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 http://retireearlyhomepage.com
, 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?