Another paying off the mortgage thread.....

[nun]

sorry to flog a dead horse, but what do you think of paying off the mortgage before retiring into what I think will be a down market?

Here's my situation, I'm in my mid 40s, own a 2 family house and get $1400 a month from renting the first floor apartment. I just got a $200k inheritance. I already had $600k in tax deferred and $300k in after tax investments and $250k left to pay on the house. So I'm in a situation where I could just about retire, maybe do something part time. I hadn't considered paying off the mortgage until I got my inheritance and as I believe that the markets my be more "bear than bull" for a couple of years would it be best to pay off the mortgage now?

 

[Nords]

It must be just a coincidence that this Dilbert ran today.

1. Do your annual expenses (both with the mortgage and without it) add up to less than 4% of the portfolio (both with the mortgage assets and without them)?

2. Will you sleep well at night?

3. Have you slogged through these threads?
http://www.early-retirement.org/forums/f47/should-i-pay-off-mortgage-invest-money-30644.html
.
.

 

[cute fuzzy bunny]

In a poll a little while back with 137 respondents (which is pretty good for a poll around here), 70% said they had no mortgage or planned to pay it off before retirement. 10% said they were still working, had a mortgage and would keep it. 15% said they were retired but still had a mortgage.

 

[youbet]

sorry to flog a dead horse, but what do you think of paying off the mortgage before retiring into what I think will be a down market?

Here's my situation, I'm in my mid 40s, own a 2 family house and get $1400 a month from renting the first floor apartment. I just got a $200k inheritance. I already had $600k in tax deferred and $300k in after tax investments and $250k left to pay on the house. So I'm in a situation where I could just about retire, maybe do something part time. I hadn't considered paying off the mortgage until I got my inheritance and as I believe that the markets my be more "bear than bull" for a couple of years would it be best to pay off the mortgage now?

As I recall from the last go-around, many of us concluded that unless your mortgage rate is extremely high or low, It will not matter much financially whether you pay it off or continue to make payments. Because of this, the key determiner seems to be how it will make you feel.

So, how would you feel if you paid off your mortgage?

The markets being bullish or bearish is of minimal significance in this decision. You can shift to a more conservative AA if you choose, whether you pay off the mortgage or not.

 

[cute fuzzy bunny]

I dont agree with any of that.

But I had been satisfied to have the OP pointed to a handful of posts where all of this has been hashed and rehashed.

The key determiner seems to be whether you feel you can ride out a long term bear market to gain a small gain by investing the mortgage money, and whether one is willing to shift to a more conservative (or aggressive) AA to accommodate the income needs and volatility issues a larger portfolio and larger spending profile bring about.

How I feel about it is irrelevant.

 

[youbet]

How I feel about it is irrelevant.

That's exactly right. Literally.

 

[nun]

It must be just a coincidence that this Dilbert ran today.

1. Do your annual expenses (both with the mortgage and without it) add up to less than 4% of the portfolio (both with the mortgage assets and without them)?

2. Will you sleep well at night?

3. Have you slogged through these threads?
http://www.early-retirement.org/forums/f47/should-i-pay-off-mortgage-invest-money-30644.html
.
.

Love the Dilbert, Yes I've read the previous dead horses, so I know the arguments pro and con. I was wondering what people thought of mortage pay off in light of my age, 46, my 80/20 allocation (I hope to live a long time) and that I may be retiring into a bear market.

PS mortage rate is 4.5% fixed. My annual expenses without the mortgage are 4.7% of my portfolio, with the mortgage its 6.9% (portfolio is $250k bigger than without mortgage calculation). I'm not including home equity in the calculations. However almost 50% of my non-mortgage expenses are covered by the rent I get from the apartment so if we take that into consideration the %ages become 2.7% and 5.3%.

 

[youbet]

PS mortage rate is 4.5% fixed.

At your age, I'd keep a 4.5% fixed mortgage. Manage the rest of your 80/20 portfolio to be congruent with your personal view of upcoming economic times.

 

[cute fuzzy bunny]

Thats a cheap rate. I'd keep it.

Unless of course you feel that in year 7 of a long term bear market and making 4.5% interest payments from steadily depreciating investment assets, that you might flinch and change your AA to something more conservative just before the stock market takes back off.

If you had a huge cash or bond allocation specifically to assure steady income in a bear market, I might give different advice.

The key question here isnt how you feel about having a debt load, its whether you really believe you've the the big brass ones that will enable you to stick with your AA that some of the long haul debt arbitragers claim to have...

 

[Babeebloos]

My mortgage is paid off...and I sleep very well at night....there is no better feeling like it at all.

 

[nun]

At your age, I'd keep a 4.5% fixed mortgage. Manage the rest of your 80/20 portfolio to be congruent with your personal view of upcoming economic times.

That sounds good, but now comes the non-quantatative stuff, I'm 5 years into a 15 year mortgage so my monthly payment is just over $3k and (here's the dead horse) it would be great to have that paid off and to be able to live off the rent and a part time job. My outgoings would be pretty small without that $36k in annual mortgage payments and life would be sweet, lots of sleep to be had.

 

[cute fuzzy bunny]

Thats a good holy grail if you can get it...never having to sell assets in a down market.

This is why looking at reducing the spending piece is as important as staring at 20 year rates of return and claiming a vulcan heritage...

 

[TickTock]

I was wondering what people thought of mortage pay off in light of my age, 46, my 80/20 allocation (I hope to live a long time) and that I may be retiring into a bear market.

I'm going to consider one additional piece of information that you posted earlier

So I'm in a situation where I could just about retire, maybe do something part time.

Okay, first I'm a devout efficient markets adherent, so I advocate disregarding thoughts about making changes because you forecast a bear market. The evidence I've seen indicates that forecasting and market timing are likely to be detrimental to investment returns. (I know that my conclusion is not universal, and for purposes of giving you advice in this thread, I'm not interested in debating it here. If you disagree, my advice changes to a more conservative stock/bond mix.)

If you intend to RE, or ESR, soon, then you move from accumulation to distribution. Different risks, different strategies. The main thing you want to avoid is a big drawdown. Given that:

You're likely to live a long time. That indicates a conservative mix, but with real growth so inflation doesn't kill your real income over time.

Your 80/20 mix is too risky. Switch to 60/40.

You want to minimize expenses. Pay off the mortgage to reduce the monthly nut. I know your fixed rate is attractive, but the risk of a large loss early in ER or ESR is greater. Think of it this way; you're going to need the money to pay monthly expenses immediately, and risky investments should have a time horizon of five years or more.

If you intend to continue w*rking for ten or more years, the financial equation changes, and keeping the low fixed-rate mortgage looks more attractive. I will note that I'm on the conservative side here and tend towards paying off the mortage anyway in order to reduce monthly expenses. Less risky. Our mortgage is 15 year fixed, and I recently stopped paying extra on it in order to increase savings. However, DW and I are not likely to retire in the next five years, and if we were to receive a windfall sufficient to pay off the mortgage, I would do so.

Good luck! It's nice to be in a position to have to ponder those choices.

 

[Nords]

That sounds good, but now comes the non-quantatative stuff, I'm 5 years into a 15 year mortgage so my monthly payment is just over $3k and (here's the dead horse) it would be great to have that paid off and to be able to live off the rent and a part time job. My outgoings would be pretty small without that $36k in annual mortgage payments and life would be sweet, lots of sleep to be had.

Well, I had some serious mortgage envy on that 4.5% loan, but ours is 5.375% for 30 years.

I'm no help to you-- spouse and I are age 46/47 with over 90% equities and COLA'd pensions to help us ride out the rough spots that your portfolio has to absorb on its own. You must be getting one heckuva Schedule E loss, but you're probably already looking at a low-tax wash with depreciation and maintenance/supplies expenses so the mortgage may not be helping much there either.

I can tell you that stocks are the only thing to beat inflation over 20 years. If you're only able to give it 15 years, and if you own bonds paying less than 4.5%, then the odds are not stacked in your favor. You might win but it's not in the statistics.

Since the math isn't so compelling, perhaps emotions are a more significant factor in making the decision. Which would give you more trouble:
1. Kicking yourself over prepaying a 4.5% loan, or
2. Sleeping at night through a five-year bear market consisting of a 20%-30% drop in equities and maybe even 4-5% inflation while you're selling bonds for living expenses?

 

[nun]

You're likely to live a long time. That indicates a conservative mix, but with real growth so inflation doesn't kill your real income over time.

Your 80/20 mix is too risky. Switch to 60/40.

I haven't changed my 80/20 allocation as I only got the inheritance in the last few months so its still in "I'm 46, I need to acumulate and I've got 10 years before I even think about retiring" mode. The unexpected $200k lump sum has given me a few more options so I might go 70/30 as I feel that I should be around for 40 plus years yet and I should be able to ride out bear markets if I pay off the mortgage so that I can live off the rent and a couple of days work a week.

 

[nun]

I'm no help to you-- spouse and I are age 46/47 with over 90% equities and COLA'd pensions to help us ride out the rough spots that your portfolio has to absorb on its own.

I'll get a small COLA'd pension at 65 ($10k/year in today's dollars) and both US and UK social security. Until I get to that ripe old age the plan is forming to live of the rent and part time work, which is possible if I pay off the mortgage. But, maybe I'm leaping a bit too soon and the extra lump sum is just tempting me into a rash ER decision......

 

[TickTock]

Paying off the mortage to reduce your monthly expenses will allow you to be more aggressive in your stock/bond allocation.

 

[cute fuzzy bunny]

Orrr....less aggressive since you really dont need the money as much. Its a nice choice.