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SWR and mortgage
Old 03-09-2012, 05:02 PM   #1
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SWR and mortgage

I refinanced my home mortgage before recently ER to take advantage of lower rates (3.375%).

I am looking at my WR two ways:

1) ignoring my mortgage in looking at my nestegg, but including my mortgage payments as part of my living expenses. Under this view, my WR is ~3.5%

2) looking at my nestegg net of my mortgage and excluding my mortgage payments from my living expenses (essentially as if I paid of the mortgage today). Under this view, my WR is ~2.9%

Or alternatively ignoring my mortgage in looking at my nestegg but including only mortgage interest (but not principal) as part of my living expenses. Under this view, my WR is also ~2.9%

So is my WR 2.9% or 3.5%
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Old 03-09-2012, 05:09 PM   #2
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In light of the "pay off the mortgage (or not) discussions we've been having, that's a very interesting question. I'm surprised the WR's are that far apart. Just so I'm following along OK.......

In scenario #1, you have a larger nestegg and larger expenses.

In scenario #2, you have a smaller nestegg and smaller expenses.

Is that it?

Do you have any other sources of income entered into Firecalc beyond your portfolio? How did you calculate the WR's? Is the length of the mortgage the same as your FireCalc tested period, typically 30 yrs?
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Old 03-09-2012, 05:16 PM   #3
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Your understanding is correct.

I wasn't getting that scientific in computing the WR. The WR is simply estimated expenses for the next 12 months divided by today's portfolio value.

I have a pension and SS coming that will effectively drop my WR when I start the pension at age 60 and SS at 66-70.
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Old 03-09-2012, 05:59 PM   #4
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Well, I did a simple example and came out with a 0.2% higher WR with a mortgage than without.

With a $1,000,000 portfolio, a $100,000 mortgage (30 year, 3.375% = $5,305 annual payment) and $30,000 in non-mortgage expenses, your WR would be 3.53%.

With a $900,000 portfolio, no mortgage and $30,000 in non-mortgage expenses, your WR would be 3.33%.

BTW, congrats on that sweet 3.375% rate! The last time I had a mortgage, it was about double that.
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Old 03-09-2012, 06:03 PM   #5
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Thanks. My first mortgage, around 1980, was 13%. OUCH!

Each subsequent mortgage has been lower (and we were mortgage free for a while).

I figured that I wouldn't see 3.375% again and if my investments can't earn 3.375% then the mortgage will be the least of my worries.

P.S. The mortgage is 15 years. If you substitute 15 years for 30 in your analysis I think you'll get a higher difference.
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Old 03-09-2012, 06:10 PM   #6
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Quote:
Originally Posted by pb4uski View Post
P.S. The mortgage is 15 years. If you substitute 15 years for 30 in your analysis I think you'll get a higher difference.
Yes.

But after 15 years, the mortgage scenario might have the lower WR depending on how portfolio performance went over the 15 years. We'd have to make some assumptions.... I don't wanna go there....
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Old 03-09-2012, 08:07 PM   #7
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So is my WR 2.9% or 3.5%
The intent of the WR is to withdraw money to cover you estimated expenses. In an extreme case, if you withdraw only enough to cover the interest not principal you would get foreclosed. You have to set a rate to cover your estimated actual expenses, PITI being several of them. So IMO your WR is 3.5%.
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Old 03-09-2012, 08:24 PM   #8
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So is my WR 2.9% or 3.5%
This sounds like the kind of discussions that go on in Hale Nords when the surf is flat...
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Old 03-10-2012, 12:46 AM   #9
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I'd say that you only include the actual expenses (i.e interest) associated with the mortgage. The principal is simply a transfer between accounts; cash to home equity.

It is no different than somebody who is trying to figure out how much their living expenses are but automatically invest $500/month with Vanguard. Their total expenditures maybe $56,000 but only $50,000 is an actual expense.
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Old 03-10-2012, 02:39 AM   #10
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Based on the information you provide, the answer in my opinion is 3.5%.
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So is my WR 2.9% or 3.5%
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