Mortgage(s) in Retirement

[haha]

It never ceases to amaze me about how many folk still have mortgages on their main abode after (or during) retirement. I can understand it on a second home. I read about people refinancing etc. at good rates, not sure if all are retired or not. Would not paying off a mortgage be a main priority first, in order to have an affordable ER or R for that matter. It was certainly a priority for us before we retired the first time. I guess if one has a high steady income or something it may not affect them. But I somehow think that most of us are not in that position. While we are probably comfortable, I would think that NO Debt would be the order of the day. Am I wrong?

Clearly you are wrong if you are saying that retired people will always look to have a paid off mortgage. Reading this site shows that some will prefer to have a mortgage. If you are stating your opinion, why ask if you are wrong? How could you be wrong? After all, it is only one person's opinion, and yours should be as good as anyone else's.

What are these bond investments that one can get today that throws off 6%? Are they somewhat safe?

I can tell you categorically that some of these will be somewhat safe. But that is a fairly low bar; and maybe too low.

Ha

 

[LakeTravis]

It would certainly be a sad state of affairs if you had paid off your mortgage, the market drops by 95%, and you lost your home anyway because you couldn't afford to pay the property taxes.

 

[REWahoo]

It would certainly be a sad state of affairs if you had paid off your mortgage, the market drops by 95%, and you lost your home anyway because you couldn't afford to pay the property taxes.

Totally unfounded premise. Once that asteroid hits there won't be any more property taxes.

 

[rayvt]

Property taxes, yes. I just looked up the current tax on our house in Chicago, that we sold when we retired and moved down South.
The current tax is $1175/mo ($14,101 annual). My current mortgage payment here is $1300/mo.

 

[ejman]

It would certainly be a sad state of affairs if you had paid off your mortgage, the market drops by 95%, and you lost your home anyway because you couldn't afford to pay the property taxes.

Not in Oregon. Once you attain senior hood failure to pay taxes simply results in a lien on one's house payable upon one's demise as part of settling the estate. The State can not kick you out of your house for failure to pay property taxes. Once you pay off the mortgage in Oregon, that baby is YOURS!

There may be other states that have similar provisions- dunno

 

[ejman]

Totally unfounded premise. Once that asteroid hits there won't be any more property taxes.

Uh, I call the odds slightly different:

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

Chance of the civilization obliterating asteroid hitting the earth- well, the last really big one was about 70 million years ago.

So let's see if I live to 100 (currently 62) the chances of the last one occurring in my lifetime are 100/70,000,000, the chances of the first one are 100/100 and I don't like that number...

Wow, I just noticed I turned over 500 posts so after 10 years of ER I finally have a full time job...

 

[LakeTravis]

Property taxes, yes. I just looked up the current tax on our house in Chicago, that we sold when we retired and moved down South.
The current tax is $1175/mo ($14,101 annual). My current mortgage payment here is $1300/mo.

Yup. Ours last year (Texas) were over $16,000 annual.

Not in Oregon. Once you attain senior hood failure to pay taxes simply results in a lien on one's house payable upon one's demise as part of settling the estate. The State can not kick you out of your house for failure to pay property taxes. Once you pay off the mortgage in Oregon, that baby is YOURS!

They will certainly take it in Texas. Although there is a little known and seldom exercised tax deferral available to over-65. As long as there is no lien on the homestead, you can defer property taxes and not pay them every year. They continue to accrue and are assessed an 8% annual interest rate and then have to be paid when the property changes hands.

 

[REWahoo]

Uh, I call the odds slightly different:

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

Chance of the civilization obliterating asteroid hitting the earth- well, the last really big one was about 70 million years ago.

So let's see if I live to 100 (currently 62) the chances of the last one occurring in my lifetime are 100/70,000,000, the chances of the first one are 100/100 and I don't like that number...

Wow, I just noticed I turned over 500 posts so after 10 years of ER I finally have a full time job...

With that many posts under your belt I would have thought you'd be able to recognize I was joking...

 

[Nords]

YES, BUT it is situation dependent.
1) If you have the money to pay it off, and if your returns on the money that would be in the mortgage is not bringing you out net positive after all costs and taxes, then paying it off is a no Brainer.
2) If the money that would be in a mortgage is bringing in returns net positive after all costs and taxes then it is a no brainer to have a mortgage.
Of course if this positive or negative number is a fraction of a percent at the end of the day, one may consider it a wash. In my case a wash is not good justification in having a mortgage.
I thought I had already made this clear? sorry if I did not.

http://www.early-retirement.org/for...rtgage-without-losing-your-ass-ets-15237.html

We have the money to pay it off, I have a rock-solid pension, and we expect to (eventually) make more money on the invested funds than we'd make by paying off the mortgage.

I don't think the word "no brainer" is an appropriate assessment of the labor involved in the analysis.

 

[sheehs1]

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.

We did the same thing. The HELOC will "sort of" be paid off in 18 months when I officially retire. However, when it gets down to the last $5,000, I'll only be making small payments on it as I don't want to close the line. I want to keep the "what is now over" a 100% equity line at 2.5% as long as the rates stay that low. Feels good to have access to the credit without having to go to a bank in the event we EVER buy that 2nd home or do major home improvements etc....without touching nest egg dollars.

 

[ejman]

With that many posts under your belt I would have thought you'd be able to recognize I was joking...

So was I...

 

[REWahoo]

So was I...

Sure fooled me. Maybe I'll catch on after you log another 500 posts...

 

[arebelspy]

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.

 

[FIREd]

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.

 

[nun]

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.

 

[ShokWaveRider]

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

 

[ejman]

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...

 

[ejman]

+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.

 

[ShokWaveRider]

+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.

 

[rbmrtn]

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.

 

[ejman]

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.

 

[Aviator]

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!

 

[ERD50]

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.

-ERD50

 

[FIREd]

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?

 

[martyp]

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.