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Mortgage payments after Early Retirement
Old 04-25-2007, 03:38 PM   #1
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Mortgage payments after Early Retirement

Hello,

I'm trying to decide if I need to pay off my mortgage before I take ER or if it makes sense to continue to pay it even after ER.

My mortgage is 15 yr fixed @ 4.875%. I assume that my investment return will exceed this amount over the 10 years that I will have left on the mortgage when I retire. This alone should make it worth keeping the mortgage instead of paying it off. Also, my mortgage amount at retirement will be around 5% of my portfolio value.

The other consideration that I can think off is deductions for mortgage interest. If my deductions (including mortgage interest) are greater than the standard deduction, this gets even better. That is, unless, the mortgage interest causes my deductions to be greater than my income - I don't think this is likely.

As far as I can tell, mortgage interest is not un-deducted for AMT in the unlikely scenario that I have to pay it.

Are there any other points that I should consider?

Also, would you consider the mortgage interest as part of the 4% SWR or should it be treated separately. I think I need to make some adjustment there, but can't get my head around the calculations needed.

Regards,
ww


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Re: Mortgage payments after Early Retirement
Old 04-25-2007, 09:47 PM   #2
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Re: Mortgage payments after Early Retirement

this has been discussed in many many many threads. It comes down to whether or not you want to take the risk of leverage against your home in your portfolio. Many folks here choose to pay off their mortgage as more of an emotional decision rather than a financial one.

Personally at your interest rate, I'd keep it and make money from the arbitrage, but you gotta do what helps you sleep at night.
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Re: Mortgage payments after Early Retirement
Old 04-25-2007, 10:17 PM   #3
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Re: Mortgage payments after Early Retirement

That's a no brainer for me...pay it off! If you want to take the risk that you can do better than your mortgage rate, fine, but the 'sleep at night' factor wins with me, hands down.
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Re: Mortgage payments after Early Retirement
Old 04-25-2007, 10:30 PM   #4
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Re: Mortgage payments after Early Retirement

Quote:
Originally Posted by CybrMike
Many folks here choose to pay off their mortgage as more of an emotional decision rather than a financial one.
Perhaps many do that, but theres a rock solid financial case for losing a mortgage. I've found that the pro-mortgage folks like to throw that "emotional" pitch when they're "financial" case runs out of steam. I suppose to make the anti-mortgage folks feel less vulcanic?

At 4.875%, I might keep it, but I wouldnt keep a lot of cash and bonds in my port if I did. I'd consider the "bond" I'm paying interest on to a bank to be part of my fixed income...just going the wrong way.

What we're missing is the amount of the mortgage and the % of the portfolio that comprises. Makes a big difference.

Do a search on mortgages, theres 4 years of fodder to chew on.
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Re: Mortgage payments after Early Retirement
Old 04-25-2007, 10:54 PM   #5
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Re: Mortgage payments after Early Retirement

Seeing my parents, who have been *comfortably* retired for nearly 20 years on a 200k portfolio, modest rental income, and some social security, I'm a firm believer in the benefits of NO DEBT at retirement.

But I can accept that others feel differently, please don't feel the need to start the mortgage debate yet again.

- John
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Re: Mortgage payments after Early Retirement
Old 04-26-2007, 03:48 AM   #6
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Re: Mortgage payments after Early Retirement

We are intending do down-size... but if I did not sell or accelerate the payoff of my mortgage, I would owe about 40k when we ER. The amount that I would earn from that would be a pitance on a net basis... not worth it. The risk is also fairly minimal when I compare the debt to the total portfolio... especially since I would not hold risky investments with the loan amount. I would pay it off just to simplify the accounting.

By the way, an arb is typically a quick flip (buy/sell).... not a long-term holding. If you hold the mortgage and invest the money in the stock market, it is kinda like a margin account. If you buy bonds with the loan as an investment, it is kinda like earning a spread.

To make money from loans!!! You must borrow alot and take substantially more risk in a short period of time or maybe slightly less risk over a long-period of time. Bottom line. You are taking on risk where you are likely to gain little and have a very real likely hood of losing much (for the average person mortgage). This falls into the category of: If you do not know how it works, then do not invest in it or use the style. Also, look at your house as another asset class. It is your dwelling so you get the benefit of being able to live in it. Hopefully you will never need to sell it due to monitary needs. But if everthing did go to hell in a handbasket... you would have that as a last resort.

My advice... Payoff the mortgage.
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Re: Mortgage payments after Early Retirement
Old 04-26-2007, 08:06 AM   #7
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Re: Mortgage payments after Early Retirement

I can't tell you what to do - - but I can tell you what I did, in preparation for ER.

I read all the arguments on both sides, thought about it, ran the numbers and carefully considered what would be best for ME, not someone else on a message board.

Then I paid off my mortgage.

I haven't regretted it for a single minute, either. Every day I get a zillion offers in the mail begging me to take on another mortgage on my home, and I happily toss them in the trash. On the first day of every month, I have a big smile on my face because I have no mortgage payment. My bank account is building nicely, and my estimated ER monthly expenses are awfully low, now.

There is no "one size fits all" when it comes to this debate, and I would be very suspicious of anyone here who claims there is. As you read about paying off or not paying off your mortgage, I am sure you will begin to lean towards the best decision for you. Go with your (educated) gut feeling and you will be fine.
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Re: Mortgage payments after Early Retirement
Old 04-26-2007, 08:38 AM   #8
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Re: Mortgage payments after Early Retirement

One thing to consider with a 15 year mortgage is that the interest portion of your payment is a much smaller percentage than with a 30 year. I refinanced to a 15 year mortgage when I had my condo, and still have the spreadsheet from it. The APR was 5.5%. The very first month, the principal made up 56% of the payment. In contrast, on the first month of the 30 year mortgage I had before that, the principal was about 88.5% of the first month's payment. That one was at 7.25%.

I ended up selling my condo just 19 months into that 15 year mortgage, so I probably didn't even hit the breakeven point for refinancing. But with the way real estate prices were shooting up, it was still worth it to get out of it. But had I stayed in that condo, the principal portion of the payment would have started exceeding the interest portion on the 30th month.

By the start of the 5th year, the interest portion would have been down to about 42%. by the start of the 10th year, it would be down to about 34%.

So, depending on how big your mortgage is, you might not be getting much of a tax writeoff in those later years.
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Re: Mortgage payments after Early Retirement
Old 04-26-2007, 09:14 AM   #9
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Re: Mortgage payments after Early Retirement

Quote:
Originally Posted by Andre1969
One thing to consider with a 15 year mortgage is that the interest portion of your payment is a much smaller percentage than with a 30 year. I refinanced to a 15 year mortgage when I had my condo, and still have the spreadsheet from it. The APR was 5.5%. The very first month, the principal made up 56% of the payment. In contrast, on the first month of the 30 year mortgage I had before that, the principal was about 88.5% of the first month's payment. That one was at 7.25%.

I ended up selling my condo just 19 months into that 15 year mortgage, so I probably didn't even hit the breakeven point for refinancing. But with the way real estate prices were shooting up, it was still worth it to get out of it. But had I stayed in that condo, the principal portion of the payment would have started exceeding the interest portion on the 30th month.

By the start of the 5th year, the interest portion would have been down to about 42%. by the start of the 10th year, it would be down to about 34%.

So, depending on how big your mortgage is, you might not be getting much of a tax writeoff in those later years.
That is kinda my boat as well...with a 15-year and is getting paid down quickly....towards the end of it, it makes more sense to just pay off....my standard deduction keeps going up each year and harder to the "full" value of the mortgage interest when I itemize and play games with my taxes....One point is that people should factor in your state taxes also...I get a little kickback on mine for having a mortgage...

And OP....CFB or somebody had a poll awhile back and something like 60% had or planned to pay off mortgage in FIRE...and some have posted some case-by-case examples like Nords, who lives in a high cost area with a larger mortgage and able to deduct all of the mortgage interest....
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Re: Mortgage payments after Early Retirement
Old 04-26-2007, 09:22 AM   #10
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Re: Mortgage payments after Early Retirement

It was more than 60%. I havent looked for the poll but it was a surprisingly large majority that paid off or planned to pay off the mortgage in retirement.

Makes great sense to keep one if you're in the accumulation phase, can use the tax writeoff, have the cash flow already in place, have a pension/income/working spouse, or a very low interest rate.

Doesnt if you're creating the cash flow (and its taxes) to make the payment, and having to make investment decisions based on having to make a 1000-2000+ payment every month.
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Re: Mortgage payments after Early Retirement
Old 04-26-2007, 11:16 AM   #11
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Re: Mortgage payments after Early Retirement

Quote:
Originally Posted by Walkinwood
Hello,

I'm trying to decide if I need to pay off my mortgage before I take ER or if it makes sense to continue to pay it even after ER.

My mortgage is 15 yr fixed @ 4.875%. I assume that my investment return will exceed this amount over the 10 years that I will have left on the mortgage when I retire. This alone should make it worth keeping the mortgage instead of paying it off. Also, my mortgage amount at retirement will be around 5% of my portfolio value.

The other consideration that I can think off is deductions for mortgage interest. If my deductions (including mortgage interest) are greater than the standard deduction, this gets even better. That is, unless, the mortgage interest causes my deductions to be greater than my income - I don't think this is likely.

As far as I can tell, mortgage interest is not un-deducted for AMT in the unlikely scenario that I have to pay it.

Are there any other points that I should consider?

Also, would you consider the mortgage interest as part of the 4% SWR or should it be treated separately. I think I need to make some adjustment there, but can't get my head around the calculations needed.

Regards,
ww


consider:
length of repayment left
cost of remaining repayment (taxes on withdraw+ tax deductions lost)
rate of return on the cost of repayment



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Re: Mortgage payments after Early Retirement
Old 04-27-2007, 07:57 AM   #12
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Re: Mortgage payments after Early Retirement

Could you be more specific, JiMOH?
We are also deciding whether to retire our 37k morgage (5.25%, last payment 4/2013, $600/month payment, $600 tax savings each year if we continue paying it until the end)
It seems to come down to peace of mind, according to many people who have posted in this forum, but I would feel more comfortable with a financial rationalization for paying it off.
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Re: Mortgage payments after Early Retirement
Old 04-27-2007, 08:03 AM   #13
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Re: Mortgage payments after Early Retirement

Does this make sense?

Lets say you have a $1000/mo P&I payment. If you are planning on a 4% SWR, wouldn't that payment mean you would earmark $300,000 for those payments?

So, say your remaining balance is $100,000, wouldn't it then make sense to pay it off?

I'm sure this has been brought up before, so I apologize in advance.
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Re: Mortgage payments after Early Retirement
Old 04-27-2007, 08:07 AM   #14
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Re: Mortgage payments after Early Retirement

Quote:
Originally Posted by hogwild
Does this make sense?

Lets say you have a $1000/mo P&I payment. If you are planning on a 4% SWR, wouldn't that payment mean you would earmark $300,000 for those payments?

So, say your remaining balance is $100,000, wouldn't it then make sense to pay it off?

I'm sure this has been brought up before, so I apologize in advance.
Yes, this had been addressed before - since the debt does not need to be inflation protected, you only need to have a pot of funds in a secure investment that you can use for the pay as you go, if that is your choice. You don't need the multiples.
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Re: Mortgage payments after Early Retirement
Old 04-27-2007, 08:48 AM   #15
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Re: Mortgage payments after Early Retirement

Quote:
Originally Posted by jIMOh
consider:
length of repayment left
cost of remaining repayment (taxes on withdraw+ tax deductions lost)
rate of return on the cost of repayment



more specific-

each situation is different. If repayment period is lower, it will favor "pay off early", where as longer repayment periods will favor investing, based on time factor when compounding returns.

In addition, the higher the tax rate, the less paying down helps. A person in 15% tax bracket is not getting much of a deduction, but a person in 33% tax bracket might need the deduction. Effective interest rate is (1-taxrate)*interest rate on mortgage.

It also depends on how tax efficient you can invest the money, and what return you get on this.
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Re: Mortgage payments after Early Retirement
Old 04-27-2007, 11:05 AM   #16
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Re: Mortgage payments after Early Retirement

The piece that swings the financial decision is whether or not you'd do something different investing wise and the REAL impact on your taxes.

A retired person has to take money from an investment to pay a mortgage. Thats taxed. Getting a deduction to offset that tax isnt particularly helpful, especially when the action of increasing ones WR to make the mortgage payment results in higher taxation of excess withdrawals. For example, without huge debt payments, we keep our taxable income below the 15% ceiling for capital gains and qualified dividends. Everything we pay is at 5%.

Also consider the effect on your portfolio. Someone without a huge "cant miss the payment" debt load has to structure their portfolio to consistently produce a reasonable income or gain, create cash or fixed income buffers to pull money from in down times, yada yada yada. Without that 'problem' you've created and then solved by jumping through more hoops, you might choose to make your portfolio more equity heavy. That'd increase your overall returns and the volatility is less important because you dont have to yank lots of money out during down times to make a big mort payment.

Alternatively, you could simplify and make your porfolio more conservative, dampening returns but almost eliminating volatility. For the same reasons as above...you dont need to "shoot the moon" to make sure you'll have sufficient overall long term returns to make the debt payments.

So in short, the 'financial reason' comes down to looking at your financial picture as a whole one, not simply piece parts. While its certainly harder to do, I cant fathom why you'd isolate pieces of your investment/financial life that have huge material effects on other ones.

Seems to me that having a mortgage creates a bunch of problems that you then have to solve or make compromises to suit, while not having the debt load simplifies your ability to control your withdrawal rate, your tax situation, and how you choose to invest.

Is there an emotional component and some sort of peace of mind/sleep at night factor? You bet! As is the case with each and every other decision we make in our lives, financial or not.

The question is: is arbing a percent or two of your loan amount worth the hassle and complication...IF you even manage to get that profit?

As mentioned, an income stream, colad pension, humongous portfolio, special tax considerations, sub 5% mortgages and all sorts of other items throw a wrench into the works. But for most actually retired people living off a portfolio, no debt makes sense emotionally AND financially. Apparently a wide majority of people agree.
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Re: Mortgage payments after Early Retirement
Old 04-28-2007, 09:03 AM   #17
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Re: Mortgage payments after Early Retirement

Thanks all for your insights.

I did not take the implication of increased withrawals on portfolio structure & income-tax. I was leaning towards keeping the mortgage, but now I'm going to think about it. I have at least a year to mull it over.

Thanks again.
ww.
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Re: Mortgage payments after Early Retirement
Old 04-28-2007, 09:08 AM   #18
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Re: Mortgage payments after Early Retirement

Quote:
Originally Posted by Walkinwood
Thanks all for your insights.

I did not take the implication of increased withrawals on portfolio structure & income-tax. I was leaning towards keeping the mortgage, but now I'm going to think about it. I have at least a year to mull it over.

Thanks again.
ww.
Run the numbers. You can run retirement simulations with and without mortgage. Also consider your own specific income tax situation.

Qualitative arguments can be made for either position, but a simulation of your actual situation is likely to indicate that some of those qualitative effects are insignificant.
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Re: Mortgage payments after Early Retirement
Old 04-28-2007, 09:26 AM   #19
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Re: Mortgage payments after Early Retirement

Quote:
Originally Posted by sgeeeee
Run the numbers.
Qualitative arguments can be made for either position, but a simulation of your actual situation is likely to indicate that some of those qualitative effects are insignificant.
1. 5.875%, 30 yrs - originally planned on renting.

2. That durn Katrina wiped out the fully paid off fish camp over Lake Ponchartrain.

3. Milo the 1 yr old Pug - will get stubborn in bad weather and crap in the house once in a while. Watching old Dog Whisperer episodes hasn't successfully trained me yet - let alone him.

Renting don't get no respect on this forum - even tho I always vote for it(never manage it myself in ER).

The ying and yang of mortgage/not mortgage in all it's forms is often good for a long thread - more so in winter, I suspect.

heh heh heh 8)
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Re: Mortgage payments after Early Retirement
Old 04-28-2007, 07:45 PM   #20
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Re: Mortgage payments after Early Retirement

Walkinwood

One other consideration is the tax implication of the source of the funds to pay off the mortgage. For example if you balance is $150,000 and you would need to sell a fund with basis of $50,000 to pay off the mortgage you would owed Fed taxes of 15K + state taxes. In this case with your low interest rate I think selling would be a mistake on the other hand if the same fund had a basis of say $175,000 than you could get a LT cap loss by selling the fund and paying off the mortgage.

FWIW, last year I was faced with had the almost exactly the same situation you face. Namely do I pay off a 15-year mortgage @4.875 with 13 years to run. The mortage was 7% of my assets. I elected to keep it because there were plenty of safe investment with higher return, and I didn't want to pay capital gains tax. If the interest rate was 1/2 higher it would be been a very close calculation and if it was 1% higher I would have paid it off.
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