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Old 08-06-2009, 01:31 PM   #41
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Thanks for the thoughtful replies everyone. I'll try to answer a bit more generally, rather than drag this out point-by-point...


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Just to try to help you understand. Have you ever taken anything like a Myers-Briggs test? ...
Yes, and this is exactly why I try to question those who view this differently. I am trying to understand what/how they come to this, so that I can better communicate with them about it. I am trying to see it from their angle. I can't do that w/o asking, because I simply do not think that way. I could ignore them, but then I learn nothing. I covered some of this on the other thread...

http://www.early-retirement.org/foru...-new-post.html



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Certainty is the answer.
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Originally Posted by tiuxiu View Post
Ding!
Ahhhh... you know, I think we are getting somewhere here. Let me re-phrase that, and say it is the "perception of certainty that is appealing". And as has been said, "perception is reality" (for some).

Yes, I'm sure these people "perceive" it as "certainty". However, we (should) know there is no such thing. Some people might like 100% cash for "certainty", but that actually has a higher "certainty" of failure over a 30+ year retirement. It isn't a positive type of "certainty", but it is a type of "certainty" (well, relative certainty, I guess).

Back in the mid 80's, I started pre-paying my mortgage, thinking it was the "right thing to do", and guess what - I "felt good" doing it, I was pretty darn proud of myself. After analyzing it years later, I realized it wasn't great, maybe a slight negative. But it took the numbers for me to realize that.

Just to be clear, I've never told anyone they should or should not pay down their debt. I have suggested that they run the numbers and see. When I've run the numbers, they always show a *slight* advantage for holding the debt - so I really don't think it is a big deal either way. But that is why I bring this up when people act as if it *is* a big deal. A lot of people seem to be creating a false sense of security over paying down the debt, when they may be actually doing the opposite. I just think they should understand what it really means for them. Run the numbers.

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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.
True, but remember that the FIRECALC failures are the *worst* periods. So, if a FIRECALC run for you shows that holding the debt helped, that means it was better in the worst of times (I suspect the higher portfolio provides a better buffer). Now, would it be better if things were worse than the historic worsts? I don't know, but I can't think of any reason to suspect it wouldn't.


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Originally Posted by RunningBum View Post
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.
Well, that is a behavioral issue that I think would keep someone from ever building a nest egg in the first place. They just won't be able to keep from dipping into the till for goodies.

I do know people who say they use a high income tax withholding, or an insurance policy as "forced savings". But I don't know anyone who did that and built up a nest egg for ER.

Thanks all - that was helpful to me. And I may just be "talked out" on this issue for awhile

-ERD50
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Old 08-06-2009, 01:36 PM   #42
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Also in the "Fire and Money" forum is a thread called "Value of USD". In that thread was a reference to the value of holding debt when one anticipated inflation rearing its ugly rear in the near future (at least, that's the way I interpreted the poster's comments). I suppose it becomes "market timing" to consider a mortgage as an inflation hedge, but it makes as much sense as some other strategies, for handling inflation.

I fall into the "pay off the mortgage for the peace of mind" camp. However, since I just obtained a mortgage, I'm rethinking paying if off quickly. And inflation is probably the only reason I'm thinking that. I have no better crystal ball than most of you, but my cloudy orb suggests that spending trillions we don't have just might lead to inflation. In that case, the mortgage could hedge against it - presuming I can find appropriate investments for the money I otherwise would use to pay off the mortgage.

I mention this because I think it might tip the scales of mortgage/no mortgage if one were convinced that inflation would soon roar. I make no recommendation, but mention it only for discussion (and to clarify my own thoughts and seek everyone's council.)
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Old 08-06-2009, 02:02 PM   #43
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Originally Posted by ERD50 View Post


Ahhhh... you know, I think we are getting somewhere here. Let me re-phrase that, and say it is the "perception of certainty that is appealing". And as has been said, "perception is reality" (for some).

-ERD50
All our computations and models rely on historical data and I was with ERD50 for a long time. But we all know that time horizon and future market returns will change the results of such calculations, a few down years going into ER is always possible. So I will continue to take 50% of my gains and put it into the mortgage as insurance against years of negative returns.
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Old 08-06-2009, 02:37 PM   #44
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Regarding my comment about blowing the money you could have used to pay off the mortgage, it doesn't have to be for goodies. Some people are market timers, and may be too aggressive in their investing. Anyone remember when PALM went public? I knew a guy who said he was going to buy every share he could because everyone he knew had a Palm Pilot, and he was certain it would take off.
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Old 08-06-2009, 04:36 PM   #45
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I've been retired for 10 years and the online mortgage debate has been going for at least that long. Frankly, there hasn't been much new in the debate for a long time, but IMO the events in the past year are so dramatic I think they are worth looking at the pay off/keep mortgage with a fresher perspective.


I personally, I have had and not had mortgages while working, and also had both situations while retired. I will say there is a psychological benefit for being debt free, but there is also a certain amount of angst by owning a house free and clear. (more on that later)

1. Forecasting tools such FIRECalc are of limited value because the range of individual outcomes varies greatly and missing data in FIRECalc

2008 was extraordinary year, and it seems to me a much more relevant event than string of market years in 1908, FIRECalc and similar calculators treat all years the same.

Right now my decision to take out a 4.99 Home Equity loan and invest in income producing assets in Jan 2008, is looking like my worse financial decision in my life. If I made this decision 15 or 16 years ago instead of paying off the mortgage, the outcome would have been much different.

One of the things that FIRECalc doesn't do, that is highly relevant to real retirees, is to model a best CD rate. US T-bond bonds, commercial paper are certainly correlated with CDs but I am not sure how close. It seems to me that typically I can get better CD rate than the corresponding T-bond rate.

I remember thinking back in late 2007, "Wow Penfed is giving my 6% on my 3 year CD and now a few months latter they are loaning me money at 4.99%, what a no brainer. Of course now I realize that next year I am not likely to be able to get close to 6% for a CD, but I am free to pay down the mortgage.

I suspect that ability to get "safe" CD rates higher than FIRECalc shows for fixed income tilts the argument in favor of keeping the mortgage.

2. There is no truly safe investment.
One of the absolutely true statements in favor of paying of the mortgage is that if I pay of a mortgage at 6% I am making 6% on my money. No other potential investment is as safe.

My big take away from events of last fall, is that people who think they are invested in an 100% safe investment like government bonds, an insurance annuity, insured muni bonds, and even CDs are kidding themselves.

If things had happened differently, Citi, AIG, and/or BofA for instance had failed, it is quite possible that the one or more of these safe investments would have lost money. For instance, either Citi or BofA failure would have completely wiped out the FDIC fund, Even something as simple as having former SEC commissioner Cox run the FDIC instead of the highly regarded Sheila Barr may have screwed CD investors.

Nor do I think that investors in US government bonds are completely out of the woods. Historically, many governments have defaulted on their debts either through outright default or via hyperinflation. It isn't just unstable countries like Russia, or those in Latin America, just ask the holders of Iceland bonds.

Now I am not trying to scare people, and it is silly for me to point the comparatively small risk in owning CDs and government bonds, while ignoring that 75-80% of my assets are in the stock market, which as I learned the hard way can go down very far very fast.

I am simply pointing out that we need to stop thinking as investments in binary fashion e.g. CDs are safe, corporate bonds and stocks are risky.
All investments are risky, the amount of risk and type of risk just varies.

3. Owning a house free and clear is risky.
A common and understandable justification for paying off the mortgage is that no matter what happens the bank can't take the house away. True enough, but the flip side is that you take 100% of the risk if the house value declines.

One of the biggest mistake bankers made in the last decade was not properly valuing the implied put that is goes with a mortgage. In simple terms, the ability for a borrower to mail back the keys if the house value falls and the mortgage goes underwater. This is an especially valuable for the folks in this board who generally have liquid assets much greater than the value of the mortgage.

For the average joe, who struggles to come up with the down for the mortgage, the banks have a pretty powerful leverage. If you default on the mortgage we are going to ruin your credit and it will be a decade before you can buy another home. For myself and many members of the forum, if my credit score went from excellent to horrible it would have little impact on my life. I simply have no need to borrow money.

Now for those of you who are saying, "I don't care that much about my home value, I have no intention or moving " or who are saying "I'd never default on my loan". I am in the same position, but stuff happens.

Imagine two retired couples from the cold Northeast or Midwest with two million and modest pension, who a few years ago moved to a warm spot like Florida, Phoenix, or Las Vegas. Both bought a 500K house, one took an 80% mortgage the other paid cash. Now both are unhappy about their timing, and the guy with mortgage sometimes wonders how much he is underwater. Suddenly a family emergency happens and there is very good reason to move back home. They both find out much to their dismay that their 500K house is now worth 250K. It seems to me that retiree with the mortgage is in much better situation. While he feels bad about mailing back the keys family comes first. The other couple has to deal with both the family emergency and trying to sell or rent their house in horrible market.

It seems to me that an important factor in decided to pay off/keep mortgage is the amount of equity. If your mortgage is relative small less than 1/2 the value of the house, than paying it off makes much more sense than if you have a small amout of equity say <20%.
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Old 08-06-2009, 06:50 PM   #46
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I'm also working on eliminating all debt. Only $4500 on car and $4K on student loan left, not counting my mortgage. Now I gotta avoid buying a new car!
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Old 08-06-2009, 08:17 PM   #47
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No debt means I have no required debt repayment. If I lose my income (job) at the same time that the market tanks (not unlikely as economic activity is highly correlated) then I have more options how to respond. I am not forced to liquidate whatever I have at a loss to cover that required payment.

If no bad scenario plays out, then I likely end up with slightly less money. If a bad scenario plays out, then I likely avoid a large loss. You can choose slightly better security or slightly better maximum outcome.
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Old 08-06-2009, 08:50 PM   #48
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I'm with you quietman, but another view is that having the cash invested is more liquid than having it in your house, and therefore more readily available in such an emergency.
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Old 08-06-2009, 11:51 PM   #49
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Yes, and if I had a paid off house and NO money, then I might wish I had some investments and a bit of mortgage. In fact, when I did have that I BORROWED some money, just so I could avoid that problem. Once I have enough otherwise saved up, I got rid of the debt. The simplification works for me. I like the low tax brackets. I like not having to worry about keeping up the debt service. It may not work for everyone. The calculations invariably favor keeping low rate mortgages, so everyone can make their own choice.
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Old 08-07-2009, 01:47 AM   #50
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It may not work for everyone. The calculations invariably favor keeping low rate mortgages, so everyone can make their own choice.
This is one of those questions where there is no clear right or wrong answers.
In many (I'd even venture to say most cases for couples) people who have a relative small mortgage 200K or so and minimal other deductions (for example you life in a state with no income tax, and/or low property) you'd be better off paying off the mortgage and taking the standard deduction than itemizing.

Let's say they pay 3,000 in state and property tax, 1,000 in charitable deductions and 10,000 in mortgage interest. Their itemized deductions are 14,000 which only slightly higher than the standard deduction of $11,400. Paying off the mortgage would allow them to utilize an additional $7,400 in standard deduction. They'd need some very terrific and tax efficient (e.g. dividend or capital gains) investments to overcome the standard deduction hurdle.

Everyone's situation is unique. It depends on your own tax situation, the size and interest rate of your mortgage, and honest appraisal of what the alternative investment is likely to earn (or better yet a range of returns).
It would seem to me that for such an important to decision it is worth the time to fire up Turbotax or talk to your CPA, and see what MAKES THE MOST FINANCIAL SENSE.

After having done the calculation you have knowledge. You are then in a much better to position, to say even though it is likely to cost me $X to pay off the mortgage, my piece of mind being debt free is worth more than that. Another person may make the same calculations and find that paying off the mortgage will actually save them money. They may conclude the opposite "I think interest rates will go up to 15%, so I want to have the flexibility of having liquid assets and that is worth more than $X in tax saving."

I suppose if you are the type that says I don't care if X=$10,000 year, I want to be Debt Free, you can skip the calculations and I'd suggest you see Dave Ramsey for a job.
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Old 08-07-2009, 07:55 AM   #51
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I'm with you quietman, but another view is that having the cash invested is more liquid than having it in your house, and therefore more readily available in such an emergency.
That's true if you're looking at safe investments (FDIC insured CDS, etc.). But my problem with this thinking, in my own scenario at least, is that the money I'd otherwise invest would most be in stocks per my long-term asset allocation. And therefore, because of all the ups and downs in the market, it's not really liquid unless I'm willing to sell and take a huge loss if necessary at crunch time when I need the money.

Of course, if I invest in safe investments no matter what, then I'm looking at very low interest rate scenarios at the moment, and it becomes a guessing game about where interest rates might go in the future.

And by the way, I'm not specifically just talking about paying off mortgage debt -- student loan debt is another big one for many of us. I have a monthly student loan debt service that I have to meet and it'd be nice to get rid of that sooner rather than later. So I divert some of my taxable savings to pay down that debt ...

I agree with everyone who says there is no overall right answer. And I even agree that in more cases than not, it probably makes more financial sense to invest rather than pay off debt per statistical probability. But I still think there are a lot of individual factors that go into the equation, plus an emotional component which is different for everyone.
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Old 08-07-2009, 08:56 AM   #52
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OK, none of you will admit it, but I will...

One of the main reasons why I love being entirely debt free, with no mortgage, is that it simplifies things.

My mortgage used to cost me $1000 per month.

Right now I know that for minimal subsistence I need x dollars ("$x") per month steadily and without fail for the rest of my life as my ER income. I will have a lot more than that, but that is what I need.

If I still had the mortgage, I would need to come up with "$x + $1,000" per month steadily and without fail for the rest of my life just for minimal subsistence.

It's a lot simpler to just have to come up with "$x" than with "$x + $1,000" every month, especially when I subtract my SS and tiny pension from the $x.

Sure, I might end up with more money on the day I die if I invested that $1,000/month, but I think that the first $1,000 of income is worth more (to me) than the last $1,000. By this I mean that having food and shelter is more important than a second TV, for example, though I might spend the same on each.

There's a lot of peace of mind tied in with having a paid off home, especially when stocks, bonds, and real estate were tanking simultaneously, banks were failing and there was talk of the FDIC running out of money, and even some money market funds were questionable. At the time I think many of us wondered what investment was safe? many of us went to treasury MM and ended up making very little on that cash. It helped to know that the "will I have a roof over my head?" question was taken care of and not a concern.

Also, it really helped for a few years when I had the Supervisor from Hades who was making my life miserable. With a paid off house, I knew that I could quit and even if I could only find a job at Mickey D's I could still survive. I didn't quit but it made day to day life more bearable to know that I could. Luckily right now I have a terrific supervisor (the other one got promoted to another part of the organization ) but until you have had a bad supervisor terrorizing you, you just can't possibly believe what a comfort it is to have a paid off home.

AND - - I completely agree that the pay off the mortgage question is one that each person should decide on their own. What is right for me, or for any one person, is not necessarily right for somebody else.
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Old 08-07-2009, 10:48 AM   #53
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That's true if you're looking at safe investments (FDIC insured CDS, etc.). But my problem with this thinking, in my own scenario at least, is that the money I'd otherwise invest would most be in stocks per my long-term asset allocation. And therefore, because of all the ups and downs in the market, it's not really liquid unless I'm willing to sell and take a huge loss if necessary at crunch time when I need the money.
Exactly. That statement you quoted regarding having liquidity available with a mortgage could be stated including a "assuming your liquid assets are still there in sufficient amounts at the time you need them" qualifier.
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Old 08-07-2009, 11:38 AM   #54
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OK, none of you will admit it, but I will...


OK, I'll admit it, you love being entirely debt free. There, that wasn't hard for me to say at all. Why do you say we won't admit it?

As far as the rest of your explanations, I think you should stick with "it makes me feel good, so I do it". Your added explanations always seem to totally ignore the benefits of having the larger portfolio, and it always leaves me wondering why that is.

When I've done the FIRECALC runs, I don't pay much attention to the final average and max (though those are generally higher as well). I look at the success rate. It always tells me that the larger portfolio *helps* in the bad times, not hurts. But I keep hearing people say they don't want that debt in case bad times come? Heck, I *want* the debt (and added liquidity) in case bad times come. More buffer for the portfolio.

-ERD50
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Old 08-07-2009, 12:25 PM   #55
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Heck, I *want* the debt (and added liquidity) in case bad times come. More buffer for the portfolio.
Maybe I'm missing something. But if the money is invested in the stock market, when the bad times come it's going to be way down, possibly even into negative return territory, so is that really liquidity?

Alternatively, if the money is invested in "safe" investments, say FDIC-insured CDs or heck even throw in short-term govt bonds ... well, the rate or return on those is lower than most debt that people are considering paying off (i.e. mortgage and student loan debt ... obviously credit card debt is generally a no brainer to pay off).

I'm just thinking out loud, I appreciate hearing the other side of the coin. I can never make up my mind, so with my after-tax dollars I always try to do both -- taxable investments & paying down debt! Schizo investing
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Old 08-07-2009, 01:13 PM   #56
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Firecalc is based on historical returns, right? And, I can't find it right now, but wasn't there recently a poll asking whether we felt America had seen it's best days? When I checked the results, it seemed like the majority said Yes. Doesn't this mean that the future may be worse than what Firecalc projects?

You (ERD50) point out the "perceived" certainty of paying off debts. One could just as easily talk about the "perceived" certainty of firecalc calculations. If you have a pessimistic outlook on the future, getting a guaranteed "return" by eliminating the loan interest may turn out to be a better choice. You can't prove it isn't. Therefore, the people who are going with eliminating debt aren't dead wrong like you seem to be saying. This isn't a no-brainer math decision like taking part in an ESPP. Besides, you said yourself that the difference is small. A small deviation from history towards the downside could put the advantage the other way.

As far as liquidity goes, my advice would be to make sure you have enough liquid assets to weather some bad times before you pay off the mortgage.
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Old 08-07-2009, 01:25 PM   #57
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Maybe I'm missing something. But if the money is invested in the stock market, when the bad times come it's going to be way down, possibly even into negative return territory, so is that really liquidity?
All these senarios depend on assumptions, so I'm tempted to quote the mutual fund mantra of "past performance is not a guarantee....."etc. I don't know the future, but if we have 10 years of zero or negative growth and put those into FIRECALC the results would be dismal. So I'm betting on both horses and cashing in 50% of any gains I get in this market and paying off the mortgage.
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Old 08-07-2009, 01:31 PM   #58
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Maybe I'm missing something. But if the money is invested in the stock market, when the bad times come it's going to be way down, possibly even into negative return territory, so is that really liquidity?

Alternatively, if the money is invested in "safe" investments, say FDIC-insured CDs or heck even throw in short-term govt bonds ... well, the rate or return on those is lower than most debt that people are considering paying off (i.e. mortgage and student loan debt ... obviously credit card debt is generally a no brainer to pay off).

I'm just thinking out loud, I appreciate hearing the other side of the coin. I can never make up my mind, so with my after-tax dollars I always try to do both -- taxable investments & paying down debt! Schizo investing
Good questions, here's what I make of the FIRECALC runs I've done - I seem to get the best results by maintaining my AA with the added mortgage money.

As I alluded to earlier, "safe from volatility" doesn't correlate with "safe from eating dog food when I'm 90". A portfolio of 100% CDs might be "safe from volatility", but FIRECALC says you are much more likely to FAIL than with a 75/25 Eq/Fixed portfolio. So, in the only way that really matters to me, a 75/25 is safer than a 0/100.

I used to agree with the camp that said for apples-apples you need to invest the mortgage money in "safe" investments. But if I use FIRECALC for my measure of safety, it says stick with your AA %. Yes, that *sounds* more "risky", but if it provides a higher success rate, I would say it is less risky. If drawing on that on hard times was an overall negative, surely FIRECALC would report a higher failure rate in those cases. But it does not with my numbers.

Unless you just don't give any credence to FIRECALC, but I think it is a really wonderful tool (tool, not predictor, not an absolute) for perspective.

Remember, you boosted your fixed by 25% of the mortgage amount too. And rebalancing means a little bit more getting shifted from EQ to Fixed in good times. I think it is the combination of all those that makes the difference.

Perspective: Remember that my runs have shown it to be a *slight* advantage to hold the debt. So slight, it isn't worth 1/10,000 of the words we have added to this topic. Do it or don't do it - no biggie. But as long as so many people keep giving the impression that this is a key element to FIRE success, I'm going to keep commenting that people should run the numbers for themselves before they get too excited. Better to put your energies on other things. Paying down mortgage debt or not just isn't going to make/break a retirement from what I have seen. No reason to think it will/won't, unless you have run the numbers for your case and see differently.

-ERD50
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Old 08-07-2009, 01:42 PM   #59
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Firecalc is based on historical returns, right? And, I can't find it right now, but wasn't there recently a poll asking whether we felt America had seen it's best days? When I checked the results, it seemed like the majority said Yes. Doesn't this mean that the future may be worse than what Firecalc projects?

You (ERD50) point out the "perceived" certainty of paying off debts. One could just as easily talk about the "perceived" certainty of firecalc calculations. If you have a pessimistic outlook on the future, getting a guaranteed "return" by eliminating the loan interest may turn out to be a better choice. You can't prove it isn't.
Correct. And you can't prove it *is* better either. I don't know, but it seems logical to me that if the debt & larger portfolio *helped* in the historic bad times, that it would also help in times that are somewhat worse also. Would you really expect the curve to go up, and then reverse at some point? Maybe, but I can't see any reason to think that. Maybe someone has some ideas. Maybe someone could 'jigger' FIRECALC to produce an even worse "history"?



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Therefore, the people who are going with eliminating debt aren't dead wrong like you seem to be saying.

Hold on there Cowboy - I NEVER said that , and I never say never .

I have only said that they may be wrong to think this makes a big difference and that they should run the numbers for themselves. Please do not misquote me. Thanks.


Quote:
As far as liquidity goes, my advice would be to make sure you have enough liquid assets to weather some bad times before you pay off the mortgage.
I think youbet may have a trademark on this phrase, so I'll credit him, but:

"Yes, more money is ALWAYS better!"

-ERD50
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Old 08-07-2009, 02:00 PM   #60
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Join Date: Aug 2005
Location: Philly 'burbs
Posts: 547
I'm lucky -- I had the pleasure of paying off my mortgage, then the stock market tanked, which meant that I was in one of the rare time periods where it was financially better to pay off the mortgage than to invest it.

Always was that "well, it is usually better to invest it", warring with the "it feels better to eliminate debt".
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