carry my mortgage into retirement?

[Perryinva]

Why would it be foolish to presume that if someone isn't making additional principal payments on their mortgage that they are saving? There is saving and spending... saving can be in home equity (by paying down the mortgage) or in taxable accounts.

Response: its not except that many people don’t save significantly in taxable accounts. The assumption is it is better to save where it is not easily accessible. Similar to a house.

If you have taxable savings because you have not paid down a low interest mortgage then you can survive a job loss with no sweat.... no need to raid retirement savings.... note that I specifically indicated taxable funds, not tax-deferred retirement savings and ERD50 was referring to taxable savings as well.

Response: agreed. And the dollar amounts discussed here are not terribly significant in the big savings picture. Again as above, I don’t know anyone that as a matter of course has $200k in taxable accounts. They want the tax shelter of deferred or eliminated. It appears common in the ER community because that is the source of your income. Tf and I still work for income.


But we are responding to a post on the ER forum... so we are already targeted... besides, I had lots of taxable investments long before I ever heard of this forum.

Good for you; you are and were a smart investor. Many of us had to learn via sites like this how to allocate assets. That is why we are here... to learn.

 

[ERD50]

Good for you; you are and were a smart investor. Many of us had to learn via sites like this how to allocate assets. That is why we are here... to learn.

You really seem to be torturing the scenarios to fit your point, or perhaps you are trying to make a different point from what we were making (or a combo)?

I was talking about what a reasonable person could reasonably decide to do if they held a reasonably low-rate mortgage, and also had sufficient pay-off funds reasonably invested. Did I mention "reasonable" and "reasonably"?

It would be uncommon for it to be reasonable to pay a penalty to use tax-deferred funds for this.

Any plain-jane AA reasonable investment portfolio (couch-potato, even just 2 funds total market and BND) will be kicking off over 2% in divs & cap gains (my 3% estimate was on the high side for that - but a perennial favorite here, psssst-Wellesley, does pay ~ 3%). You would have to work to avoid it (like BRK-B). So I stand by the idea that you do not gain, and may lose security by pre-paying a mortgage.

Based on that info, people can decide which they prefer, it's really not that big a deal in most cases. But they shouldn't use bad logic/info to make that decision. As you say, people are here to learn, let's make sure they learn the right things (then decide for themselves).

Now, if you are talking about someone in the accumulation phase, without sufficient funds to pay off the mortgage, that is a different scenario. In that case, I would suggest they compare the mortgage rate with expected long term market gains, and in the current environment, that would likely point to saving/investing and keeping the $ liquid, rather than lock it up in the house.

Now if you are going to say that person wont save, they will spend it, well that's their decision. But it doesn't change the matters they should be looking at to make the decision. They would be better off working on developing an appropriate saving/LBYM mindset. Or that they won't invest wisely, well again, they should learn, it is easy.

-ERD50

 

[pb4uski]

.....Now, if you are talking about someone in the accumulation phase, without sufficient funds to pay off the mortgage, that is a different scenario. In that case, I would suggest they compare the mortgage rate with expected long term market gains, and in the current environment, that would likely point to saving/investing and keeping the $ liquid, rather than lock it up in the house. ...

+1

But OTOH, it is a lot harder for people to arrange two automatic transfers per month... one for their mortgage payment and another to Vanguard for investment in the mutual fund of their choice... than just increase their mortgage payment automatic transfer for additional principal.

 

[bobandsherry]

The answer to whether to pay off the mortgage is so unique to every situation. We want to pay ours off but would not pull the entire amount due ($186k) from IRAs or we would be slammed with big taxes. We live in CA and what we are doing instead is pulling about $20k per year out of IRAs to get it down within 5 years to Zero. We will still have $7000 a year in Real Estate taxes (including some random local bonds attached to the real estate). We want to have a very clear picture of our net worth and our discretionary income. With the budget we have, we need $98k in after tax income right now. Once we pay off the house, we'll be able to drop the annual budget to $74k a year (yes, $2,000 a month is just for our Principal and Interest on our mortgage). Our note is a 10 year, 2.75%. It will be paid off in 5 years as our plan is executed. Then the BIG extended family vacations will commence. Yahoo!

Just something to consider - instead of paying more $ ($24K/yr) now towards paying off your mortgage quicker, you could use those funds NOW towards BIG extended family vacations. It's not like you will have any found money later, especially when you figure it's a 3% interest rate on your mortgage.

In my mind you'll have less income as you'll have less in your investment accounts (that would generate dividends) and instead sitting in an asset that you can't readily spend.

That said, if it gives you comfort in knowing that you owe $0 on a mortgage in 5 years vs. having a balance of ~$90K then all the best to you. But don't fool yourself (and others) that you'll have more from income to spend. It's largely right pocket vs. left pocket.

 

[Perryinva]

I don’t know how much more clear I can try to be. I’ve already said I agree with all the financial points. I’ve said that personally I am carrying a mortgage just large enough to avoid PMI. With todays rates it makes no sense to not take advantage. I am not trying to fit anything to make my point. I am only pointing out that the brain trust here assumes everyone is at their level of investment acumen. And all you all do is actually reinforce that point. Pb4uski says he had many taxable investments before he ever set foot here, you talk about Wellesly funds and easy dividend portfolios that throw out 3 or 4 % divs. “They should learn, it’s easy”. For many many it is not easy (and I don’t mean me, but my wife is a prime example). All this is fine and dandy if you’ve been reading ER for years and participate in investment discussions, etc. You insist security is defined by financial flexibility and net gains. I agree Tf is not using sound financial logic but it is what is secure in their mind. The “extra income” when the house is paid off is not extra income.

Yet plenty of people keep a lot of cash in online banking at 1.25%. Or ladder CDs for a whopping 2%. Why? It is all about comfort levels. You all give sound advice, I get it. But you all seem to refuse to acknowledge that not everyone is at your comfort level for risk because they may not clearly understand what the heck you are all referring to. This is my last post on the subject, I swear.

 

[Travelfreek]

Haha! I love reading these replies! It's great to see how passionate we all are! I admit we are not sophisticated investors. We have worked hard and both recently retired. I think I'll consult with our CPA on our plan going forward. We are going to be in an interesting pickle tax-wise in a few years when my husband begins collecting his SSA. Our 4 current income streams (3 pensions and 1 very small SSA for me - $402 a month) are all COLA indexed and the 5th (his SSA in a few years) will be as well.

The sale of the Michigan inherited investment property provided a lot of the $ to bring our mortgage balance down from $356k to now $188k. That was not taxable income and our cap gains on that property was a mere $400. But we did pull $20 k this year from IRAs to pay down Mtge and I'll now put the brakes on to consult with our CPA. Meanwhile, we'll see what the tax reform shakes out to be if it's ever finalized.

Thanks to all of you for your input.

 

[dallas27]

The only way to be wrong on this topic is to believe you are right, or even that there is a right answer.

For such topics, I always say split the difference and move on knowing you have saved time worrying about and will always be 50% right which is more than most people can say with certainty.

 

[daylatedollarshort]

The only way to be wrong on this topic is to believe you are right, or even that there is a right answer.

For such topics, I always say split the difference and move on knowing you have saved time worrying about and will always be 50% right which is more than most people can say with certainty.

Opportunity costs are a real thing, not an opinion. I don't recall any posters here telling someone to pay off a mortgage or not, just pointing out potential math flaws in some of the savings calculations presented.

 

[dallas27]

Opportunity costs are a real thing, not an opinion. I don't recall any posters here telling someone to pay off a mortgage or not, just pointing out potential math flaws in some of the savings calculations presented.

Did you mean to quote someone else? Not sure how this references my post.

But, I will say opportunity costs are, by definition imagined and projected, not real, because they never occur , even if their certainty is high. Studied econ/finance, I know the arbitrage math, but that ain’t everything.

 

[pb4uski]

It sounds to me like remedial training may be necessary.

 

[ERD50]

I don’t know how much more clear I can try to be. ....

I think there are a couple things making it unclear for some of us...

I think you are mushing together:

A) What the more objective calculations/risks are, and...
B) What the 'average' person might do or know.

Those may be two different things. If the average person doesn't know to do something, that doesn't change what should be done.

And a statement like this from you:

.. But I think it is a bit (dis?)ingenious to act like it’s absurd to want a paid off home.

I don't think anyone implied it is absurd to want a paid off home. I think it was just being said that some of the reasons given to pre-pay a mortgage don't pass muster.

Yet plenty of people keep a lot of cash in online banking at 1.25%. Or ladder CDs for a whopping 2%. Why? It is all about comfort levels. You all give sound advice, I get it. But you all seem to refuse to acknowledge that not everyone is at your comfort level for risk because they may not clearly understand what the heck you are all referring to.

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

 

[daylatedollarshort]

Did you mean to quote someone else? Not sure how this references my post.

But, I will say opportunity costs are, by definition imagined and projected, not real, because they never occur , even if their certainty is high. Studied econ/finance, I know the arbitrage math, but that ain’t everything.

There may be no right answer to the pay off or not pay off decision itself, but there are correct and incorrect math calculations in formulating that decision. Those are math facts, not opinions, and that is the part some posters here have been trying to point out. As runningbum pointed out in a previous post, " Travelfreek talks about this $24K windfall as if it just appears, but it is at the expense of depleting some savings."

 

[dallas27]

There may be no right answer to the pay off or not pay off decision itself, but there are correct and incorrect math calculations in formulating that decision. Those are math facts, not opinions, and that is the part some posters here have been trying to point out.

Agreed, there are mathematical optimality’s. But those maths lack empathy for people who spend more time working on the left hemisphere don’t they? So while the math may be optimum for a rational actor, how does that help the majority of humans who are not? So maybe behavioral finance suggests the practical optimality for a human is somewhat short of the mathematical optimality.

You’ll have to excuse me, I spent today listening to lectures at harvard on thalers work, the latest econ Nobel winner from chicago. So B-finance in front of mind tonight.

 

[daylatedollarshort]

Agreed, there are mathematical optimality’s. But those maths lack empathy for people who spend more time working on the left hemisphere don’t they? So while the math may be optimum for a rational actor, how does that help the majority of humans who are not?

As ERD50 just posted, "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."

 

[Yarnstormer]

To me it depends on the price of the home. Sure, it's all relative but I can't imagine tying up $450k in home equity before retirement, or making a huge effort to pay off early. I have a mortgage - easily paid for now. I'll probably keep it for the entire term. I have enough equity that if I want to do a big downsize I can buy a house with the proceeds so I feel I'm covered. Big housing drop - guess I'll become one of those rv people

 

[dallas27]

As ERD50 just posted, "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."

So your point is you agree with me?

Not sure, maybe you thought my post a few back was in response to something you might have written instead of the general thread concept. I can promise you, i have not read your posts or the whole thread, this topic is predictable and repetitive. For all I know the mortgage payoff threads are russian troll bots.

 

[rayvt]

So while the math may be optimum for a rational actor, how does that help the majority of humans who are not?

Well, those people are not hanging around Financial Independence and Early Retirement sites, are they? So they won't be reading our words of wisdom.

Discussions here are DIRECTLY focussed on becoming financially independent and retiring early. So there's no particular reason to discuss the majority of people who will work until they hit retirement age and then spend their retirement playing canasta and waiting for the Social Security check to arrive.

 

[dallas27]

Well, those people are not hanging around Financial Independence and Early Retirement sites, are they? So they won't be reading our words of wisdom.

Discussions here are DIRECTLY focussed on becoming financially independent and retiring early. So there's no particular reason to discuss the majority of people who will work until they hit retirement age and then spend their retirement playing canasta and waiting for the Social Security check to arrive.

Who is discussing them?

 

[dallas27]

These threads crack me up, people see everything as religion and as if others are speaking to them. I’ll leave this thread reiteration my point. There is no right answer, what feels good psychologically is opposed to what is financially optimal, and most people will continually switch between the two modes and regret either one. When there isn’t a right answer, people should split the difference and be content they are alway half right.

Everyone who uses 1970s style finance reasoning that there is a right answer may be myopic in todays finance theory. I think billy Shakespeare said only a fool thinks himself a wiseman, and a wiseman knows himself a fool.

Good night all, carry on.

 

[IrishMoss]

I was facing the same question about paying off early vs not. Int rate of 3.5% on a 30 yr mortgage, already paid down 8 years worth in 4 years. I decided to split my extra payments for awhile, paying half extra to the principal each month and half extra to investments each month.

I've decided upon doing the math that I want the monies I would otherwise spend on extra principal payments to go into my investments and especially so as I start early retirement. By investing with an expected average return of 6% to 7%, I will be in the position of paying off my mortgage in its entirety in 9 years if I want, or forgo the payoff and keep the loan going and leverage those monies into investments on an ongoing basis.

 

[BeachOrCity]

That is why we INVEST in broadly diversified portfolios of stocks and bonds, especially in retirement, rather than SPECULATE on narrow market sectors. Graph below compares Total Stock Market with Wellesley and Wellington for the decade ending in 2005.... the latter were much smoother.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart

I love how it shows ending up at about the same place if u expand graph to 2017.

 

[pb4uski]

Not sure what you are looking at. If you extend it to 2017 (from 1996) it looks pretty darn good to me. The balanced funds have a smoother ride but they are all 5-6.5x the initial investment.

$10k grows to $52k or $64k or $65k depending on which one you pick... over 20+ years... a 8.25% to 9.4% annual return...

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart

 

[BeachOrCity]

Not sure what you are looking at. If you extend it to 2017 (from 1996) it looks pretty darn good to me. The balanced funds have a smoother ride but they are all 5-6.5x the initial investment.

$10k grows to $52k or $64k or $65k depending on which one you pick... over 20+ years... a 8.25% to 9.4% annual return...

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart

Exactly. Less volitility and about the same total gain over time. My point was Wellesley is a smoother way to get to the gain without the volatility

 

[Perryinva]

Who is discussing them?

I lied. I couldn’t help myself. Yes, disingenuous. Typo. I WAS discussing those that rayvt referenced. I didn’t realize that mere mortals were not allowed to read your words of wisdom, ray, and only those young enough to begin a FIRE plan or already had FIREed were the only readers of this forum. What a load of bovine excrement. Why would anyone assume that? Because they don’t have 13000 posts? Of course those people read these threads, as ERD50 said, you can show them the reasons and math, and then they can decide if the gains are wroth the risk (as they see it). Why on earth would everyone already invested heavily in Wellesley discuss why investing in Wellesley is the best thing to do with others already invested in Wellesley? A mutual admiration society? It is almost never too late to learn about smarter paths to take and those with the most to gain on here are those with the least experience and haven’t or didn’t FIRE.

And as to my point about savings at 1.25, again, the math is clear. One could just show the actual calculations and illustrate the gains. Many do that here and it is usually “end of discussion” from that viewpoint. And yes, you are correct that I incorrectly read in to some of the replies that “this” is the correct thing to do. Many just pointed out the financial shortcomings. Others here made my point more eloquently.

 

[joeea]

These threads crack me up, people see everything as religion and as if others are speaking to them. I’ll leave this thread reiteration my point. There is no right answer, what feels good psychologically is opposed to what is financially optimal, and most people will continually switch between the two modes and regret either one. When there isn’t a right answer, people should split the difference and be content they are alway half right.

If you post a financial question in a financial independence forum, you should expect a financial answer.

You can always choose to ignore the financially better answer. Basically, you are spending money to feel better/more secure. We all spend money that isn't necessary.

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.