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Re: Pay off the Mortgage at Retirement???
Old 04-05-2007, 02:25 PM   #21
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by brewer12345
If you are actually fired and living off the portfolio, I think paying off the mortgage makes sense. Otherwise, nope.
This is my point.
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Re: Pay off the Mortgage at Retirement???
Old 04-05-2007, 02:27 PM   #22
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by Sam
At 4%, you are assuming a 30 or more years mortgage, which is not your case. At $750/mth, 6% interest, that 70K mortgage would be paid off in 10 years.
Good point. I essence, I am ignoring the fact that I will still have 225,000 after the mortgage is paid off. And your math is correct, I have about 10 years left on the note.
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Re: Pay off the Mortgage at Retirement???
Old 04-05-2007, 03:25 PM   #23
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Re: Pay off the Mortgage at Retirement???

Holding a mortgage when you have the money to pay it off is borrowing to invest. The question seems pretty simple, what does the interest rate need to be to make you conclude that the probable investment returns are sufficient to outweigh the risks occasioned by borrowing? Your borrow to invest comfort threshold is likely to go up as you approach the draw down years just like your bond allocation is likely to go up. Calculate what interest rate would convince you to take a straight, non-deductible loan. Compare that with the mortgage rate adjusted to account for your tax deduction (a little complicated since it changes over time). Does the adjusted rate reach your threshold? If so, keep the mortgage.

Personally, I was always comfortable leveraging mortgages during the accumulation years when there was a substantial horizon before I would need access to the invested funds. Now that I am ERd, I paid off the mortgage. I also carried 100% equities and have now diversified into bonds. I don't even know what my borrow threshold is at this point - but I know it has gone up a lot.

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Re: Pay off the Mortgage at Retirement???
Old 04-05-2007, 04:20 PM   #24
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Re: Pay off the Mortgage at Retirement???

When you apply the 4% rule to your mortgage consideration you are implicitly assuming a number of things. 1) that your mortgage has 30 years left on it. 2) that you are planning for absolute, worst in history, financial times over those next 30 years. 3) that your risk-reward profile does not change by owning a home rather than a mortgage.

The first assumption can be true if you just started on your mortgage, but probably isn't for most folks.

The second is an interesting point. Remember the 4% rule comes about by doing a worst case analysis. That seems like a pretty smart, conservative thing to do if you are trying to decide what minimum nest egg you might feel comfortable with. But it would lead to some pretty strange choices if you try to apply it to figure out how to invest. For example: if you look at worst case analysis and 30 year time frames as applied to investments, you might conclude that you should never own real estate or bonds of any kind. If you look at worst case analysis and 10 year time frames as applied to investments, you might conclude that you should never own real estate or stocks of any kind -- only US bonds.

The third assumption is important to people who really believe in asset allocation strategies. If your goal is to manage risk with acceptable reward, then every investment is different from a risk-reward perspective. A stock is a stock. A bond is a bond. A mortgage is a mortgage. And a house is a house. Don't confuse a house with a bond. They have very different risk-reward profiles. Choosing to hold a house instead of a mortgage brings different risks and offers different rewards. A house provides a hard asset but locks up money. If a neighborhood declines, you have your investments tied up in a dwindling asset. There is an opportunity cost associated with owning the house. A mortgage does not tie up current investment money so it can be directed in other investments and also protects against inflation risk, but requires regular payments and leaves the actual asset at somewhat greater risk. Each investor has to decide the balance that works for them.

Typically, investment planning involves looking at risk-reward profile and trying to manage risk with acceptable reward. A typical asset allocation will consist of some solid, low volatility risk bonds that might come with quite a bit of inflation risk; but the portfolio also has some potentially higher reward stocks that carry quite a bit of volatility risk. The whole portfolio might also include a mortgage or a house. Each of these provides distinct risks and distinct rewards to manage as a whole.
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Re: Pay off the Mortgage at Retirement???
Old 04-05-2007, 04:30 PM   #25
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Re: Pay off the Mortgage at Retirement???

Not to be redundant but... I guess I'm in the camp of - Would I borrow an amount of money equal to the outstanding balance to invest? I know on paper a case can be made for keeping the mortgage after RE but for me it's a reduced risk to get it out of the way if you can.
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Re: Pay off the Mortgage at Retirement???
Old 04-05-2007, 10:29 PM   #26
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by al_bundy
we still haven't broken the 2000 high on the SP500.
This is not true. The SP500 does not reflect dividends which have been paid. If you had remained invested and reinvested the dividends, you would be above the March 2000 level.
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 12:01 AM   #27
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Re: Pay off the Mortgage at Retirement???

When you are saving for FIRE, leverage can make sense because you don't need your savings to live.

When you are retired and living off savings, then leverage is bad. The reason is fairly simple and clear: Your SWR is determined mostly by how well your portfolio will survive a bad bear market right after retiring. The leverage of a mortgage always (yes always) reduces the survivability in a bear market right after retirement. So for me, it's completely clear that a mortgage reduces the safe withdrawal rate. If you are someone who can live on less than your SWR and want to take risks for possible gains then maybe it makes sense, just don't think it's helping your safety.

In short my opinion is that if you have streams of income like a pension, then a mortgage can be useful in retirement. If you are living off savings exclusively, spending around 4%, then a mortgage is playing with fire (not FIRE).
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 01:24 AM   #28
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by free4now
. . .When you are retired and living off savings, then leverage is bad. The reason is fairly simple and clear: Your SWR is determined mostly by how well your portfolio will survive a bad bear market right after retiring. The leverage of a mortgage always (yes always) reduces the survivability in a bear market right after retirement. . . .
This is not true. FIRECalc simulations confirm that holding a low interest, long-term mortgage increases portfolio survivability. The reason is easy to understand. After a bad bear market, a portfolio survives if it has enough dollars left to grow in the recovery that follows. The more portfolio left to grow, the greater the chance for survival. A mortgage holder will have more money left to grow since the starting portfolio was not reduced by a mortgage payoff.

You have to run your own specific numbers in FIRECalc, but historically, paying off a mortgage has often resulted in greater portfolio risk -- not less.
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 03:35 AM   #29
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Re: Pay off the Mortgage at Retirement???

I have asked myself the same question. I have a 5.25% loan with about 9 years left till payoff. We will ER in 4.5 years.

The balance on our loan will be about 40k at that time. That amount is such a small amount of our portfolio value that I do not think it matters. The question for us was whether or not to accelerate the loan payoff over the next several years.

For us it is a moot point. We are probably going to down-size the house. If we do so, we will payoff the balance of the loan from the proceeds of the sale.

The target house/lando/condo will be for less money. We will pay cash for the new place.
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 07:40 AM   #30
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Re: Pay off the Mortgage at Retirement???

Sqeee - I understand what you are saying. But the psychology of holding a mortgage in retirement is interesting. Does anyone know of a retiree who has chosen to pull cash out of a paid off home to invest? Theoretically, you could sit in your paid off house for 5-10 years after ER and if things looked good you could go out and take a mortgage to pull out equity and put it in the market. Or you could downsize but take out a 90% mortgage on the new place. Probably happened in late 1999, early 2000 but I don't know anyone doing it today.
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 10:06 AM   #31
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by donheff
Does anyone know of a retiree who has chosen to pull cash out of a paid off home to invest?
Very interesting point Don.

My house was paid off before ER mainly because we've been in the same house for 30+ years. But, when mortgage rates were very low, just before I RE'd, I could have taken out a mortgage and invested the money. This would have yielded the same results for me as holding an existing mortgage of the same amount and duration would have had for someone else. I never even considered beginning a new mortgage on my paid-off house so I'd have a loan balance, and offsetting additional investments, during retirement.

Perhaps there is a subjective difference between continuing to hold an existing mortgage and going out and obtaining a new mortgage? But objectively, the numbers would say there is no difference, everything else being equal.

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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 11:35 AM   #32
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by donheff
Does anyone know of a retiree who has chosen to pull cash out of a paid off home to invest?
When I refinance in 03, I decided it was a good time to put more into the market. I took an additional $30K morage out of the house.

The $30K invested in 03 now worth $27K more (good market timing). Taxes on the additional money borrowed is less the $5K (with a tax benefit of more than $1K).

This worked well for me, but most people warn against borrowing too much against the house. In my case, it was a small (percentage) gamble.
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 12:06 PM   #33
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by donheff
Does anyone know of a retiree who has chosen to pull cash out of a paid off home to invest?
As a matter of fact I do: "Covering a mortgage without losing your ass(ets)".

Just updated it for the 30 March distibution. Up 45% since Oct 04 inception after taxes, roughly 16% APY with reinvested dividends. I'll be 74 years old by the time this is paid off, but I've noticed that NFCU now offers a 40-year loan...
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 12:24 PM   #34
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by donheff
Sqeee - I understand what you are saying. But the psychology of holding a mortgage in retirement is interesting. Does anyone know of a retiree who has chosen to pull cash out of a paid off home to invest? Theoretically, you could sit in your paid off house for 5-10 years after ER and if things looked good you could go out and take a mortgage to pull out equity and put it in the market. Or you could downsize but take out a 90% mortgage on the new place. Probably happened in late 1999, early 2000 but I don't know anyone doing it today.
The psychology question is really just a question of risk tolerance. Each individual investor has their own unique risk tolerance and there is not right answer to what is the "best" risk tolerance. We have had one or two posters in the past indicate that they did choose to pull cash out of a paid off house for investment reasons. That clearly seems extreme to many people. I personally have not done that, but 6 years ago (3 years prior to retirement) when I moved into my "retirement home", I looked at the mortgage rates, ran a lot of simulations and chose to assume a mortgage rather than buy the house outright. That has been a very good financial decision so far and I am comfortable with risk that comes with that mortgage. In fact, I think I would be less comfortable with the risk of owning the house outright. A lot of investors seem to ignore the fact that home ownership is not without risk.

The point I always try to make in these "pay off the mortgage debates" is simply that there is no one right answer. Whether you are talking about optimizing return, optimizing SWR, or optimizing risk . . . each specific situation will yield different results. Anyone who claims "it is always better financialy to do X", or "risk is always reduced by doing y", or "SWR will always improve by doing z" , is not correct.

Furthermore, even if you analyze your specific situation and find that for you, the optimum financial decision is X . . . if you don't feel comfortable with X then it's the wrong decision. We do this kind of thing all the time with our investments. Anyone who spends time looking at historical returns data knows that for 25 year or longer horizons an investor would have historically been better off with a 100% stock portfolio -- no bonds. Some small minority of investors actually are comfortable in this knowledge and go 100% stock. But most - even those with 30+ year horizons and a clear understanding of the historical record - decide to eliminate some volatility and invest in some bonds.

When investors choose to buy bonds for personal volatility risk tolerance reasons, they usually say so without trying to claim that it is the only reasonable financial decision anyone could ever make. But for some reason, when the debate turns to mortgage payoff, a large number of investors seem to feel that they have to rationalize the decision they made to be the "best" and "only reasonable" financial decision.
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 03:20 PM   #35
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by bbuzzard
My point here, and I think it may be new, is that if a 4% SWR is the right SWR, then paying off the mortgage makes sense. It gives you more spending money, by a significant margin.
Oh boy.

CFB has tried to make this SWR / cash flow point a few times before. I'm sure he's chomping at the bit right now.

I'll just point you to one of the discussions:

link
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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 09:12 PM   #36
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Re: Pay off the Mortgage at Retirement???

Another point to consider is that the $750/mo is $9,000 more a year you need to live on. Now if this amount comes from a deferred plan, IRA, 401K, you will pay taxes on it.

If you are collecting SS this extra 9K COULD cause more of your SS to be taxed. The limit for "other" income for SS taxation is 25K single and 32K married I believe. After those points more and more of your SS is taxed. So not having that 9K mortgage payment could save you substantial $$ on your taxes once you start SS.

Add to that strategic use of a ROTH IRA and you can dodge/delay even more taxes.

Each person has to do the numbers to see the impact for their situation.


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Re: Pay off the Mortgage at Retirement???
Old 04-06-2007, 11:46 PM   #37
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by Bikerdude
Another point to consider is that the $750/mo is $9,000 more a year you need to live on. Now if this amount comes from a deferred plan, IRA, 401K, you will pay taxes on it.

If you are collecting SS this extra 9K COULD cause more of your SS to be taxed. The limit for "other" income for SS taxation is 25K single and 32K married I believe. After those points more and more of your SS is taxed. So not having that 9K mortgage payment could save you substantial $$ on your taxes once you start SS.

Add to that strategic use of a ROTH IRA and you can dodge/delay even more taxes.

Each person has to do the numbers to see the impact for their situation.


While this is a theoretical possibility, I have never met anyone whose tax situation was actually affected adversely because they kept their mortgage in retirement. Depending on your personal situation, the tax advantages of holding a mortgage can be real.

Like you say, every person needs to check the numbers for their situation.
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Re: Pay off the Mortgage at Retirement???
Old 04-07-2007, 02:53 PM   #38
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by free4now
The leverage of a mortgage always (yes always) reduces the survivability in a bear market right after retirement.
Quote:
Originally Posted by sgeeeee
This is not true. FIRECalc simulations confirm that holding a low interest, long-term mortgage increases portfolio survivability. The reason is easy to understand. After a bad bear market, a portfolio survives if it has enough dollars left to grow in the recovery that follows. The more portfolio left to grow, the greater the chance for survival.
I maintain that someone who takes a mortgage out and invests the proceeds at least partially in the stock market will end up worse off while living off their savings in a down market.

Of course I agree that the leverage will help them when the market turns around and starts going up, but by then the damage of the down market has been done.

I simulated a mortgage in FIRECalc and it made survivability worse. I started from the default values in Standard FIREcalc, and assumed a $100k loan, 6.25% interest only for 30 years, meaning payments of $520/mo, or 6240/year. To simulate the mortgage in FIREcalc I increased the spending from $30k/yr to $36,240/yr, and increased the assets invested from 750k to 850k.

Simulating the mortgage this way in FIRECalc dropped the success rate from 94.3% to 91.5%.

sgeeeee, if you have an example of how a mortgage can increase the FIREcalc success rate I would like to see it. It would have to be for someone with no income streams besides interest from savings invested mostly in equities, since I agree that mortgages can help if there are income streams in place.
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Re: Pay off the Mortgage at Retirement???
Old 04-07-2007, 03:13 PM   #39
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Re: Pay off the Mortgage at Retirement???

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Originally Posted by sgeeeee
When you apply the 4% rule to your mortgage consideration you are implicitly assuming a number of things.
geez you know what? I started reading this thread and thought "Isnt it nice that SG and I can sit back and not need to participate in these mortgage threads anymore?"

Guess not.

Do some thread searches. I've quite specifically outlined how you can retire earlier, make and spend more money in retirement without a mortgage.

The secret is, as usual, in not compartmentalizing the decision or trying to place unnecessary value judgments on some aspect of the decision in order to color it towards the outcome you desire.

Got a 4% mortgage? Keep it. Early in your accumulation phase with a high tax burden that the interest deduction helps? Keep it.

Otherwise you're creating a set of problems and then desperately trying to resolve them by keeping a mortgage.

You have a smaller withdrawal rate without one, you can keep a higher equity percentage in your portfolio because you can handle the volatility better, your tax load is smaller due to the lower withdrawal rate, and you can ALWAYS take a mortgage or tap into home equity whenever you want to.

Except for rare instances, there arent many good cases for keeping a mortgage, especially in retirement.

Which is why most people dont.
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Re: Pay off the Mortgage at Retirement???
Old 04-07-2007, 03:43 PM   #40
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by free4now
I simulated a mortgage in FIRECalc and it made survivability worse. I started from the default values in Standard FIREcalc, and assumed a $100k loan, 6.25% interest only for 30 years, meaning payments of $520/mo, or 6240/year. To simulate the mortgage in FIREcalc I increased the spending from $30k/yr to $36,240/yr, and increased the assets invested from 750k to 850k.

Simulating the mortgage this way in FIRECalc dropped the success rate from 94.3% to 91.5%.
Even though I agree with paying off your mortgage when/before you retire, when you use FIRECalc to look at this problem you need to use the Advanced version and put the mortgage in as a non-inflation adjusted increase to your withdrawal of $6240/yr. When you do this the success rate for the having a mortgage example is 96.2% instead of the 94.3% success without a mortgage.
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