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Mortgage/Withdrawal Rates
Old 06-30-2002, 07:20 PM   #1
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Mortgage/Withdrawal Rates

I am thinking of purchasing a new residence which would probably be my long term retirement home. I will need about $200,000 plus the net proceeds from my current house. I can either take the $200,000 from my nest egg or get a mortgage. My thoughts were that $200,000 equals $8,000 per year using a 4% withdrawal rate. That $8,000 would not be enough to service a $200,000 mortgage at any rate greater than 4%. Thus it seems to me that I am better off taking the $200,000 from my nest egg rather than obtaining a mortgage.

What do you think? Am I missing something here?

Thanks, Steve

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Re: Mortgage/Withdrawal Rates
Old 06-30-2002, 09:58 PM   #2
Dryer sheet wannabe
Join Date: Jun 2002
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Re: Mortgage/Withdrawal Rates

Remember to take into account the effect of taxes. Mortgage interest is deductable. Selling equities might trigger more taxes now. The net effect could make taking the mortgage a better deal.

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Re: Mortgage/Withdrawal Rates
Old 07-02-2002, 01:04 AM   #3 Founder
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Re: Mortgage/Withdrawal Rates

The big factor that keeps the safe withdrawal rate to 4% is volatility. You'll almost for sure do better than that as a return -- a 4% safe rate is just the worst you should expect over the life of the portfolio.

On the other hand, the (greater than 4%) mortgage withdrawal is not volatile -- it's gotta be paid no matter what.

Since we're talking safe rates and not optimum returns here, we can use the safe rate tools.

To make a quantitative comparison, enter the mortgage amount in FireCalc or any of the downloadable safe withdrawal calculators from the, enter the mortgage interest rate and term, and look at the survival rate.

I just tried, and found that an 8% mortgage over 30 years is only about 37% safe. In other words, historically, if you set aside that $200,000, it would be completely depleted before the mortgage was paid off, 63% of the time.

(If you assume the tax rules and rates won't change over 30 years, you can doctor the annual payment amount in your input to show the tax benefit, and still see the safety of mortgage versus cash. To get to 80% safe, you'd need an effective mortgage rate of about 5%.)

So, from a safety perspective, it looks like cash is the way to go. Emotionally, at least for me, paid for beats payments any day. From the perspective of optimizing returns, well, how much of a gambler are you?

Often uninformed, seldom undecided.

Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. Mark Twain
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