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Old 07-11-2012, 11:08 PM   #61
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With that many posts under your belt I would have thought you'd be able to recognize I was joking...
So was I...
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Old 07-11-2012, 11:13 PM   #62
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So was I...
Sure fooled me. Maybe I'll catch on after you log another 500 posts...
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Old 07-11-2012, 11:45 PM   #63
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Uh, I call the odds slightly different:

Chance of a major economic depression occurring with market dropping ~ 90% - maybe once in a 100 years.

So let's see if I live to 100 (currently 62) ... the chances of the first one are 100/100 and I don't like that number...
That's not quite how statistics works. The statement you made is equivalent to me saying that a fair coin comes up heads 1/2 the time, so in 2 throws it'll come up 2/2, or 100% of the time. But we sure know you can get tails twice in a row.

Obviously market returns aren't random, like a coin, but nor are they perfectly evenly distributed.
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Old 07-11-2012, 11:53 PM   #64
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In my case, the decision to pay off the mortgage was a pretty easy one. First, generating enough income to continue making mortgage payments required almost 3 times as much capital as paying the mortgage off since my planned withdrawal rate is quite low. In addition, since none of my income is guaranteed (no pension or SS), it seemed logical to slash mandatory expenses as much as possible. Third, our house is pretty cheap and paying it off did not make a big dent in our portfolio. Fourth, knowing we have a paid off home in a fiscally sound area with low property taxes and low cost of living makes us feel very secure. Even if our income took a big hit, we could still live there pretty well.
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Old 07-12-2012, 06:19 AM   #65
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In my case, the decision to pay off the mortgage was a pretty easy one. First, generating enough income to continue making mortgage payments required almost 3 times as much capital as paying the mortgage off since my planned withdrawal rate is quite low. In addition, since none of my income is guaranteed (no pension or SS), it seemed logical to slash mandatory expenses as much as possible. Third, our house is pretty cheap and paying it off did not make a big dent in our portfolio. Fourth, knowing we have a paid off home in a fiscally sound area with low property taxes and low cost of living makes us feel very secure. Even if our income took a big hit, we could still live there pretty well.
+1

My ER strategy is to reduce my need for income so that I can reduce my taxes when I don't have a wage coming in. It also means that I'll be able to support my retirement with a conservative low risk AA.
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Old 07-12-2012, 06:35 AM   #66
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Our decision for paying of our mortgage was 2 fold. Firstly I do not proclaim to be the best financial planner, in fact I am not really. I am a good saver though, always have been. This experience is also prior to retirement so may not be completely relevant, but it is what I base my opinions on. In the mid 90's in SoCAL we had a very good friend who was a CPA and managed our investments for us. My job was commissioned technical sales (Salary + Bonus' 70%/30% respectively). My wife also had a reasonably good job, although she was basically on fixed salary, she did get annual bonus' on occasion not huge but anything is good right.

While a lot of our friends were taking lavish vacations etc. with their bonus', our CPA recommended that we put as much into our mortgage as possible after contributing to our 401ks, that we maxed out on for at least 10 years straight. We did take some nice vacations etc so we were not hurting in that department, but the mortgage came first. We purchased our home in SoCAL with basically all the spare cash we had and still had to get a $400k+ mortgage in 1991. So $50k off the mortgage was a big deal. Plus the interest rates were around 8% or so if I remember correctly. We refinanced about 3 times I think always with an ARM of some kind. Well to cut a long story short by 1997 the mortgage was completely paid off, I remember the night out we had to celebrate. After that we invested the money that we would normally put into the mortgage into other investments that were recommended by our CPA. as we had been doing with other savings. from there we never looked back. Our CPA friend also paid his off and retired early, although we do not keep in touch any more since leaving SoCAL. I do however like people that practice what they preach.

So for our particular situation, I find it very difficult to think of having a mortgage now when we have not had one for 13+ years. (Hence my original comments at the start of the thread) I guess it is the English in me (Second Reason), I (and I have now convinced my Canadian Wife over the years) do not like any form of debt. The Mortgage was the only debt we ever had. We just bought cars we could afford to buy outright, or as I was in Sales I wrote off my business cars and always leased those at the time. (A Lease is classified as a rental and is 100% tax deductible, or at least it was and I had a car allowance from work).

As mentioned each person is different. I am not a good investor so I would not stand a hope in !@ll of getting the returns people talk about on this forum. So for me I am paying myself every month the amount I would be paying on a mortgage.

SWR
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Old 07-12-2012, 08:50 AM   #67
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That's not quite how statistics works. The statement you made is equivalent to me saying that a fair coin comes up heads 1/2 the time, so in 2 throws it'll come up 2/2, or 100% of the time. But we sure know you can get tails twice in a row.

Obviously market returns aren't random, like a coin, but nor are they perfectly evenly distributed.
I know (although my last statistics course in grad school was a long, long time ago). I just thought mumbo jumbo pseudo statistics would pair well with REWhaoo's comment. I mean after all 97.5 % of all statistics are made up on the spot...
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Old 07-12-2012, 08:55 AM   #68
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+1

My ER strategy is to reduce my need for income so that I can reduce my taxes when I don't have a wage coming in. It also means that I'll be able to support my retirement with a conservative low risk AA.
+1 to me that is the essence of ER particularly with no pension/SS as FIRED said.
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Old 07-12-2012, 09:10 AM   #69
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+1 to me that is the essence of ER particularly with no pension/SS as FIRED said.
Hopefully it can be done without reducing one's standard of living. That is what I am struggling with. Quality of life for me is a decent size home with a garage and a nice view with no neighbors behind me. WE are not prepared to downsize just yet (although we should). Like you we have no SS or Pension. Just what we can get from our stash.
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Old 07-12-2012, 09:20 AM   #70
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In my case, the decision to pay off the mortgage was a pretty easy one. First, generating enough income to continue making mortgage payments required almost 3 times as much capital as paying the mortgage off since my planned withdrawal rate is quite low. In addition, since none of my income is guaranteed (no pension or SS), it seemed logical to slash mandatory expenses as much as possible. Third, our house is pretty cheap and paying it off did not make a big dent in our portfolio. Fourth, knowing we have a paid off home in a fiscally sound area with low property taxes and low cost of living makes us feel very secure. Even if our income took a big hit, we could still live there pretty well.
My thoughts as well. Keeping the mortgage would require double the cash flow I need to generate from investments, which means more risk.
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Old 07-12-2012, 10:01 AM   #71
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Hopefully it can be done without reducing one's standard of living. That is what I am struggling with. Quality of life for me is a decent size home with a garage and a nice view with no neighbors behind me. WE are not prepared to downsize just yet (although we should). Like you we have no SS or Pension. Just what we can get from our stash.

I think one of the most wonderful things about ER is that one is able to explore a multitude of options that are much more difficult to pursue when one is tied to a job. The full spectrum from where to live to how one prepares one's meals to what one does is entirely up to reinvention. And quality of life is one of these, however one chooses to define it. Moving from a house in crowded Bay area in California to a 7 acre property (for half the money) in a rural area of SW Oregon with the nearest neighbor about a quarter of a mile away was a tremendous improvement in quality of life for me, but it might be just the opposite for someone else.
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Old 07-12-2012, 10:26 AM   #72
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As you can see, everyone's financial situation is slightly different so everyone's decision matrix will be slightly different. Additionally some folks are comfortable carrying debt while others, like DW and I, will avoid debt at almost all costs, even if it means sacrificing an opportunity of 1-2% gain in the market. I'm 50 with 45 days left on active duty. We're paying cash for our new house which is under construction using a mix of Roth IRA and non-IRA assets, which have very little cost basis due to some financial decisions I have made over the years in anticipation of this day. We have a rock-solid pension with benefits and will have additional assets available for all the things we enjoy doing. I say to each his own on the mortgage debate. There is no right or wrong answer....it just depends!
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Old 07-12-2012, 11:13 AM   #73
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My thoughts as well. Keeping the mortgage would require double the cash flow I need to generate from investments, which means more risk.
I'm trying to picture a case where this would apply. It seems to ignore (as many of these posts do), that with a mortgage, you have a larger investment to draw from.

A $215,000 mortgage @ 3.75% rates would require $12,000 annual cash flow. If that doubles your cash flow requirements, that means you are currently drawing that same $12,000 from investments, and a 4% WR makes that a $300,000 portfolio. So with that mortgage, you now have a much larger portfolio, so drawing more from it really doesn't change things much. Tax considerations are another factor, but that could also be an issue in using the funds to pay off the mortgage. Remember, some of that mortgage payment goes back to principal, it isn't all 'expense'.

A scenario like that would probably be one where the person has a substantial pension/SS income anyhow. I don't think anyone would recc taking out a $215K mortgage if your total portfolio was $300K with no other income, or if that $12,000 was the total of your pension/SS income.

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Old 07-12-2012, 11:35 AM   #74
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I'm trying to picture a case where this would apply. It seems to ignore (as many of these posts do), that with a mortgage, you have a larger investment to draw from.

A $215,000 mortgage @ 3.75% rates would require $12,000 annual cash flow. If that doubles your cash flow requirements, that means you are currently drawing that same $12,000 from investments, and a 4% WR makes that a $300,000 portfolio. So with that mortgage, you now have a much larger portfolio, so drawing more from it really doesn't change things much. Tax considerations are another factor, but that could also be an issue in using the funds to pay off the mortgage. Remember, some of that mortgage payment goes back to principal, it isn't all 'expense'.


-ERD50
Where does that larger portfolio comes from? To keep the mortgage, you need to save $300K. To pay off the mortgage you only need to save $215K. So why save more, when you can achieve the same result quicker and with less money?
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Old 07-12-2012, 12:08 PM   #75
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Originally I planned to retire after my mortgage was paid off but when I worked out the numbers it didn't really matter that much to me. I ER'd a year and a half ago and my mortgage is paid off next year. Not too long of a wait. My wife is still working as well.
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Old 07-12-2012, 04:12 PM   #76
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ERD50 & martyp: Exactly!

A lot of the "analyses" that people toss out are as sound as the people who say "I got a raise that put me into the next tax bracket and my taxes went up more than my raise was."

There have been countless throrough analyes of having vs. not having a mortgage in retirement, and they always show that there is only a trivial difference. So when somebody says that there is a BIG difference (like "need double the cash flow") it generally means that they have not done comprehensive calculations on the actual financial data but merely took a SWAG.

The thing that they usually get wrong is failing to realize that the money to pay off the mortgage principal would otherwise be in an investment or savings account.


When we were out today I got to wondering about this, and wondered, "If I had a $100K mortgage at 3.75%, and I needed to make the payments entirely by withdrawals from a savings account (consisting of CDs, bonds, etc.) how much money would I need in that account to start off with?" Note that you'd be drawing down principal from that account, rather than needing just the interest to make the mortgage payment. That's a different question.

Presuming that you had $100K in the account, which is what you'd use to pay off the mortgage today if you decided to, what interest rate would it have to earn so that it covered 100% of the mortgage payment?

So I fired up an on-line calculator and put the numbers in. What it said made me go . Duh!!
A savings account that you make monthly withdrawals from is the mirror image of a mortgage that you make monthly payments to. They are identical. The only difference is in which one is the payor and which one is the payee.

A $100K 30 year mortgage is a payment of $463.12/mo. An investment account that starts off with $100K, earning 3.75%, with a monthly withdrawal of $463 is depleted to zero in 30 years.
It's a wash!

But, what if your account can earn 5.0%? Taking that same $463 monthly withdrawal to make the mortgage payment, after 30 years the account balance is $60K. So you paid off your $100K mortgage but depleted the account by only $40K.

What if your account can earn 6%? You'd make the same $463/mo withdrawal to make the mortgage payment, after 30 years the mortgage would be paid off, and your account balance would be $135K.

This is the kind of analysis that astute money managers go through in deciding whether to pay off the mortgage or keep the mortgage and keep the money invested. If you can earn more than 3.75% on your investments, the financially superior thing is to have the mortgage. You don't have to worry about making the payments, and you don't have to double your cash flow (since the cash inflow from the investments balances the cash outflow for the mortgage).

Of course, there is more to life than finances. Emotionally, some people would rather not have the mortgage payment and don't want to be concerned about balancing out investment cash flows.
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Old 07-12-2012, 04:19 PM   #77
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Where does that larger portfolio comes from? To keep the mortgage, you need to save $300K. To pay off the mortgage you only need to save $215K. So why save more, when you can achieve the same result quicker and with less money?
Well, I was just trying to understand the framing of that 'double the cash flow' statement from the earlier poster.

Clearly, if one does not think that there is a reasonable chance that their investment returns will exceed the mortgage costs, they shouldn't do this. Remember that not all that cash flow is an expense, some of it (the principal) is just shifting from one asset (your portfolio) to another asset (your house).

In any case, to pay off $X of a mortgage means you have $X less in your liquid portfolio, and less potential income from that smaller portfolio. That's all. It seems to me that many posters only look at one side of the equation.

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Old 07-12-2012, 04:38 PM   #78
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But there's another valid situation. Suppose somebody says, "But I don't want to deplete my investment/savings account with the withdrawals for making the mortgage payments. I don't want to touch my principal."

How much money do you need in the account so that the withdrawals cover the mortgage but don't eat into the principal, if the account earns 5.0%?

$112,000.

That's all. After 30 years of making mortgage payments from the account, the mortgage is completely paid off and the account balance is $113,000.

You can have your cake and eat it too.

This is why somebody who retires with a large net worth doesn't have any pressure to have a paid-off mortgage. They need $X to support their 4% SWR (which they need with or without a mortgage) plus an addition sum that amounts to 12% more than the mortgage balance.

If you need $3000/mo income (not counting the mortgage payment) from the 4% SWR, then your investment account needs to be $900K. That means that if you have a $100K mortgage, your initial nest-egg would have to be $1,000,000, so that you have 900K after paying off the mortgage.

But, if your initial nest-egg is $1,013,000, then it is a wash because you carve out $113K for the mortgage-payoff account, leaving you with the same $900K to support your 4% SWR.

Now, in the big scheme of things there's not much difference between $1,000,000 and $1,013,000. That's only 1.3% more than a million. That's why people that are not retiring on a showstring don't get all excited about paying off the mortgage. If you've been able to build up your liquid net worth to a million, then building it up to a million and thirteen instead is not a big deal.
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Old 07-12-2012, 05:00 PM   #79
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Well, I was just trying to understand the framing of that 'double the cash flow' statement from the earlier poster.

-ERD50
I meant I would need to generate twice the income from investments to cover living expenses plus a mortgage payment versus living expenses only. You seem to be assuming you'll have some excess return from your larger portfolio. That may or may not happen. Paying of the mortgage is a sure thing.
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Old 07-12-2012, 05:38 PM   #80
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Presuming that you had $100K in the account, which is what you'd use to pay off the mortgage today if you decided to, what interest rate would it have to earn so that it covered 100% of the mortgage payment?
I guess that would have to be an after-tax interest rate, not the APY offered by the financial institution.
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