Pay off the Mortgage at Retirement???

bbuzzard · 04-04-2007, 10:15 PM

I have always believed it is pretty clear from the financial side of the house that it is better to keep a mortgage if you are disciplined enough to invest your extra cash instead of spending it. However, I also believe that peace of mind has value and I am paying off my mortgage at an accelerated pace, paying about 30% extra per year.

I was considering the fact that I would be carrying a mortgage in retirement, and what the implications would be for paying it off. Playing with my budget spreadsheet, I realized that if you accepted the 4% SWR, it makes sense to pay off your mortgage once you are retired. This is especially true if you are FIRE and have the cash to pay for emergency expenses even after paying off the mortgage.

Consider my situation. I have about $70,000 in principle remaining with a $750 mortgage payment. At a 4% SWR, I need $225,000 in the bank to make the payment. If I just paid off the balance of $70,000, I would have $155,000 left, and withdrawing at 4% from the $155,000 I would be able to spend an extra $6,200 on myself as compared to keeping the mortgage.

I realize the downside is that I would miss out on the fact that 4% is conservative and my $225,000 would most likely grow larger. On the other hand, if I really believed this was likely, I would be living on a 6% SWR instead of 4%. I think I will pay it off.

Has this been discussed before? Did I actually think of something new? Probably not likely in this forum.

CyclingInvestor · 04-04-2007, 11:12 PM

I paid off the balance of my mortgage in 2004 to celebrate reaching my FI target,
more for psychological reasons than financial. It just felt good not to have that
$1240/month payment.

I feel it made the decision to retire in 2006 that much easier.

Spanky · 04-04-2007, 11:44 PM

This topic has been discussed many times before. A simple way to look at it is comparing the two rates: mortgage and investment. If you are sure (or confident) that your investment rate is higher than your mortgage on a consistent basis, you should not pay off the mortgage.

tkp · 04-05-2007, 02:45 AM

Although I could make a decent arguement AGAINST paying it off early, my wife and I "burnt" ours a couple of years ago.....Sure gives great peace of mind!

bbuzzard · 04-05-2007, 07:48 AM

Quote:

Originally Posted by Spanky

This topic has been discussed many times before. A simple way to look at it is comparing the two rates: mortgage and investment. If you are sure (or confident) that your investment rate is higher than your mortgage on a consistent basis, you should not pay off the mortgage.

Spanky,

I have reviewed many (all?) of these threads, and agree that "if you are sure (or confident) that your investment rate is higher than your mortgage on a consistent basis, you should not pay off the mortgage."

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.

ScaredtoQuit · 04-05-2007, 07:58 AM

Financially, I think it's a bad decision. Theoretically, you should be able to make money on the spread.

However, psychologically, (at least from my experience) it's better to pay it off. I paid off my mortgage about four years ago and since then everything SEEMS so much better. My cash flow has increased significantly and all of that goes right into savings. Not counting 401K savings, I've been putting away about $3K per month. And the feeling of not having to make a monthly mortgage payment.... PRICELESS!

brewer12345 · 04-05-2007, 08:01 AM

If you are actually fired and living off the portfolio, I think paying off the mortgage makes sense. Otherwise, nope.

garrynky · 04-05-2007, 08:02 AM

No mortgage here.

I want to keep my expenses in retirement to a minimum. In theory this might not be the smart thing, but it sure feels good.

OKLibrarian · 04-05-2007, 08:27 AM

1. A smart financial guru (my dad) told me as a kid that the key to LBYM was keeping your recurring expenses as low as possible. (He said this when I was pestering him to get cable for the 15th time, but I digress).

2. A mortgage, while having definite tax advantage, is a recurring monthly expense.

3. we're not going to be in a big rush about it, but I hope to have enough in the kitty to pay of the mortgage at FIRE or a little sooner--one more thing to make us feel more secure.

of course we have to get the house first, so YMMV. :-)

tryan · 04-05-2007, 09:05 AM

Kept the 4.875% fixed rate mortgage in place after FIRE ... also kept a 3% fixed rate loan on a rental.

We can - at least - all agree the 3% loan on a rental is a NO BRAINER. Heck, it's FREE money - considering only inflation (3% historically). Sooo, the question becomes "at what rate do you keep the loan." Rather than "do I keep the loan."

Sandy · 04-05-2007, 09:08 AM

BBuzzard,

I have had the same thought.

If we do not payoff the mortgage, we will need significantly more income than if it is paid off. OTOH, other investments give a better return than prepaying the mortgage rate.

So, we are maxing out 401K and Roths and prepaying some each month cutting down the principal at a faster rate. When it is time to FIRE I will look seriously at taking a chunk of $$ to pay off the mortgae, easing the cash flow and increasing income flexibility. We have kids, and will likely sell this house and move once they are off to college (after FIRE). At that point, I expect to purchase something smaller and hopefully pocket enough $$ to replace the smaller lump sum I will have used to pay off the mortgage at the start of FIRE.

kcowan · 04-05-2007, 09:09 AM

I think this really goes back to the issue of leverage. Borrowing to invest makes sense if you need to take the extra risks. But if you do not need to then why bother? People who have reached FIRE status do not need the extra leverage.

Now as tryan says: At what rate does it make sense? Even if you no longer need leverage...

lazygood4nothinbum · 04-05-2007, 11:27 AM

i think time is also a factor. i've got a nothing $400 payment on mortgage that i still can't decide to pay off. i might downsize in five years because firecalc says my portfolio will need an influx of cash then to maintain my desired swr. or i might just sell and live a vagabond life at that point. or if the portfolio surprisingly does really well maybe i won't sell at all. peace of mind is nice over the long run but i'm not sure it is worth the short one.

jIMOh · 04-05-2007, 11:42 AM

Paying down, to me, makes sense IF I can send in early extra prepayments (to compund principal in reverse).

We have two mortgages (5.75% first and a 7.4% second). Both 30 yr fixed.

The payment on the second is $380/mo. I can afford to send $1200/year to prepay this. The prepayments pay it off in year 15, saving me a significant amount of money. To invest the same $1200 @9% for 15 years would not even come close to improving my net worth.

The opposite is true on the first. After the 2nd is paid off, the $380*12+$1200 extra will be invested, because the net investment gain (with 9% return) is 40k higher than amount I'll pay to mortgage, and the mortgage would only be paid off 4 years sooner.

Being debt free has it's appeal, but at same time the extra amount invested (in taxable accounts) should help ER, not hold it back.

Ask me again in 25 years if I feel the same way.

al_bundy · 04-05-2007, 12:32 PM

what is the rate of return of the SP500 from March 2000?

i know someone who lost a ton of money 7 years ago because of the buy and hold mentality. Luckily they had a paid off home and can live very comfortably with the small amount of bills they have and a social security check

Sam · 04-05-2007, 12:34 PM

Quote:

Originally Posted by bbuzzard

Consider my situation. I have about $70,000 in principle remaining with a $750 mortgage payment. At a 4% SWR, I need $225,000 in the bank to make the payment. If I just paid off the balance of $70,000, I would have $155,000 left, and withdrawing at 4% from the $155,000 I would be able to spend an extra $6,200 on myself as compared to keeping the mortgage.

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.

Mwsinron · 04-05-2007, 12:36 PM

Quote:

Originally Posted by al_bundy

what is the rate of return of the SP500 from March 2000?

i know someone who lost a ton of money 7 years ago because of the buy and hold mentality. Luckily they had a paid off home and can live very comfortably with the small amount of bills they have and a social security check

Would be one of my considerations. IF you are older and cant get back into the work force. At least you would have a paid off place to live. Never know when we might get a record market crash for the ages

al_bundy · 04-05-2007, 12:47 PM

the stock market was essentially flat from 1929 through the end of WW2. 1966 to 1973 was another bear market. we still haven't broken the 2000 high on the SP500.

for all you know the mortgage you are paying interest on is going to be dead money for another 10 years. why borrow money and take on this risk?

Sam · 04-05-2007, 12:53 PM

If you view the stock market that way, why bother with any kind of investment at all? Pay everything with cash, and put all your saving in CDs.

dgalbraith100 · 04-05-2007, 01:53 PM

I don't apply the 4% withdraw rate to pay for the mortgage expense. It does not go up with inflation. Its a static expense. Instead I create a seperate pool of money that is not part of the 4% amount.

That pool of money simply exists to pay off the mortgage and hopefully make extra returns than what my mortgage rate is. So if you have a 100K mortgage over 30 years at 5%, your payment is $536.

You only need about 74K invested at 8% to pay off that mortgage, which is alot different that needing the extra 160K the 4% rule would require. This of course will require some wiggle room on your 4% withdraws. You may need to replenish that fund if you have some bad first couple years, you do have 30 years to recover. (The plan is that I always keep the account big enough to cover the mortgage, so each year I will move money into it if needed.)

If you are already at 4% required withdraw to live, then doing this will be very risky, but if you plan on being at a 2.6-3% withdraw rate for required expenses, keeping the mortgage and using the "extra" money to play makes the most sense to me.

Over the entire 30 years I find it very unlikley that you will not beat the 5% loan rate. And you can use your wiggle room to fund the house account if needed early on. After 10 years I suspect the account will actually begin generating excess and that can be pulled out and put into your main body of money.

Laters,
-d.

04-04-2007, 10:15 PM	#1
bbuzzard Recycles dryer sheets Join Date: Dec 2005 Posts: 208	Pay off the Mortgage at Retirement??? I have always believed it is pretty clear from the financial side of the house that it is better to keep a mortgage if you are disciplined enough to invest your extra cash instead of spending it. However, I also believe that peace of mind has value and I am paying off my mortgage at an accelerated pace, paying about 30% extra per year. I was considering the fact that I would be carrying a mortgage in retirement, and what the implications would be for paying it off. Playing with my budget spreadsheet, I realized that if you accepted the 4% SWR, it makes sense to pay off your mortgage once you are retired. This is especially true if you are FIRE and have the cash to pay for emergency expenses even after paying off the mortgage. Consider my situation. I have about $70,000 in principle remaining with a $750 mortgage payment. At a 4% SWR, I need $225,000 in the bank to make the payment. If I just paid off the balance of $70,000, I would have $155,000 left, and withdrawing at 4% from the $155,000 I would be able to spend an extra $6,200 on myself as compared to keeping the mortgage. I realize the downside is that I would miss out on the fact that 4% is conservative and my $225,000 would most likely grow larger. On the other hand, if I really believed this was likely, I would be living on a 6% SWR instead of 4%. I think I will pay it off. Has this been discussed before? Did I actually think of something new? Probably not likely in this forum. __________________ ----------------------------------<br />You see in this world there's two kinds of people, my friend; those with loaded guns, and those who dig.

04-04-2007, 11:12 PM	#2
CyclingInvestor Full time employment: Posting here. Join Date: Jul 2005 Location: Los Angeles area Posts: 787	Re: Pay off the Mortgage at Retirement??? I paid off the balance of my mortgage in 2004 to celebrate reaching my FI target, more for psychological reasons than financial. It just felt good not to have that $1240/month payment. I feel it made the decision to retire in 2006 that much easier. __________________ learn, work, save, invest, fire

04-04-2007, 11:44 PM	#3
Spanky Thinks s/he gets paid by the post Join Date: Dec 2004 Location: Minneapolis Posts: 2,778	Re: Pay off the Mortgage at Retirement??? This topic has been discussed many times before. A simple way to look at it is comparing the two rates: mortgage and investment. If you are sure (or confident) that your investment rate is higher than your mortgage on a consistent basis, you should not pay off the mortgage. __________________ May we live in peace and harmony and be free from all human sufferings.

04-05-2007, 02:45 AM	#4
tkp Dryer sheet wannabe Join Date: Mar 2007 Posts: 11	Re: Pay off the Mortgage at Retirement??? Although I could make a decent arguement AGAINST paying it off early, my wife and I "burnt" ours a couple of years ago.....Sure gives great peace of mind!

04-05-2007, 07:58 AM	#6
ScaredtoQuit Recycles dryer sheets Join Date: Jan 2007 Posts: 149	Re: Pay off the Mortgage at Retirement??? Financially, I think it's a bad decision. Theoretically, you should be able to make money on the spread. However, psychologically, (at least from my experience) it's better to pay it off. I paid off my mortgage about four years ago and since then everything SEEMS so much better. My cash flow has increased significantly and all of that goes right into savings. Not counting 401K savings, I've been putting away about $3K per month. And the feeling of not having to make a monthly mortgage payment.... PRICELESS!

04-05-2007, 08:01 AM	#7
brewer12345 Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Mar 2003 Posts: 9,226	Re: Pay off the Mortgage at Retirement??? If you are actually fired and living off the portfolio, I think paying off the mortgage makes sense. Otherwise, nope. __________________ “When you realize that you are one of the rare few who observe moral principles in their relationships with others, there is a temptation to sink into amorality, not out of conviction or pleasure but simply to avoid further pain, because there is no greater suffering than being an angel in hell, whereas a devil feels at home wherever he goes.” – Martin Page, How I Became Stupid

04-05-2007, 08:02 AM	#8
garrynky Recycles dryer sheets Join Date: Jul 2004 Posts: 60	Re: Pay off the Mortgage at Retirement??? No mortgage here. I want to keep my expenses in retirement to a minimum. In theory this might not be the smart thing, but it sure feels good.

04-05-2007, 08:27 AM	#9
OKLibrarian Recycles dryer sheets Join Date: Mar 2007 Posts: 211	Re: Pay off the Mortgage at Retirement??? 1. A smart financial guru (my dad) told me as a kid that the key to LBYM was keeping your recurring expenses as low as possible. (He said this when I was pestering him to get cable for the 15th time, but I digress). 2. A mortgage, while having definite tax advantage, is a recurring monthly expense. 3. we're not going to be in a big rush about it, but I hope to have enough in the kitty to pay of the mortgage at FIRE or a little sooner--one more thing to make us feel more secure. of course we have to get the house first, so YMMV. :-)

04-05-2007, 09:05 AM	#10
tryan Thinks s/he gets paid by the post Join Date: Mar 2005 Posts: 1,454	Re: Pay off the Mortgage at Retirement??? Kept the 4.875% fixed rate mortgage in place after FIRE ... also kept a 3% fixed rate loan on a rental. We can - at least - all agree the 3% loan on a rental is a NO BRAINER. Heck, it's FREE money - considering only inflation (3% historically). Sooo, the question becomes "at what rate do you keep the loan." Rather than "do I keep the loan." __________________ FIRE'd since 2005

04-05-2007, 09:08 AM	#11
Sandy Full time employment: Posting here. Join Date: Dec 2006 Location: Florida Posts: 856	Re: Pay off the Mortgage at Retirement??? BBuzzard, I have had the same thought. If we do not payoff the mortgage, we will need significantly more income than if it is paid off. OTOH, other investments give a better return than prepaying the mortgage rate. So, we are maxing out 401K and Roths and prepaying some each month cutting down the principal at a faster rate. When it is time to FIRE I will look seriously at taking a chunk of $$ to pay off the mortgae, easing the cash flow and increasing income flexibility. We have kids, and will likely sell this house and move once they are off to college (after FIRE). At that point, I expect to purchase something smaller and hopefully pocket enough $$ to replace the smaller lump sum I will have used to pay off the mortgage at the start of FIRE. __________________ I would not have anyone adopt my mode of living...but I would have each one be very careful to find out and pursue his own way, and not his father's or his mother's or his neighbor's instead. Thoreau, Walden

04-05-2007, 09:09 AM	#12
kcowan Thinks s/he gets paid by the post Join Date: Jul 2006 Location: Pacific latitude 20/49 Posts: 1,544	Re: Pay off the Mortgage at Retirement??? I think this really goes back to the issue of leverage. Borrowing to invest makes sense if you need to take the extra risks. But if you do not need to then why bother? People who have reached FIRE status do not need the extra leverage. Now as tryan says: At what rate does it make sense? Even if you no longer need leverage... __________________ For the fun of it...Keith

04-05-2007, 11:27 AM	#13
lazygood4nothinbum Thinks s/he gets paid by the post Join Date: Feb 2006 Posts: 3,762	Re: Pay off the Mortgage at Retirement??? i think time is also a factor. i've got a nothing $400 payment on mortgage that i still can't decide to pay off. i might downsize in five years because firecalc says my portfolio will need an influx of cash then to maintain my desired swr. or i might just sell and live a vagabond life at that point. or if the portfolio surprisingly does really well maybe i won't sell at all. peace of mind is nice over the long run but i'm not sure it is worth the short one. __________________ "off with their heads"~~dr. joseph-ignace guillotin "life should begin with age and its privileges and accumulations, and end with youth and its capacity to splendidly enjoy such advantages."~~mark twain - letter to edward kimmitt 1901

04-05-2007, 11:42 AM	#14
jIMOh Thinks s/he gets paid by the post Join Date: Apr 2007 Location: Milford, OH Posts: 1,182	Re: Pay off the Mortgage at Retirement??? Paying down, to me, makes sense IF I can send in early extra prepayments (to compund principal in reverse). We have two mortgages (5.75% first and a 7.4% second). Both 30 yr fixed. The payment on the second is $380/mo. I can afford to send $1200/year to prepay this. The prepayments pay it off in year 15, saving me a significant amount of money. To invest the same $1200 @9% for 15 years would not even come close to improving my net worth. The opposite is true on the first. After the 2nd is paid off, the $38012+$1200 extra will be invested, because the net investment gain (with 9% return) is 40k higher than amount I'll pay to mortgage, and the mortgage would only be paid off 4 years sooner. Being debt free has it's appeal, but at same time the extra amount invested (in taxable accounts) should help ER, not hold it back. Ask me again in 25 years if I feel the same way. __________________ Light travels faster than sound. That is why some people appear bright until you hear them speak.* One person's stupidity is another person's job security.

04-05-2007, 12:32 PM	#15
al_bundy Thinks s/he gets paid by the post Join Date: Jun 2005 Posts: 1,372	Re: Pay off the Mortgage at Retirement??? what is the rate of return of the SP500 from March 2000? i know someone who lost a ton of money 7 years ago because of the buy and hold mentality. Luckily they had a paid off home and can live very comfortably with the small amount of bills they have and a social security check

04-05-2007, 12:47 PM	#18
al_bundy Thinks s/he gets paid by the post Join Date: Jun 2005 Posts: 1,372	Re: Pay off the Mortgage at Retirement??? the stock market was essentially flat from 1929 through the end of WW2. 1966 to 1973 was another bear market. we still haven't broken the 2000 high on the SP500. for all you know the mortgage you are paying interest on is going to be dead money for another 10 years. why borrow money and take on this risk?

04-05-2007, 12:53 PM	#19
Sam Thinks s/he gets paid by the post Join Date: Mar 2006 Posts: 1,743	Re: Pay off the Mortgage at Retirement??? If you view the stock market that way, why bother with any kind of investment at all? Pay everything with cash, and put all your saving in CDs.

04-05-2007, 01:53 PM	#20
dgalbraith100 Recycles dryer sheets Join Date: Feb 2006 Posts: 71	Re: Pay off the Mortgage at Retirement??? I don't apply the 4% withdraw rate to pay for the mortgage expense. It does not go up with inflation. Its a static expense. Instead I create a seperate pool of money that is not part of the 4% amount. That pool of money simply exists to pay off the mortgage and hopefully make extra returns than what my mortgage rate is. So if you have a 100K mortgage over 30 years at 5%, your payment is $536. You only need about 74K invested at 8% to pay off that mortgage, which is alot different that needing the extra 160K the 4% rule would require. This of course will require some wiggle room on your 4% withdraws. You may need to replenish that fund if you have some bad first couple years, you do have 30 years to recover. (The plan is that I always keep the account big enough to cover the mortgage, so each year I will move money into it if needed.) If you are already at 4% required withdraw to live, then doing this will be very risky, but if you plan on being at a 2.6-3% withdraw rate for required expenses, keeping the mortgage and using the "extra" money to play makes the most sense to me. Over the entire 30 years I find it very unlikley that you will not beat the 5% loan rate. And you can use your wiggle room to fund the house account if needed early on. After 10 years I suspect the account will actually begin generating excess and that can be pulled out and put into your main body of money. Laters, -d.