Mortgage(s) in Retirement

[grasshopper]

In 2003 I had shares in GNMA equal to the amount left on our mortgage. We sold the fund paid off our mortgage, trading RE asset to RE asset. This was 3 years before we were even thinking about retirement. We socked away a lot of cash in 3 years and realized FI. Not having a mortgage and FI helped us make the decision to RE.

[pb4uski]

Quote:

Originally Posted by Animorph Strictly a financial decision for us. My assumption for future portfolio returns is greater than my current mortgage interest rate. So I should come out ahead by leaving that money in the market, for as long as possible.

+1 I expect to earn 5.5% or better on my investments and am paying 3.375% on my mortgage, so I hope to come out ahead. If my investments cannot provide at least a 3.375% return then having a mortgage will be the least of my worries. While others have peace of mind being mortgage free, I have peace of mind knowing that at anytime I wish I could write a check and pay it off if I wanted to.

[ChainsBeGone]

I purchased a home this year with a 30 year mortgage. I will retire in 8 months at age 48, fully FIRED, with mortgage, property tax, utilities, and allotment for annual home maintenance repairs making up about 30% of my retired income. No other debt, with COLA'd pension, and health care as part of my retirement benefit. I could have kept working another 4-5 years and paid cash for the house, but I'd rather retire now, make mortgage payments, and if I chose, pay off the mortgage when I reach 59 1/2 and can access Roth IRAs/Traditional IRAs. My career (Army) has caused me to move 13 times in 25 years, and never back to the same place, and never to where we know we want to retire. Consequently, we've not had the opportunity to buy a house, keep it for years, and pay down a mortgage while we lived in it. My 14th move will be to our retirement home. For us, a mortgage means 4-5 extra years of FIRED.

[Finance Dave]

Quote:

Originally Posted by ShokWaveRider Now that is the best reason I have heard. That is a no brainier really and makes sense. So if one is paying 3.5% in a mortgage and getting 10% in return invested funds. The mortgage is actually costing 2.2% (assuming 33% back in taxes) they are paying 3% in taxes on the 10% so net net they are ahead ~3% makes a lot of sense. But hopefully the return warrants the expense.

Not sure I'd call it a "no brainer"...what if the market declines 40% and stays there for 3 years? Then how do you live? By withdrawing money that's worth 30% less?

IMO, you must have enough money in "stable" accounts that you can live for at least as many years as you think could be the longest possible downturn in the market. In the long run things will likely be fine...but even our beloved S&P has recently had a 10-year period where values were flat.

[Finance Dave]

Quote:

Originally Posted by ShokWaveRider I cannot think of a good reason to have one.

Perhaps you don't consider this a "good" reason, but in Indiana where I live, you lose a property tax deduction if you don't have a mortgage...it's called the "mortgage exemption". Property taxes increase when your mortgage is paid off...the bank files a document with the county assessor and this happens automatically.

The amount is modest...for us $300/year on a house worth about $350k.

For the record, we "sort of" paid our mortgage off last November. We are not yet FIREd, and have high incomes. We noted last year that we had 3 years left on our 15-year fixed rate loan at 5.125%. We then noted we could get a HELOC for 3.25% with no closing costs or fees. So, the math seemed pretty easy...take out a HELOC for the amount due on the mortgage, and pay it off...so we did. Now we owe the same amount (less any payments made since then) on our HELOC that we did on the primary mortgage. When we got our bonuses in April of this year, we put all $25k of the money (after taxes were deducted) against the HELOC...so now the balance is very small...and we should have it paid off in about 16 months.

One watch-out with this strategy...HELOCs are VARIABLE rate loans. So if you plan to use one for a longer term, you are exposing yourself to interest rate risk. In our case, the rate was fixed for one year, and then is tied to a federal reserve rate....which Geitner clearly noted they would not be increasing for "the foreseeable future"...so we felt pretty good that we could pay it off before rates increased. As a last resort...we could use our emergency fund to pay it off....we carry an e-fund of 9 months expenses...and most experts recommend 3-6...so we have a bit of cushion there.

IMO there is a certain "peace of mind" to having the mortgage paid. There are occasions where we'll take on debt...but we always have a solid plan to avoid risks. For example, if we buy a new car and Ford is offering 0% financing, we'll do it...even if we have the money to pay for the car cash....then we'll put that money in a CD or similar fund and pay off the loan as needed.

[akck]

I originally intended to pay off the mortgage, 3-5 years into retirement because most of the funds would come from a tax deferred account. We recently refinanced and now the rate is at a point where I'll probably let it run the full term. As others have said, I can probably invest with a higher return than the rate we're paying.

[LakeTravis]

Had this very same conversation with my CFO yesterday. At rates of 3.5% or less, many would consider that virtually "free" money. And from a purely financial perspective, it's hard to argue that it makes sense to pay it off when it's entirely possible you can earn a better return somewhere else.

Take into account that a home is normally an appreciating asset (recency effect has led many to no longer believe that!) and it makes even more sense to not pay off a mortgage.

We also debated how anyone would throw funding into the mortgage markets with such a low return, and how that might impact the future. Then we realized that's only an issue if you assume that everyone goes full term with their mortgages. The majority never do, in fact I think he mentioned that the average "life" of a 30 year mortgage is less than 6 years.

But different people take comfort in different things, and many people like the feeling of not having to make a mortgage payment. From a purely emotional perspective, it might make sense to pay it off.

[ShortInSeattle]

Quote:

Originally Posted by LakeTravis Had this very same conversation with my CFO yesterday. At rates of 3.5% or less, many would consider that virtually "free" money. And from a purely financial perspective, it's hard to argue that it makes sense to pay it off. Take into account that a home is normally an appreciating asset (recency effect has led many to no longer believe that!) and it makes even more sense to not pay off a mortgage. We also debated how anyone would throw funding into the mortgage markets with such a low return, and how that might impact the future. Then we realized that's only an issue if you assume that everyone goes full term with their mortgages. The majority never do, in fact I think he mentioned that the average "life" of a 30 year mortgage is less than 6 years. But different people take comfort in different things, and many people like the feeling of not having to make a mortgage payment. From a purely emotional perspective, it might make sense to pay it off.

Good points. We currently list mortgage payoff as last on our priority list.

#1. Save for normal retirement.
#2. Save for early retirement.
#3. Pay off Mortgage.

So basically when we hit our "number" for FIRE if we have any steam left in our careers we'll pay the mortgage down. If we don't, our retirement income should cover the payment.

SIS

[traineeinvestor]

Quote:

Originally Posted by Animorph Strictly a financial decision for us. My assumption for future portfolio returns is greater than my current mortgage interest rate. So I should come out ahead by leaving that money in the market, for as long as possible.

Another +1

With the floating interest rate on our mortgage currently hovering at around 1% and local CPI currently above 4%, we intend to keep it in place unless the interest rate rises to the point where we feel early repayments are justified.

[ejman]

I think that having a mortgage after retirement is fine as long as one's income to cover it is bomb proof. If the portfolio can handle a 95% drop in the stock market, State pensions going poof! on account of state insolvency, annuities not being paid because insurance companies have gone belly up and of course, the other insurance companies not being able to cover that much vaunted insurance pool and so on and so on. As long as the world keeps purring along (sort of) mortages are fine. Just remember one of the main reasons for some folks relocating on the old model T during a period of time known as the great depression was being kicked out of their homes due to a lack of ability to pay their debts.

[nun]

I'm in the "no mortgage" camp having paid mine off. However, I can see why at 3.75% people would want to keep a mortgage, the tax deduction and put their money to work in other places and hopefully pocket the difference between 3.75% and their investment return. Of course this assumes everything goes according to plan. I think us "pay off types" are essentially pessimists and we are planing for the worst case.

IMHO, the mortgage argument comes down to psychology and asset allocation. Going into ER I want to reduce my expenses as much as possible and move to a more conservative AA that will protect principal. Paying of my mortgage did that for me. My house is a two family and I rent out the ground floor apartment for $1200/month. So with no mortgage, that $1200/month covers real estate taxes, home insurance, health insurance and income taxes. Those are things I MUST pay. I can then manage my investments and the rest of my budget without having to worry about the basics.

[Mulligan]

I am in the same camp as chains be gone. I have plenty of cash flow for retirement, but asset base is not built up sufficiently to pay off the note and still have any cushion funds left. My payment is somewhere around 15% of my after tax monthly income, so it is no problem to pay it monthly.

[ShokWaveRider]

Quote:

Originally Posted by Finance Dave Not sure I'd call it a "no brainer"...what if the market declines 40% and stays there for 3 years? Then how do you live? By withdrawing money that's worth 30% less?

Then the "No Brainer" is to pay off your mortgage. Again I am really only talking about retired folk. And Assume that they have the means to pay it off if they want to.

[Texas Proud]

Quote:

Originally Posted by ejman I think that having a mortgage after retirement is fine as long as one's income to cover it is bomb proof. If the portfolio can handle a 95% drop in the stock market, State pensions going poof! on account of state insolvency, annuities not being paid because insurance companies have gone belly up and of course, the other insurance companies not being able to cover that much vaunted insurance pool and so on and so on. As long as the world keeps purring along (sort of) mortages are fine. Just remember one of the main reasons for some folks relocating on the old model T during a period of time known as the great depression was being kicked out of their homes due to a lack of ability to pay their debts.

If the stock market drops 95%.... having a mortgage or not having a mortgage will not be the issue that most people would be worrying about...

[MichaelB]

Quote:

Originally Posted by ShokWaveRider Now that is the best reason I have heard. That is a no brainier really and makes sense. So if one is paying 3.5% in a mortgage and getting 10% in return invested funds. The mortgage is actually costing 2.2% (assuming 33% back in taxes) they are paying 3% in taxes on the 10% so net net they are ahead ~3% makes a lot of sense. But hopefully the return warrants the expense.

Quote:

Originally Posted by ShokWaveRider Then the "No Brainer" is to pay off your mortgage. Again I am really only talking about retired folk. And Assume that they have the means to pay it off if they want to.

So it's a no brainer to have a mortgage, and also a no brainer to pay it off.

[Bestwifeever]

Quote:

Originally Posted by Finance Dave Not sure I'd call it a "no brainer"...what if the market declines 40% and stays there for 3 years? Then how do you live? By withdrawing money that's worth 30% less? IMO, you must have enough money in "stable" accounts that you can live for at least as many years as you think could be the longest possible downturn in the market. In the long run things will likely be fine...but even our beloved S&P has recently had a 10-year period where values were flat.

Quote:

Originally Posted by ShokWaveRider Then the "No Brainer" is to pay off your mortgage. Again I am really only talking about retired folk. And Assume that they have the means to pay it off if they want to.

No, if Finance Dave's scenario happened, it would be the worst possible time to pay off the mortgage--you would be selling very low to do so. The "best" possible time to pay off the mortgage if one wanted to not have a mortgage, would be to sell high, at the top of the market, and put the proceeds against the mortgage.

[pb4uski]

Quote:

Originally Posted by Texas Proud If the stock market drops 95%.... having a mortgage or not having a mortgage will not be the issue that most people would be worrying about...

+1 If the stock market crashed 95% then having a mortgage would be the least of my worries. I suspect that for many individual stocks that their cash and cash equivalents exceeds 5% of their market cap.

[ejman]

Quote:

Originally Posted by pb4uski +1 If the stock market crashed 95% then having a mortgage would be the least of my worries. I suspect that for many individual stocks that their cash and cash equivalents exceeds 5% of their market cap.

Why would it be the least of your worries? If I'm retired and living off my investments withdrawing 4% and part of that 4% goes to pay a mortgage why wouldn't I be better off if I don't have a mortgage in the first place? During the great depression the folks moving out of desperation were not the ones that had their homes free and clear. I can see the decision being one of "running the numbers" under normal circumstances but since we got so close to total collapse in 2008 I'm not so sure that "normality" is what I would use to describe current times. And no, I don't think society would collapse under a 95% drop scenario. After all, it didn't back in 1929 and things went along (more or less) for the 75% that had jobs. The highly leveraged folks and the ones in the 25% unemployed were the ones that had a hard time of it.

[pb4uski]

Quote:

Originally Posted by ejman Why would it be the least of your worries? If I'm retired and living off my investments withdrawing 4% and part of that 4% goes to pay a mortgage why wouldn't I be better off if I don't have a mortgage in the first place? During the great depression the folks moving out of desperation were not the ones that had their homes free and clear. I can see the decision being one of "running the numbers" under normal circumstances but since we got so close to total collapse in 2008 I'm not so sure that "normality" is what I would use to describe current times. And no, I don't think society would collapse under a 95% drop scenario. After all, it didn't back in 1929 and things went along (more or less) for the 75% that had jobs. The highly leveraged folks and the ones in the 25% unemployed were the ones that had a hard time of it.

Well to begin with, the whole notion of a 95% reduction in stocks is idiotic.

Even the Great Depression was "only" 89% and there are more protections against such a decline in place today than back then. Also, it seems likely that there would be second order effects on corporate bonds as well so diversification would be of little protection. I differ from you in that I think the society would collapse and that would be much more worrying to me than having a mortgage.

Unless the crash was a one-day event, there would probably come a time where I would do some selling an put the money aside so that I could use it to pay the mortgage. Even if it was a one day event I could sell the remaining 5% and some fixed income assuming those don't crash as well and pay off my mortgage, plant a big garden and continue on. Worst case, I would need to go back to w*rk.

[Texas Proud]

Quote:

Originally Posted by ejman Why would it be the least of your worries? If I'm retired and living off my investments withdrawing 4% and part of that 4% goes to pay a mortgage why wouldn't I be better off if I don't have a mortgage in the first place? During the great depression the folks moving out of desperation were not the ones that had their homes free and clear. I can see the decision being one of "running the numbers" under normal circumstances but since we got so close to total collapse in 2008 I'm not so sure that "normality" is what I would use to describe current times. And no, I don't think society would collapse under a 95% drop scenario. After all, it didn't back in 1929 and things went along (more or less) for the 75% that had jobs. The highly leveraged folks and the ones in the 25% unemployed were the ones that had a hard time of it.

Well, just for me, putting food on the table would be more of a concern... and paying the utilities etc. etc..

If your are retired and you lose 95% of your money... then the 4% withdrawal plus inflation is thrown out.... you now have to live on your new standard... so if you were spending $100K per year before, you now are spending $5K... what are the other $95K of spending are you going to cut