Lifestyle creep delays early retirement

[DawgMan]

OP, my 2 cents after reading this thread/own experience is you are tracking just fine. You have a plan and plans change as life happens. Balance as said is really important. As long as you are not fooling yourself and make decisions consciously, then just keep moving forward adjusting/reviewing your plan as you will hit many many forks in the road that will require continual modifications to your plan, but the important thing is you have life map.

Personally for me at 52, I planned since around 21 to be able to "retire" around 45 which included being married at 30 and having 1.2 kids with first $1M in bank. Well, I got married at 25, have 4 kids and wife that stays at home, big house, too many cars over the yrs, private school for 1 "needed" child, 4 college tuitions (2 out now), 1 wedding so far (3 kids are girls... feel my pain), and yes, I have a nice Beemer I currently enjoy driving (my 1 personal endulgence). So about 15 yrs ago I ratcheted up my target date to 55 and along the way adjusted my target $ to match the life style costs I wanted to have which is relatively high compared to many on this site, but that is my personal plan as you will determine yours. I have been blessed to make a very good living at a profession I still enjoy, but have always lived well below my means and saved between 10% - 50% of my income (can fluctuate a good bit). So at 55, I will have options, which is what I think the whole FIRE concept is all about. So here is the other challenge for many of us that I have not seen really touched on in this thread... all of us planners spend all this time working our plans for the "day" and then we get there and at least in my case, I'm asking now what am I going to do in RE that is going to motivate/inspire/provide purpose me?? That's what I am working on over theses next 3 yrs as what you RE too is pretty important to know before you launch.

Good luck!

[Fedup]

Quote:

Originally Posted by eta2020 I was expecting you will say this It turns out those deductions work perfectly for married couple earning around 300k. They earn more and deductions are phased out. They earn less and tax bracket starts dropping down. So majority of people support/pay mortgages (via taxation) of what one could call rich folks, but not too rich. Taxpayers who benefit the most from the mortgage deduction tend to be concentrated in high-cost metropolitan areas. IE Silicon Valley. New York, Boston.

We maybe in this case. Because I noticed we pay less tax then before.

[rodi]

Quote:

Originally Posted by Fedup We maybe in this case. Because I noticed we pay less tax then before.

And you pay money out in interest instead.

[Hamlet]

Quote:

Originally Posted by rodi And you pay money out in interest instead.

And receive more dividend interest than he would get paying off the mortgage. I'm not selling Cisco, IBM, Coke, and Exxon stock to completely pay off a mortgage when they yield about as much as the interest I would save. I expect that those dividends will grow over the years, but the interest rate on the mortgage won't.

Everyone needs to find their own comfort level, but with rates where they are I'm going to carry some mortgage debt.

[eta2020]

Quote:

Originally Posted by Hamlet And receive more dividend interest than he would get paying off the mortgage. I'm not selling Cisco, IBM, Coke, and Exxon stock to completely pay off a mortgage when they yield about as much as the interest I would save. I expect that those dividends will grow over the years, but the interest rate on the mortgage won't. Everyone needs to find their own comfort level, but with rates where they are I'm going to carry some mortgage debt.

E*Trade margin rates with 1 million plus accounts are not too far from mortgage rates.

So you recommend maxing out margin account and buy CSCO, IBM and KO.

Why would I buy equities on margin if I do not have to? It would be more appropriate to compare Mortgage rates to CD rates since they are both guarded. Can you get Mortgage below CD rate?

[kcowan]

Quote:

Originally Posted by Hamlet And receive more dividend interest than he would get paying off the mortgage. I'm not selling Cisco, IBM, Coke, and Exxon stock to completely pay off a mortgage when they yield about as much as the interest I would save. I expect that those dividends will grow over the years, but the interest rate on the mortgage won't.

Admit it. You have to use leverage because your investment returns are insufficient to support your retirement. That is what leverage is for.

[Fedup]

Quote:

Originally Posted by rodi And you pay money out in interest instead.

No, we would pay less than what we paid in rent. I think our effective rate would be zero in some years in retirement. But whatever works for you is fine. There is no one size fits all. I have less pain paying less tax then mortgage interest.
I personally don't want to depend on stocks, I structure my finance so I can sleep well my way. YMMV.

[Fedup]

Quote:

Originally Posted by kcowan Admit it. You have to use leverage because your investment returns are insufficient to support your retirement. That is what leverage is for.

There is nothing wrong about leverage and nothing to admit. My brother went to his CPA and they told him to get a loan out of his rental so he can get deductions. Otherwise he would be paying boat loads on tax. I don't get religion on paying off mortgage or not paying off mortgage.

[Hamlet]

Quote:

Originally Posted by kcowan Admit it. You have to use leverage because your investment returns are insufficient to support your retirement. That is what leverage is for.

Admit it. You assume all leverage is bad because you have a visceral aversion to it and refuse to look at it rationally.

If the interest rate were actually zero, would you still insist that paying off the mortgage is better?

My retirement plans really don't factor into it very much. I kept a 3.0% 15-year mortgage on my existing house rather than sell stocks to pay it off. If we were staying in that house, retirement at 50 would be a real possibility (although with 2 young children, I would likely have OMY'd for awhile since they add so much variability to my future expenses).

Why would I sell assets (incurring significant capital gains taxes) that I expect to generate income significantly in excess of the cost of this debt to pay it down?

[Fedup]

Also with a house you can sell and pocket $500k capital gain per couple, I don't think you can do that with stocks.

[eta2020]

Quote:

Originally Posted by Fedup Also with a house you can sell and pocket $500k capital gain per couple, I don't think you can do that with stocks.

https://hotelivory.wordpress.com/201...-house-prices/

That is more like not taxing money you put into your house since historically houses go up at inflation rate.

We know this by looking at 400 years of records in Amsterdam.

I know there are very special places like Silicon Valley where Housing market did much better then inflation, but this does not apply to 95% of USA.

[daylatedollarshort]

We've increased our mortgage in ER to keep our AGI under the ACA cutoff until we reach 65 and go on Medicare. The ACA tax credits are worth much more to us than the interest on the mortgage. We're not into peace of mind or anything like that from not having debt. It is just the math for us.

If I could borrow a $100B dollars at 0% I would take the loan, put the money in Treasuries or CDs and sleep like a baby.

[Hamlet]

Quote:

Originally Posted by eta2020 E*Trade margin rates with 1 million plus accounts are not too far from mortgage rates. So you recommend maxing out margin account and buy CSCO, IBM and KO. Why would I buy equities on margin if I do not have to? It would be more appropriate to compare Mortgage rates to CD rates since they are both guarded. Can you get Mortgage below CD rate?

Buying equities on margin has two massive downsides compared to using mortgage money to invest--

1. You can be forced to sell your equities in a downturn to pay back the margin loan. So no, I would never recommend doing that.
2. It isn't fixed rate debt. If rates go up, the margin interest could spiral up dramatically. If the market happens to be down as well, you are likely to end up in a world of hurt.

It's all about the level of risk people are comfortable with. Most people live their lives with a large mortgage and very little in the way of assets beyond the house itself, and maybe a little money in their 401(k)s. They manage to sleep at night, while I would have trouble.

My situation will be--

~ 300k outstanding on the very cheap mortgage of a 480k house
~300k in taxable equity investments
~ 1 million in IRA/457/401(k) tax-sheltered accounts.

That is a little riskier than --

paid off house worth 480k
no taxable equity investments
~ 1 million in tax-sheltered accounts

However, by the time I pay the mortgage off, I am very likely to be ahead in the first situation. Potentially dramatically ahead if inflation ever picks up again. The downside is if we get deflation and my wife and I both have extended job losses, we could end up in a bad spot.

People have different levels of comfort with debt. Mine varies with the cost of that debt, so at 3.625%, I'm going to keep a little more of it than I would at 6%. Some people would think I'm nuts for using the existing home equity to pay down the mortgage with rates this low, but a ~400k mortgage creates a pucker factor for me that a 300k mortgage doesn't.

It's funny how every 3rd thread on this site seems to turn into a "should I pay off the mortgage" thread.

[ivinsfan]

Not really funny when you consider how many variables enter into the picture, I think a lot posters here, including myself were pointing out upgrading houses cost a bunch of money.

If you had kept your original home with the smaller payments and debt, the how big a mortgage should I carry posts. would not be as significant. BTW you just told us that you purchased a 480K house.. and used 100K of liquid assests for the downpayment.so yes that is significant in regards to ER.

[rodi]

kcowen is Canadian, I believe.... so he doesn't get the same tax break.

FWIW - I paid off my mortgage when the interest had shrunk to the point of no longer offering a tax break. We're on standard deduction....

For us - cash flow is better in retirement with no mortgage. And not having to come up with cash to make the mortgage payments keeps us well under the ACA limits.... A mortgage would work against us getting those tax credits (even though we'd get a tax deduction.)

[Hamlet]

Quote:

Originally Posted by rodi kcowen is Canadian, I believe.... so he doesn't get the same tax break. FWIW - I paid off my mortgage when the interest had shrunk to the point of no longer offering a tax break. We're on standard deduction.... For us - cash flow is better in retirement with no mortgage. And not having to come up with cash to make the mortgage payments keeps us well under the ACA limits.... A mortgage would work against us getting those tax credits (even though we'd get a tax deduction.)

That makes perfect sense. The math is a whole lot different in retirement that in the accumulation phase.

[FUEGO]

Quote:

Originally Posted by rodi FWIW - I paid off my mortgage when the interest had shrunk to the point of no longer offering a tax break. We're on standard deduction....

I'm jealous of all you folks in high COL areas that paid enough interest to take the mortgage interest deduction. Those of us in cheap housing land are missing out.

[Hamlet]

Quote:

Originally Posted by FUEGO I'm jealous of all you folks in high COL areas that paid enough interest to take the mortgage interest deduction. Those of us in cheap housing land are missing out.

It's really easy for a couple with two reasonably high earners to take the mortgage interest deduction in a high tax state.

I haven't looked in awhile, but I'm pretty sure just our property taxes and state income taxes put us pretty close to the standard deduction.

We're over the standard deduction even with our small 3% ~100k mortgage.

[kgtest]

Quote:

Originally Posted by Hamlet I agree to a point. Our current house is about 1500 square feet. It has two bedrooms upstairs and a small bedroom in the somewhat damp basement. There is substantial value to me for moving into say a 2000 sqft house with 3-bedrooms on one level so that I can separate my kids. So moving to a $300k house in the school district we wanted would be perfectly sensible to my mind, and it would've had a pretty small impact on our FIRE plans given our income level. That would have been the sensible, FIRE-friendly approach. Instead, we bought the 3400 sqft house with 5 bedrooms, a master bath, a walk-in closet and a 3-car garage. That will likely push back the FIRE date a fair amount. Although, having just locked my mortgage rate at 3.6125 for a 30-year mortgage, I'm starting to think a 55 FIRE date may still be in the cards. We just need a little inflation.

Make extra payments if you can. I am in your exact situation and I was actually able to INCREASE our rate of saving. That 3car with 4rooms on one floor sure is nice. I am shooting for retiring at 50 with 2-3million in assets. More than enough for the next 25+ yrs of living.

Daycare, like housing and transportation...should be shopped around. We pay $160/week and they are closed Fridays so MIL helps Fridays. There are really only about 40 friday's you need to cover so not too bad. We were getting quoted up to $320/week for the "centers".

[FUEGO]

Quote:

Originally Posted by Hamlet It's really easy for a couple with two reasonably high earners to take the mortgage interest deduction in a high tax state. I haven't looked in awhile, but I'm pretty sure just our property taxes and state income taxes put us pretty close to the standard deduction. We're over the standard deduction even with our small 3% ~100k mortgage.

I guess I was fortunate to never suffer from the high incomes either.