Eliminating debt is my main FIRE goal

[jdw_fire]

OK, I see where you are coming from now (I think). So sure, equity in a house is certainly worth something. I don't think anyone is denying that. A retiree with $X portfolio and some home equity is certainly in better shape than a retiree with the same $X and *no* home equity.

But what some of us are saying is: Assume that your home represents some standard of living that you wish to maintain during your retirement.

and what i said is that your home has a certian portfolio value which i will now call $Y (since you just used $X as the rest of the portfolio) which is computed more like a landlord would compute the present value of his income stream from that house if it was rented. and in other words $Y would be the retirement $ value of that standard of living you mentioned

At that point, the $ value of it does not mean much. It is what it is, also assuming that any future moves would be a "sideways" move in cost (maybe trading square foot for location or other qualities, but at roughly the same cost). So, whether it goes up, down, or stays flat in value is of little consequence - it's all a wash.

since we now have 2, potentially different, values for said house (what i call $Y above and the price you could get for the house if you sold it, lets call this $Z) i must disagree with you when you say that "it does not mean much" and that "it's all a wash". it is only a wash if $Y = $Z

Under those assumptions, let's say my home quadruples in value (along with all comparable properties). I am not in a position to increase my spending based on this higher Net Worth, because I didn't really "gain" anything - replacement homes are the same cost, and I said I was not going to downgrade. So why include it in a Net Worth calculation?

-ERD50

ok lets consider that. first lets set the initial conditions, you own the house F&C and before the increase in value $Y = $Z. now when you say "my home quadruples in value" i am assuming you are talking about $Z quadruples in value, but if $Y doesnt quadruple in value then you could harvest some of the $Z's increase and not affect your standard of living. that amount would be $Z - $Y. you could do that by selling and moving into a rental.

there is a similar argument for moving to a different part of the country (or world for that matter) however this kind of move has other factors involved that might outweigh the financial side.

 

[ERD50]

jdw - what you say is true, but it isn't within the constraints I was talking about. I prefaced all that with "a living standard you wish to maintain". That means not going from owner to renter, and not downgrading.

Clearly, if downgrading is in the forecast, and the timing works, that's great.

Having a lot of equity in a house gives you options, but so does having equity in a portfolio.

-ERD50

 

[jdw_fire]

jdw - what you say is true, but it isn't within the constraints I was talking about. I prefaced all that with "a living standard you wish to maintain". That means not going from owner to renter, and not downgrading.

Clearly, if downgrading is in the forecast, and the timing works, that's great.

Having a lot of equity in a house gives you options, but so does having equity in a portfolio.

-ERD50

i think you should go back and reread my posts. what i said maintained a constant standard of living (and was therefore even inflation adjusted). going from owner to renter doesnt necessarily change your standard of living. and i never said anything about downgrading.

 

[clifp]

Exactly right. That's what I was trying to get across when I said, "You have to live somewhere."

Or in the words of Buckaroo Banzai, "No matter where you go, there you are"

My I haven't heard a reference to that movie in a couple of decade. Never understood why a movie that supposedly was a cult classic had so few references to it on the internet. Where exactly is the cult?

Well laugh while you can Monkey Boy there are a least two members on the forum and Netflix finally has it on DVD, sweet.

I now return you to the exciting topic of curvy woman,or is paying off the mortgage?

 

[ERD50]

i think you should go back and reread my posts. .... going from owner to renter doesnt necessarily change your standard of living. and i never said anything about downgrading.

jdw, I'm gonna give it a rest - we seem to be talking "past each other".

I'm just trying to keep it apples-to-apples. Going from owning to renting might even be an "upgrade" for some - but it is "different". So to keep it apples-to-apples financial comparison, I'm looking at keeping the home itself a constant, and letting the price of that home and equivalent homes vary. Anything else throws in another variable, and becomes another discussion.


There was a previous comment you made though, that I do want to comment on before moving on -

your argument is based on complete faith in FIRECalc as a predictive tool. ....

your post implies that an investor either doesnt give FIRECalc any credence or believes it entirely. have you noticed how many people on here are no longer comfortable with a 4% "SWR" and are shooting for something 3% or less. looks like there are some people who dont have your complete faith in FIRECalc. ....

No, this is just not true for me. Just like the intro to FIRECALC states, I understand that it is not predictive, it merely tells us what would have happened under all the past scenarios in its database. As far as I know, no one has a predictive tool, so we do the best we can (I'm anxiously awaiting tests of Want2Retire's cool Crystal Ball purchase).

But, if something failed in the past, it seems reasonable that it would do poorly under any similar future scenarios.

Going from 4% to 3% doesn't reflect a lack of faith in FIRECALC at all. FIRECALC presents the data, it is up to each of us to decide what we want to do with that data. FIRECALC is exactly *why* I want to be closer to 3% than 4% over the long run. A 4% WR FAILS 1 in 20 times over 30 years in past scenarios, more over 40 years. A 4% WR has those "scary" dips in net worth, taking your portfolio down to 50% of its value even when it "succeeds". History says 3% is a smoother ride, history says I am less likely to be eating dog food.

To me, a "lack of faith" in FIRECALC would mean that I don't think it is doing the math properly, or it has wrong data in its database. I accept it is only a limited data set, but it is what it is, a tool. And it seems to agree pretty well with other methods, and w/o a predictor, it is one I will keep in my toolbox and refer to.

-ERD50

 

[ziggy29]

Going from 4% to 3% doesn't reflect a lack of faith in FIRECALC at all. FIRECALC presents the data, it is up to each of us to decide what we want to do with that data. FIRECALC is exactly *why* I want to be closer to 3% than 4% over the long run. A 4% WR FAILS 1 in 20 times over 30 years in past scenarios, more over 40 years. A 4% WR has those "scary" dips in net worth, taking your portfolio down to 50% of its value even when it "succeeds". History says 3% is a smoother ride, history says I am less likely to be eating dog food.

I would tend to agree with this. FIRECalc is giving expected outcomes based on history. As we all should know about historical results, they are no guarantee of future performance.

In that sense, using 3% instead of 4% is showing a lack of faith that the future will be like the past, not a lack of faith in the tool's accuracy. If you had complete faith that the future would be like the past, you could use 4% and sleep well at night even through horrible bear markets.

 

[ERD50]

If you had complete faith that the future would be like the past, you could use 4% and sleep well at night even through horrible bear markets.

Only if you could sleep well knowing that 1 in 20 past scenarios failed at a 4% WR (got a backup plan?). And if you knew you and your spouse would not be alive 30 years and one day out from retirement, and you could still sleep well knowing that.

Of course, knowing the date of our demise opens up all sorts of SWR possibilities if you have no concerns with leaving money to heirs/charities. As you approach that day, it simply becomes $Portfolio/Days_on_Earth. At that point, spending anytime evaluating spreadsheets wouldn't be much of a priority anyhow (for better or for worse).


-ERD50

 

[jdw_fire]

jdw, I'm gonna give it a rest - we seem to be talking "past each other".

I'm just trying to keep it apples-to-apples. Going from owning to renting might even be an "upgrade" for some - but it is "different". So to keep it apples-to-apples financial comparison, I'm looking at keeping the home itself a constant, and letting the price of that home and equivalent homes vary. Anything else throws in another variable, and becomes another discussion.

ok let me try 1 more time to show you what i am saying by using a very specific example designed to make this an apples to apples comparison. suppose you live in track housing. the house you own F&C (house 1) sits right next to an identical house (house 2) that is owned by an investor who has it up for rent. SO living in either house would provide you with the "same" house (apples to apples). in reality both houses have both $Y and $Z values (please remember that $Y is derived from the rental income stream and $Z is derived from price you would get if you sold your house) and because the houses are identical sitting right next to each other, house 1's $Y = house 2's $Y and house 1's $Z = house 2's $Z (apples to apples).

hopefully you will grant me that living in either house you could get almost exactly the same lifestyle (apples to apples) except for maybe the financial side so lets talk about how house 1's $Z compares to house 2's $Y. i submit to you that at the point where house 1's $Z = house 2's $Y your financial lifestyles are equal (and this is because of the way i defined $Y).

soooo if house 1's $Z > house 2's $Y you could increase your lifestyle by selling your house (house 1) and renting house 2, thus harvesting the portion of $Z that is greater than $Y. you have just added more money ($Z -$Y) to your lifestyle. the reason house 1's $Z > house 2's $Y might happen is because rent prices are driven by a different market than house prices. now conversly if someone is renting house 2 and you are selling house 1 and house 1's $Z < house 2's $Y then that someone could increase their lifestyle by buying (and moving into) your house

the tricky (but not too tricky) part in this whole thing is determining $Y. you will need to take into account monthly rent, house maintenance costs, property taxes, home owners insurance, renters insurance, utilities that are included in the rent, hoa fees, and any other expenses that may be different between renting and owning i may have left out, all adjusted for inflation, as well as how to compute a PV you accept as real from that ultimate income stream. but just because it may be hard to compute doesnt mean $Y doesnt exist nor does it mean it cant be used the way i describe.

 

[rayvt]

soooo if house 1's $Z > house 2's $Y you could increase your lifestyle by selling your house (house 1) and renting house 2, thus harvesting the portion of $Z that is greater than $Y. you have just added more money ($Z -$Y) to your lifestyle.

This is not comparing apples-to-apples at all!

If you own a house, either free-and-clear or with a fixed rate mortage, your housing expense (P&I) is known and fixed.

If you are renting, your rent is *not* fixed---unless you have convinced the owner to sign a 30 year fixed-rent lease. Which no landlord would do.

These two scenarios are not even remotely the same.
Since they aren't, any further analysis is bogus.

But, it is trivially true that if you can sell your house for $X and re-aquire it (or an exactly identical one) for $Y which is less than $X, then you would benefit by doing so. In the real world, this is not possible.

And with this rental scenario we've drifted waaaaaay from the original point.

 

[ziggy29]

And with this rental scenario we've drifted waaaaaay from the original point.

Never assume a thread can't morph into a rent vs. buy discussion....

 

[jdw_fire]

Going from 4% to 3% doesn't reflect a lack of faith in FIRECALC at all. FIRECALC presents the data, it is up to each of us to decide what we want to do with that data. FIRECALC is exactly *why* I want to be closer to 3% than 4% over the long run. A 4% WR FAILS 1 in 20 times over 30 years in past scenarios, more over 40 years. A 4% WR has those "scary" dips in net worth, taking your portfolio down to 50% of its value even when it "succeeds". History says 3% is a smoother ride, history says I am less likely to be eating dog food.

To me, a "lack of faith" in FIRECALC would mean that I don't think it is doing the math properly, or it has wrong data in its database. I accept it is only a limited data set, but it is what it is, a tool. And it seems to agree pretty well with other methods, and w/o a predictor, it is one I will keep in my toolbox and refer to.

-ERD50

geezz! the faith i was talking about here is the faith that if FIRECalc says your WD rate would have survived 95% of the time you are actually safe going into the future, not the accuracy of its calculations. the tone on this board over the last few years has gone from "4% is safe, can we stretch it to 4.5 or 5%" to "not sure if 3.X% will be safe". FIRECalc's outputs havnt changed all that much in those few years so it must be peoples "faith" in what FIRECalc is telling them that has changed. FWIW, i am not a FIRECalc hater, elsewhere in my post i talked of a positive use of FIRECalc. and i have many times used FIRECalc to make a point about income streams.

btw, there has been an increase in discussion (and seemingly acceptance) for using a SPIA to support some portion of a minimum lifestyle set of expenses (as well as what appears to be pension envy). it seems to me that this has come about because of people's lack of faith that self-annuitizing a portfolio is all that safe from a continued income stream standpoint. it dawned on me that paying off your mortgage is almost exactly the same thing as buying a fixed term fixed dollar SPIA, so there is another "advantage" to paying off the mortgage, or at least another way to look at it.

No, this is just not true for me. Just like the intro to FIRECALC states, I understand that it is not predictive, it merely tells us what would have happened under all the past scenarios in its database. As far as I know, no one has a predictive tool, so we do the best we can (I'm anxiously awaiting tests of Want2Retire's cool Crystal Ball purchase).

But, if something failed in the past, it seems reasonable that it would do poorly under any similar future scenarios.

i know you said it isnt true for you but the way you wrote your posts read like you thought that way.

 

[jdw_fire]

soooo if house 1's $Z > house 2's $Y you could increase your lifestyle by selling your house (house 1) and renting house 2, thus harvesting the portion of $Z that is greater than $Y. you have just added more money ($Z -$Y) to your lifestyle.

This is not comparing apples-to-apples at all!

If you own a house, either free-and-clear or with a fixed rate mortage, your housing expense (P&I) is known and fixed.

If you are renting, your rent is *not* fixed---unless you have convinced the owner to sign a 30 year fixed-rent lease. Which no landlord would do.

These two scenarios are not even remotely the same.
Since they aren't, any further analysis is bogus.

But, it is trivially true that if you can sell your house for $X and re-aquire it (or an exactly identical one) for $Y which is less than $X, then you would benefit by doing so. In the real world, this is not possible.

And with this rental scenario we've drifted waaaaaay from the original point.

it is obvious that you are not understanding what i am saying. 1st off i was talking about a F&C house SOOOOOO NO P&I. 2nd i never said rent was fixed, in fact i said the analysis needed to include adjustment for inflation for alot of things including rent. 3rd since the apple i was talking about is "lifestyle" it is too apples to apples as i am comparing 2 different ways to use the equivilant house, providing the same lifestyle and that is why my analysis is NOT bogus. 4th if you own a house your expenses (P&I is not your only expense and in my example not even an expense since the home is F&C) are NOT fixed, they can and do change with inflation. and finally "this rental scenario" is dead on point since you said in owning a house you completely consume it (from a financial standpoint) by living in it, and using "this rental scenario" i have shown that said house has financial value (i.e. $Y) even when you are living in it.

you must not understand owning rental property since you dont seem to understand that a flow of rents has value and that you can value a property based on its income flow. this is often done but mainly for larger residential properties (apartments) and commercial properties. it can be done on any property but the income approach of valuing a house rarely equals the market value because houses are not exclusively used for rentals. btw it appears that you even are not understanding my terminology of $Y being defined as the value of the house using an income approach and $Z being defined as being the value of the house using a market approach. $Y and $Z are variables not unknown constants.

if you are at all interested in understanding the point i made, go back and reread everything i wrote about $Y (including my posts before i named it $Y) and then ask me specific questions about what you dont understand. if you are not interested in understanding please stop slaming (as well as misrepresenting) what i wrote.

 

[tuixiu]

Never assume a thread can't morph into a rent vs. buy discussion....

I think we should consider whether taking social security early or later is better for paying this mortgage.

 

[clifp]

JDW I've been trying to follow you on this thread and I have to say I am confused at this point, I think ERD maybe in the same boat.

You suggest to Rayvt to go back and re-read everything you wrote, that is a somewhat daunting task. Could you summarize your main points and contrast them ERD point that their generally isn't a big difference between paying off mortgage vs keeping it but often it slightly improves survival rates.

As for FIRECALC, I think including 2008 in the data set of possible results should have significant impact on WR rates, it is the worse year since 32.

 

[ERD50]

JDW I've been trying to follow you on this thread and I have to say I am confused at this point, I think ERD maybe in the same boat.

You suggest to Rayvt to go back and re-read everything you wrote, that is a somewhat daunting task. ....

Thanks, clifp - you are spot on as far as me being confused.

I am impressed with jdw's persistence though, so I did get out the yellow legal pad and and tried to ferret it out (encumbered [or inspired?] by 3 Pilsner Urquells, as the family is out doing other things tonight). As I said earlier, I don't think we really disagree, but I do think the conversation took different turns (hence my "talking past each other" comment).

So, not really relevant to the OP (whatever that was anyway ), I did glean a bit of info from all that. I think it tells me that buying versus renting is a bit like an annuity. For simplicity, assume a paid up home. So the $ in the home save you the rental expense. So the home is like an annuity - you stick $ into it, and then you get a lifetime of $ out of it ($ in rental savings, minus ownership expenses). And using my assumption that the homeowner never downgrades or shifts to renting, the $ in the home are never recovered (to the owner), like an annuity.

So, like an annuity, buying versus renting is a bad deal if you live a short time. You could have used those $ for living expenses. If you live a long time, the savings from rental costs keeps growing. But it's hard to take advantage of that with an unknown life-span.

Unlike an annuity, the value of the home can go to heirs/charities, if that is important.

So maybe we could say that buying a home gives a bit of financial diversity, like putting some $ in an annuity? I like the idea of diversifying my risks, as we cannot predict the future. I guess once the home value exceeds the cost of rentals for your foreseeable lifetime, that is the time to shift to renting - but there will likely be other, larger factors at that time also.

-ERD50

 

[Martha]

But I think it is irrational. Sure, it does increase your net worth figure, but that's rather meaningless.

IMHO, your house is a consumption item, just like the food in your freezer and pantry. You don't count those in your net worth, because those are consumption items. You have to live somewhere. Whereever that is, you are using up the benefit by simply living in it. Unless you are planning to sell your house and move into a cardboard box under a bridge, that is.

The food disappears, the house does not. Historically, it appreciates. Often people have homes than they could downsize from into a cheaper apartment or home. Certainly in that case it is rational to include the value of your home in your net worth and it is not meaningless. If you have a mortgage, you include the debt and you include the value of the home. If no mortgage, only the value of the home. Now I generally would not include the cars and household goods in net worth because they depreciate to nothing too fast.

Now if you are determining what assets generate in income for you, you then only count those assets. If you are doing a FIRECalc calculation, you might include at the start only those income generating assets and later add part of the value of the home if you plan to downsize. The calculator allows you to do that. What is important is what will generate income for you and in a number of circumstances you home can generate income for you, whether it is from a sale or even a reverse mortgage.

As far as living expenses, that is a separate but entwined issue. It is partly an issue of cash flow. If you have no mortgage and have a paid off home, your cash needs may be pretty low. (I say may, because you might live in too much house which requires a lot of cash). However, having no mortgage and low cash needs can be helpful when you have a market crash. If you sold your home and pay rent, you have higher cash needs. You might want to invest your money differently depending on whether or not you have a home and whether it is paid for. Just like you may invest differently if you have a pension.

If I had 1.5 million dollars in net worth, with 750,000 in a paid off home, I could sell the home, rent or downsize into another home, and retire. But if I did not sell the home I should not retire. Same net worth, but a bad mix of investments. And the home certainly is an investment, just not a very smart one if you want to retire immediately as it can be illiquid.

Originally Posted by rayvt
Well, I would say that, yes, your house is a financial asset. In essentially the same sense that your car, your clothes, and the food in your freezer are. You can either sell it to raise cash, or "consume" it by living in it. But you can't do both. You can't eat your cake and have it, too.

I have my cake and am eating it to. I think about this some because I live in an apartment in a four unit building I own. The building generates cash. It is an income producing asset. It would produce more income if I didn't live there, but I would have to pay rent, where now I live here for nothing. The place is worth 300,000. If I sold it and invested the money I likely could "safely" take 12,000 from that investment each year and use it for housing. Well, 1000 a month doesn't give me much, when you think about rent and the utilities. I could buy another place for cheap and invest the rest to cover the costs of living in the new place. Maybe a 150,000 place, with 500 a month for expenses? Not quite. Property taxes, maintenance, insurance, utilities will likely run more than 500 a month average. Right now the building not only gives me a nice apartment to live in at no cost, but also puts money in my pocket every month after all expenses are paid. In this circumstance, how can I sell? I would have to have a real strong reason to want to live somewhere else. The building is worth more to me than the 300,000 the market says it is worth.

BTW, it is impossible to deal with my situation using FIRECalc.

BTW, my building is up for sale.

 

[NW-Bound]

...I would have to have a real strong reason to want to live somewhere else.

BTW, my building is up for sale.

You cannot write that without expecting the readers to wonder what that strong reason is. Let me venture a guess: to escape from the brutal northern winter?

 

[Nords]

Right now the building not only gives me a nice apartment to live in at no cost, but also puts money in my pocket every month after all expenses are paid. In this circumstance, how can I sell? I would have to have a real strong reason to want to live somewhere else.

If we can get Audrey & REWahoo! to chime in, then this thread can also ask whether it's best to stay put in your paid-off home or to sell it and vagabond the nation in an RV...

I think selling a 100+year-old home in a blasted frozen sub-Arctic wasteland is a wise choice no matter what other living arrangements you have in mind.

 

[tuixiu]

I agree with Martha, not including the value of your home in your net worth like food because you sleep within it's walls doesn't make sense. It's not "used up" like a ham sandwich, you sleep there and it's there the next day.

If it's worth less because if you sell it someday you will have to use the money for rent or another house, you might as well not count any savings that you're planning on using.

The plan for my savings is for someday it to provide three meals per day, beer, and the occasional vacation when I'm done working. Should I not count the savings in my net worth since I plan on using it for something else in trade someday, just like I might plan on using the proceeds from a house sale to rent?

 

[rayvt]

Cool--we got some more people to chime in.

"Whereever you go, there you are." Owning a 4-unit building while renting 3 andlliving in 1 is the same as owning 4 houses while renting 3 and living 1. The one you are living in is the one you are "consuming". The other 3 are indeed part of your overall investment portfolio.

The logic problem with treating your house as part of your portfolio is double counting. You can't both rent it out (i.e., it is indeed an investment) and also live in it (i.e., you are consuming it or "renting it to yourself"). One thing that nobody has yet mentioned in this thread is the "imputed income" of owning and living in your house. I'm a bit surprised at this, since there was a little dust-up a few years ago when the fedgov wanted to include this imputed income in the definition of the "rich people who aren't paying their fair share of income taxes". Just google "imputed income house".

----------
In my case, as probably with most retirees, the value of my houe is immaterial. We are never going to sell it, we'll only be moving out in the back of a herse. Whether it's worth is $100K or $500K makes no financial difference to me. I can't invest the value of the 3 rooms that we never use, and nobody will pay me for letting them look at the river out the back yard.

It is different if you have other plans. Our last house was our "when we retire we'll sell this for mucho bucks" house. We designed it on that basis. That's why it had 5 bedrooms, 5 1/2 baths, 2 jaccuzi tubs, 3 car garage, and on a pond. For just the two of us.

----------------------
But here's the real reason to not count your house as part of your portfolio. I think ERD50 was alluding to this but just didn't say it explicitly.
You fool your self into taking too large of a SWR.
Consider:
$500K stocks&bonds, $500K house.
4% SWR
You say "I have a $1MM portfolio. therefore I can draw 4% or $40K/yr."
But that $40K will eventually deplete the $500K stocks&bonds and you'll be forced to sell the house. You are actually taking 8% draw from the liquid part of your portfolio.
And you can't rebalance. In 5 years (assuming no growth & no inflation) your portfolio will be $300K stocks&bonds, $500K house. You need to rebalance to $400/$400, but you can't sell $100K (1/5th) worth of the house.

vs.
$500K stocks&bonds, $500K house.
4% SWR
You say "I have a $500K investment portfolio. therefore I can draw 4% or $20K/yr."
This is sustainable, where $40K is not.

In this 2nd case, it does not matter what the house value is. You don't take it into account in computing the SWR.

===========================
W/R/T mortgage vs. paying it off:
Since money is fungible, it doesn't matter if you have a $500K house with a $400K mortgage and $400K in the bank, or take that $400K cash and pay off the mortgage.
Your net worth is the same, the only difference is whether your $400k is in cash or in the house. Financially, it is only an asset allocation and liquidity issue.
Therefore it's a matter of emotional personal preference. A matter of your feelings about risk. There's no right or wrong answer. "de gustibus non est disputandum"

We feel quite safe with an 80% mortgage, because we can pay it off whenever we feel like it. I can call Pentagon Fed CU and tell them to close my 5.25% CD and pay off my 4.875% Countrywide mortgage. Other people would prefer to have no CD and no mortgage. Whatever floats your boat. Surprisingly, my wife feels the same as me. She doesn't feel that we are at any risk at all with the mortgage.

 

[tuixiu]

Okay, then you can't count a 10 year jumbo CD that you got a great deal on either. After all, you can't rebalance without breaking it apart.

In fact, I'd better not count it in my portfolio since I'd have to sell it if the rest of my portfolio dives enough to maintain my SWR.

A house is just an asset, and living expenses are a completely different column on the spreadsheet. If someone is counting their house in their portfolio when calculating their net worth for SWR purposes they certainly should make sure if they had to sell it their SWR can cover the cost of renting an apartment or house or whatever maintains an acceptable standard of living.

Say we have a 500k house, and that's all we have. We sell it and move to Honduras to live on $1500/month near a pretty beach. How was this possible? Afterall since we couldn't count that house as part of our net worth the retirement money came from nowhere, we had zero yet are now sitting on a beach eating beans and rice everyday.

Everyone's situation is different like you said, and those who are going to live in their house until they drop would certainly make different choices with what they need for living expenses, but to make an absolute statement that house isn't part of a portfolio because your particular situation would make that unwise if you wanted to calculate a SWR with it's inclusion doesn't make sense to me.

 

[simas]

Overestimating 'predictive power' of the FIRECALC and liquidity of the porfolio

ERD50 - having read the discussion with interest there are two comments that i would like to get your opinion on.

a) it appears that you are placing a lot of faith in firecalc numbers and willing to loose immediate benefits of removing pressure on the cash flow (by paying off the debt like mortgage) for the uncertain longer term results based on the tool calculation. what is the rationale behind the belief that 20th century american stock market results are going to continue long term ('predictive power') ?
the reason why I am asking this is that US went through significant (and I believe one time) transformation from being a emerging developing country by the start of the 20th century with miniscule share of the world equity market to lone superpower by the end of the century with 40% of the market. repeating this in highly unlikely in mathematical terms to do again , so what predictive value do firecalc results hold over longer term for you?

Being interested in history i enjoy looking at similar scenarios in the past - i.e. take Spanish empire in 16th century. By the start of the 16th century (post unification of the Castile an Aragon) and the end of the reconquista a new country entered the world stage unleashing tremendous amount of creative energy - voyages of discovery, manifest destiny in spreading God's word in the new world, supply of trained and willing people building the Spanish empire. By mid to end of 16th century the world was Spanish, anyone who was anybody anywere had to speak Spanish as it was the language of Europe, the might of its armies was unrivaled, the weath of its kings was unmatched. However, empire greatly overestended itself weaking its economy, relied heavily of debt (including foreign debt) and eventually going down in civil war (which created Netherlands) , fractured into multiple states and eventually faded away from world power status.

Same could be said for France in 18th century (not to the same extreme) there french language was the language of europe, of diplomacy , of trade, french king was the trend setter and everyone was imitating french courts from Spain to Russia,etc. This empire also greatly overextended itself and ended in French Revolution.

i am not sure US is different longer term... we are no longer emerging power , we rely heavily of foreign debt to build up consumption and maintain our current position - that is why i tend to discount any studies of the US stock market in 20th century as having predictive value going into 21st

b) having reduced requirements for the regular debt obligations provides in my opinion flexibility impossible in other scenarios making be believe that a lot of areas you have looked at overestimate the liquidity of portfolio.
when it rains, it pours - a person who is being fired at economic downturn will face a number of challenges and having less fixed obligations to worry about is a significant benefit.

Thank you
Simeon

 

[dizzy]

I have always used FireCalc to help with payoff decisions. Compare the portfolio draw rate with larger portfolio and larger expenses of the mortgage vs. smaller portfolio and smaller expenses without the mortgage. It turns out using this simple method it is rarely favorable to keep the mortgage if you are targeting SWR around 4%. In order for paying off the mortgage to improve the SWR, the ratio of payments/payoff needs to be more than the target SWR. This is almost always the case, a 5% mortgage starts at a payments/payoff ratio of 6.4% and only increases from there as principle accumulates.

The one flaw in this approach is that unlike other expenses, a fixed mortgage expense is not inflation adjusted. Unfortunately FireCalc does not have an easy way to enter an expense which is not inflation adjusted and ends after N years. This would be a welcome addition. You can simulate it by adding "off-chart" spending which is not inflation adjusted, and an offseting non-adjusted "off-chart" spending reduction N years later. I've done a few runs with this more sophisticated model and sometimes it does in fact point to keeping your mortgage, contradicting the simple approach above. If you think out-of-control inflation is a real risk going forward, keeping your mortgage might be a way to hedge it since the payments will shrink rapidly in real dollars. In my case the actual difference in average terminal portfolio value was relatively small in any case (<1%), but YMMV.

 

[caninelover]

I look at risk a little differently. I think the real risk is having a liability against an asset that also happens to serve as the roof over your head. Yes, you can invest your money and maybe come out a little ahead if everything goes smoothly. But what if you lose your job in a recession, when the markets are down. Then you may need to liquidate your expenses at the worst time to pay your expenses, including mortgage. For me eliminating the mortgage just takes that type of risk away and secures the shelter necessary to live.

If it were a second home or an investment property, I would be fine keeping that mortgaged to the hilt.

 

[ERD50]

ERD50 - having read the discussion with interest there are two comments that i would like to get your opinion on.

First - where we agree:

I tend to agree with you that the past history of the US is a period of growth that likely will not be repeated. This is just a guess on my part of course, but I fully expect that the next 40 years will not be as good (financially) to retirees as the average of all the past 40 year periods. It may even be very significantly worse than average.

I'm less certain that the next 40 years will be worse than the worst of those 40 year past periods, but it would not surprise me.

Where we are not exactly agreeing: I'm not sure why some people think that I look at FIRECALC as "predictive". I agree with the intro to FIRECALC, it just a test through historic patterns. I'm not aware of anyone with a functional crystal ball, so what else can we do? And because the future may well be worse than the past, I am shooting for getting closer to 3% WR. If that gives 100% success with some margin, that will get me through a "worse than past" future.

As far as holding a mortgage, I sure would not hold one in retirement that was so big that I couldn't pay it off, even if I had to at a bad time. I dunno, maybe no more than 15% of liquid NW?

I have always used FireCalc to help with payoff decisions. ....

The one flaw in this approach is that unlike other expenses, a fixed mortgage expense is not inflation adjusted. ....

You can simulate it by adding "off-chart" spending which is not inflation adjusted, and an offseting non-adjusted "off-chart" spending reduction N years later. I've done a few runs with this more sophisticated model and sometimes it does in fact point to keeping your mortgage, contradicting the simple approach above. .

Yes dizzy, I always do the off-chart non-inflation adjusted spend and offset. That's really the only way I know of to model it. Anything else misrepresents the situation. And like you, I find it shows a slight advantage in most cases.

-ERD50