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Old 08-03-2009, 02:46 PM   #21
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Does Firecalc take into consideration the possibility of getting a reverse mortgage at a later point in time?
Not sure if this is a rhetorical question or not.

If you have used FIRECALC, you'd know that it can only "take into consideration" what you input. So, if you want to input the possibility of getting a reverse mortgage at a later point in time, I guess you could give that a go. A couple things to consider:

1) Typically, one would consider a reverse mortgage late in the cycle, right? I mean, if everything is going well, portfolio is intact, you just would not bother, I would think.

2) Since the runs I've done show that holding the mortgage improves your success rate, the odds of needing to do a reverse mortgage would be less if you held a mortgage (again, your data may provide a different result).

3) By the time you might need to consider to go reverse, the mortgage would probably be paid off or paid down to a small amount - probably not a big diff either way.

4) I'm not sure how you would input a reverse mortgage at say, year 28 of a 35 year FIRECALC run. The rates you receive today may be far different from the rates that would be offered under whatever the scenario is that trashes a portfolio after 28 years. High inflation might mean high rates paid out, low rates under other conditions?


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Old 08-03-2009, 03:03 PM   #22
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I'm late to this discussion, but I am completely debt free and like it that way.
It's not clear to me that I would be better off having a mortgage and a correspondingly larger portfolio, but there are probably mathematical models which could show I would be. But the mental freedom of no mortgage is worth a lot to me.
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Old 08-03-2009, 03:11 PM   #23
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If Nun is calculating that the 4.5% mortgage rate is a good investment then what about keep that liquidity handy in case interest rates go up. What about investing that money at 6% instead of paying off the mortgage?

If one is basing one's investment decision on the likelihood of a double dip in the stock market, then shouldn't one also consider the likelihood of interest rates going up?
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Old 08-03-2009, 03:29 PM   #24
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The recent (and past) comments about how "freeing" it is to be debt free are very fascinating to me, I guess that is why I keep coming back to this.

I mean, I understand that different things appeal to different people. One person's idea of the perfect vacation is to sit on the beach and get caught up in a book, but that might be hell on earth for the adventure seeker. Different strokes and all.

But when it comes to financial decisions, I just don't get that there is anything else to consider other than the likely financial outcome. I understand that people have different risk tolerance levels, but the FIRECALC runs I have done show that holding the debt provides (slightly) *less* risk, (slightly) *less* volatility, and (slightly) *higher* success rates.

So do you see why I am confused that people describe a path that may entail (slightly) *more* risk as "freeing"? It is cognitive dissonance for me.



Maybe one more parallel story to illustrate:

I've known people who would rev up their car real good just before shutting it off. It made them "feel good" - they thought they were "burning off carbon", or "getting oil everywhere for the next start". But most car guys know that this is *not* recommended, it is likely to increase wear on the engine, and most car manuals recommend against it (esp if turbo).

So, do you suggest to them that maybe this isn't as helpful as they think, and may actually be harmful? They should appreciate the helpful advice. Or, do you decide that you don't want to disturb their "feel good" mood, and just keep quiet when their turbo freezes up?

Now, if you have mentioned it and they just insist on doing it, sure, let them be, it is their decision, it may not hurt their car anyway. But, if every time you see them at a get together, they are telling other people how good it makes them feel to rev up the engine before shutting it down, isn't it reasonable to inform those people that they may want to read their manual, and check for themselves?

Sorry for the long post, just trying to cover as many bases as I can. As I say, this is fascinating to me.

-ERD50
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Old 08-03-2009, 03:41 PM   #25
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But when it comes to financial decisions, I just don't get that there is anything else to consider other than the likely financial outcome. I understand that people have different risk tolerance levels, but the FIRECALC runs I have done show that holding the debt provides (slightly) *less* risk, (slightly) *less* volatility, and (slightly) *higher* success rates.

So do you see why I am confused that people describe a path that may entail (slightly) *more* risk as "freeing"? It is cognitive dissonance for me.
It's behavioural finance. We don't always make "rational" decisions. Sometimes the decisions we make are not about the math, they are about how we see the world.
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Old 08-03-2009, 03:55 PM   #26
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Originally Posted by ERD50 View Post
The recent (and past) comments about how "freeing" it is to be debt free are very fascinating to me, I guess that is why I keep coming back to this.

I mean, I understand that different things appeal to different people. One person's idea of the perfect vacation is to sit on the beach and get caught up in a book, but that might be hell on earth for the adventure seeker. Different strokes and all.

But when it comes to financial decisions, I just don't get that there is anything else to consider other than the likely financial outcome. I understand that people have different risk tolerance levels, but the FIRECALC runs I have done show that holding the debt provides (slightly) *less* risk, (slightly) *less* volatility, and (slightly) *higher* success rates.

So do you see why I am confused that people describe a path that may entail (slightly) *more* risk as "freeing"? It is cognitive dissonance for me.



Maybe one more parallel story to illustrate:

I've known people who would rev up their car real good just before shutting it off. It made them "feel good" - they thought they were "burning off carbon", or "getting oil everywhere for the next start". But most car guys know that this is *not* recommended, it is likely to increase wear on the engine, and most car manuals recommend against it (esp if turbo).

So, do you suggest to them that maybe this isn't as helpful as they think, and may actually be harmful? They should appreciate the helpful advice. Or, do you decide that you don't want to disturb their "feel good" mood, and just keep quiet when their turbo freezes up?

Now, if you have mentioned it and they just insist on doing it, sure, let them be, it is their decision, it may not hurt their car anyway. But, if every time you see them at a get together, they are telling other people how good it makes them feel to rev up the engine before shutting it down, isn't it reasonable to inform those people that they may want to read their manual, and check for themselves?

Sorry for the long post, just trying to cover as many bases as I can. As I say, this is fascinating to me.

-ERD50

Three comments to think about:

1) I think that "risk" is not just about where I end up 30 years from now. It also involves how well I sleep at night between now and then. Short term volatility is one valid definition of "risk".

2) Doesn't age (really, other risks) have something to do with this? A working person without much for current assets has an immediate risk of getting fired exactly when the economy is bad and the market is down. A retiree with a comfortable portfolio may feel that short term ups and downs are irrelevant.

3) When you set up a FireCalc run, shouldn't the results of paying off the mortgage be the same as buying a fixed bond for the same interest rate? If so, this seems like an AA question. I'm not sure what bond/stock mix FireCalc finds as optimal, but I thought there was a fairly wide band of "pretty good".
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Old 08-03-2009, 04:44 PM   #27
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Everybody has to decide what they want to do with their money. Some people buy cars, some spend it on trips scuba diving, some spend it playing golf. Deciding whether you want to pay off your mortgage and live debt free is one of those choices. Going scuba diving in the Cayman's won't get you any closer to retirement, but if it's what you want to do, fine go diving. Paying off my mortgage may not get me to retirement faster, but I sleep well and enjoy life more.
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Old 08-03-2009, 07:34 PM   #28
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Not sure if this is a rhetorical question or not.

If you have used FIRECALC, you'd know that it can only "take into consideration" what you input. So, if you want to input the possibility of getting a reverse mortgage at a later point in time, I guess you could give that a go. A couple things to consider:

1) Typically, one would consider a reverse mortgage late in the cycle, right? I mean, if everything is going well, portfolio is intact, you just would not bother, I would think.

2) Since the runs I've done show that holding the mortgage improves your success rate, the odds of needing to do a reverse mortgage would be less if you held a mortgage (again, your data may provide a different result).

3) By the time you might need to consider to go reverse, the mortgage would probably be paid off or paid down to a small amount - probably not a big diff either way.

4) I'm not sure how you would input a reverse mortgage at say, year 28 of a 35 year FIRECALC run. The rates you receive today may be far different from the rates that would be offered under whatever the scenario is that trashes a portfolio after 28 years. High inflation might mean high rates paid out, low rates under other conditions?


-ERD50
It was not a rhetorical question, I was wondering how FIRECALC could possibly take into account the flexibility that paying off your mortgage provides. If it just handles it inflexibly as money out of the system being repaid at present rates, since the long term averages are over the present mortgage rates over time it would appear to always take the mortgage.

Thinking about this the only logical comparison to me would be determine the success rate with inputs of the value realized if a reverse mortgage were immediately implemented. That would seem to be the present value to the owner of paying off the mortgage whether realized or not. This value would grow as the owner aged (reverse mortgage payment would increase assuming the same interest rate and home value), so that depending on the age of the homeowner the present value of paying off the mortgage would vary also effecting the firecalc outcomes, making less availing of generalizations of the value of paying a mortgage and requiring more individual inputs.
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Old 08-03-2009, 07:43 PM   #29
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If Nun is calculating that the 4.5% mortgage rate is a good investment then what about keep that liquidity handy in case interest rates go up. What about investing that money at 6% instead of paying off the mortgage?

If one is basing one's investment decision on the likelihood of a double dip in the stock market, then shouldn't one also consider the likelihood of interest rates going up?
I agree, which is why I only put 50% of my after tax gains towards the mortgage and leave the rest in the market.
If I could get 6% in a MM or savings fund I'd let it compound, but right now that's not going to happen. Also I have a 50/50 mix in my tax deferred investments so I'm participating in this run up. I actually just did a 6 month rebalancing of those
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Old 08-03-2009, 07:51 PM   #30
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I'd say eliminating debt is "a" FIRE goal. I ws pretty much down to a low rate mortgage that will be paid off before I FIRE and a student loan at a laughably low interest rate, but I intentionally borrowed $50k on my HELOC to buy stupidly priced bonds at the start of the year. Now that the bonds are nearing par, I am liquidating and paying down the HELOC (and laughing all the way to the bank). Leverage can be a very valuable tool. As "Machine Gun" Kelly said, "Its an instrument: play it."
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Old 08-03-2009, 10:46 PM   #31
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It was not a rhetorical question, I was wondering how FIRECALC could possibly take into account the flexibility that paying off your mortgage provides. If it just handles it inflexibly as money out of the system being repaid at present rates, since the long term averages are over the present mortgage rates over time it would appear to always take the mortgage.

Thinking about this the only logical comparison to me would be determine the success rate with inputs of the value realized if a reverse mortgage were immediately implemented. That would seem to be the present value to the owner of paying off the mortgage whether realized or not. This value would grow as the owner aged (reverse mortgage payment would increase assuming the same interest rate and home value), so that depending on the age of the homeowner the present value of paying off the mortgage would vary also effecting the firecalc outcomes, making less availing of generalizations of the value of paying a mortgage and requiring more individual inputs.
I'm sorry, I am not following you with the reverse mortgage simulation. Also not following " flexibility that paying off your mortgage provides" - I consider having the added liquidity to be extra flexibility.

All I've done in FIRECALC is along the lines of:

A) 35 year span, $1.2M portfolio, 3.5% WR, add in a non-inflation adjusted annual payment for a 30 year $200,000 mortgage.

B) 35 year span, $1M portfolio ($200K less to pay off mortgage), 3.5% WR, no added mort payment.

Use whatever numbers match your scenario and see. If you think the tax hit of the added withdraw will be greater than the tax deduction, add some marginal tax rate to the mortgage payment. This becomes a guess- who knows what taxes will be and whether it would all be taxed (some might be from a Roth, some might not have cap gains associated, etc). But even at 15% on the whole nut, my runs showed a small advantage to holding the mortgage.

Does that help? - ERD50
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Old 08-04-2009, 02:49 PM   #32
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I agree, which is why I only put 50% of my after tax gains towards the mortgage and leave the rest in the market.
If I could get 6% in a MM or savings fund I'd let it compound, but right now that's not going to happen. Also I have a 50/50 mix in my tax deferred investments so I'm participating in this run up. I actually just did a 6 month rebalancing of those
I agree interest rates aren't likely to reach 6% very soon. But in 18 months? Your crystal ball is as good as mine.

Another consideration is your location. Where I live in colorado I could see housing prices continue to decline a little. I would hesitate to pay down my mortgage in this situation, rather keep the liquidity and invest.
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Old 08-04-2009, 02:59 PM   #33
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I agree interest rates aren't likely to reach 6% very soon. But in 18 months? Your crystal ball is as good as mine.

Another consideration is your location. Where I live in colorado I could see housing prices continue to decline a little. I would hesitate to pay down my mortgage in this situation, rather keep the liquidity and invest.
I'm in Boston so prices haven't fallen as much as in some other places. The price is down 15% from the high in 2006, but is now on the way back up. Also as I own a 2 family I get rent from it so once the mortgage is paid off I'll be able to ER and the rent will go a long way to covering my expenses.
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Old 08-05-2009, 09:02 PM   #34
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Everybody has to decide what they want to do with their money. Some people buy cars, some spend it on trips scuba diving, some spend it playing golf. Deciding whether you want to pay off your mortgage and live debt free is one of those choices. Going scuba diving in the Cayman's won't get you any closer to retirement, but if it's what you want to do, fine go diving. Paying off my mortgage may not get me to retirement faster, but I sleep well and enjoy life more.
But this seems like a very different argument to me, and gets to the core of why I keep trying to understand why people feel this way.

Certainly, we trade money for things we enjoy, things we value. What I value may be different from what you value. I agree with you. And, we may enjoy some of those things more than we fear the delay they may put in our retirement. I'm frugal in many ways, but I was not going to live like a hermit to speed along my FIRE date.

But, this "pay off the debt" thing is comparing money to money. In the most basic terms:

Net Worth = Assets minus Liabilities.

A) $3M Assets minus $2M liabilities = $1M Net Worth

B) $1M Assets minus $zero liabilities = $1M Net Worth

Why do so many seem to value B over A when they are equal? Or even if FIRECALC indicates that A>B?

I don't get it.


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Old 08-05-2009, 10:18 PM   #35
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"Net Worth = Assets minus Liabilities.
A) $3M Assets minus $2M liabilities = $1M Net Worth
B) $1M Assets minus $zero liabilities = $1M Net Worth
Why do so many seem to value B over A when they are equal? Or even if FIRECALC indicates that A>B?"

For me, the difference is that I would have $3M available to invest and build on. A 10% increase for A nets me $300K. For B I only get $100K. For mortgages, I know, on a visceral level, that paying off the mortgage will make me feel more liberated. But I will also have that much less money to invest and have available for an emergency. If you are 45 and working full time in a well paying job, you can pay off the mortgage and be fairly certain you can take out a new one if you need the money.

Once you get past 60 and are retired, banks are not really that enthusiastic to lend you money unless you have a good cash flow - meaning money coming in. They don't care what you have in savings - in fact, if you have it in savings, then they ask why are you asking the bank for a mortgage? The problem I have seen people have, especially in today's banking and lending environment, is that they can't get large loans in an emergency if they only have SS and investment income, no matter what the value of their home is.

We will pay off our mortgage eventually - 7 or 8 years, but, if we move, I'll start another one. No one solution is good for everyone and my goal is to have no debt other than a mortgage when I retire.
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Old 08-05-2009, 10:25 PM   #36
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But, this "pay off the debt" thing is comparing money to money. In the most basic terms:

Net Worth = Assets minus Liabilities.

A) $3M Assets minus $2M liabilities = $1M Net Worth

B) $1M Assets minus $zero liabilities = $1M Net Worth

Why do so many seem to value B over A when they are equal? Or even if FIRECALC indicates that A>B?

I don't get it.


-ERD50
Certainty is the answer. FIRECALC is software that uses historical data to give you a projection. Given recent events certainty is pretty appealing. It all comes down to your risk tolerance. US bonds look pretty safe, but with the level of debt in this country some of us must have wondered if the Argentinian experience is at all possible here. I'm not putting all my eggs in one basket, just paying down the mortgage with half of my stock market gains and letting the rest ride.
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Old 08-06-2009, 09:40 AM   #37
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But this seems like a very different argument to me, and gets to the core of why I keep trying to understand why people feel this way.

Certainly, we trade money for things we enjoy, things we value. What I value may be different from what you value. I agree with you. And, we may enjoy some of those things more than we fear the delay they may put in our retirement. I'm frugal in many ways, but I was not going to live like a hermit to speed along my FIRE date.

But, this "pay off the debt" thing is comparing money to money. In the most basic terms:

Net Worth = Assets minus Liabilities.

A) $3M Assets minus $2M liabilities = $1M Net Worth

B) $1M Assets minus $zero liabilities = $1M Net Worth

Why do so many seem to value B over A when they are equal? Or even if FIRECALC indicates that A>B?

I don't get it.


-ERD50
Just to try to help you understand. Have you ever taken anything like a Myers-Briggs test? They clearly indicate that there are different types of personalities. I suspect you are like me, and fall heavily into the Analytical range of any such test. But I've come to realize that most people aren't like that. So knowing the numbers work out doesn't neccesarily help them sleep better at night. For some of those people, not having debt is worth more than the empty (to them) knowledge that the odds are better if they do something different.

It's not quantifiable. It's just people. I wouldn't be able to wrap my head around it so well if DW wasn't so strongly in the EF range. She's explained (loudly, often, and passionately ) that we are just different. Sort an "I am from Mars, and she is from some bizarre alternate reality" thing.

What I try to do now is offer my opinion once (or twice), then let it go. Sometimes she comes around to my way of thinking after a time, sometimes she doesn't. IMHO, it's much more important to get along than to be "right". For some reason it seems that the righter I am, the less often I get lucky.
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Old 08-06-2009, 10:17 AM   #38
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Old 08-06-2009, 10:18 AM   #39
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But, this "pay off the debt" thing is comparing money to money. In the most basic terms:

Net Worth = Assets minus Liabilities.

A) $3M Assets minus $2M liabilities = $1M Net Worth

B) $1M Assets minus $zero liabilities = $1M Net Worth

Why do so many seem to value B over A when they are equal? Or even if FIRECALC indicates that A>B?

I don't get it.


-ERD50
I think nun's answer is the most common one for paying off a mortgage. You just know where you stand. Firecalc says you probably will do better investing that money, but you don't know that. I understand that paying off the mortgage is more conservative, and a conservative plan can be more risky to long term economic survival, but Firecalc isn't a guarantee.

Another reason is that a bank can't take away your house if I don't have a mortgage. Just one example, if I miss that my mortgage is sold and my payments aren't made to the right company, they might foreclose after some time. I don't have to worry about that. It's more than just money. It's the roof over your head.

Then there's the human nature that if I have the money available, I might spend it. We all know the stories of the people who take out a 2nd mortgage or home equity loan and blow the money. Most of us would never do that, but this takes away the temptation.

In my own case, I never took out a mortgage on the house I'm in, so I never had to pay a loan origination fee or any other fees. If the numbers are close as you say, perhaps I came out ahead because I never paid those fees. That's a different case from paying off an existing loan.

Also in my case, the bubble burst shortly after I bought my house. I probably would've sold the house and bought smaller (in my case I'd have moved full-time to Texas rather than keeping 2 residences) because I'd have had trouble making the payments. Part of that was due to poor diversification at the time, but that was the fact of my situation. Instead, I sat on the house and it has appreciated well.
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Old 08-06-2009, 10:41 AM   #40
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But when it comes to financial decisions, I just don't get that there is anything else to consider other than the likely financial outcome. I understand that people have different risk tolerance levels, but the FIRECALC runs I have done show that holding the debt provides (slightly) *less* risk, (slightly) *less* volatility, and (slightly) *higher* success rates.

So do you see why I am confused that people describe a path that may entail (slightly) *more* risk as "freeing"? It is cognitive dissonance for me.
For me, I think the word "likely" is the key phrase in your analysis above.

Everyone's circumstances are different, but here's one example:

Mid-thirties, still working toward FIRE, maxing out all tax deferred accounts, nice emergency fund stashed up, college savings for kids on target. Now the question is, for the extra savings/investing, how should it be allocated such that it helps bring me to FIRE as soon as possible?

Sure, doing some pure financial analysis might say that I should continue to invest this money in taxable accounts, at my calcuated asset allocation (let's hypothetically say 75% stocks). But that's based on "likely" outcomes, "average" returns, etc.

As we all know, things don't always follow the average or likely scenario. The last 10 years have taught me that. Who knows what the future may hold.

If I throw all of my taxable savings at my long term asset allocation, I may come out OK in the long run, but along the way I may have made little (or negative) gain after a decade of investing. There may be long periods of time where my taxable savings aren't doing anything to get me closer to FIRE, aren't growing, may even be shrinking, and all the while I'm still slaving away at the j*b to pay the monthly nut on that debt. And I need to keep that j*b to keep making those payments. I'm more locked in.

Alternatively, if I used some of all of those savings to pay down debt, I can reach a point where I no longer have that monthly nut to pay the debt. I may not have enough to FIRE, my FIRE stash will be less because I've invested less in taxable account. But I have more flexibility. I can switch to a lower paying job with less stress, or maybe part-time work, or maybe start my own business, all because I no longer have that monthly nut to pay in debt and interest. Sure, I may decide to stick with my job and accelerate the FIRE stash, but it gives me options and future flexibility that I don't get from locking my money into long-term investments that are "likely" to pay off in the long-run, but that require me to maintain my current income in the meantime.

There are obviously lots of factors in the example above: your age, the type of job you have (high stress high pay? something you might want to downsize? at risk for layoffs? or a 9-to-5 ho-hum job that you have no plans to change before FIRE and that is rock solid like working for Uncle Sam?), the certainty of your plans post-FIRE, etc.

But the bottom line, for me anyway, is that by splitting my savings between investments and paying down debt is a way for me to reach the flexibility and financial independence that fits my circumstances. Even if it is, perhaps, not the way to maximize my gains under the most "likely" scenario.

And in any case, it's certainly not comparable to revving the engine before turning off the car, which has been shown with certainty to be a harmful activity that has zero positive results.
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