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Re: pay off mortgage
Old 05-03-2005, 07:42 PM   #21
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Re: pay off mortgage

Quote:
Originally Posted by Tomcat98
This debate no matter how many time as a group we plow the same ground is by far the most thought provoking and entertaining.* Folks can articulate and formulate the most eloquent arguments for either side, but at the end of the day "what does you gut tell you?"

Right, wrong, or indifferent I am in the pay off the mortgage camp.*

JDW

Me too.
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Re: pay off mortgage
Old 05-03-2005, 08:09 PM   #22
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Re: pay off mortgage

Quote:
Originally Posted by Tomcat98
This debate no matter how many time as a group we plow the same ground is by far the most thought provoking and entertaining. Folks can articulate and formulate the most eloquent arguments for either side, but at the end of the day "what does you gut tell you?"
I've often said that people who enter or participate in these discussions have already made up their minds and are just seeking the right set of 'facts' to make themselves comfortable with their decision.

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Re: pay off mortgage
Old 05-03-2005, 08:10 PM   #23
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Re: pay off mortgage

Quote:
Originally Posted by Tomcat98
. . . but at the end of the day "what does you gut tell you?"
I think it's clear that most posters (on this board anyway) do feel like this is a "gut" decision, or is based on "psychology", or gives them a "good feeling", or allows them to "sleep better" . . .

I think that's the most important thing. *Interestingly, I've said so many times, but that always seems to get lost in the exchange. *I think all of you are doing the right thing *because it's the right thing for you. *

Unfortunately, I don't share the "good feeling" so many get from paying off a loan. *I can't imagine sleeping any better than I do. *And my "gut" just doesn't tell me anything except when it's hungry. * *I guess I'm unlucky that way. *So I try to look at other parts of the issue that do tend to influence me. *For me, the approximately $250,000 (on average) that investors would have made historically by keeping a mortgage like mine and investing in a balanced portfolio is worth the effort. *Especially since the historical downside is so small and I can choose to change my decision at any time. *I completely understand my tax situation, and I'm very happy with my current return. *I know there are others who have made the same decision as I have, but not many on this board. *That's okay. *I'm not right . . . or wrong. *I just hate to be criticized as ignorant. *I'm pretty sure I have my hands around this and I offer a financial alternative based on historical simulation for anyone who happens to share my lack of "gut" response to the loan question.

It really becomes a moot point soon as mortgage rates are climbing. *The higher the mortgage rate, the larger the risk of trying to come out ahead through investments. *
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Re: pay off mortgage
Old 05-03-2005, 08:19 PM   #24
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Re: pay off mortgage

Th - true, true.

The SO wanted to live on the water in 1979. Math and trade - off calc.'s were irrelavent.

If it was me and the dog - RENT! In this case - 'I' - recieved the offer I couldn't refuse.
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Re: pay off mortgage
Old 05-03-2005, 08:28 PM   #25
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Re: pay off mortgage

"Gut" doesnt play a very significant role for me. I ran the numbers. Made no sense for me. The psychological part is there, but its about 5th or 6th on the list.

One thing that was a major telling point for me: Last year I had a shot at a sub 4% 5/1 fixed/variable loan from my credit union. I was intrigued. I floated the question as to whether it might be worth a shot at taking this and dropping it into equities.

Surely I could beat 4% over 5 or 6 years before the variable rates climbed above the historic s&p500 annual return rate, right?

Not one person here thought that was a good idea. During periods of less than ten years there have been a lot of pretty bad bear markets. Only a very small fraction of people stay in their homes past 10 years...most move within 7.

Given that time frame, you could get better odds betting on black in roulette. Just as many bear markets as bulls during a 7 year period.

I've seen two real-life ER scenarios where a mortgage made good sense.

Nords has a mortgage, along with a 100% equities portfolio and a good indexed pension that more than pays the bills. And little intention to move within that ten year period. Makes sense. A lot of ER's dont have an income stream but a lot do hold bonds paying well under prevailing mortgage rates.

Raddr has a mortgage, a fairly large portfolio of equities and commodities. He could go either way and it probably wouldnt make any difference in the long run. A lot of ER's dont have really large porfolios and arent comfortable with commodities as their inflation protection and 'balast' in a portfolio.

Suggesting that a retiree with a balanced portfolio is better off with a mortgage than without? You can spin the numbers to make that case if its what you've already decided to do. For the few cases where you can make the numbers work, I can spin a hundred where you're better off without it.

Without a debt load, I could do an 80/20 portfolio, beat the pants off a 50/50, 60/40 or 70/30 port that included a monthly mortgage payment. I dont think most people would feel comfortable with that volatility level when their house is on the line. I can also do a 30/70 or 40/60 and with such a small withdrawal rate, live off the dividend payments, pay no income tax, and let my small equity portion maintain my inflation protection. But I cant do that and make enough income to meet a mortgage payment every month.

Especially considering that equities arent exactly underpriced right now, I wouldnt bet on a great return over the next 7 years.

Buit if you put rigid conditions like a 50/50 portfolio with and without a mortgage and not considering your broader financial options? Yep, that makes the case to keep a big debt load...
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Re: pay off mortgage
Old 05-03-2005, 08:55 PM   #26
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Re: pay off mortgage

Quote:
Originally Posted by th
Without a debt load, I could do an 80/20 portfolio, beat the pants off a 50/50, 60/40 or 70/30 port that included a monthly mortgage payment.* I dont think most people would feel comfortable with that volatility level when their house is on the line.* I can also do a 30/70 or 40/60 and with such a small withdrawal rate, live off the dividend payments, pay no income tax, and let my small equity portion maintain my inflation protection.* But I cant do that and make enough income to meet a mortgage payment every month.
th,

Are you talking 80% bonds and 20% stocks? Just wondering?

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Re: pay off mortgage
Old 05-03-2005, 10:12 PM   #27
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Re: pay off mortgage

Yep, when i've seen someone talk about an xx/yy or xx:yy portfolio, my experience is that the xx is stocks and yy is bonds.

I guess the whole point is removing a huge debt load from your life should also trigger looking at your entire financial pciture. You no longer need a high level of monthly income, yet you also dont need to take large risks if you dont want to. Pick your pleasure...
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Re: pay off mortgage
Old 05-03-2005, 11:15 PM   #28
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Re: pay off mortgage

Alan Greenspan is continuing to raise rates, so if you are going to shoot for greater returns like SG says, you better be in the house you want and have locked in that low low rate. Otherwise, I think the window is closing. Isn't this a classic risk vs. reward continuum?
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Re: pay off mortgage
Old 05-04-2005, 01:28 AM   #29
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Re: pay off mortgage

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Originally Posted by laurencewill
Alan Greenspan is continuing to raise rates, so if you are going to shoot for greater returns like SG says, you better be in the house you want and have locked in that low low rate.* Otherwise, I think the window is closing.* Isn't this a classic risk vs. reward continuum?*
Yeah. That window is definately slamming shut. I figure I was pretty lucky to have bought my house when rates were near bottom.

I've given some thought to why I seem to think about mortgage decisions so differently from some of the others on this board. I think one of the reasons is based on how I learned about finances and loans. I never heard my parents ever talk about finances and mortgages. I never learned to have any anxiety about it. I never really had to think about investments and loans till I started working as an engineering manager and eventually as a Director. The first loan decisions I was ever involved in were in large corporatations. I can't imagine any of the executives talking about "gut" feelings or "sleeping well". Certainly, none of them would have suggested that we don't borrow money until every one of our ventures is earning more than the loan rate. No one ever suggested that a long term loan decision be based only on the current available bond rates. We used financial simulators. We evaluated best case up-side and worst case down-side potential. Then we made our decision based on the probabilities and our tolerance for the risks. I guess I just feel more comfortable looking at my mortgage in the same way.

When I put my situation into FIRECALC with my current loan situation and compare it to the FIRECALC simulation with mortgage payoff, I get a 100% historical probability of profiting from keeping my mortgage. On average, that profit amounts to just over $250,000 after 30 years. Of course that simulation does not account for either the tax advantages early in the mortgage or the additional taxes that might eventually result from needing to withdraw an extra $9000 per year, but $250,000 will pay a lot of taxes. I'm well aware of the fact that past performance is no guarantee of future results, but I like my odds.

Yet, I don't discount those who feel otherwise. My comfort with the simulations has no impact on the "gut" feel others get.
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Re: pay off mortgage
Old 05-04-2005, 05:55 AM   #30
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Re: pay off mortgage

To eloquently pontificate further, dividend - gooood; debt baaaaad.
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Re: pay off mortgage
Old 05-04-2005, 07:02 AM   #31
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Re: pay off mortgage

I was going to start a new topic because I had a nifty subject line.
However, SG has led me right into it, so I will post it here.

Before 1993 (and especially when interest was 100%
deductible), I was quite cavalier about borrowing. I would borrow
very casually. We were big spenders, could deduct the interest, and
had I had full confidence in my ability to "handle" any level of debt.
I borrowed for investment, cars, houses, or just because I wanted
to maintain our lifestyle. OPM (other people's money) was my
mantra. In fact, some of the biggest deals of my life were 100%
leveraged. Now.......... we have no debt.
(except those -0-% CC deals) and it just feels right.
Now, I know I could "prove" that we could borrow and make money
with it (I did it my whole life). However, the no-debt
psychology has held us back so far. I recall a conversation with
my brother. He told me he had a 4.75% fixed 15 year
mortgage. My first thought was "Man, I could do that, find a home
for the cash and make out easily with 15 years to work it".
Didn't though. "No debt" is a powerful force in ER.

JG
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Re: pay off mortgage
Old 05-04-2005, 07:11 AM   #32
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Re: pay off mortgage

Hello laurencewill. We are in the house (houses) we want
(or at least are comfortable with given our situation) and our interest
rate is -0- on both (no mortgages). Thus, assuming you are
correct, it would appear we are in good shape.

JG
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Re: pay off mortgage
Old 05-04-2005, 08:09 AM   #33
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Re: pay off mortgage

Quote:
Originally Posted by - SG
I've given some thought to why I seem to think about mortgage decisions so differently from some of the others on this board.* I think one of the reasons is based on how I learned about finances and loans.* *I never heard my parents ever talk about finances and mortgages.* I never learned to have any anxiety about it.*
Hmm...had a complete opposite experience...come to think of it, brothers (who grew up in the same household experience above) have the same approach. No debt before, why start now? It is good to be beholden to no one.

If everything went to very bad handbasket, 2nd Great Depression scenario, whole economy totally tanked... could hunker down in the home, grow food on the lawn, and enough savings to make the utilities and tax man happy for decades.

Plus, one great benefit is should you need to move for whatever reason, and find another house comparably priced or cheaper, you can pay cash for the property, which saves a TON on closing costs. Hmm..I don't think you can deduct closing costs.

If you're really nit-picking, then I would also have to calculate per hour worth (pretty good) times the hours it would take to shop for mortgage, applying, mailing mortgage payments, stamps, envelopes, making sure mortgage co doesn't mess up (have heard horror stories)...
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Re: pay off mortgage
Old 05-04-2005, 09:27 AM   #34
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Re: pay off mortgage

Quote:
Originally Posted by th
Yep, when i've seen someone talk about an xx/yy or xx:yy portfolio, my experience is that the xx is stocks and yy is bonds.

I guess the whole point is removing a huge debt load from your life should also trigger looking at your entire financial pciture.* You no longer need a high level of monthly income, yet you also dont need to take large risks if you dont want to.* Pick your pleasure...
I agree. With no debt I tend towards Vanguard Wellsley and find other things to do, besides constantly monitioring my portfolio. Just my take.

eleighj
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Re: pay off mortgage
Old 05-04-2005, 10:20 AM   #35
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Re: pay off mortgage

Hey JG, I'm hearing ya, and I hope to be in the same place someday!

SG, my undereducated opinion is your plan seems sound. I think you have a low risk of not coming out ahead, but the risk (however low) is with your home. It's like standing on the edge of a step stool vs. standing on the edge of the grand canyon. Your confidence in keeping your balance should logically be the same, the laws of physics didn't change. But you feel a lot safer on the step stool because you only have a 1/million chance of a bruised knee, not plummeting to your death (gross exaggeration disclaimer). If we had another major depression, we could see equity holding go down to 10% of their current value (like it did 1929-36ish). Every one of us who holds equities is betting it won't happen again, but you see my point. While I'm working and have a steady income stream, I see the risk vs. reward as favoring investments over paying off the mortgage. But when I'm retired, I see the risk vs. reward balance shifting towards paying it off since I'll be depending solely on my investments. You stare into the abyss unflinchingly, I blinked.
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Re: pay off mortgage
Old 05-04-2005, 10:53 AM   #36
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Re: pay off mortgage

I've posted this on other boards ... probably "fits" here too.

Brinker makes the mortgage-payoff-decision this way:

1. Deduct your tax benefit. For me, it's a 4.875% rate and a FIRE tax rate of 15%. So, the resulting cost of the mortgage is 4.14% (4.875 x .85).

2. Subtract inflation, since the future payments will be made with cheaper $$. 3% would be a good historical number. So the final cost of the $$ is 1.14% (4.14 - 3).

Most savings accounts pay better that 1.14%, heck treasurys are paying over 4%. Not much risk there.

As a side note, I'll pay my mortgage off when I get - and sell - my next vacancy ... for the psychological benefits. But I am in no hurry for the reasons above.

Enjoy!
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Re: pay off mortgage
Old 05-04-2005, 10:59 AM   #37
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Re: pay off mortgage

Quote:
Originally Posted by tryan
I've posted this on other boards ... probably "fits" here too.

Brinker makes the mortgage-payoff-decision this way:

1. Deduct your tax benefit. For me, it's a 4.875% rate and a FIRE tax rate of 15%. So, the resulting cost of the mortgage is 4.14% (4.875 x .85).

2. Subtract inflation, since the future payments will be made with cheaper $$. 3% would be a good historical number. So the final cost of the $$ is 1.14% (4.14 - 3).

Most savings accounts pay better that 1.14%, heck treasurys are paying over 4%. Not much risk there.

As a side note, I'll pay my mortgage off when I get - and sell - my next vacancy ... for the psychological benefits. But I am in no hurry for the reasons above.

Enjoy!
O.K., step one I am following you, in fact I think I've posted something similar. But step two I'm not following. Inflation effects all rates of return, not just mortgage payments, so a 2% savings account during 3% inflation is getting you -1% real rate of return. Is there something I'm missing?
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Re: pay off mortgage
Old 05-04-2005, 12:04 PM   #38
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Re: pay off mortgage

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Originally Posted by laurencewill
. . . I think you have a low risk of not coming out ahead, but the risk (however low) is with your home.* . . .
A lot of people say this. But for me the argument makes no sense. I can pay off my house tomorrow. If I did, I would be about $50,000 richer than I would have been had I paid if off 3.5 years ago. I'm not forced to lose my entire nest egg during a decline and be forced in the street. In fact, it seems to me that if things ever really got that bad, I might prefer to have cash than a house. Rent would be dirt cheap and money could buy food. Try to exchange your house for a tomatoe. But the historical simulator shows that even under Great Depression conditions, my approach would be more profitable than paying off my mortgage. That won't be true for everyone, but it works for my situation. It takes something worse than that to make this plan financially disadvantageous. And, keeping a low interest mortgage does a lot to help you under mid-60's retirement scenarios. FIRECALC details bring this out dramatically. A fixed mortgage during times of high inflation is very valuable.

It is no more work to me than I have to do anyway. I keep my allocations the same as I would otherwise keep them and I rebalance on the same schedule. I don't have to do anything extra to keep a mortgage except make the payment and take the tax deduction. The payment is an automatic withdrawal. I do have one extra form to enter into TurboTax.

But that's just me. A lot of people have a "gut" level attachment to their house. It doesn't bother me at all that the bank holds the title instead of me. They don't ever come over and try to use it or tell me how to paint it. It's just 4 walls and a place to store my stuff between excursions for me. The mortgage decision is just like other investment and fiancial decisions as far as I'm concerned. I look at the financial data I can find, balance the probabilities and risks, and make my decision. Apparently, that's not for everyone.
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Re: pay off mortgage
Old 05-04-2005, 12:25 PM   #39
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Re: pay off mortgage

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Is there something I'm missing?
I think Brinker is just trying to account for the fact that a mortgage is a hedge against inflation. If you foresee deflation then debt free is the way to go.

I think of it this way ... the last payment on a 30 year loan will be made with dollars which lost alot - almost all - buying power. The loan payments however are fixed (assuming a fixed rate). Reducing the loan "costs" by inflation is a way to account for this.

Enjoy!
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Re: pay off mortgage
Old 05-04-2005, 12:35 PM   #40
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Re: pay off mortgage

In the brinker example, he doesnt count the fact that an ER will have to possibly double their withdrawal amount to pay for the mortgage, and that increases your income taxes by that amount. I was able to stay just under the line to pay no tax.

I guess it bugs me that SG brings this back to it being all about some sort of psychological thing. Its absolutely not that at all in my case, the 'wow I have no debt' part is just a little icing on the cake. I get drawn into this discussion primarily to debunk this "keep your mortgage and make money, pay it if you're a scaredy-cat" approach.

Its a decision SG's made for himself, and he's structured it so it works for him. Thats great. However...he has to presume that stock gains during the time he's in the home exceed the mortgage cost. If he stays in the home for more than 15 years, thats probably going to happen. If he doesnt, the odds are 50/50. He also has to hope that the yields on the bonds he's holding eventually top the mortgage rate he's paying, otherwise he's making less on those than he's paying out on the mortgage. In other words, its not a slam-dunk that he's going to do better; there are a lot of "ifs".

I'm also skeptical about the above $50k in 3.5 years claim; I cant see any investments that would have produced a positive return of that level over that time period.

The last 5 years, equities have not turned out a rate strong enough to overcome ANY widely available mortgage cost, and bonds have paid less than mortgage rates as well. Statistically, about 55% of homeowners move within 5 years, 68% in 7 years, and 85% in 10 years. After moving, you get a new mortgage at the new prevailing rates, its a new calculation. (Side note: yes you can find 10 sets of numbers that are different from the ones I just put out, depending on who gathered them. The basic intent is the same; if you stay in your house long enough for the long term equity curve to move into a positive bias in the favor that you'll make money on them, you're an odd duck as far as length of stay in one home is concerned.)

You can do this three ways:

1 - Take a mortgage, keep your investment balance of stocks:bonds the same, commit to staying in the property for 15+ years, and by historical numbers, make money off the float. You'll have to pull more money from the portfolio to pay the mortgage, incurring capital gains. You'll get some benefit from the mortgage interest tax deduction, but by halfway through the mortgage that'll slide off and in the last 25% of it, you'll be paying for the withdrawal while getting little benefit tax-wise.

2 - Pay the mortgage, shift your investment balance from a traditional 50/50 or 60/40 to an 80/20. You dont have to stay in the home for any particular length of time. Over the same time period as #1, you will make even MORE money because of your higher equity to bond ratio even though your portfolio has been reduced by paying off the mortgage. You can totally take the volatility as you're not paying much out every month. Food and the regular bills. I can slash mine down to ~$10k a year and not feel like I'm suffering. You can make that kind of money working part time at any old job. I can make 10k a year mowing lawns, pet sitting, painting a few houses, selling a couple of cars or sitting behind the counter at the quick-e mart. If you have to come up with 45k+ a year to make your mortgage payments, you're back to your old cube farm job for the alleged forty hours a week. In this scenario, with a good set of deductions you'll probably little or no taxes, and since most of your withdrawals will be equity capital gains, you're capped at 15%. Get richer while taking on a fairly small risk with no catches. Still feeling like a scaredy-cat?

3 - Pay the mortgage, shift from a 50/50 or 60/40 to a 35/65 or 40/60. On portfolios in the $1M to $1.5M range you're pulling in $40-60k a year in dividends alone (Wellesley paying ~4%). Unless you're a big spender or big traveller, any couple can live comfortably on 40-60. With a good set of deductions you'll probably pay no taxes and what you do pay will be at the regular income rate of 15% or less. Funds like Wellesley have paid the ~4% dividend while also keeping pace with inflation. Enjoy your almost completely risk free life with no catches.

There you go. Not a damn thing to do with 'psychology' or 'fear'. Roll the dice in one case or pick a payoff scenario that will either make you more money than the gamble, or reduce your risk and still enjoy a comfortable retirement.

You can play with the calculators to make yourself feel more at-home with this, providing your mind is not already made up.

Run SG's example in firecalc. Confirm the results.

Now deduct that mortgage payoff amount from the total port size. Change the equity portion to 80%. Reduce the withdrawal by the annual mortgage payment amount. Do the run. Your average terminal portfolio size will be higher than SG's example and your allowable withdrawal rate and success percentage will go up. In fact, with this construction you can actually retire earlier with less money and still make it. Try it...reduce the portfolio size until you drop below 100%...in the examples I ran I could retire with well under a million and still hit a 99%+ success ratio. Wouldnt THAT suck? Retiring on less earlier and making more, without a mortgage?

Now do it again but change the ratio to 40% equities. You'll have a smaller average terminal size, but your success ratio will stay the same. If you look at the detail report, you'll see very little volatility from year to year, even during the worst of times. Sound sleeping.

Sounds like math, finances and science to me. No fear, no psychology.
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