pay off the house or no?

[twaddle]

The latest version of FIREcalc has a "leave some money in my portfolio" option on the "investigate" tab. You can set whatever threshold for failure you like.

 

[ERD50]

The latest version of FIREcalc has a "leave some money in my portfolio" option on the "investigate" tab. You can set whatever threshold for failure you like.

Yep, that is the scary part. Not so much the concern of what you (your heirs/charities actually) would end up with, but what you would see on your NW statement along the way.

-ERD50

 

[haha]

Yep, that is the scary part. Not so much the concern of what you (your heirs/charities actually) would end up with, but what you would see on your NW statement along the way.
-ERD50

That is how I see it, ERD50. I've been living from a portfolio for a long time. I know at least some of the mental pitfalls. It's like a sports bettor who works out an historical data-tested method for betting say college football. He tests it on data outside his discovery range; he knows the games are not correlated. Still, if he loses 10 straight bets at $1000 each, unless is very rich he pulls back. He thinks something has changed that throws his method into question. This could be just a statistically expected variance, or it could be that the linesmakers have changed the way they operate.

Investing is even worse. We know that all these things are correlated in various and shifting ways. Or if we don't know that we should. So when we are irrevocably retired we can get spooked by serious drawdowns. Almost all of us are following a total return strategy, rather than a current income strategy, so it is highly sensitive to assumptions about returns and paths.

This is not and will not ever be a popular idea on a retirement board, and it may be one that no one will ever have to confront. But conceptually it is a certainty that eventually even the PPT will f-up and we will experience an out of range event.

Here is one earlier thread- I believe there is at least one other dealing more particurly with FireCalc.

http://www.early-retirement.org/forums/f28/worst-draw-down-15925.html

Ha

 

[cute fuzzy bunny]

This is one of the reasons why I favor minimizing the cost side of the equation, even if it involves reducing the portfolio size. By making as large a % of your spending into discretionary line items, and assuring you could squeak by a couple of years (at least) on dividends, it makes the sickening drops a little more palatable.

The two bucket (or more) strategy also helps. Having your more volatile investments in a bucket you wont be sipping from for at least 15 years makes what happens to those investments seem a little more distant.

 

[megacorp-firee]

When one has tasted it, he knows what the angels eat.

CFB, what is your quote in reference to please. ty.

 

[ERD50]

I've been doing some FireCalc runs, and looking at that 'minimum' number that pops up. When I get it organized, I'll start a thread on that with some test cases, ....
-ERD50

By this do you mean the nadir reached on any non-failing trip?

I posted on this about three years ago; there was zero interest.

Here is one earlier thread- I believe there is at least one other dealing more particularly with FireCalc.

http://www.early-retirement.org/forums/f28/worst-draw-down-15925.html

Ha

OK, to avoid crossing this subject with this current thread, I started a new thread on the 'Dips in FireCalc' observation:

http://www.early-retirement.org/for...net-worth-anyone-scared-32866.html#post606756

-ERD50

 

[chinaco]

IMHO - Pay down the mortgage. But make sure you have an emergency fund before you pay it down. People get caught in cash crunches by unexpected expenses.

 

[W2R]

IMHO - Pay down the mortgage. But make sure you have an emergency fund before you pay it down. People get caught in cash crunches by unexpected expenses.

Good point. Katrina taught me that a $1,000 emergency fund, even if only that small for a few days, is not enough and I should have kept $5,000. Thank goodness Frank helped me out during those difficult days.

 

[megacorp-firee]

Good point. Katrina taught me that a $1,000 emergency fund, even if only that small for a few days, is not enough and I should have kept $5,000. Thank goodness Frank helped me out during those difficult days.

believe it or not, I am a card carrying risk taker ... but now that I am FIREd, I think that a $5K buffer may be a little smallish, unless you are living on $20K a year. IMO one should have at least 3 -4 months (or maybe 6 if you are really risk adverse) of living minimal expenses as an emergency fund.

 

[REWahoo]

believe it or not, I am a card carrying risk taker ... but now that I am FIREd, I think that a $5K buffer may be a little smallish, unless you are living on $20K a year. IMO one should have at least 3 -4 months (or maybe 6 if you are really risk adverse) of living minimal expenses as an emergency fund.

If you have a few years living expenses in MMkt, CD's, etc. as many of us FIREd profess to have, I think that would more than cover the need for an emergency fund.

 

[Spanky]

believe it or not, I am a card carrying risk taker ... but now that I am FIREd, I think that a $5K buffer may be a little smallish, unless you are living on $20K a year. IMO one should have at least 3 -4 months (or maybe 6 if you are really risk adverse) of living minimal expenses as an emergency fund.

Up to 6 months worth should suffice. However, I am sure that someone will argue that this is insufficient to protect against unexpected expenses, e.g., medical bills, or catastrophic events, e.g, hit by a truck.

 

[megacorp-firee]

If you have a few years living expenses in MMkt, CD's, etc. as many of us FIREd profess to have, I think that would more than cover the need for an emergency fund.

Agreed, and I do (have a 5 year bucket)
... I was responding to W2R's post on increasing an emergency fund while (I think in her case) still PRE-FIRE (i.e. w*rking).

 

[W2R]

Agreed, and I do (have a 5 year bucket)
... I was responding to W2R's post on increasing an emergency fund while (I think in her case) still PRE-FIRE (i.e. w*rking).

I agree with you - - at the time, a $5000 emergency fund would have easily covered 4-5 months expenses. I was and am still in the accumulation phase. My federal job comes with pretty decent job security and a paycheck equal to several times my expenses. However, Katrina damage and evacuation expenses were not cheap, and I was pretty concerned for a few days until I officially heard that my paychecks would continue uninterrupted, even though I could only work remotely at best.

Now, since I am slowly beginning to receive partial distributions from my mother's estate, I have considerably more in my emergency fund. In ER, I will have several years' expenses in that fund as well. How many years' worth of expenses depends on whether I'm comparing with bare bones, LBYM, or 4% of my portfolio, or what. But with a paid off house, and a balanced portfolio with a somewhat conservative AA, and no need for more than maybe 1% SWR if push comes to shove, I can earmark plenty as an emergency fund. I will probably have 2 years' worth of LBYM expenses in a separate emergency fund account, but could easily supplement it, KWIM?

 

[cute fuzzy bunny]

CFB, what is your quote in reference to please. ty.

Watermelon.

 

[megacorp-firee]

Watermelon.

LOL a man of simple (but good) tastes.

 

[W2R]

Watermelon.

I was SURE it referred to a good seafood gumbo or shrimp creole. Oh, well. Those angels need some education.

 

[HFWR]

Watermelon.

I was thinking "bacon"...

 

[cute fuzzy bunny]

Well, I'd have said bacon, but I dont have the world renown that Twain has.

 

[mathjak107]

I was thinking "bacon"...

didnt he write hamlet?

 

[cute fuzzy bunny]

Perhaps. Among others.

 

[twaddle]

IMHO - Pay down the mortgage. But make sure you have an emergency fund before you pay it down. People get caught in cash crunches by unexpected expenses.

My mortgage (HELOC) is my emergency fund.

 

[megacorp-firee]

I was thinking "bacon"...

mmmmmmm ... fatty pig meat ... I LOVE BACON.
you guys have helped me immensely with advice, knowledge, and overall moral financial support.
... but you're really scr*wing up the diet portion of my brain.

 

[clifp]

So, there are many ways to play this game:

1) Play the odds, like Nords.
2) Play it safe, and find a risk-free return higher than your mortgage rate.
3) Play it safe, and pay down your mortgage.

Of course, there are a bunch of hybrids, too. For example, clifp indicated he would probably buy high-yield financials with his proceeds. That puts the principal at risk, but he has an excellent chance of sustaining a yield that will be sufficient to cover the interest on his loan.

In general, the larger your nest egg, the less you need to worry about matching specific liabilities to specific investment assets.

Nice analysis Twaddle.

Interestingly enough now that I actually have the cash (it arrived last Thursday). I have decide to keep 1 year loan payments in a money market, I am losing about 60 BP 4.99 for the loan vs 4.4% for MM for the $12K I am keeping in reserve. Last week I bought just over $50K of stock with dividends of ~$4K. I think I'll be able to get close to ~$3K more income.

 

[thefed]

I always felt that inflation was my friend when considering a mortgage. It sure will be easier to come up with the $1000 in 30 yrs than today....no?

 

[cute fuzzy bunny]

Definitely your friend when you're working and making a wage adjusted income.

If you're taking money out of the mortgage to invest, inflation becomes a zero factor.

Because every dollar in your investment portfolio is devalued at the same inflation rate as the mortgage money.