Mortgage and Firecalc

[Extinction]

I will be retiring this year or next depending on a few variables. I am 56 and my wife is 55. We have 26 years left on a 30 year mortgage and there is a good chance we may never move. My Firecalc projections are coming in at 97% for 35 years. Since the mortgage is fixed, I had entered that value into off chart spending and then reversed it as pension income when it is paid off.

Now my question. It always bugged me that I may have that mortgage until I am 80. The 15 year rates are 2.75% and could be dropping even more with Brexit. I plugged in the new 15 year mortgage (with money pulled out to pay for a new roof and some other upgrades) into Firecalc and my success rate rose to 100%.

So my expenses will increase almost 10K if I refi but I get a new roof, various necessary upgrades and the mystical (mythical?) Firecalc 100%. It seems to be the the right strategy according to Firecalc. But taking on that extra expense is a bit unsettling. Am I missing something here?

 

[Senator]

What is the old interest rate vs. the new interest rate?

Do you really need a new roof now, or can it wait a few years? What are the other "various necessary upgrades", and do you need them, or want them?

How much additional are bank fees for the refinance? Not prepaid, but fees that you never recover.

If you paid the 15-year amount on the 30-year loan, how much faster would it get paid off. Have you paid anything extra on your current mortgage? If you can't do that now, a higher loan payment will not be helpful.

 

[pb4uski]

I suspect that the increase from 97% to 100% is due to paying much less interest (2.75% for 15 years vs a higher rate for 26 years). What would your success rate be if you simulated paying off the mortgage by reducing your assets by the amount of the mortgage and eliminating the off-chart spending and pension offset?

 

[ivinsfan]

You are going to refi and cash-out equity for a roof and home improvements? A roof is not an unexpected expense, do you have cash to pay for a new roof?

IMO the difference between 97 and 100 is minimal and you really want to do this for the home repair and upgrade, don't kid yourself it's about another 3% with Firecalc....

 

[bclover]

I would start with Senators advice and start doubling down on the current mortgage for a few months and see how it goes.

not sure how you did the firecalc calculations. maybe I'm doing it incorrectly, anyhoo I ran the calculations with my current spending. why did you include it in off chart spending?

so my 65K annual spending includes everything, my mortgage, my healthcare expenses, food, yada yada yada and an extra 5k annually for an Armageddon apocalyptic zombie attack

 

[pb4uski]

IMO best practice is to include mortgage in off-chart spending with an offsetting pension when the mortgage ends for two reasons. First, expenses are increased each year for inflation and most mortgage payments are fixed. Second, expenses never end and your mortgage payments do.

So if you included mortgage payments in expenses then your success rate is lower than it really is. For some people it is close enough to make a difference in the decision whether or not to retire.

 

[bclover]

IMO best practice is to include mortgage in off-chart spending with an offsetting pension when the mortgage ends for two reasons. First, expenses are increased each year for inflation and most mortgage payments are fixed. Second, expenses never end and your mortgage payments do.

So if you included mortgage payments in expenses then your success rate is lower than it really is. For some people it is close enough to make a difference in the decision whether or not to retire.

so that would be a good thing right? I include my mortgage payment in my expenses and come out with a 96% success rate until age 90. you're saying that is the low side?

 

[pb4uski]

Yes. Try taking your mortgage out of expenses and putting in an off chart spending item for your mortgage and then an offsetting pension starting when your mortgage ends and your success rate should go up.

 

[bclover]

Yes. Try taking your mortgage out of expenses and putting in an off chart spending item for your mortgage and then an offsetting pension starting when your mortgage ends and your success rate should go up.

thanks Pb4uski. I need to start spending waay more money.

 

[GravitySucks]

Yes. Try taking your mortgage out of expenses and putting in an off chart spending item for your mortgage and then an offsetting pension starting when your mortgage ends and your success rate should go up.

I must be missing something....
I can understand the mortgage as an off chart expense in FIRECalc, but why add an offsetting pension once the mortgage is paid off?

 

[pb4uski]

Because when the mortgage is paid off you don't make mortgage payments anymore and you can't have off-chart spending end at a certain date so you need to include an off-chart spending reduction (aka pension) of equal amount.

 

[Independent]

I agree that I'd want to try the "pay off the mortgage immediately" scenario.

FireCalc is going to look at the very worst retirement years. It will probably say that, defensively, you are best off getting money out of the market and paying off a fixed expense.

 

[petershk]

I ran this scenario a bunch of times for similar reasons.

Basically what I found is the more I paid the mortgage off the tighter the range of minimum to maximum money became in firecalc (which makes total sense).

Having a few million more or less at death is much less important to me than having a smoother ride so I plan to have no mortgage in retirement.

Of course it's totally case by case... but that's what I'm doing.

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[Extinction]

I suspect that the increase from 97% to 100% is due to paying much less interest (2.75% for 15 years vs a higher rate for 26 years). What would your success rate be if you simulated paying off the mortgage by reducing your assets by the amount of the mortgage and eliminating the off-chart spending and pension offset?

In hindsight, the added expense of interest is the simple discriminator. Spend less, have more over the long term. If one can manage their expenses, then spending less on interest is a no-brainer.

Interestly, when I simulate paying off my mortgage as pb4uski suggests, my success rate drops another few points. The reduction in my initial assets has a significant negative effect despite the reduction in expenses. An argument against paying off mortgage?

These few percentage points disturb me because we may be entering an economic period similar to the few failures I am seeing in my firecalc simulation.

So borrowing cheap money instead of using my cash assets for "upgrades" also appears to be the way to go. My roof is at least 25 years old. Not if, when. Maybe solar panels. Kid's bathroom is disaster. I want a front porch to grow old on and to yell at the kids to get off my lawn.

Thanks to all for your input. Great board