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Much of the debating about paying off the mortgage or not does not
include any hard numbers. I put together a comparison using
some hard numbers using actual figures from a personally-known
situation. I assumed a very generous desired retirement income--no reason
to retire early if you can't live large!
Summary:
Under these conditions, starting with about $1 million portfolio
plus this pension and SS income, if you pay off the mortgage
your net worth 25 years later will be about $1 million less than if
you keep the mortgage.
This is with same net spendable per month (after mortgage pymt).
Even with an average investment return of 8% instead of the historical
average of 10%, paying off the mortgage falls behind.
In all cases "net worth" means investable net worth, excluding
your house, cars, etc.
The required networth is what you need to draw from to make up
the shortfall of income requirement in excess of pension & SS.
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Paying off the house or not, with early and normal retirement age incomes.
Note that the pension starts 3 years earlier than SS, so there's a gap
in the total income. To cover this, you need $60,876 extra.
Income Source Early (age 59) Age 65
Pension (@ 59) $28,465 $44,662
SS (@ 62) $20,292 $25,602
Total $48,757 $70,264
Assume desired annual retirement income is $90,000 ($7500/mo)
........ Including a mortgage P&I payment of $2000/mo.
........ 30yr FRM @6.0%, 25 years remaining, balance $300,000.
Desired retirement income $90,000 $90,000
Shortfall $41,243 $19,736
Req networth @ 4% SWR $1,031,076 $493,397
Req networth @ 5% SWR $824,861 $394,717
(SWR = safe/starting withdrawal ratio)
Without the mortgage (desired retirement income is $5500/mo)
Desired retirement income $66,000 $66,000
Shortfall $17,243 -$4,264
Req networth @ 4% SWR $431,076
Req networth @ 5% SWR $344,861
NW req before paying off @ 4% SWR: $731,076 ($431,076 + $300,000)
Using the 4% SWR and the early retirement income figures,
if you have $1,031,076 and pay off the mortgage you have $731,076
remaining.
If your NW is $1,031,076 and you want to retire at 59, you can either
keep the mortgage and keep investing the $1,031K, or
pay off the mortgage and keep investing the remaining $731K.
Assume a 25 year period, assume long-term average gain of 10%
assume constant 4% withdrawal, leaving a net LT return avg of 6%.
Caveat: this ignores the risk due to variations in annual gains/losses,
but using a low 4% SWR the risk is virtually eliminated.
Using a simplifying assumption that the networth remains constant--that's
the reason for using the "safe" SWR of 4%.
$1,031K at 6% grows to $4,425K + fully paid off house
$731K at 6% grows to $3,137K + fully paid off house
If average growth is only 8%, net LT avg return is therefore 4%.
$1,031K at 4% grows to $2,748K + fully paid off house
$731K at 4% grows to $1,949K + fully paid off house
Using an even lower assumed growth rate, $1,031K at 2.5% grows to $1,911K.
This would be the same 4% withdrawal with an assumed avg gain of 6.5%,
or a 6.5% withdrawal (over 50% more) with an avg gain of 8%.
$731K at 2.5% grows to $1355K.
So paying off the house exposes you to more risk and/or
substantially lowers withdrawal amounts.
