haha
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So true, and additionally there are so many back door taxes like higher Medicare pt B and pt D premiums, deduction and credit phaseouts, etc.
Interesting Mortgage Article
- Thread starter Katsmeow
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That's silly. Unless, perhaps, you are single. Do the math.
Married Filing Jointly, 10% bracket is up to $17K, 15% bracket is up to $68K. That's on taxable income, so part of SS isn't counted, nor is return-of-capital, nor is qualified dividends, nor is capital gain.
Standard deduction is $11K, so the 15% bracket caps out at $79K of taxable income. Just about any pension will push you over the 10% cap, so let's focus on the $79K cap of 15%.
Assume a mortgage P&I payment of $15K/yr or $1250/mo.
You won't get pushed above the 15% bracket as long as you "otherwise" income is $64K. (FWIW, the median household income is $50K--so you'd already be well above the median!)
64K is 4% of $1,600,000.
So.....if all your investment withdrawal is taxable and you have no other income and you take a 4% SWR, you'll still be in the 15% bracket if your investment portfolio is as high as $1,600,000.
Now, if you have a $1.6M portfolio, do you think you'll lie awake nights worrying about how to come up with your $1250 mortgage payment? Me neither.
Not just Ric Edelman. Financially it makes a lot of sense to borrow money at 4%-5% if you can earn (long-term average) 10.5%....Edelman thinks everyone needs a big mortgage so they can invest with edelman financial... even in retirement (once heard him tell a 75 year old to get a 30 year mortgage!).
My parents-in-law moved back to the Mainland in 2006 and didn't have enough cash to buy their condo... so they got a 30-year fixed-rate mortgage at their ages of 72 and 69.i suppose that in the end each person must decide what is best for them. don't tell ric edelman about this paper, he thinks everyone needs a big mortgage so they can invest with edelman financial... even in retirement (once heard him tell a 75 year old to get a 30 year mortgage!).
Pretty much like a reverse mortgage, only with a higher loan-to-value ratio and lower closing costs...
haha
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Being single is not a rare condition. More than half the adults in my city are single.
veremchuka
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thanks for the reply and yes i am single so that $79k is more like $34k. i've done the math.
well i said that when you are younger i agree having a mortgage is good because it allows you to use your money to invest vs plowing it all into a house and in 15 years you have it paid off and little to nothing in investments for retirement ala dave ramsey, another financial kook imo. and btw, in retirement one may not have a long term! most retirees don't want the volatility of equities as their highest asset allocation but again it depends upon each individual. besides most retiree's crystal ball is not that clear and would prefer to not be betting on these things.
well the key words are didn't have enough cash. ric edelman told this 75 year old who had the cash to buy the house outright to get a 30 year mortgage. i think that is lousy advice and shows that edelman is just interested in getting people to have lots of cash to invest with his company. i have heard this nonsense so many times from him it is maddening.
chinaco
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That does not mean it is a great idea!
First there are two basic scenarios:
- Working, earning wages and have a mortgage and also investing in 401k for retirement.... accumulating
- Not working, older, retired, not earning a wage. Spending the nest egg.
Focusing on the retired scenario...
Just stating a potential difference between (long-term stock gains and current mortgage rates) is a lopsided description... throwing out a half described idea of some reward... without properly describing the risk (of potential loss... which is real)!
Plus you (and others) probably won't get that long-term average... Even if you did, it will be lower also due to investment expenses.
The big problem is that most people do not factor in the long-term risk. Which (IMO grows) when people get older and are not earning a wage. Things go wrong! Situations that people never imagined can occur or a combination of life events that can (and do) collide!
While I do not believe a home is an investment... in the broader sense, it does provide some diversification in people's personal assets.
If one's house is a substantial asset (% of overall assets)... why put it in play?
Of course, it is a personal decision...
But IMO - advising people to do it (as a generalization) without really understanding all of the issues is "bad advice"! If things go wrong, it could be devastating.
Danmar
Thinks s/he gets paid by the post
Well put Chinaco. A mortgage in retirement is risky. Different during the accumulation phase when you have more time and opportunity to make up any losses. I don't want to be unkind but I suspect the reason so many think a mortgage is a good idea in retirement is because it allows them to buy things they don't really have the money for.
Danmar, your "suspicion" is somewhat absurd. And you are assuming facts not it evidence. There are quite valid arguments on both sides of the question. You & chinaco are coming at it from a completely emotional standpoint. Emotions and finance do not mix!
Did you miss that part about an investment portfolio of $1.6MM? (Okay, for a single person maybe $800K). That's the figure that destroys the argument that the necessary withdrawals to pay the mortgage would push someone into a higher tax bracket. I notice that the replies to that post ignored the math and went back with the-sky-will-fall hysteria.
50% bonds / 50% stocks is hardly risky. In a terrible bear market where the stocks get cut in half your portfolio value crashes down to $1.2MM (for the single's $800k, down to $600k). OMG!!!! How can anyone afford a $1200 mortgage payment with only $1.2M
How much safely do you want? Studies show that anywhere from 25/75 to 75/25 have roughly the same risk & return.
Work it backwards. Assume everything else (income & expenses) are the same, but A has no mortgage and B has a $1200/mo mortgage. That's a house value of about $250K.
At 4% SWR, B needs $360K of portfolio value to cover the mortgage. A needed $250K to pay off the house. So the net difference is $110K.
B (with a mortgage) needs to have only $110,000 in additional portfolio value to be situated as A (with no mortgage).
Ahhhh heck. This whole argument is silly, anyway. There are only difficult decisions to be made at one inflection point.
If a retiree has only a little money, the debate doesn't matter because they, um, don't have any options since they don't have any money.
If a retiree has a lot of money, the debate doesn't matter because the mortgage payment is (figuatively) pocket change.
Only in the middle area does somebody have both the ability and the money to do either, so that's the only area that can be debated(*).
The moral of the story is: Don't purposely retire on a shoestring. Aim for the "lot of money" scenario.
(*) Except for the matter of liquidity, which debaters tend to ignore. My retired neighbor paid off his house when he retired, using the proceeds from selling his previous house. So now he has a free-and-clear $300,000 house-but has to work as a part-time janitor at a local church for spending money. And if he needs to come up with a quick $10,000 for medical expenses or to replace his car, he's S.O.L.
If a retiree has only a little money, the debate doesn't matter because they, um, don't have any options since they don't have any money.
If a retiree has a lot of money, the debate doesn't matter because the mortgage payment is (figuatively) pocket change.
Only in the middle area does somebody have both the ability and the money to do either, so that's the only area that can be debated(*).
The moral of the story is: Don't purposely retire on a shoestring. Aim for the "lot of money" scenario.
(*) Except for the matter of liquidity, which debaters tend to ignore. My retired neighbor paid off his house when he retired, using the proceeds from selling his previous house. So now he has a free-and-clear $300,000 house-but has to work as a part-time janitor at a local church for spending money. And if he needs to come up with a quick $10,000 for medical expenses or to replace his car, he's S.O.L.
I'm going to try to say this without using words & acronyms like "silly", "absurd", and "OMG!!!" REWahoo already knows how I feel about the challenge of not substituting emoticons for my vocabulary...
People tend to think that any decision made on the basis of emotion is a bad idea. However I'm not using that word in a pejorative sense but rather its literal one-- if people won't do something because they don't (or can't) feel good about it then they probably shouldn't do it. We could also call it "ethics" or "morals" or simply "standards". But while all of those are different for different people, they can all be above some minimum degree of "right". After that minimum is met then we start getting into "holier than thou" territory.
There's nothing wrong with deciding not to carry a mortgage because it interferes with sleep. There is, however, a problem with extending that decision to the sweeping generalization of "all mortgages in retirement are bad". A decision made on the basis of your emotions may be the right decision for you, but judging my decision on the basis of your emotions is not right.
My spouse and I are not spending any more nor any less money with a mortgage. We don't say "Well, thank goodness we have a mortgage so that we can afford that!!" I'd agree, however, that having assets tied up in either real estate or in mortgage payments reduces the amount of discretionary cash to be used for other impulsive spending.
Your next thought might be "Well, if you truly don't need it then you wouldn't mind giving it to charity." That's not correct. I think I'd like to [-]play with it[/-] compound it for a while before I give it away, and I think that I can do a better job of compounding it than the charity can do. (The Buffett Attitude.) The other issue is that I have yet to find a charity that really seems worthy of my money... not just from a mission perspective but also of not getting enough funds yet. I've done quite a bit of research on the subject over the last few years, and I've found a few organizations worth a little money, but I have no compelling reason to give it all away yet-- so I don't mind playing with it until something compelling comes along.
I think we all agree that a mortgage involves more risk than no mortgage, but from a financial perspective it's possible to be judged as an acceptable degree of risk. At the same time it can be unacceptable from an emotional perspective.
People tend to think that any decision made on the basis of emotion is a bad idea. However I'm not using that word in a pejorative sense but rather its literal one-- if people won't do something because they don't (or can't) feel good about it then they probably shouldn't do it. We could also call it "ethics" or "morals" or simply "standards". But while all of those are different for different people, they can all be above some minimum degree of "right". After that minimum is met then we start getting into "holier than thou" territory.
There's nothing wrong with deciding not to carry a mortgage because it interferes with sleep. There is, however, a problem with extending that decision to the sweeping generalization of "all mortgages in retirement are bad". A decision made on the basis of your emotions may be the right decision for you, but judging my decision on the basis of your emotions is not right.
Yes, that seems unkind. It's possible that people are making the decision to take risks with money that they don't perceive a need for (so they wouldn't mind losing it) in order to "win" or to "enjoy themselves". It's not necessarily because they don't have enough money or because they're fueled by consumer lust or because they're in denial over the slow failure of their ER plans. It's because they enjoy assessing risk and making money. Simple as that. UncleMick would call it "testosterone poisoning". On Wall Street it's "keeping score".
My spouse and I are not spending any more nor any less money with a mortgage. We don't say "Well, thank goodness we have a mortgage so that we can afford that!!" I'd agree, however, that having assets tied up in either real estate or in mortgage payments reduces the amount of discretionary cash to be used for other impulsive spending.
Your next thought might be "Well, if you truly don't need it then you wouldn't mind giving it to charity." That's not correct. I think I'd like to [-]play with it[/-] compound it for a while before I give it away, and I think that I can do a better job of compounding it than the charity can do. (The Buffett Attitude.) The other issue is that I have yet to find a charity that really seems worthy of my money... not just from a mission perspective but also of not getting enough funds yet. I've done quite a bit of research on the subject over the last few years, and I've found a few organizations worth a little money, but I have no compelling reason to give it all away yet-- so I don't mind playing with it until something compelling comes along.
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Katsmeow
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I agree with your post that the paid off house/mortgage issue is really only an interesting discussion for the people in the middle. For those who can have a portfolio that far exceeds their desired spending and who can afford to invest every penny of the mortgage and it wouldn't materially affect their life to lose the invested money then having a mortgage is no big deal.
Conversely, if someone doesn't have a mortgage and doesn't have enough income to pay living expenses without working part time as a janitor (or whatever) then it could certainly be argued that this person lacks sufficient liquidity.
But the discussion for the person in the middle is more interesting:
Or to put it another way, let's assume that B has $1,000,000 and doesn't pay his mortgage and is withdrawing 4% a year. Of the $40,000 that B is withdrawing, $14,400 goes to the mortgage, leaving $25,600 to be spent on other things.
Let's assume that A started the year with the same $1,000,000 and pays off the mortgage leaving $750,000 and at a 4% withdrawal rate this person can spend $30,000.
Let's assume that $25,600 plus whatever other income (SS, pension, etc) that the person has is enough for a basic existence while $30,000 is a nice improvement for enjoyable spending. It can certainly be argued that in that situation not having a mortgage ends up with better quality of life.
Conversely, if someone doesn't have a mortgage and doesn't have enough income to pay living expenses without working part time as a janitor (or whatever) then it could certainly be argued that this person lacks sufficient liquidity.
But the discussion for the person in the middle is more interesting:
Or to put it another way, let's assume that B has $1,000,000 and doesn't pay his mortgage and is withdrawing 4% a year. Of the $40,000 that B is withdrawing, $14,400 goes to the mortgage, leaving $25,600 to be spent on other things.
Let's assume that A started the year with the same $1,000,000 and pays off the mortgage leaving $750,000 and at a 4% withdrawal rate this person can spend $30,000.
Let's assume that $25,600 plus whatever other income (SS, pension, etc) that the person has is enough for a basic existence while $30,000 is a nice improvement for enjoyable spending. It can certainly be argued that in that situation not having a mortgage ends up with better quality of life.
Danmar
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Again I didn't want to appear unkind and if I did I apologize. Nords- I agree that having a mortgage in retirement wouldn't necessarily mean you are short funds. I agree that at certain levels the risks would be minimal or at least manageable. Many people (you excepted) don't realize that mortgages can be risky and that there is no real free ride. Low rates can cloud judgement in this regard. I still believe a mortgage free retirement is a valid and worthy goal for most people. That's all for me.
A lot of people tend to forget that there are risks everywhere in life-some seen and some unseen. That being so, the right thing to do is to take steps to protect yourself from the risks that you can't afford to take on. And, of course, to compare risks & rewards of your various choices.
One big unseen risk is inflation-the risk of losing purchasing power. Lots of people are scared away from equities because of the visible risk of stocks. So they put their money in safe fixed (your house) and fixed-income investments (bonds & CDs) without taking cognisance that they are losing ca. 3% a year from inflation.
The only risk to having a mortgage is that you cannot keep up the payments. That's it. (AFAIK. Are there other risks that I'm not aware of?)
The reward of having a mortgage is that: 1) inflation benefits you because you pay with cheaper and cheaper dollars, and 2) you can put the money into investments that will outpace inflation.
Frankly, IMHO the ideal position to be in W/R/T mortgage in retirement is to have a liquid net-worth that is al least 2 or 3 times the value of your house. When you can completely pay off the mortgage at whim, the fear factor pretty much is gone.
One big unseen risk is inflation-the risk of losing purchasing power. Lots of people are scared away from equities because of the visible risk of stocks. So they put their money in safe fixed (your house) and fixed-income investments (bonds & CDs) without taking cognisance that they are losing ca. 3% a year from inflation.
The only risk to having a mortgage is that you cannot keep up the payments. That's it. (AFAIK. Are there other risks that I'm not aware of?)
The reward of having a mortgage is that: 1) inflation benefits you because you pay with cheaper and cheaper dollars, and 2) you can put the money into investments that will outpace inflation.
Frankly, IMHO the ideal position to be in W/R/T mortgage in retirement is to have a liquid net-worth that is al least 2 or 3 times the value of your house. When you can completely pay off the mortgage at whim, the fear factor pretty much is gone.
donheff
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In what way? You will owe taxes and insurance with or without a mortgage so they would seem a non-issue.
