Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Pay off mortgage to reduce annual income?
Old 03-01-2018, 02:25 PM   #1
Confused about dryer sheets
SoReadyToQuit's Avatar
 
Join Date: Mar 2018
Posts: 9
Pay off mortgage to reduce annual income?

I intended to keep paying a mortgage after retiring (LCOL, $600 per month principle/interest) but if I pay off the balance of $120K, I could reduce my annual retirement withdrawal by about $7K. I want to keep my income low for tax and healthcare subsidy purposes. Should I pay it off when I quit working? Hoping to retire in about 3 years. Never considered the income effect of withdrawing that extra cash and whether it will affect my health insurance cost under the ACA (if that still exists in 3 years.)
__________________

SoReadyToQuit is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-01-2018, 02:41 PM   #2
Thinks s/he gets paid by the post
38Chevy454's Avatar
 
Join Date: Sep 2013
Location: Cincinnati, OH
Posts: 2,256
There is no exactly right answer. Been debated on here a lot. It essentially comes down to your preference. Putting ACA into the mix might lean towards paying off, since that would give you $7K more potential withdrawal for living, instead of the $7K going directly to mortgage. But then you also give up any gains on that $120K over time. So you see the equation has many variables, the examples I mentioned are only two.
__________________

__________________
The advice we're giving you is invaluable, that's why it's free
Experience is a good teacher, but the tuition can get expensive real fast

Semi-Retired 7/1/16: working part-time (60%) for now [4/24/17 changed to 80%]
Retired Aug 2, 2017; age 53
38Chevy454 is offline   Reply With Quote
Old 03-01-2018, 02:51 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 23,427
What would you use to pay it off with? Taxable accounts? Or a big one-time withdrawal from tax-deferred accounts?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 03-01-2018, 03:01 PM   #4
Confused about dryer sheets
SoReadyToQuit's Avatar
 
Join Date: Mar 2018
Posts: 9
Planned to use taxable accounts. Currently I'm where I want to be in my retirement accounts, but not where i need to be on my taxable accounts (trying to get 5 year's of expenses saved in taxable.) I read today that without the subsidy, my insurance could be much higher per month...so I want avoid that. So of course, adding the payoff to my taxable target would tack on more working time..
SoReadyToQuit is offline   Reply With Quote
Old 03-01-2018, 03:36 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 23,427
If as a result of tax efficient placement you have equities in your taxable accounts like many of us do, in the long run your taxable account earnings will exceed what you pay in mortgage interest so you'll be ahead. Plus, if your are managing your income to be low for subsidies, your taxable account income from equities will be tax free or at worst, low tax (mine is a minor net tax benefit).

OTOH, a lot of people just prefer the peace of mind of not having a mortgage payment... but having a mortgage payment has never bothered me.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 03-01-2018, 03:42 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 8,581
It makes some sense, but there are a few ways to look at it. You can decide whether you want to get the biggest subsidy possible, or if just being on the right side of 400%FPL to get any subsidy is good enough. If the latter, maybe you don't have to pay off the mortgage.

Also, remember that $7000 taken from a taxable account isn't $7000 in income. If you are selling off some of your taxable assets, only the capital gains count toward your MAGI. You can probably sell specific shares of stocks or funds (unless you've already started selling some funds using average cost) to limit gains.

You might also want to take the time before retirement to make your taxable account tax efficient if possible. Index funds usually don't have capital gains distributions as some managed funds do, so you may want to shift to those.

Selling funds while you are working would presumably make more or all of the capital gains taxable, while in retirement with lower income they may not be. So you may want to look at that benefit vs. an ACA subsidy. Health insurance rates and subsidy amounts are very hard to predict but it may not be the huge deal you think it is.

You may also find that converting your 401K/tIRA to a Roth before you get hit with the tax torpedo when you start collecting social security and maybe a pension is a better deal too.

I'd run some simulated tax and subsidy scenarios for your case and try to get a better picture of where you stand. You really haven't given nearly enough information for anyone to give you good advice, and even with all the information it's not always clear.

One more thing, while you are still working, if you do pay off the mortgage you should think about getting a home equity line of credit, as an emergency fund. Once your retired and stop having regular income it will probably be harder to qualify.
RunningBum is offline   Reply With Quote
Old 03-01-2018, 03:51 PM   #7
Confused about dryer sheets
SoReadyToQuit's Avatar
 
Join Date: Mar 2018
Posts: 9
Great points! Thanks so much for all the great feedback!
SoReadyToQuit is offline   Reply With Quote
Old 03-01-2018, 05:29 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Posts: 1,471
Pay off housing was my strategy. Reduces income needed to live and lowers income for ACA purposes.
jim584672 is offline   Reply With Quote
Old 03-01-2018, 05:59 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jan 2013
Location: SoCal, SE Florida, Lausanne
Posts: 1,125
Quote:
Originally Posted by SoReadyToQuit View Post
I intended to keep paying a mortgage after retiring (LCOL, $600 per month principle/interest) but if I pay off the balance of $120K, I could reduce my annual retirement withdrawal by about $7K. I want to keep my income low for tax and healthcare subsidy purposes. Should I pay it off when I quit working? Hoping to retire in about 3 years. Never considered the income effect of withdrawing that extra cash and whether it will affect my health insurance cost under the ACA (if that still exists in 3 years.)
Carrying a mortgage into retirement is not a good idea. It's one less worry when you pay it off. Plus with tax reform, there is even less benefit. Here in California, mortgage balances are generally high. In our area it averages about $650K. I have seen many people who planned to work into their mid 70's but had to retire in their early 60's due to health issues or job termination and found themselves in a financial crisis.

We paid off ours 10 years before retirement. We bought our second home all cash at pennies on the dollar after the last financial crisis as an investment. My generous father-in-law gave us a third one with a free and clear title. He wanted to distribute some of his assets early so there wouldn't be any issues after.

But then again, I don't like the idea of borrowing money. I pay cash for large ticket items or I don't buy them.
Freedom56 is offline   Reply With Quote
Old 03-01-2018, 07:59 PM   #10
Thinks s/he gets paid by the post
gcgang's Avatar
 
Join Date: Sep 2012
Posts: 1,225
If you can't use the tax deduction of the mortgage, pay it off.
__________________
In theory, there's no difference between theory and practice. In practice, there is. YB
gcgang is offline   Reply With Quote
Pay off mortgage to reduce annual income?
Old 03-01-2018, 08:32 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Mulligan's Avatar
 
Join Date: May 2009
Posts: 8,261
Pay off mortgage to reduce annual income?

If I didnt have a sizable pension, I would pay mine off. But now that my 3.75% mortgage sits so low below market yield now, I will just pay minimum. Cheap money and at sub $500 who really cares. It is way down my list of monthly expenditures in terms of cost... Now if I could pay off my 11 years health insurance premiums before I hit Medicare, I would cut the check today!
Mulligan is offline   Reply With Quote
Old 03-01-2018, 09:03 PM   #12
Full time employment: Posting here.
USGrant1962's Avatar
 
Join Date: Dec 2016
Location: DC area
Posts: 984
At $600/month it is really a personal preference. I paid mine off because it was over $3K/mo, requiring a draw from my portfolio that would be a substantial fraction of ACA limits, 0% cap gain limits, and other horrible cliffs in the tax code

I learned fairly late in the ER game that tax diversification was very important. When you are working with all W-2 income plus a few dividends you don't have much control over your tax bracket, and no control of all the tax benefits available to middle/lower income folks. And later when you are taking SS and RMDs, that is all essentially ordinary income at the "normal" tax brackets.

So there is an ER window where you are Pre-SS/RMD and Post-W-2 where you actually have substantial control over your taxable income. That is where a mortgage pay-off may be very helpful.

Anyway, having maximum flexibility on your portfolio draws gives you maximum flexibility to accept the tax benefits that our wise politicians have bestowed upon us.

But it is a bit of a trade-off because you would pay off your mortgage with taxable funds (using tax deferred accounts would not make sense in most cases). Using a substantial fraction of those funds also decreases your tax diversification.
__________________
FI and Semi-ER March 24, 2017
Consulting to stay engaged

"All models are wrong, some are useful." - George Box
USGrant1962 is offline   Reply With Quote
Old 03-01-2018, 09:13 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 8,581
For those with limited taxable account money, keeping a mortgage makes a lot of sense to bridge until you can tap tax deferred accounts, SS, and pensions. Sure, your monthly expenses are higher but paying off the mortgage can drain your taxable account. The ACA subsidy issue can swing it the other way though.

I just can't see how anybody can come in and say "Do this or do that" based on so little information.
RunningBum is offline   Reply With Quote
Old 03-02-2018, 12:46 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
harley's Avatar
 
Join Date: May 2008
Location: Following the nice weather
Posts: 7,256
Quote:
Originally Posted by Freedom56 View Post
Carrying a mortgage into retirement is not a good idea. It's one less worry when you pay it off. Plus with tax reform, there is even less benefit. Here in California, mortgage balances are generally high. In our area it averages about $650K. I have seen many people who planned to work into their mid 70's but had to retire in their early 60's due to health issues or job termination and found themselves in a financial crisis.

We paid off ours 10 years before retirement. We bought our second home all cash at pennies on the dollar after the last financial crisis as an investment. My generous father-in-law gave us a third one with a free and clear title. He wanted to distribute some of his assets early so there wouldn't be any issues after.

But then again, I don't like the idea of borrowing money. I pay cash for large ticket items or I don't buy them.
Paying off a mortgage before retirement is not a good idea. You end up with a lot of money locked into a non-liquid investment. Plus with a low interest mortgage you can probably make more on the invested money than what you are paying in interest.

I buy everything I can on credit cards. I never pay interest or fees, and get tons of cash back from things like food, insurance, and doctor payments. The only things I pay cash for are things that charge a fee for using a CC.

Actually, I don't think any of these are a "bad" idea, one way or the other. I just get so tired of seeing people assuming that their way of thinking is the only one that is valid.
__________________
"Good judgment comes from experience. Experience comes from bad judgement." - Anonymous (not Will Rogers or Sam Clemens)
DW and I - FIREd at 50 (7/06), living off assets
harley is online now   Reply With Quote
Old 03-02-2018, 01:33 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Jan 2013
Location: SoCal, SE Florida, Lausanne
Posts: 1,125
Quote:
Originally Posted by harley View Post
Paying off a mortgage before retirement is not a good idea. You end up with a lot of money locked into a non-liquid investment. P
Don't assume that a home represents "a lot of money locked into a non-liquid investment" for everyone. It's all relative. We took a 15 year fixed mortgage and paid our home off in 8 years. My wife and I were both professionals and made very decent salaries and lived well below our means. We just don't like to being in debt. We were brought up that way by our parents. We pay cash for big ticket items like cars and save a lot of money exactly the same way our parents did it. We also use credit cards for small purchases, airline tickets, car rentals, and pay balances in full, never pay fees, get 1-5% cash back, and other perks. I can tell you that when shopping at many stores you can get far better discounts with cash than the 1-5% rebates you get with credit cards. Everyone has their own comfort level with debt. We just like living completely debt free.
Freedom56 is offline   Reply With Quote
Old 03-02-2018, 07:42 AM   #16
Recycles dryer sheets
 
Join Date: Sep 2007
Location: Chicago
Posts: 219
You might find it a bit easier to get good advice if you are comfortable providing a bit more information about your position. I'm in a similar position - I'll be retiring shortly at 39 with about $100k mortgage.

As some of the others have mentioned, for me the decision to keep the mortgage is largely based on low rate (<4%) and the tax structuring of my accounts. I'll be converting over significant sums each year from 401k/IRA to RothIRA, and will be using my taxable accounts for both living expenses and taxes due on conversions. By keeping my mortgage, I have $100k extra available to manage that process. 5 years in, when the conversions are considered aged-in contributions, I'll have much more flexibility, and may reconsider.

With potential increases in interest rates, I may well keep it for the remaining 18ish years, as I may not get a chance at a non-callable loan at these rates again, and if I rent my place out while travelling, I may be able to take advantage of the interest deductions down the road even if I'm not itemizing now.
seabourne is offline   Reply With Quote
Old 03-02-2018, 07:48 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
harley's Avatar
 
Join Date: May 2008
Location: Following the nice weather
Posts: 7,256
Quote:
Originally Posted by Freedom56 View Post
Don't assume that a home represents "a lot of money locked into a non-liquid investment" for everyone. It's all relative.
I don't. If you read my entire post all I was doing was reacting to the fact that you were assuming that a mortgage is a bad deal for everyone. It's all relative.
__________________
"Good judgment comes from experience. Experience comes from bad judgement." - Anonymous (not Will Rogers or Sam Clemens)
DW and I - FIREd at 50 (7/06), living off assets
harley is online now   Reply With Quote
Old 03-02-2018, 07:51 AM   #18
Thinks s/he gets paid by the post
SumDay's Avatar
 
Join Date: Aug 2012
Posts: 1,565
Quote:
If as a result of tax efficient placement you have equities in your taxable accounts like many of us do, in the long run your taxable account earnings will exceed what you pay in mortgage interest so you'll be ahead. Plus, if your are managing your income to be low for subsidies, your taxable account income from equities will be tax free or at worst, low tax (mine is a minor net tax benefit).
I was a big fan of going into retirement mortgage-free, but our financial planner ran the numbers for us and convinced us that leaving the money invested was far more beneficial. We're at 3.75% and payment is <$500, so we'll just keep plugging along. If a load of cash drops on us (I have some real estate that could sell soon) then I'd pay it off.
SumDay is offline   Reply With Quote
Old 03-02-2018, 08:10 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
harley's Avatar
 
Join Date: May 2008
Location: Following the nice weather
Posts: 7,256
Due to the changes in the tax plan I'll have to reconsider the value of carrying a mortgage. I haven't worked through the process yet (I haven't done this year's taxes, much less next year's), so I'm not sure whether we'll be itemizing or not. But I'm pretty sure I'll still keep the mortgage just based on the low rate vs. what I can make on it with my investments. In my case I used the money that was freed up by the mortgage to buy two rental properties 6 or 7 years ago. The return on the investment is far greater than the mortgage rate plus the original investment and ongoing costs. Plus at this point the value of the properties has risen at 6+% per year. I know that can change, but so far it's been a much better use of the money than having it locked into the equity of our house. And, since going forward our rental income will be tax free for 20% of it, it's an even better use of the money.

I can certainly understand the appeal of not having debt, although I don't consider savvy use of credit cards debt any more than I consider not paying my water bill each time I turn on my shower debt. But every time I run the numbers having a mortgage comes out as a winner financially. And since I can pay it off out of my after tax cash bucket at any time I choose, it's not worrisome debt, it's just another conscious use of a financial tool. YMMV.
__________________
"Good judgment comes from experience. Experience comes from bad judgement." - Anonymous (not Will Rogers or Sam Clemens)
DW and I - FIREd at 50 (7/06), living off assets
harley is online now   Reply With Quote
Old 03-02-2018, 08:41 AM   #20
Confused about dryer sheets
SoReadyToQuit's Avatar
 
Join Date: Mar 2018
Posts: 9
Just to provide more info, bought a house last year for $160K. Had the cash to buy it, but opted to invest my cash instead of paying for the house outright. So I put $30K down to avoid PMI insurance, and I have a 4.31% interest rate on a 30 year mortgage. I don't plan to stay in this house more than 2-4 years, and will then sell it or rent it out. In my FI budget, I have plugged in a similar cost per month for a permanent house (don't know if I will stay in this cheap rural area or not - so that amount is something I may have to adjust.) I had $830 per month in my FI planned spending per year for house pmt plus property taxes and insurance. Then I was reading the "Our Next Life" blog post about the difference in qualifying for ACA subsidies vs not qualifying, and it's a pretty big difference in premiums. That got me thinking that instead of having a mortgage pmt after FI Retirement, I should just buy a place and reduce my taxable income. I plan to start IRA conversions as soon as I retire, so that will be taxable income.

Depending on some job change possibilities, I will work at least 3-4 more years, then I will need to know for sure whether I try to pay cash for a place or not. Maybe by then I'll have more clarity around the insurance situation.
__________________

SoReadyToQuit is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Pay off or not to pay off? brownred FIRE and Money 16 03-13-2017 06:28 PM
Just paid off the mortgage. Putting the pay off the mortgage question to rest. FUEGO FIRE and Money 65 06-08-2015 06:08 PM
Pay Capital Gains Tax to Reduce Expense Ratio of Investment Portfolio nico08 FIRE and Money 6 02-09-2014 09:34 PM
What would you do - pay off student loan or pay down mortgage? bank5 FIRE and Money 27 07-27-2009 06:30 PM
Using HELOC to reduce interest payments and term of 30-year mortgage stephenandrew FIRE and Money 32 05-12-2008 06:46 PM

» Quick Links

 
All times are GMT -6. The time now is 11:07 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.
×