The Value of Debt in Retirement

[Car-Guy]

I don't think there is a one size fits all answer.

In a different state the opposite might be true. There are many factors to consider.

+1 For me to assume any debt in retirement, the offsetting benefits would have to be very significant and virtually guaranteed.

 

[mpeirce]

This sounds like the advice Ric Edelman has been giving for years.

And the opposite advice of what Dave Ramsey tells his millions of followers
daily.

Whatever helps you sleep at night is the right answer. But liquidity is a must if you do payoff your mortgage sooner than later.

Dave Ramsey tells people daily to pay off their mortgage as they head into retirement and these people are using a huge chunk of their overall retirement nest egg to do it. Thats just irresponsible.

I get the whole "slave to the lender" thing but a well funded diversified portfolio will outperform a 3% mortgage and will also provide a retirement paycheck to make the house payment.

My take is that Dave Ramsey's advice has more to do with human behavior than math.

Like when he tells people to pay off the smallest debt first, even if it's not the highest interest rate. Obviously, with all things being equal, one should pay off the highest interest debt, but all things are not equal. There are many people who become discouraged when they try to pay off the higher interest debt and fail. Paying off the smaller debt is easier and succeeding leads to a real psychological boost and helps many people keep with the program.

Likewise, owning a house is very different from owning a stock portfolio. Investments are pretty easy to cash out of while selling a house is a bigger deal. A house often turns out to be the largest asset some people have and can be cashed out when it's time to move into assisted living. I know both my DMIL and my DGM sold their houses when it was time to move into assisted living and the cash from that provided the money they needed.

Now, I know all of us here in this forum are strictly rational and will do whatever it takes to earn an extra 1% on their money but owning a house gives many people a real asset they can rely on.

 

[mpeirce]

This sounds like the advice Ric Edelman has been giving for years.

Funny how Ric Edelman stopped pushing the idea that people should mortgage their house to the max and pore the money into the stock market after the troubles of 2008.

Of course, as that recedes in our memories, it's made it back into his spiel.

 

[jim584672]

Let me put another spin on it.

Lets say I have 24k a year mortgage. So 50 year old couple without mortgage who has income 50k a year has same money as 50 year couple with income of 74k a year. (because second couple bought lets say annuity)

Guess who is financially smarter? Couple without mortgage because they will get Obama-care subsidies.

One of the reasons I bought a Condo for cash was to lower my income from investments and get a better deal with health insurance. Luckily they don't tax "implied" or "phantom" interest. Implied interest being the amount I save by not having to pay a rent verses what I pay for taxes and maintenance.

 

[harley]

+1

There are FA's, who promote carrying a mortgage, and other who do not,
when retired. Simple [-]fact[/-] opinion, Life is much easier mentally and financially with the house paid for.

Assuming you can make more money, by carrying a mortgage, take an
interest deduction, and invest the "mortgage" money for a better return
(equities, etc), seems to be to risky. Especially when retired.

In my humble [-]fact[/-] opinion, having a large amount of money tied up in a relatively illiquid item such as your home is risky, especially when it's practically a no brainer to be able to match the cost of the mortgage. I don't care what others do, but I get annoyed at the "facts" that are tossed around. Make your choice, do as you will, but a fact would be true across the boards for everyone. This is not.

 

[jim584672]

One advantage to owning real estate outright is the homestead exemption. In my state almost all my equity is exempt from lawsuits.

 

[Mulligan]

In my humble [-]fact[/-] opinion, having a large amount of money tied up in a relatively illiquid item such as your home is risky, especially when it's practically a no brainer to be able to match the cost of the mortgage. I don't care what others do, but I get annoyed at the "facts" that are tossed around. Make your choice, do as you will, but a fact would be true across the boards for everyone. This is not.

When I retired I did not have enough money to pay off mortgage. Now I do, but prefer the liquidity at this point. Certainly not a math question to me, as once I get a bigger stash, I will pay that note off without regards to the math either way.


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[pb4uski]

+2 I did a cash-out re-fi just prior to retiring a few years ago, reducing my rate from 4.375% to 3.375%. The low rate was hard to pass up. Since that re-fi, my portfolio has averaged almost 10.98% annual return so I'm way ahead and things would have to go sour in a big way for me not to come out ahead.

That said, our mortgage is less than 10% of our NW and I am a comfortable with risk and our WR is reasonably low.

Also, having a mortgage makes my itemized deductions more than the standard deduction and allows me to do more Roth conversions that I could without a mortgage and I am gaining at least 5% on those conversions as I am paying 10% in federal income tax on those conversions to avoid 15% or more in federal income tax later in life.

 

[marko]

A HELOC would be one way to reduce your claimed income for an ACA subsidy.

If you needed to bridge a few years (till Medicare) it would certainly pay for itself.

 

[daylatedollarshort]

A HELOC would be one way to reduce your claimed income for an ACA subsidy.

If you needed to bridge a few years (till Medicare) it would certainly pay for itself.

+1. A HELOC or mortgage. The ACA tax credits can be well over $10K in after tax money, certainly for many households that can make up for the possibility of a slightly lower return on after tax investment returns vs. after tax mortgage interest rates.

 

[Dog]

To each their own....whatever helps you sleep at night. I prefer to not have a mortgage payment as it will be $1100/month I won't need to pull from retirement accounts. Our situation may be different as we will be selling primary home (still has a 20 yr. mortgage) when DH retires next year to move full time to the home we built for retirement (no mortgage). Personally, I like the idea of being debt free (except taxes of course).
I don't believe there is a "one size fits all" answer.

 

[haha]

I have no mortgage, becasue at the time I bought (2011), cash talked

I then went to take out a mortgage, but I decided that the fees and hassle were not worth it to me. Also, I need less cash flow to meet my obligations, thus enabling me to keep a closer eye of income tax and Medicare fees.

I had thought that I would definitely want a mortgage at today's rates, but overll I think it turned out to be different for me.

Ha

 

[Badger]

We are glad to have paid off our mortgage years ago after the interest was no longer enough to allow us to itemize on our taxes. We don't owe even a penny to anyone. Less hassle, will always have a place to live as long as we pay the low property taxes, and left us with a pant load of money since that time to invest each month in our 403b(s) and Roth IRA(s).

Worked for us.

Cheers!

 

[purplesky]

My take is that Dave Ramsey's advice has more to do with human behavior than math.

Like when he tells people to pay off the smallest debt first, even if it's not the highest interest rate. Obviously, with all things being equal, one should pay off the highest interest debt, but all things are not equal. There are many people who become discouraged when they try to pay off the higher interest debt and fail. Paying off the smaller debt is easier and succeeding leads to a real psychological boost and helps many people keep with the program.

Likewise, owning a house is very different from owning a stock portfolio. Investments are pretty easy to cash out of while selling a house is a bigger deal. A house often turns out to be the largest asset some people have and can be cashed out when it's time to move into assisted living. I know both my DMIL and my DGM sold their houses when it was time to move into assisted living and the cash from that provided the money they needed.

Now, I know all of us here in this forum are strictly rational and will do whatever it takes to earn an extra 1% on their money but owning a house gives many people a real asset they can rely on.

I agree with Dave Ramsey about the behavior issue with spending and saving.

But Dave Ramsey tells people everyday to pay off their mortgage completely before they retire and he doesn't even ask them for the exact details of their retirement savings situation. Thats kind of important information one should have before they tell a person to spend a huge portion of their nest egg to payoff their mortgage.

Many people live several decades in retirement so a paid off house is useless without retirement income to eat and keep the lights on. Not to mention taxes,insurance and maintenance costs.

 

[purplesky]

Funny how Ric Edelman stopped pushing the idea that people should mortgage their house to the max and pore the money into the stock market after the troubles of 2008.

Of course, as that recedes in our memories, it's made it back into his spiel.

The housing market crashed in 2007-2008 if I remember correctly and we were dealing with a major recession. He was probably busy dealing with investors.

Edelman has been telling people for the last several years to not put all your eggs in your housing basket. Invest in the markets while paying off your low interest mortgage at the same time.

Edelman tells people all the time the he is ok with it if they have the cash to go ahead and payoff their mortgage in full as long as they have a well funded diversified portfolio that will produce retirement income. Perfect world scenario.

Obviously in a perfect world no debt in retirement is what everybody wants but for the average person thats not going to happen.

 

[daylatedollarshort]

Obviously in a perfect world no debt in retirement is what everybody wants

I want to maximize my net worth.

 

[samclem]

I want to maximize my net worth.

Hmmm. Think that through carefully. If someone offered to pay you 3:1 on the flip of a coin if you would wager your entire portfolio, would you take it? If your goal is maximizing your net worth, you definitely would.
There's a lot of nuance in the goals we set, whether we recognize it or not. You goal is probably more like mine, which might read something like "primary objective is to maximize the chance I have enough resources for a comfortable retirement. Consistent with and subordinate to this, a secondary goal is to maximize my net worth to allow marginal enhancements to my quality of life (or a chance to leave legacy funds, etc)"
Sorry--off topic.

 

[pb4uski]

OK, I guess that DLDS should have said "maximize net worth without taking stupid risks" to cover off samclem's hypothetical.

Give me 3:1 odds where if I lose it isn't financial ruin and I might take you up on it.

 

[daylatedollarshort]

OK, I guess that DLDS should have said "maximize net worth without taking stupid risks" to cover off samclem's hypothetical.

Give me 3:1 odds where if I lose it isn't financial ruin and I might take you up on it.

Yes, without taking stupid risks is a addition good. I could also add things like maximizing net worth without being a prostitute, swindling the elderly, getting into derivatives I don't understand or betting on dog fights. But that would take a long time to write all out. So I kept it short and assumed people would understand in the context of this thread it meant I would go with a mortgage if it maximized my net worth.

I can't personally relate to the whole debt is bad kind of thinking. On the fatwallet forum there are threads and threads about where to get 0% credit card money and invest the difference. One of our kids has 0% loans as part of the financial aid package. Why would we ever pay that off before the rate increase kicks in? Why not invest the money and enjoy the returns? It is some easy extra passive income and helps to keep our AGI low for now and lets us qualify for ACA and college tax credits.

 

[mpeirce]

I can't personally relate to the whole debt is bad kind of thinking. On the fatwallet forum there are threads and threads about where to get 0% credit card money and invest the difference.

What happens to those folks when the markets tank 50% and stays there for a while. How do they pay back that "sweet loan". Especially if they lose their job at the same time.

Likely? Maybe not. But certainly a possible scenario.

One of our kids has 0% loans as part of the financial aid package. Why would we ever pay that off before the rate increase kicks in? Why not invest the money and enjoy the returns?

If our beneficent government wants to give you low interest money to invest, there nothing illegal in using it. But frankly it doesn't sounds like your kid actually was in "financial need" if the money didn't go to pay for school expenses.

 

[samclem]

Yes, without taking stupid risks is a addition good. I could also add things like maximizing net worth without being a prostitute, swindling the elderly, getting into derivatives I don't understand or betting on dog fights. But that would take a long time to write all out. So I kept it short and assumed people would understand in the context of this thread it meant I would go with a mortgage if it maximized my net worth.

I wasn't trying to be pedantic, sorry for the sidetrack. But the issue goes right to the heart of investing for retirement, and an opportunity to think through the whole issue of "marginal utility" as we try to figure out how to craft a secure income stream for the future. Virtually nobody in this game is really trying to maximize their net worth.

Would I take 3:1 odds on a coin flip? In a minute, but only on a portion of my stash. As favorable as that payout is, the "pain" of losing the entire wad makes taking that risk unfavorable, for me.

 

[Mulligan]

I wasn't trying to be pedantic, sorry for the sidetrack. But the issue goes right to the heart of investing for retirement, and an opportunity to think through the whole issue of "marginal utility" as we try to figure out how to craft a secure income stream for the future. Virtually nobody in this game is really trying to maximize their net worth.

Would I take 3:1 odds on a coin flip? In a minute, but only on a portion of my stash. As favorable as that payout is, the "pain" of losing the entire wad makes taking that risk unfavorable, for me.

I would too, but Im a bit more conservative. But I would insist on the stash being split equally into three separate flips of the coin.


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[brewer12345]

What happens to those folks when the markets tank 50% and stays there for a while. How do they pay back that "sweet loan". Especially if they lose their job at the same time.

Likely? Maybe not. But certainly a possible scenario.

At one point pre-bust I had 6 figures in 0% advances outstanding. The money was housed in the highest paying online savings account I could find. Easy money for some minor book keeping.

During the depth of the bust I had 50k out on a HELOC I invested in a mix of junk and Baa-rated corporates that was yielding 12% to maturity. I could do the credit work on the bond obligors and did not get too concentrated in any one issue. Scarier money, but extremely profitable.

Invest that scratch in equities? Not me.

 

[karluk]

I've made investments with borrowed money many times over the years, but have always insisted on betting only on a sure thing. Naturally this has limited both my opportunities and the profit I realize on those opportunities. But even though I haven't grown rich on borrowed money, I've definitely made thousands of dollars in profits, most likely in the low five figure range.

My most common strategem is to borrow money on the 0% teaser rates that credit cards companies offer and invest the money in stocks in my taxable account. Simultaneously I sell the same amount of equites in my 457 plan and transfer it into a stable value fund. My stock allocation hasn't changed, so my profit is simply the interest generated from the extra money in the stable vaue fund minus fees, if any, charged on the 0% loan. I also profit at tax time by having more of my stock profits taxed at favorable LTCG rates.

 

[bclover]

I agree with Dave Ramsey about the behavior issue with spending and saving.

But Dave Ramsey tells people everyday to pay off their mortgage completely before they retire and he doesn't even ask them for the exact details of their retirement savings situation. Thats kind of important information one should have before they tell a person to spend a huge portion of their nest egg to payoff their mortgage.

Many people live several decades in retirement so a paid off house is useless without retirement income to eat and keep the lights on. Not to mention taxes,insurance and maintenance costs.

which is what annoys me with ole dave. NJ has some of the highest property taxes in the nation. I do know a number of neighbors who house rich and cash poor. then when they retired were forced to sell said house and downsize in order to live.

Dave promotes not having a mortgage as the answer to all the financial problems of the world.

I do have a question? people are mentioning the "stress" from having a mortgage? what stress? what difficulty?