carry my mortgage into retirement?

[ERD50]

Everyone who uses 1970s style finance reasoning that there is a right answer may be myopic in todays finance theory.

I have no idea what this means.

Running the numbers has nothing to do with the 1970s any more than ignoring the numbers has anything to do with the 2010s.

Thank you. I am also totally lost - there seems to be an argument/discussion here, but I'm lost on just what is being argued/discussed.

-ERD50

 

[MichaelB]

Thank you. I am also totally lost - there seems to be an argument/discussion here, but I'm lost on just what is being argued/discussed.

-ERD50

Easy. This is a conversation about whether or not there's a debate going on about an idea that's under discussion - or not.

 

[Montecfo]

I think we have answered the Op's question adequately. However, I think some of the dogma to the effect that paying down your mortgage is not the way to go, and the big mortgage is the way to go is a bit flawed. At the heart you have an investment decision, which depends on return expectation, cost of funds, time horizon, and risk tolerance.

When you decide to take out a mortgage to fund stock investments, you are making a leveraged bet on stocks. That has risk. To make such an investment, your expected return must exceed your cost of funds (after taxes) by a large enough amount to justify risking loss.

The market is at all-time highs. Many prognosticators believe based on history that equity returns from here will be lower than historical averages, perhaps in the low single digits. Incurring a fixed 4% with such a nominal upside appears risky. If interest incurred is not fully deductible, the balance tilts more toward mortgage paydown, assuming taxable investments.

If the time horizon is not a decade or more, it tilts toward toward mortgage paydown.

A tool that has worked in the past in different market conditions may not work in the future, obviously.

So ultimately the answer lies in investor analysis, not in assuming markets will always generate market average returns, in my opinion.

 

[REWahoo]

Easy. This is a conversation about whether or not there's a debate going on about an idea that's under discussion - or not.

We've already answered that. It appears to me that you posted because you wanted to try to have the last word - or not.

 

[imoldernu]

Easy. This is a conversation about whether or not there's a debate going on about an idea that's under discussion - or not.

Yeah... I got lost about one third of the way through, but it got me to thinking about our own situation, which has to do with the asset value of the house in real numbers.
We bought outright. Current value of the home is 26% more than the purchase price in 2004. The same numbers in the CPI inflation index came out to 28%.

Who knows what the future will hold? Inflation? Rate of increase in the home values in the "given" location. Tax rates? hmmm.

I can still remember a day back in 1986 when we finally decided to buy a summer home in Lake Placid NY... Mountain top home with a view of the ski jump for $30K... Went to the bank on Wednesday to work out the interest rate... high, @ 11.4%. On Thursday we went back, and were told the rate had gone to 12.6% overnight. Sad, 'cuz we loved that place.

What looks right today, can be very different in a decade or so.

 

[daylatedollarshort]

I think we have answered the Op's question adequately. However, I think some of the dogma to the effect that paying down your mortgage is not the way to go, and the big mortgage is the way to go is a bit flawed.

There is no dogma about paying down a mortgage here that I am aware of and I've seen none in this thread. The issue in this thread is that the $24K doesn't fall from the sky once the mortgage is paid off. The principal payoffs don't change net worth, and the interest payments saved are offset by the loss of the investment income on the IRA. The only savings come if the IRA was earning say 2% and the mortgage was 2.75%. Then the difference is the .75% on the on the outstanding balance. If the balance was $100K, then they are up $750 for the year, not $24K. If they had a mortgage deduction that reduced the 2.75% interest payment and paid taxes on the IRA money to pay down the mortgage, that whittles away the $750 or maybe makes it negative.

 

[ERD50]

I think we have answered the Op's question adequately. However, I think some of the dogma to the effect that paying down your mortgage is not the way to go, and the big mortgage is the way to go is a bit flawed. ...

I'll second daylatedollarshort - I don't see that 'dogma' just a discussion about applying the numbers properly.

... So ultimately the answer lies in investor analysis, not in assuming markets will always generate market average returns, in my opinion.

It doesn't depend on market averages, just accepting the risk that the market won't return less than the mortgage rate over the long term. Current mortgage rates are lower than historical market averages, I believe. ...OK, this chart shows 20 year returns are rarely less than 5%, and that could be tempered with some bonds in the AA.

...
If the time horizon is not a decade or more, it tilts toward toward mortgage paydown. ...

Agree - 10 years is getting a little short term for this approach, but still not an unreasonable approach to consider.

-ERD50

 

[xmanz3]

We just downsized last year from a big-a$$ house to something smaller, lower maintenance. Unfortunately, now have fresh 30y mortgage of $347K at 3.625%. Have about $110K in equity.

I am 61yo and would like to leave the rat race in < 3yrs if possible. I currently have $770K in liquid retirement assets (IRA,401K)

Also have 176K in older pension. Wife has $842K lump sum retirement assets. She is 57yo.

Cash flow estimates tell me we will be ok to carry the mortgage into retirement. However, 30yrs is a long time to have that hanging over our heads and it makes me uncomfortable.

Would it be a bad idea to dip into my retirement to pay off the mortgage?
Emotionally, I don't like having a lot of debt.

I will pay off the mortgage ASAP!!!!!! Not having any type of debt is the best feeling and you will be able to sleep better at night!!!

 

[pb4uski]

I will pay off the mortgage ASAP!!!!!! Not having any type of debt is the best feeling and you will be able to sleep better at night!!!

Re-read the OP and consider the effect of income taxes. Do you stil want to pay it off to feel good? and in the process write a big check to the IRS?

Think.

 

[xmanz3]

Re-read the OP and consider the effect of income taxes. Do you stil want to pay it off to feel good? and in the process write a big check to the IRS?

Think.

What is write a big check to the IRS There are no facts on your response. There is no way to get away from paying taxes in the US, that's just how it is.

NO DEBT is a good thing for some of us!

 

[RunningBum]

Ah, don't ruin the bliss.

 

[pb4uski]

What is write a big check to the IRS There are no facts on your response. There is no way to get away from paying taxes in the US, that's just how it is.

NO DEBT is a good thing for some of us!

The fact that you are not considering is that the OP was asking if they should make a $227k withdrawal from their retirement accounts to pay off the mortgage. That will be $227k of income in addition to whatever income that they would otherwise have, which will likely put them in the 28% or 33% tax bracket and result in a huge tax bill.

OTOH, if they just make ~$24k/year withdrawals from retirement accounts as needed to make the mortgage payments, then the tax cost will likely be much lower.

So while you can't get away from paying taxes, you can make some smart moves to minimize the amount of taxes that you do pay.

Still sticking with your advice to the OP to withdraw from retirement accounts to pay off the mortgage?

 

[xmanz3]

After carefully reviewing the information you provided for that particular scenario, I'm in full agreement with you. He must find another way to pay off the mortgage without getting hit so hard when it comes to taxes.

 

[pb4uski]

There you go.

 

[ERD50]

After carefully reviewing the information you provided for that particular scenario, I'm in full agreement with you. He must find another way to pay off the mortgage without getting hit so hard when it comes to taxes.

Well yes, he is contractually obligated to pay it off. To not do so could result in penalties, and/or foreclosure, and bad credit rating. That is the only thing he "must" do.

And with a reasonably low interest rate, the likely best way to pay off that mortgage would be with the regular monthly payments, over the next 30 years, right?

-ERD50

 

[ChrisC]

And I'm pretty sure that if someone insisted that they would not do anything with the money other than keep it in 2% CDs (even after being shown that a 30-40% stock allocation has proven safer in the past), then the collective feedback would be to prepay the mortgage, if it left them with adequate liquidity. There is no sense in paying 4% on a mortgage if you would keep the payoff money in a 2% account, unless you need the liquidity.

Numbers tell the story. What someone decides to do after seeing those numbers is up to them. But if someone is misusing or misapplying or misunderstanding the numbers, helpful people here will try to explain.

-ERD50

Numbers do tell some of the story, but we operate emotionally and are driven by irrationality. We now have another Nobel Prize winner in Economics with a significant body of his word devoted to financial misbehaving. I have a refinanced 2.75%, 15 year mortgage (with 14 years remaining) with just about enough money sitting in 1 percent CD accounts to pay off the mortgage. I really like, not need, the liquidity, so I'm not paying anything off, right now. In a few years, I might decide otherwise. I'm not making the most optimum financial decision, but it feels right to me. Part of my reasoning is that we're very financially comfortable in not doing anything, for now.

 

[mpeirce]

you can't eat a home and you can't get a HELOC when you are unemployed.

Um, possibly not now (I have no idea), but I certainly did just that back in the early 2000's.

I recall a very specific discussion with HELOC the loan guy. "You mean I can write the minimum payment each month using these checks you just handed me?" Yes, you can.

That's when I realized that he had just handed me a loaded gun.

We never had to tap into that HELOC, but he got it for use if we needed it.

 

[Honeyfill]

Below is a good article outlining discussing the advantages of paying off the mortgage vis-a-vis the sequence of returns problem. The summary is that a paid off mortgage can mitigate the effects of a severe drop in the market early in your retirement. For example , you plan to withdraw 5k a month and have a 1k mortgage. If the market tanks and you find it prudent to reduce your withdrawals to 4k a month, your disposable non mortgage spending will actually drop 25% from 4k to 3k.
For the record, I still plan to keep my 29yr 3.5% mortgage but this article makes some good points that our worth considering.
https://earlyretirementnow.com/2017...hdrawal-rates-part-21-mortgage-in-retirement/

 

[ERD50]

Numbers do tell some of the story, but we operate emotionally and are driven by irrationality. We now have another Nobel Prize winner in Economics with a significant body of his word devoted to financial misbehaving. I have a refinanced 2.75%, 15 year mortgage (with 14 years remaining) with just about enough money sitting in 1 percent CD accounts to pay off the mortgage. I really like, not need, the liquidity, so I'm not paying anything off, right now. In a few years, I might decide otherwise. I'm not making the most optimum financial decision, but it feels right to me. Part of my reasoning is that we're very financially comfortable in not doing anything, for now.

And again, I don't ignore the emotional aspect of this. As I always say, people will do what they decide, either following what the numbers say or not.

But what I try to keep getting across is, emotions don't affect the numbers. Emotions may affect the decision.

-ERD50

 

[RobLJ]

Home Equity Loan

I confess I haven't followed the complete thread. I would be leary to take out a large amount of pre-tax monies to pay off a mortgage, given the current low rates--but I confess we paid off our mortgage in Houston about 5-6 years ago because we were sitting on taxable cash that was earning .1% or whatever it was.

To get to the point, it looks like DW will be calling it quits next year, so I'm wondering about the advisability of a Home Equity Loan before that occurs--just for the hell of it. We paid off the Reno home about 12 months after we moved here (DW was tired of writing small mortgage checks and we had a lot of cash), but I could see the convenience of being able to tap equity, although I doubt we would need to.

1) Anyone know what a decent rate would be? (I'm aware that the rate is variable).
2) Upfront costs?

This is more an emergency bucket that I don't foresee is likely we would use, but you never know. I will keep working part-time for another two years, but I suspect it would be better to apply now before DW hangs it up.

Responses appreciated.

 

[rayvt]

I will pay off the mortgage ASAP!!!!!! Not having any type of debt is the best feeling and you will be able to sleep better at night!!!

Debt is just a tool, not something to get emotional about.

You want to know what gives you the ability to sleep well at night? An investment portfolio that is several times your mortgage balance.

If you have a $200,000 mortgage and a $1,500,000 stock/bond portfolio, you can sleep like a baby. Security is knowing that you can make a phone call to your broker in the morning and have the mortgage paid off via wire transfer before dinnertime.

 

[Winemaker]

Debt is just a tool, not something to get emotional about.

You want to know what gives you the ability to sleep well at night? An investment portfolio that is several times your mortgage balance.

If you have a $200,000 mortgage and a $1,500,000 stock/bond portfolio, you can sleep like a baby. Security is knowing that you can make a phone call to your broker in the morning and have the mortgage paid off via wire transfer before dinnertime.

I agree. Just as I posted in #69 of this thread, debt is a tool that is used by some real estate investors. Every 5 years, refinance a property to extract appreciation, and five years of principal tax free. Spend or use as a down payment for next property. Rinse and repeat.