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Re: Pay off the Mortgage at Retirement???
Old 04-09-2007, 12:31 PM   #61
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Re: Pay off the Mortgage at Retirement???

I don't think a paid off mortgage is the "central issue", it's the time it takes a person to pay it off and the trade off of that time, which is the central issue.

Most posts here looked at rates of return/ and whether it's a god idea to have the mortgage paid off for early retirement... there is also "regular" retirement and "late" retirement which have different time variables.

If a person can pay off their mortgage and be FI, then that is best case scenario.

If a person has time, and realizes they need to make decisions which will "reap" benefits in 20-30 years, then the time to execute given plan is the most important variable.

For example, if extra payments on mortgage pay it off in 26 years instead of 30. But same "extra payment" if invested would be 3-5 years of income for ER, then the trade off is

either "debt free" in 26 years
or
ER in 30 years.

4 years is the cost (4 extra years of debt, but a larger pool of "savings" to draw from in ER.

If trade off is "debt free" in 15 years or ER in 30 years, then the situation changes, because in years 16-30 of being debt free allows one to save a significant amount and probably come out ahead.

I just described my situation in terms of time... I can eliminate most debt in 15 years (2nd mortgage paid off) with 1st mortgage left. To hit that 15 year mark with only 1 loan/debt (1st mortgage) is a major milestone, IMO.
However the time/effort/resource to pay off the 1st could cost me ER, because the savings which would be created from investing could be the difference between FIRE and FIRO (retire on time at 67 bs early at 55 or 60).
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Re: Pay off the Mortgage at Retirement???
Old 04-09-2007, 03:58 PM   #62
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Re: Pay off the Mortgage at Retirement???

I tend to look at this theoretically. Let's say your mortgage rate is 6%. If you can earn more than 6% elsewhere, keep the mortgage. It's not that simple of course because you have the tax deductibility, but that's the general idea. In addition, if you have ALREADY paid off your mortgage and are thinking of taking out a new one to get the tax benefit, be sure to figure in all the closing costs you'll have to pay the bank.

For me it's more about safety. In other words, to get more than a typical mortgage rate, you'd have to be invested in the market...and many of us (depending on age and risk tolerance) don't want to be too heavily in the market in our older years...too much volatility for some.

I'm not saying to get completely out of the market....just saying there is a balance...and as we get older we tend to shift out slowly.

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Re: Pay off the Mortgage at Retirement???
Old 04-09-2007, 10:55 PM   #63
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Re: Pay off the Mortgage at Retirement???

If there were a risk free way to earn more than mortgage rates, then the mortgage underwriters would be investing in that rather than loaning their money to yahoos who want to buy homes.

Sometimes the timing makes it seem like you can earn more, e.g. today my mortgage is at 3.75% because I took it out when rates were low, and I do indeed get about 5% in interest on my savings account. In this case the only thing that allowed me to be in this enviable position is having gotten lucky by originating the mortgage during a dip in rates... it's not anything I could duplicate or would want to spend money trying to duplicate in the future.

There is one thing that can make the mortgage a useful tool for some investors with very long time horizons: The interest rate is determined by the fact that most people pay them off in 5-7 years, so it tracks that part of the yield curve. But a fixed rate stays the same for 30 years. So essentially a mortgage is the purchase of an option on that rate for 30 years, contingent on your staying put. If you know (not just hope or wish) that you will be in the same place for 30 years for some unique reason, then there is a chance that you can take advantage of that option.
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Re: Pay off the Mortgage at Retirement???
Old 04-10-2007, 01:51 PM   #64
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Re: Pay off the Mortgage at Retirement???

Taxes really made the difference to me. Higher income and taxes, vs low income and low taxes. Mortgage rates are also based on tax deductibility and if you are in a position they are no longer deductible, they can be very expensive.
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Re: Pay off the Mortgage at Retirement???
Old 04-11-2007, 05:44 PM   #65
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Re: Pay off the Mortgage at Retirement???

It has nothing to do with "the house being at risk".

It has EVERYTHING to do with the planning and asset allocation you have to fit yourself to in order to assure making the payments, the higher withdrawal rates, the limited asset choices and the negative tax implications of a mortgage.

With a mortgage, i'd be uncomfortable with a high equity percentage in my portfolio. I'd have a higher withdrawal rate and need more income producing components, which means I could kiss my 5% capital gains and qualified dividend rates goodbye. I'd probably want to keep a larger cash buffer.

Wow, a lot of problems created to try and arb out a percent or two. Although statistically it might work out in 30-40 year spreads, why go through all that angst?

For you firecalc modelers, try out the calc using a regular 60/40 with a mortgage and using 80/20 without one. You can certainly take the higher volatility and if its your bag, the 30-40 year higher return rates on the 80% equity portfolio.

Yep, with that 80/20 no mortgage model, you can retire earlier, with less money, a higher level of spending cash, higher survival rate, and so on.

But if you wanna wait longer, have less money, and a lower rate of survival...but maybe arb out a few grand over several decades...keep the mortgage.

This has nothing to do with fear, emotions, or a lack of vulcanlike approaches to investing. You simply have to look at your WHOLE investing picture.

"I dont have a quarter million of debt and I dont need the 20k a year in income I used to require. What would I do differently?"
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Re: Pay off the Mortgage at Retirement???
Old 04-11-2007, 06:37 PM   #66
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Re: Pay off the Mortgage at Retirement???

I'm in the payed-off mortgage camp, for what that's worth.

I always wondered if the keep-the-mortgage crowd also believe in financing all vehicle purchases to the largest amount possible, if the rate is reasonable.

If you believe in keeping a mortgage so you can invest your money, wouldn't you logically extend that philosophy to *any* financial purchase that you could finance instead?

I hate to add a post to the payoff-mortgage debates. Guess I did anyway though

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Re: Pay off the Mortgage at Retirement???
Old 04-11-2007, 06:45 PM   #67
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by runchman
I always wondered if the keep-the-mortgage crowd also believe in financing all vehicle purchases to the largest amount possible, if the rate is reasonable.
Yes, to the extent that the seller of the used vehicle is willing to let themselves be exploited in this manner. The beauty of a 30-year mortgage is that it beats the worst of the historic stock market's losses. I haven't found a Craigslist seller willing to take back 30 years of paper on their clunker fine used vehicle, but maybe I should keep asking them...

I think we save more by buying used vehicles than by trying to arb the financing on a new vehicle.

Quote:
Originally Posted by runchman
If you believe in keeping a mortgage so you can invest your money, wouldn't you logically extend that philosophy to *any* financial purchase that you could finance instead?
Yeah, but I just don't make that many major purchases. I thought I was doing pretty well getting 1.5% back on my credit card for buying $7000 of blemished photovoltaic solar panels... they wouldn't loan me the money, either!

But your point is well made. We refinanced our mortgage four times to get it down to its current low low rate (all refinancings were paid back within a year through minimal closing costs and lower monthly payments). I did recently break a NFCU five-year CD at 5% in favor of a PenFed three-year CD at 6.25%. The early-redemption penalty was way less than the profit.
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Re: Pay off the Mortgage at Retirement???
Old 04-11-2007, 07:00 PM   #68
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Re: Pay off the Mortgage at Retirement???

I still carry a 40K mortgage at 4% ARM, expiring next year. I could have paid it off any time I wanted to in the past 4 years. But no way!!! In the past 4 years, the average return in equity is 2 to 3 times 4%.

Why treat the house mortgage differently?
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Re: Pay off the Mortgage at Retirement???
Old 04-11-2007, 07:28 PM   #69
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by Cute Fuzzy Bunny
. . .For you firecalc modelers, try out the calc using a regular 60/40 with a mortgage and using 80/20 without one. You can certainly take the higher volatility and if its your bag, the 30-40 year higher return rates on the 80% equity portfolio.. . .
That's how I ran the simulations I posted here a few years ago. I never ran a simulation with a higher than 60/40 stock/bond ratio. I did run the simulations to consider a shift in the portfolio to keep a constant ratio of stock/(bond + mortgage). I personally don't think that is a reasonable thing to do, but I ran the simulation because you brought up this belief you have that a mortgage is the same as a bond. I also ran simulations that considered 100% of the $$s used to pay the mortgage to be taxable.

No matter how you look at it, there are mortgage rate-mortgage periods-portfolio combinations that have historically favored keeping your mortgage. This is simply a hisrorical fact. That's all FIRECalc can do, simulate what would have happened.
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Re: Pay off the Mortgage at Retirement???
Old 04-11-2007, 08:10 PM   #70
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Re: Pay off the Mortgage at Retirement???

Have you guys ever looked at what would happen to your early retirement if you couldnt make 5% on your money over the years.
I still think that anyone that argues its better to pay off the mortgage is being emotional and not logical.
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 12:34 AM   #71
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by spideyrdpd
Have you guys ever looked at what would happen to your early retirement if you couldnt make 5% on your money over the years.
I still think that anyone that argues its better to pay off the mortgage is being emotional and not logical.
I disagree.

if I can't make 5%, then my rate of return is lower than I'd like. if my rate of return is lower, then I need a bigger stash (my SWD is less). If I have a mortgage, I have higher expenses so I need an even bigger stash to go with my lower SWD. So the less I can make on my money, the less desirable a mortgage is.

If I have reasons why the tax benefits are not usable (like living in Canada where it's not deductable, or having the standard deductable being nearly as much as the interest), then it is even less 'logical' to carry a mortgage.
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 05:44 AM   #72
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Re: Pay off the Mortgage at Retirement???

The reason this can be debated so long is because it is a marginal play either way - if you are comparing "like risk" alternatives.

The decision should be comparing "like risk" alternatives on an after tax basis.

For me in "AMT land", there basically no deductibility of mortgage interest. So a 6% mortgage costs me 6% after tax. So I would need 8.57% "like risk" pretax return - to get me 6% after tax (assuming 30% total taxes).

I can't get that return for comparable risk to house (hell, equities might not return that the next few years....).

So I have no mortgage (like the "emotional feeling" too...)

Once retired (and not in AMT situation), there could be a small "carry trade" play in having a mortgage. Pay 6% for money, 4% after tax cost for that money. if you can beat 5.7% for a "like risk" pretax return - then there's a small spread to make a buck.

So the Penfed 6.25% CDs a few months back would give a 1/2% spread over mortgage money -- which is about $500 / year for every $100,000 of mortgage.

You can compare to equity returns for greater spread - but that involves assuming greater risk - and is not an "apples to apples" comparison to home mortgage risk.

Not a big deal either way.
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 07:23 AM   #73
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by spideyrdpd
Have you guys ever looked at what would happen to your early retirement if you couldnt make 5% on your money over the years.
I still think that anyone that argues its better to pay off the mortgage is being emotional and not logical.
in the last 100 years there has been more than one 20 year stretch where the market returns less than 5% a year on average with some years being double digit negatives. in the 30 year period off 1965 to 1995 the Dow went from 1000 to 4000. too lazy for math, but that is not exactly stellar returns.

paying your mortgage off is completely risk free since after you do so you get to live in the home for just the cost of taxes and utilities. taking out a mortgage to invest can involve a lot more risk
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 09:37 AM   #74
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by Delawaredave

So the Penfed 6.25% CDs a few months back would give a 1/2% spread over mortgage money -- which is about $500 / year for every $100,000 of mortgage.
So call it $1250 per year for the 250k I'd hypothetically pull out of my house if it were paid off.

I'll trade that extra $104 per month investment gain for the sleep-easy feel of the paid off mortgage any day. Sure that 250k might grow to a nice tidy sum, but then again it might drop.

Risk/reward ratio just doesn't cut it for me.

- John
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 09:46 AM   #75
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Re: Pay off the Mortgage at Retirement???

This has probably been discussed, but just about all of my retirement money is in tax deferred accounts. I haven't run the figures exactly but my thinking has been that taking out money from those accounts to pay off the mortage would not be a good idea. Taking out large sums would make the tax due immediately on that money, at a higher tax bracket, and would lose me the tax deduction from the mortgage. Anyone disagree?
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 07:20 PM   #76
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by sgeeeee
That's how I ran the simulations I posted here a few years ago. I never ran a simulation with a higher than 60/40 stock/bond ratio. I did run the simulations to consider a shift in the portfolio to keep a constant ratio of stock/(bond + mortgage). I personally don't think that is a reasonable thing to do, but I ran the simulation because you brought up this belief you have that a mortgage is the same as a bond. I also ran simulations that considered 100% of the $$s used to pay the mortgage to be taxable.

No matter how you look at it, there are mortgage rate-mortgage periods-portfolio combinations that have historically favored keeping your mortgage. This is simply a hisrorical fact. That's all FIRECalc can do, simulate what would have happened.
Of course there are scenarios that work. And I have never, ever, ever, ever said a mortgage is the same as a bond.

I said a lack of a mortgage can perform the same FUNCTION that bond holdings do.

One holds bonds to reduce volatility and increase income...primarily to help someone meet their spending requirements without problems. Remove most of the spending, you've removed the need for the higher bond holdings.

If I dont have a mortgage, and my spending drops by 50% or more, I dont need all those bonds to 'smooth out the ride'.

I cant find a reasonable ER scenario where a 70% or better equity allocation and no mortgage doesnt beat a 60% or lower allocation and a mortgage. Try it...pay off your mortgage from your bond holdings, and then take the resulting portfolio size and run it and your new spending needs through firecalc with an 80% equity allocation.

Wowee! Your survival rate goes up, and either your annual spending ability goes up or your portfolio size needed to meet your spending needs goes down. More money to spend or retire earlier with a smaller portfolio and still have a high survival rate...dont throw me in THAT briar patch!

Unreasonable? Arbing hundreds of thousands of dollars into investments is reasonable but removing more than half of your spending risk and raising your investment risk a little bit isnt? Oh PUHLEEEZE!
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 07:37 PM   #77
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Re: Pay off the Mortgage at Retirement???

[Must resist... Oh, no. Ahhhh!]

OK, here's a reductio ad absurdum hypothetical for you. Let's pretend your house was really an ATM, and you could withdraw from it as long as you paid it back.

So, I take $100,000 out of my house and invest it. But I have to pay myself back $1000/month at 0%. My "expenses" have gone up by $1000/month! Oh, no -- my poor SWR! But I'm just paying myself back, so it's not really an "expense." You'd be crazy not to do this, right?
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 09:17 PM   #78
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Re: Pay off the Mortgage at Retirement???

Quote:
Originally Posted by wab
[Must resist... Oh, no. Ahhhh!]
OK, here's a reductio ad absurdum hypothetical for you. Let's pretend your house was really an ATM, and you could withdraw from it as long as you paid it back.
So, I take $100,000 out of my house and invest it. But I have to pay myself back $1000/month at 0%. My "expenses" have gone up by $1000/month! Oh, no -- my poor SWR! But I'm just paying myself back, so it's not really an "expense." You'd be crazy not to do this, right?
You're right, it is an absurd example. In yours you neglected to add the $100K to your portfolio (plus the value of any gains). And a 30-year loan of $100K at zero percent would be monthly payments of $278, which equates to an annual withdrawal of about 3.33%. Oh, gee, wait, for a zero-percent loan that works out to 30 years divided into 100%. (And that 360th payment has been depreciated by almost 30 years of inflation.) So it's remotely possible that this $100K (with its 3.33% withdrawal) added to your portfolio would even lower your former 4% SWR.

Can we just agree that there's plenty of variables in this equation with lots of room for equally good & bad decisions? Look at SG's example of a zero-percent loan for 30 years and step the interest rate up until your personal efficient frontier is reached. Or don't. But this type of strawman math isn't adding to the quality of the debate.

And that's just the Vulcan logic without even getting into the equally-valid emotional "sleep at night" heuristics.

C'mon by Hale Nords someday. After we finish the morning surf session we'll sit under a cabana and crunch the real numbers, then decide if FIRECalc's historical perpsective makes it worth the odds. With the gains spouse & I have realized in the last 30 months, it doesn't matter if the next 330 are flat.
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 09:56 PM   #79
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Re: Pay off the Mortgage at Retirement???

Quote:
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But this type of strawman math isn't adding to the quality of the debate.
It might if you understood the example. It was intended to counter CFB's argument about the instablizing force of increased expenses due to a mortgage. It's not really an expense if you're just paying yourself back. But if an example has to be explained, then like a joke that has to be explained, it must be bad.

Never mind.
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Re: Pay off the Mortgage at Retirement???
Old 04-12-2007, 10:16 PM   #80
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Re: Pay off the Mortgage at Retirement???

If I were to buy a house for my own use I would get the biggest 30 year fixed mortgage I could find, as long as rates are as low as today or lower. This of course is contingent on the house being a bargain. But I wouldn't buy it if it weren't, so the financing is a separate issue.

The reason I would do this is to gain flexibility. Sometime we may get an opportunity to buy assets cheap. When that happens, we want money to do it with.

The American residential mortgage is the best financial product from the POV of the consumer that has ever been devised. Where else does the consumer get to keep the debt for up to 30 years, so long as the rate is advantageous, but put it back to the lender whenever better rates come along? Heads I win, tails you (lender) lose. This is all thanks to MBSs and all the wondrous things that modern financial enginering can do to allow asset/liabilty matching for different classes of bond purchasers.

Just be sure to avoid prepayment penalties.

ha
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