Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 08-06-2010, 12:27 AM   #41
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,972
Quote:
Originally Posted by Nords View Post
Hey guys, what is this, the Dave Ramsey show? Do I talk trash about whatever assets you choose to invest in?
I've never even seen(or heard?) Dave Ramsey and I wasn't trying to "talk trash" and am sure W2R wasn't either. As I said in my post, what ever works for you. I wish you the best.
__________________

__________________
aaronc879 is online now   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 08-06-2010, 07:08 AM   #42
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by Nords View Post
Hey guys, what is this, the Dave Ramsey show?
Yes
Attached Images
File Type: jpg keep_out_of_debt.jpg (40.3 KB, 54 views)
__________________

__________________
rescueme is offline   Reply With Quote
Old 08-06-2010, 07:15 AM   #43
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 717
What he said. Nords.

Except that I do pay interest on my car loan. 3.99%. Less than my mortgage rate. PenFed Credit Union. We also have a PenFed 7-year CD paying 5.25%.
So......wait......I'm borrowing my own money and making 1.26%.
__________________
rayvt is offline   Reply With Quote
Old 08-06-2010, 07:32 AM   #44
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 717
I also see a problem w/r/t asset allocation. I you have, for example, a $750,000 stock&bond portfolio and a $250,000 house free-and-clear, then 25% of your net worth is in real-estate. Worse, 25% is in a one (non-diversified) piece of illiquid, non-income producing real-estate.

I'd rather shift the risk over to the bank. They are in a better position to shoulder the risk. To me, it's 25% of my net worth. To them it's less than 0.1% of their real-estate portfolio.

I'd seriously consider having a paid-off house only when it represents less than 5% of my net worth. That would be $5 million net worth.
A $4.75M stock&bond portfolio would easily throw off enough income so that the mortgage payment would lost in the round-off.
__________________
rayvt is offline   Reply With Quote
Old 08-06-2010, 07:42 AM   #45
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by rayvt View Post
I also see a problem w/r/t asset allocation. I you have, for example, a $750,000 stock&bond portfolio and a $250,000 house free-and-clear, then 25% of your net worth is in real-estate. Worse, 25% is in a one (non-diversified) piece of illiquid, non-income producing real-estate.
I'm sure you also include other assets (example - cars) as part of your net worth; however they are not investable assets.

My DW/me have a "gross estate net worth" that is calculated by everything we own. That is what the "terminal life value" of everything we own (and if we had debt, would be subtracted) to come up with this "version" of net worth.

We include our home in this mix. We don't include it, the cars, furniture, bank accounts, etc. in what we consider our retirement investable assets.

A home is a home. Sure it has value and you can use it to trade up, trade down, and anything else you want to do with it. However, unless you sell it and move any part of that sales you are not going to use for further housing to your retirement portfolio, it is just that. If you have other investment properties (not where you live) and consider them as part of your retirement investment portfolio, that's another story. In that case, what you say should be considered.

It's not part of your portfolio, and it's not part of your AA, IMHO....
__________________
rescueme is offline   Reply With Quote
Old 08-06-2010, 08:47 AM   #46
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by rayvt View Post
I also see a problem w/r/t asset allocation. I you have, for example, a $750,000 stock&bond portfolio and a $250,000 house free-and-clear, then 25% of your net worth is in real-estate. Worse, 25% is in a one (non-diversified) piece of illiquid, non-income producing real-estate.

I'd rather shift the risk over to the bank. They are in a better position to shoulder the risk. To me, it's 25% of my net worth. To them it's less than 0.1% of their real-estate portfolio.

I'd seriously consider having a paid-off house only when it represents less than 5% of my net worth. That would be $5 million net worth.
A $4.75M stock&bond portfolio would easily throw off enough income so that the mortgage payment would lost in the round-off.
In my case I have a $600k 50/50 stock and bond portfolio and $150k to pay on a 2 family house worth $550k. So I'm over weighted as far as RE goes, however, it's a 2 family house so I rent one unit out at $2000 a month. It's like having $500k at 4%. If I refi to reduce my monthly mortgage payment from $2500 to $800 I can ER on the positive income stream from the house and a small 72t.
__________________
nun is offline   Reply With Quote
Old 08-06-2010, 09:20 AM   #47
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 717
As Nords said, it's very much an emotional issue, and different people will have different feelings about it. De gustibus non disputum.

As for me, I've been in many different financial situations, and have seen plenty of other people in them too. Including close relatives.
I can say this: Illiquidity sucks!
Having few options sucks.
"Cash is king."

I just went through a refi to a 4.25% 30 year mortgage. Had to pay down about $30K to get that rate. (Not points, just needed to get the new mortgage balance below a breakpoint.) Lender said, "Do you have the means to pay that much? You'll have to show us proof that you have the funds. Oh---no---wait. You already gave us your broker account statement that shows, um, hmmmm, you don't even need a mortgage."

Says me, "Right. As you can see, I could pay off the house tomorrow if I wanted to, with just one phone call to my stockbroker."

Oddly enough, my wife feels the same way. She said, "But our preferred stock account pays us more monthly dividends than the mortgage payment. So why would we pay off the mortgage?"

A close friend & neighbor (also retired) has a fully paid off house. They paid it off when they sold their previous house in Chicago. So, whoopie, no mortgage payment. Except that he just had to go out and get a part-time handy-man job. Better to have a large bank account and a small note than a zero bank account and no note.
__________________
rayvt is offline   Reply With Quote
Old 08-06-2010, 09:31 AM   #48
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by rayvt View Post
What he said. Nords.

Except that I do pay interest on my car loan. 3.99%. Less than my mortgage rate. PenFed Credit Union. We also have a PenFed 7-year CD paying 5.25%.
So......wait......I'm borrowing my own money and making 1.26%.
Note that pen fed is offering car loans at 2.99% now. I suspect you could refinance.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 08-06-2010, 09:39 AM   #49
Full time employment: Posting here.
CCdaCE's Avatar
 
Join Date: Apr 2006
Posts: 887
Quote:
Originally Posted by brewer12345 View Post
Note that pen fed is offering car loans at 2.99% now. I suspect you could refinance.
And, plus, take a min. of $5k cash out at 3%. You can pay it right back, but I backed up the truck. Load me up on that 3% debt.

-CC
__________________
"There's those thinkin' more or less, less is more, but if less is more, how you keepin' score?
It means for every point you make, your level drops. Kinda like you're startin' from the top..." "Society" - Eddie Vedder
CCdaCE is offline   Reply With Quote
Old 08-06-2010, 10:46 AM   #50
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,284
Quote:
Originally Posted by nun View Post
I didn't really want this to become a pay off mortgage thread.


Is anyone actually listening to the OP (nun, in case you lost track)?

I just re-read every post in this thread by nun. Not once did I see even a hint of any expression of the 'fear of debt' that some people have. It's a financial decision for nun, based on cash flow, and nun has already commented on the long term financial impact:

Quote:
Both scenarios work on Firecalc, but refinancing gives me a better results for min max and average portfolio.
But since the line has been crossed....

Nords captured it pretty well. And one thing I really can't understand is why anyone would label this subject as 'controversial'? There are two elements, financial and emotional:

FINANCIAL: From everything I've seen, and from what others have reported, there may be a slight positive bias towards keeping the debt - but it depends on your assumptions. I've never seen it make a big difference.

EMOTIONAL: Some people seem to be able to sleep better at night after moving a chuck of money from a diversified portfolio of investments into a single piece of RE. So they should do that if they want, and they can also sleep easier knowing that if they look back at the financial side of things, it probably won't make much difference either way. One caveat (as mentioned by others) is that you want to make sure you maintain sufficient liquidity - that can indeed become a real-life problem.

How is any of that 'controversial'?


Quote:
Originally Posted by aaronc879 View Post
I've never even seen(or heard?) Dave Ramsey and I wasn't trying to "talk trash" and am sure W2R wasn't either. As I said in my post, what ever works for you. I wish you the best.
aaronc879, I'm sure you didn't mean to come across as 'talking trash' towards anyone, but think about this:

When people imply that 'not paying all that interest' is a smart thing to do, or celebrate moving money from a diversified portfolio to their home, they are also implying that holding the debt must be 'not smart', and that we should be sulking (the opposite of celebrating) over our poor decision. You really can't have one w/o the other. So consider how it sounds to those of us who have run the numbers and feel comfortable with our decision. I have never implied anyone was 'stupid' for paying off their mortgage (assuming liquidity is adequate), or 'celebrated' having a mortgage. It's just a choice I made.

And when someone says "I hate paying interest", w/o even making a passing reference to the opportunity cost of the the money used to pay down the debt, or the lack of liquidity that may result, they are (perhaps unintentionally) providing a very distorted view of the situation. And I don't see how anyone on this forum is served by one-sided views of any matter.

It would be like pointing to a managed fund, and saying it did better than an index, without acknowledging the loads or measuring it on a risk-adjusted basis. Or talking about great returns in Real Estate, w/o acknowledging that it is an active, not passive investment, and that there are risks to RE also. Those posts get brought back to reality in a second. How is this any different?

PS - I'm also re-thinking my lifelong stand on paying cash for cars. Those rates look attractive to me.

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 08-06-2010, 11:21 AM   #51
Full time employment: Posting here.
 
Join Date: Aug 2007
Posts: 892
Quote:
Originally Posted by ERD50 View Post

Nords captured it pretty well. And one thing I really can't understand is why anyone would label this subject as 'controversial'? There are two elements, financial and emotional:

FINANCIAL: From everything I've seen, and from what others have reported, there may be a slight positive bias towards keeping the debt - but it depends on your assumptions. I've never seen it make a big difference.

EMOTIONAL: Some people seem to be able to sleep better at night after moving a chuck of money from a diversified portfolio of investments into a single piece of RE. So they should do that if they want, and they can also sleep easier knowing that if they look back at the financial side of things, it probably won't make much difference either way. One caveat (as mentioned by others) is that you want to make sure you maintain sufficient liquidity - that can indeed become a real-life problem.
You've summarized this nicely.

I've spent hours reading the threads regarding paying off the mortgage. By not paying of the mortgage, cash-flow does improve and there seems to be a slight overall advantage. But as you said, it doesn't seem to ever make a big difference.

I should probably start another thread, instead of hijacking this one, but maybe somebody can quickly point out what I'm missing.

If I have 12k/year mortgage payment, at a 4% WR that means I'd need to have 300k in capital to sustain this payment. The initial balance was 190k, but by the pay-off time (let's say 8 years into the mortgage) it would be ~162k. Why would you choose not to pay it off in this case?

And I think I just realized the answer. The WR could be higher, since I'm only dealing with 22 years before this expense is paid-off. Is that right? Are there any other factors that I'm missing?
__________________
tulak is offline   Reply With Quote
Old 08-06-2010, 11:27 AM   #52
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
The big difference between "pay off or not" isn't so much in the end result, but the difference in available cash. Whether you ultimately end up better off is dependent on investment returns and that number is a very fuzzy. However, the difference in cash flow will be a known quantity.

Right now I have a job and wages are rolling in so I don't mind having a short duration, high monthly payment mortgage because I can support it and like seeing the principal come down by $2000 a month. If I was to ER those wages would go away and I'd want to reduce expenses, so refinancing would be the thing to do.
__________________
nun is offline   Reply With Quote
Old 08-06-2010, 11:56 AM   #53
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,284
Quote:
Originally Posted by kiki View Post

If I have 12k/year mortgage payment, at a 4% WR that means I'd need to have 300k in capital to sustain this payment. The initial balance was 190k, but by the pay-off time (let's say 8 years into the mortgage) it would be ~162k. Why would you choose not to pay it off in this case?

And I think I just realized the answer. The WR could be higher, since I'm only dealing with 22 years before this expense is paid-off. Is that right? Are there any other factors that I'm missing?
Correct, one factor is the payment stops at some point. Also, the 4% rule assumes the expense increases over time with the CPI, while a mortgage payment is fixed.

When I've roughly tried to compare COLA to Non-COLA income, I've found it represents ~ 12X instead of 25x (the inverse of 4%). So, very roughly the 12K fixed expense would require ~ $150K in the portfolio to support the payment. Or, you can just look at it as expected returns over 30 years versus the mortgage rate, consider taxes, etc. Again, probably small potatoes in the overall scheme of things.

You could plug this into FIRECALC, but I doubt you'll see anything different from what we've discussed. I think the margin of error on our assumptions is probably greater than any real deltas we might experience.

Heck, I'm so agnostic on the subject that one reason I have a mortgage now is that I'm too lazy to do whatever it takes to close it. Auto payments are easy. That, and it is adjustable, and down to ~ 3.5% right now, so I'm not motivated at this point. If rates rise, we will see.


Quote:
You've summarized this nicely.
Thank you - I tried to keep it as balanced and complete as I could. Hopefully reasonably succinct, but I'm not so good at that

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 08-06-2010, 12:18 PM   #54
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
HFWR's Avatar
 
Join Date: May 2005
Location: Lawn chair in Texas
Posts: 12,964
One thing Cute Fuzzy Bunny used to point out is that without a mortgage payment, you "might" be able to reduce your WR, thus lowering your tax rate. Just another factor...
__________________
Have Funds, Will Retire

...not doing anything of true substance...
HFWR is offline   Reply With Quote
Old 08-06-2010, 12:39 PM   #55
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,284
Quote:
Originally Posted by HFWR View Post
One thing Cute Fuzzy Bunny used to point out is that without a mortgage payment, you "might" be able to reduce your WR, thus lowering your tax rate. Just another factor...
Yes he did. With the thinking that the higher WR would be taxed at (or near) your marginal tax rate. So it could well be a factor (unless your minimum WR from an IRA and/or pensions already exceeds that?).

But once again, it is ignoring the other side of that equation. Where did the money come from to pay off the mortgage? If that money could be cashed in tax free, then the monthly payments could also be made from that tax free stash. And it is usually preferable to stretch a tax payment over time, than to have to take it in one big hit. Or am I missing something? As I recall, CFB never answered that one.

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 08-06-2010, 12:49 PM   #56
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 717
Quote:
Originally Posted by kiki View Post
If I have 12k/year mortgage payment, at a 4% WR that means I'd need to have 300k in capital to sustain this payment. The initial balance was 190k, but by the pay-off time (let's say 8 years into the mortgage) it would be ~162k. Why would you choose not to pay it off in this case?

And I think I just realized the answer. The WR could be higher, since I'm only dealing with 22 years before this expense is paid-off. Is that right? Are there any other factors that I'm missing?
Correct on the WR. Plus the bit about the payment not growing with inflation.

But you did miss one (if not THE) significant factor: The opportunity cost.

However you slice and dice it, and notwithstanding the recent "lost decade" of the market, the long-term average growth of the market is about 10%, plus dividends of maybe 2%.

If you allow for a really crappy 22 year period average of half that, it's 5% + 2%, or 7%.
This opportunity cost is 7%, whereas 30 year FRMs are now 4.5% or less.
Of course, you must have adequate cash-flow to make the mortgage payments--but you could draw down the investment portfolio if necesssary.

Giving up 250 BPs is a pretty high price to pay, IMHO, just for a emotional reason. Problem is, lots of people have a hard time with the concept of opportunity cost. They feel the money going out, but don't feel the absense of money coming in. Somehow the lack of new money inflow feels less real than the concreteness of money outflow.

:shrug: Guess that's why my neighbor had to get a part-time job as handyman at a local church but we are going on a cruise.
__________________
rayvt is offline   Reply With Quote
Old 08-06-2010, 12:53 PM   #57
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by rayvt View Post
A close friend & neighbor (also retired) has a fully paid off house. They paid it off when they sold their previous house in Chicago. So, whoopie, no mortgage payment. Except that he just had to go out and get a part-time handy-man job. Better to have a large bank account and a small note than a zero bank account and no note.
Regardless of having debt (in whatever form) while entering retirement, your "friend" was not financially prepared to enter retirement.

Either have the cash flow to handle all your debts (e.g. note/mortgage/CC/etc), or have the assets to handle your expected retirement expenses (without debt), it dosen't matter, since it's the same thing.

Our choice was to enter retirement debt free, with a substantial retirement portfolio. That was always our option, and goal to live our retirement years in the manner we wished - not driven by income/debt constraints.

Sure, one could enter retirement with note/mortgage/other debt, but then you had better have retirement income and/or retirement assets to cover the possibilities. Otherwise you had better planned to stay in the w*rkforce (assuming you were not forced out, or have a physical imparement that will not allow you to continue work).

You see a cross-section of those folks at Wally-World, as well as the window at the local Micky D's...

Retirement isn't for wimps.
__________________
rescueme is offline   Reply With Quote
Old 08-06-2010, 12:55 PM   #58
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,072
Nords key point is his COLA'd pension is a very secure financial instrument and he believes he can arbitrage the long-term knowing that - i.e., take the long-term risk by using the money from the mortgage in the market. He can sleep at night as he knows his pension covers his costs.

Most people are *not* in that type of situation, so their decisions work for them both financially and emotionally. It's all about risk tolerance - I and my husband will be in a similar situation to Nords *however* we believe in having a paid off house - plus, we won't be buying a house in an area which has the types of housing costs that Nords has - the arbitrage amount for us wouldn't be worth the hassle factor. Perhaps had we stayed in CA and 'moved' up in our housing tastes, we would have looked at this type of arrangement.

I say run the hnubmers, see what your comfortable with and then do it what you are comfortable with. Other people have other comfort zones. They are the ones who will live with their decisions, not you (unless it's the ants and grasshoppers scenario, which is whole 'nuther post - which I seem to have posted before).
__________________
Deserat aka Bridget
“We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.” - George Orwell/Winston Churchill
deserat is offline   Reply With Quote
Old 08-06-2010, 01:03 PM   #59
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by deserat View Post
I say run the hnubmers, see what your comfortable with and then do it what you are comfortable with. Other people have other comfort zones.
Exactly. You have to make your own life, your own plans. To try to debate (and yes, I'll admit that I do that once in awhile ) any action on whatever anybody should do is an exercise in futility.

It depends your personal financial situation along with your "life norms" that you apply to your life - your situation.

Each of us can share what we did in a certain situation. However to say that what we did is what everybody else should do is wrong, IMHO.
__________________
rescueme is offline   Reply With Quote
Old 08-06-2010, 02:31 PM   #60
Full time employment: Posting here.
 
Join Date: Aug 2007
Posts: 892
Quote:
Originally Posted by rayvt View Post
But you did miss one (if not THE) significant factor: The opportunity cost.

However you slice and dice it, and notwithstanding the recent "lost decade" of the market, the long-term average growth of the market is about 10%, plus dividends of maybe 2%.

If you allow for a really crappy 22 year period average of half that, it's 5% + 2%, or 7%.
This opportunity cost is 7%, whereas 30 year FRMs are now 4.5% or less.
Of course, you must have adequate cash-flow to make the mortgage payments--but you could draw down the investment portfolio if necesssary.
This is a lot higher than my forecasted rate of return. I have a real rate of return at about 4%. It might turn out to be higher, and in that case I'm wrong, but I prefer to use a conservative number. This is why I don't take into consideration the opportunity cost, there's too much uncertainty on future rate of return.

The other points regarding inflation, etc, are helpful. It looks like I need to run some numbers. I've been debating if I should refinance and extend the term (Nords, we could actually get a 40 years at ~4.5%), but my personal preference is to not have any debt when we pull the plug (in about 10 years). Of course, at these rates, in ten years from now I might not be in a hurry to pay off the mortgage (something only ERD50's approach: too lazy to deal with paying it off).
__________________

__________________
tulak 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
refinance AGAIN?? jblack FIRE and Money 21 06-27-2010 10:41 PM
Refinance or not glinka FIRE and Money 15 10-14-2009 02:54 PM
Need Help with Refinance Numbers theHundt FIRE and Money 1 02-25-2009 08:36 AM
Should I refinance? JohnDoe FIRE and Money 12 01-16-2008 09:41 AM
Refinance? Bimmerbill Young Dreamers 1 03-27-2006 12:06 PM

 

 
All times are GMT -6. The time now is 10:00 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.