. This is illustrated by running complete simulations of both cases. It really depends on the exact details of your situation. That's why I always reccommend that people examine both situations thoroughly rather than just listen to stories about theoretical possibilities that may be extremely low probability events.

In either case, you can probably work yourself into a zero or very low income tax situation.

Income tax situations are different for everyone. Some have very low (no) income taxes already and benefit by taking higher withdrawals, higher investment without income tax implications. Again, every situation is different and I describe how someone can analyze their own personal situation to get an answer rather than depend on stories of what might be. I only considered those in the 15% tax bracket in my examples. Even this low income tax rate reduced the probability of comming out ahead to the point that it was very risky for 5.5% or higher mortgage rates. I think it was clear that those with 5.5% rates and 15% or higher income tax bracket should seriously consider payoff.

In either case, if you lose all of your portfolio, you can live comfortably working part time at almost any job paying slightly north of minimum wage.

Using FIRECALC you can determine how probable this event has been historically. If you are retired with minimal safety margin, this is a legitimate concern and shows up in the analysis. But if you are living well below the 100% SWR, then keeping a mortgage allows you to trade excess safety for improved financials. Again, using the tools, provides numbers rather than stories.

Or you can mortgage the house, invest it at todays high valuations, lose 20-40% of your money, then watch your overinflated house value drop another 20-30%.* Good choice.

Losing money in investments is always a risk, but so is losing money to inflation. FIRECALC examines both and gives you the historical odds of the combination. Of course, someone who chooses the investment over payoff route can change their mind at any time and pay off the mortgage. This possibility of changing courses is one form of risk reduction that is not as readily available to the person who pays off their mortgage then faces large inflation.

In the meanwhile, if you're invested in any bonds that are paying less than current high yield rates and you're carrying a mortgage with a rate higher than your bonds pay after all the tax implications are factored in, you're an idiot that cant do simple math.* No complex calculations required.

Arguments that if you have any bonds that pay below mortgage then you should pay it off make no sense to me. If I follow that advice, why not analyze my rate of return on every investment I have today and move every dime into the highest paying investment tomorrow. Not even a day trader believes in that strategy. Most people invest in a mix of investments for risk reduction. Since a home, a treasury, a corporate bond, an index fund, an individual stock . . . all have different risk-return profiles, they all have a place in a well-designed portfolio. But if that's the way someone wants to invest, they should definately pay off their mortgage and do what they feel comfortable with. No amount of math will convince them that this method is risky.

Or, you can mortgage yourself, put the money into any of SG's formulations, stay in the house for 30 years (because thats the term his calcs use), and except in times of starting high valuations, you might make a few percentage points a year.

* Perhaps you didn't actually read my whole post, but I did address the shorter time in the house issue. The FIRECALC analysis allows you to look at shorter than 30 year loans as well as early sales. I mentioned in the beginning of my post that time to the loan end is an important parameter in the analysis. If you are 5 years from completing the loan payments, it probably doesn't make sense to refinance for 30 years. I also provided an example of what happened with a 5.25% loan if you moved in 5 years. You can look at this information using the techniques I describe. By the way, although the average home buyer stays in a home only about 5 to 7 years, the average retiree is not nearly so mobile. And it depends on the person. My father has been in his home since 1964. My Aunts and Uncles have all been in their homes for over 30 years. My older brother has been in his home since 1985. I can evaluate my odds of staying put as I imagine others on this board can. But even if one ends up moving, the analysis to decide what to do is difficult. You need to make some sort of assumptions about property value between now and the time of sale.

Considering we're in a time of high valuation, and every other period of high valuations has had disappointing returns following, good luck to you.

Well . . . that's just not true. Periods of high valuation have not all resulted in disappointing returns. Valuation is a combination of today's instantaneous price and yesterdays returns. While it has correlated at times to future performance. At times it definately has not. And "disappointing" has to be quantified against mortgage rate, inflation, etc. before you can determine the best choice. That's really what FIRECALC does.

If you use a term of 7-10 years staying in the home, as the vast, vast majority of worldwide homeowners do, your odds of losing money by investing your mortgage money is about even steven.* Why not drop by the local casino and put it all on red and get it over with quick?

As I pointed out in my posts, the 7-10 year situation is easily evaluated. Apparently you didn't actually read my posts. If you think you might move in 7-10 years, you can analyze that situation. You might decide that payoff makes more sense. Then you can do what the analysis shows with increased assurance.

I would also take this moment to point out that had you tried the mortgage route over the last 5 years, any investments short of high risk asset classes like reits and energy returned less than the standard mortgage rate.* You would have lost an average of 3-5% per year starting in 2000 until today.

Well, FIRECALC won't tell you how you would have done since 2000. The data isn't available in the program yet. It will tell you that a 5.25% loan held for only 5 years has only a marginal probability (59.9%) of being ahead of the payoff option at this time. A higher interest loan (typical of the rates available in 2000) would indicate a probable loss. So the FIRECALC analysis would have warned the 2000 retiree that payoff would be a preferable approach at that time. I think your objection proves the value of the analysis.

[unclemick]

Rent! If the rent's too high - move somewhere else with cheaper rent.

Of course if you have a girlfriend of 29 yrs and counting - who wanted to live on the lake - well - er ah adjust accordingly.

Heh, heh, heh, heh

Outside the levee, over water, - nobody would give me a mortgage in those days. So - not an option.

Had a mortgage on our rental property though - you could get positive cash flow in those 'olden' days. 1977 - 1995.

[MRGALT2U]

Originally Posted by - SG

As opposed to you?* I offer people an approach to analyze the mortgage payoff decision.* I offer numbers and probabilities.* The numbers can favor payoff and they can favor keeping the mortgage.* For some reason that threatens you.* I really don't get it.* The reason people keep asking about mortgage payoff is because the answer is not clear-cut for many.* The simulations are one tool that can be used to analyze the decision.*

All I have ever offered on this topic is methods of analysis, TH.* You can analyze the situations you mention too, using the same approach I describe.* If the numbers look good and you are comfortable with the investment profile, then go for it.* I'm not as aggressive an investor as some of your suggestions, but they can be analyzed.
* You assume that paying off a mortgage is without risk.* One of the points that all the analysis shows is that the risk is greater historically if you pay off that sub 5.25% mortgage.* The risk is inflation.* You choose to ignore it and that's okay if you want to do that.* The FIRECALC simulations include it and that seems like a good thing to me.* I'm not making these numbers up.* Historically, inflation, rate of return and mortgage rates determined what was the better result.* And sometimes they favor payoff.* The simulations will show that.*
You, of course ignore inflation volatility in your statements.* FIRECALC takes this into account.* You also seem to assume something about wellesley performance that I don't have any actual data on.* A complete analysis of wellesley investment at the mix you suggest against various mortgage rates would be interesing, but I don't know how to do that.* Do you?* I would reccommend that those considering your advice look at inflation too.* You can also increase volatilaty of your portfolio by reducing the overall size of your portfolio.* This is illustrated by running complete simulations of both cases.* It really depends on the exact details of your situation.* That's why I always reccommend that people examine both situations thoroughly rather than just listen to stories about theoretical possibilities that may be extremely low probability events.*
Income tax situations are different for everyone.* Some have very low (no) income taxes already and benefit by taking higher withdrawals, higher investment without income tax implications.* Again, every situation is different and I describe how someone can analyze their own personal situation to get an answer rather than depend on stories of what might be.* I only considered those in the 15% tax bracket in my examples.* Even this low income tax rate reduced the probability of comming out ahead to the point that it was very risky for 5.5% or higher mortgage rates.* I think it was clear that those with 5.5% rates and 15% or higher income tax bracket should seriously consider payoff.*
* Using FIRECALC you can determine how probable this event has been historically.* If you are retired with minimal safety margin, this is a legitimate concern and shows up in the analysis.* But if you are living well below the 100% SWR, then keeping a mortgage allows you to trade excess safety for improved financials.* Again, using the tools, provides numbers rather than stories.
Losing money in investments is always a risk, but so is losing money to inflation.* FIRECALC examines both and gives you the historical odds of the combination.* Of course, someone who chooses the investment over payoff route can change their mind at any time and pay off the mortgage.* This possibility of changing courses is one form of risk reduction that is not as readily available to the person who pays off their mortgage then faces large inflation.
Arguments that if you have any bonds that pay below mortgage then you should pay it off make no sense to me.* If I follow that advice, why not analyze my rate of return on every investment I have today and move every dime into the highest paying investment tomorrow.* Not even a day trader believes in that strategy.* Most people invest in a mix of investments for risk reduction.* Since a home, a treasury, a corporate bond, an index fund, an individual stock . . . all have different risk-return profiles, they all have a place in a well-designed portfolio.* But if that's the way someone wants to invest, they should definately pay off their mortgage and do what they feel comfortable with.* No amount of math will convince them that this method is risky.
* Perhaps you didn't actually read my whole post, but I did address the shorter time in the house issue.* The FIRECALC analysis allows you to look at shorter than 30 year loans as well as early sales.* I mentioned in the beginning of my post that time to the loan end is an important parameter in the analysis.* If you are 5 years from completing the loan payments, it probably doesn't make sense to refinance for 30 years.* I also provided an example of what happened with a 5.25% loan if you moved in 5 years.* You can look at this information using the techniques I describe.* By the way, although the average home buyer stays in a home only about 5 to 7 years, the average retiree is not nearly so mobile.* And it depends on the person.* My father has been in his home since 1964.* My Aunts and Uncles have all been in their homes for over 30 years.* My older brother has been in his home since 1985.* I can evaluate my odds of staying put as I imagine others on this board can.* But even if one ends up moving, the analysis to decide what to do is difficult.* You need to make some sort of assumptions about property value between now and the time of sale.
Well . . . that's just not true.* Periods of high valuation have not all resulted in disappointing returns.* Valuation is a combination of today's instantaneous price and yesterdays returns.* While it has correlated at times to future performance.* At times it definately has not.* And "disappointing" has to be quantified against mortgage rate, inflation, etc. before you can determine the best choice.* That's really what FIRECALC does.*
As I pointed out in my posts, the 7-10 year situation is easily evaluated.* Apparently you didn't actually read my posts.* If you think you might move in 7-10 years, you can analyze that situation.* You might decide that payoff makes more sense.* Then you can do what the analysis shows with increased assurance.*
Well, FIRECALC won't tell you how you would have done since 2000.* The data isn't available in the program yet.* It will tell you that a 5.25% loan held for only 5 years has only a marginal probability (59.9%) of being ahead of the payoff option at this time.* A higher interest loan (typical of the rates available in 2000) would indicate a probable loss.* So the FIRECALC analysis would have warned the 2000 retiree that payoff would be a preferable approach at that time.* I think your objection proves the value of the analysis.* *

SG, you are a patient man.

JG

[riskadverse]

JG - as a new reader of this group I am wondering what purpose you had in mind to quote the long post from SG?

[Nords]

Originally Posted by riskaverse

JG - as a new reader of this group I am wondering what purpose you had in mind to quote the long post from SG?

I suspect operator error...

[Texas Proud]

SG, good post at the beginning and good rebuttal...

What I will interpret from Notth's post about higher returning bonds.... and I tell most people who ask me about finances this...

Think of your bonds as a place to make loans... so, if you are 50-50 investor and you have $100,000 you have $50,000 in bonds. Let's say your bonds total return are about 5.5%. If you are about to buy a car or something and the loan rate is 7 or 8%, loan yourself the money. Say it is $30K. You now have $20 in bonds and $50 in stock... but, do not rebalance!!! And pay off your loan WITH INTEREST of the 7%. If you are financially good, you treat it like a loan an pay it off. Your net is higher than the other...

So, the same applies with a home mortgage, but usually larger numbers.

[cute fuzzy bunny]

SG - sorry, didnt read it. As usual, you claim I am 'threatened' by your post.

Allow me to offer an alternative. You made a decision that hasnt worked out for you for the last 5 years unless you've invested your mortgage money in high risk assets. Now you seem compelled to bring up this dialog three to four times a year to try to validate your decision.

You offer an inflexible one dimensional example that shows a modest possible financial advantage to having a mortgage. I offer several rethinks of ones financial picture with and without debt...one offers even greater financial advantage with less risk, while the other offers a reasonable financial picture with FAR less risk. You example also uses a 30 year model, because shorter time periods fail to offer successful arbitrage. As I keep pointing out and you keep ignoring, not only do very few people stay in a home over 7-10 years, the calculator you use doesnt offer a complete 'run' for time periods since 1975, so you're not even working with 'modern' economic data.

I also note that in periods of high stock valuations, as in 2000 and today, one could expect to lose their shirt trying this arbitrage strategy.

I also note that by using a no-debt strategy coupled with an 80/20 plan vs one of your many 50/50 or 60/40 plans, an ER can quit with 20-35% less money than with a mortgage.

Lastly, I see that most people nearing ER or in retirement seek the no-debt strategy as making the most sense. Excepting specific people who have cola'd pensions paying their bills, zero bond allocations, and who firmly intend to never move, that appears to make the most sense.

I guess I'll see you again on this in 3 months, when you'll again paint a picture that is applicable and a good idea for a small number of people and I'll provide the rest of the picture. Again.

Riskaverse: Dont mind John, he doesnt say much of value, but he tries to make up for it in volume.

[Nords]

SG, TH,

Hey, you two, you both raise good points and we get it.

You could both stand to lighten up a little...

[HFWR]

As if!!

[cute fuzzy bunny]

Hey, I walked past the 'mortgage' thread for about 4 days now and minded my own business. SG feels this compulsive need to throw in his 2c on it for the 33rd time, I feel the need to point out the huge gaping holes in that two cent theory.

Then we get his "You feel threatened by me" / "You hate me" / etc followed by the 300 line point by point arguments that we've had more times than anyone needed.

Go back and look, he's first man in every time.

Since the last thread we discussed this in was referenced in that mortgage thread, anyone that cared to do so had access to all of this information.

Explain to me why it needed to be posted a second time. Scratch that...about the 15th time.

Is it just grand compensation or is he trolling me?

[sgeeeee]

Originally Posted by Notth

SG - sorry, didnt read it.*

That was clear.

Allow me to offer an alternative.* You made a decision that hasnt worked out for you for the last 5 years unless you've invested your mortgage money in high risk assets.* Now you seem compelled to bring up this dialog three to four times a year to try to validate your decision.

Well . . . again you apparently don't read my posts. I make a decision every day about my mortgage. Starting 3.5 years ago when I purchased my house I did this kind of analysis and I am profiting very nicely from it, thank-you. I am hardly a high risk investor with most of my funds in Vanguard index funds and a little bit scattered around in other investments. As I pointed out, if I had done this analysis 5 years ago with the rates available at the time, it would have told me to choose payoff as the best choice. Despite your insistance to the contrary, I have never recommended to anyone on the board that they should keep a mortgage. Nor have I said or implied that keeping a mortgage is always (or even usually) the best choice. You keep hearing that even though I never say it. What I do suggest to everyone is that they can use the FIRECALC analysis to understand the payoff vs mortgage financial situation at the time. That's all there is to it, TH. I've said it dozens of times and you just won't listen.

You offer an inflexible one dimensional example that shows a modest possible financial advantage to having a mortgage.* I offer several rethinks of ones financial picture with and without debt...one offers even greater financial advantage with less risk, while the other offers a reasonable financial picture with FAR less risk.* You example also uses a 30 year model, because shorter time periods fail to offer successful arbitrage.* As I keep pointing out and you keep ignoring, not only do very few people stay in a home over 7-10 years, the calculator you use doesnt offer a complete 'run' for time periods since 1975, so you're not even working with 'modern' economic data.

TH, you aren't reading the posts. I have specifically addressed how to use the tool to look at shorter than 30 year intervals and even posted the results for one particular 5 year case. I have specifically stated that the probability of gain by keeping a mortgage drops for shorter time periods and taken one specific case to show how much. I'm not trying to get anyone to keep their mortgage, TH. Let me say that again since you don't seem to get it. I'm not trying to get anyone to keep their mortgage. I am trying to supply people who might be interested, with an analysis tool they can use. I have used examples that I think reflect an approximate frontier between when one might choose payoff vs choosing to keep the mortgage. If you look at higher mortgage rates, shorter time periods, more conservative investments, etc. the choice for payoff is more likely to be the best choice. If you look at lower mortgage rates, more aggressive investors, full mortgage time periods you are more likely to find keeping the mortgage a smart thing to do.

I also note that in periods of high stock valuations, as in 2000 and today, one could expect to lose their shirt trying this arbitrage strategy.

Well . . . we'll just have to disagree here. I don't buy into your ability to predict mortgage rates, inflation, stock returns and bond returns in the future based on PE analysis. It hasn't worked in the past and I'm not betting on it in the future. Remember that when FIRECALC produces no failure since 1937, it is considering all time periods and PE valuations since that time. But everyone has a different risk profile and you are entitled to yours. I would definately say you made the right choice for you when you paid off your mortgage. I don't think that any amount of simulation would or should have changed your mind.

I also note that by using a no-debt strategy coupled with an 80/20 plan vs one of your many 50/50 or 60/40 plans, an ER can quit with 20-35% less money than with a mortgage.

I'm not sure how you arrived at that conclusion. I know that I would not feel as safe with my investments at 80/20 with or without a mortgage. My own reccolections of historical and