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The Value of Debt in Retirement
Old 03-29-2015, 08:37 AM   #1
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The Value of Debt in Retirement

The Washington Post ran an interview with Tom Anderson, the author of the book The Value of Debt in Retirement. In the interview he argues that it can make economic sense to carry debts such as a mortgage into retirement.

As part of the "keep the mortgage" group, I found it a refreshing change from the typical advice seen in media. The danger is in hearing only the part about holding onto the mortgage without implementing the offsetting part of the strategy which is to save/invest the money which would have been used to pay off the mortgage.
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Old 03-29-2015, 09:18 AM   #2
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Thanks for the link! We decided last week that we would get a 30 year loan for our retirement home; for the reasons stated in this article.

Marc
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Old 03-29-2015, 09:38 AM   #3
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Makes sense if mortgage is fully deductible and you can find guaranteed investment that pays more than mortgage rate.

CDs are guaranteed investments and I do not believe CDs pay higher rate then mortgage.

Hence having mortgage in retirement is humbug

I do not margin purchase of equities against my house....even though we had always been 100% in equities and they do pay more then mortgage rate (over a long period of time)
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Old 03-29-2015, 09:51 AM   #4
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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.
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Old 03-29-2015, 09:54 AM   #5
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Read the article and some of the comments. My understanding is he assumes you are using savings to pay off your mortgage and risking liquidity. He doesn't even address the folks out there that have built up a large emergency savings fund outside of their retirement accounts and can afford to pay off their mortgage - meaning they need less monthly income since they don't have a mortgage payment. How are they less liquid? Why would they need more liquidity?
I didn't understand his example of his relative going into nursing home either. How would having a mortgage have helped in that situation?
Just my thoughts


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Old 03-29-2015, 10:47 AM   #6
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Intriguing book. I'm going to check it out.
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Old 03-29-2015, 10:55 AM   #7
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I don't think there is a one size fits all answer. If you have a part-time retirement job involving fireworks, and live in a state with no asset protection for personal residences, it might be a good idea to keep a mortgage. In a different state the opposite might be true. There are many factors to consider.
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Old 03-29-2015, 11:09 AM   #8
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Originally Posted by eta2020 View Post
Makes sense if mortgage is fully deductible and you can find guaranteed investment that pays more than mortgage rate.

CDs are guaranteed investments and I do not believe CDs pay higher rate then mortgage.

Hence having mortgage in retirement is humbug

I do not margin purchase of equities against my house....even though we had always been 100% in equities and they do pay more then mortgage rate (over a long period of time)
Your choice, but your arguments are deeply flawed.

A) Fully deductible or not is a consideration and part of the calculation, it is not binary.

B) The investment does not need to be 'guaranteed' - it only needs to fit your overall risk profile.

For example, if you inherited some CDs (say from a joint account), does that mean you could never invest that money in the market, because you could never get the same 'guaranteed' rate in the market (even though it might just be 1%)? Nope, just invest it to match your overall risk profile.

During any time that you had any money in equities (even a single $), did you hold a mortgage? Or did you pay the mortgage off before buying anything other than guaranteed investments that paid more than your mortgage rate (beyond an emergency fund)?

-ERD50
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Old 03-29-2015, 11:21 AM   #9
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Your choice, but your arguments are deeply flawed.

A) Fully deductible or not is a consideration and part of the calculation, it is not binary.

B) The investment does not need to be 'guaranteed' - it only needs to fit your overall risk profile.

-ERD50
If mortgage interest rate is not fully tax deductible then I would need to earn enough to cover mortgage interest PLUS to cover income taxes. So I would need even higher earnings....

If I start buying something that carries risk then in effect I bought investment on margin against my house.

BTW we payed of mortgage in 6 years. That was long long time ago. We pretty much did not buy anything except 401ks and IRAs while having mortgage.
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Old 03-29-2015, 11:28 AM   #10
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Our mortgage is 3.38%. Our total portfolio growth from the start of 2007 (8 years) was 5.8% compounded. So it is working for us. Our investment gains are mostly in retirement accounts so we have a lot of control over taxes until RMD's.

I think the mortgage decision is highly dependent on temperament, taxes, investor's risk preferences, etc.
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Old 03-29-2015, 11:37 AM   #11
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Originally Posted by eta2020 View Post
Makes sense if mortgage is fully deductible and you can find guaranteed investment that pays more than mortgage rate.

CDs are guaranteed investments and I do not believe CDs pay higher rate then mortgage.

Hence having mortgage in retirement is humbug

I do not margin purchase of equities against my house....even though we had always been 100% in equities and they do pay more then mortgage rate (over a long period of time)
+1

There are FA's, who promote carrying a mortgage, and other who do not,
when retired. Simple fact, 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.
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Old 03-29-2015, 11:43 AM   #12
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Our mortgage is 3.38%. Our total portfolio growth from the start of 2007 (8 years) was 5.8% compounded. So it is working for us. Our investment gains are mostly in retirement accounts so we have a lot of control over taxes until RMD's.

I think the mortgage decision is highly dependent on temperament, taxes, investor's risk preferences, etc.
Now my angle is like this. We have no debt no mortgage.

That allowed us with ease to be 100% in equities. That in turn resulted in pretty good returns.

If we had carried mortgage we would not had been so aggressive in our portfolio over a last 15 years.
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Old 03-29-2015, 11:54 AM   #13
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If mortgage interest rate is not fully tax deductible then I would need to earn enough to cover mortgage interest PLUS to cover income taxes. So I would need even higher earnings....
Exactly what I said. It is a consideration/calcualtion, not a yes/no.

Quote:
If I start buying something that carries risk then in effect I bought investment on margin against my house.
Money is fungible. You have a mortgage or not, you invest one way or another, it isn't 'against the house', it's all part of your pot.

Quote:
BTW we payed of mortgage in 6 years. That was long long time ago. We pretty much did not buy anything except 401ks and IRAs while having mortgage.
You didn't answer the question.

-ERD50
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Old 03-29-2015, 12:14 PM   #14
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Originally Posted by eta2020 View Post
Now my angle is like this. We have no debt no mortgage.

That allowed us with ease to be 100% in equities. That in turn resulted in pretty good returns.

If we had carried mortgage we would not had been so aggressive in our portfolio over a last 15 years.
That works for you and is fine with me.

The 100% equity position is not enabled just by a payed off mortgage. You felt that that was a reasonable risk just like most of us come to our position by our personal risk profile and net worth + income.

I'm guessing that there is more to your story that enables the 100% equity position. Some possibilities that come to mind:
1) High portfolio value compared to yearly spending, i.e. low withdrawal percentages so you can take a 50% portfolio hit.
2) Pension + SS covers much of the spending.
3) You are fine with a high level of risk.
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Old 03-29-2015, 12:36 PM   #15
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Exactly what I said. It is a consideration/calcualtion, not a yes/no.



Money is fungible. You have a mortgage or not, you invest one way or another, it isn't 'against the house', it's all part of your pot.



You didn't answer the question.

-ERD50
You have a point as well. There is no exact good choice here. People should do whatever works for them.

I guess I view house as extremely safe bucket of money which I would not want to move into less safe bucket. Kinda like giant CD with benefit of providing home.
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Old 03-29-2015, 01:41 PM   #16
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... There is no exact good choice here. People should do whatever works for them. ...
Agreed, I just have an aversion to absolutes and one-size-fits-all statements. Hard for me to let them stand w/o a challenge.

Quote:
I guess I view house as extremely safe bucket of money which I would not want to move into less safe bucket. Kinda like giant CD with benefit of providing home.
And I would not say there is anything 'wrong' with that view, I think it is fair to say that it is a 'guaranteed' return. And if you feel that way, act accordingly (but I'd still separate the 'providing a home' statement - the home is there whether mortgaged or not, and assuming adequate liquidity - again, fungible accounting).

But I do think the 'safety issue' might be a bit of a limiting view, and it is better to take an overall risk/volatility view. But that is in the eyes of the beholder.

As an example, I think a few past posts have said they had $X funds sitting in a money market, and no way in hell-or-high-water would they put that money in anything more volatile. They just wouldn't do it. At the same time, they are paying a higher rate on their mortgage, and they could pay it off with those funds and still have sufficient liquidity. Given those constraints, then clearly the answer is to pay off the mortgage.

Personally, I think the constraints should be reconsidered, but if that is how it is, the decision is clear.

-ERD50
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Old 03-29-2015, 02:17 PM   #17
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Independent of the perenial mortgage/no mortgage debate, I think that retaining the >ability< to go into debt in retirement is important for most retirees. It can be difficult to get a regular mortgage at an attractive rate once the regular paycheck stops, that's why we got a HELOC.

Even if one doesn't want to have a mortgage now, circumstances can change and a slug of money might be darn handy just when it is inconvenient to sell assets (due to tax costs/tax penalties, illiquidity, temporarily depressed prices, etc). So, I'd recommend that even dyed-in-the-wool "no mortgage in retirement" types at least consider the potential value of having a HELOC or other means to get money if needed. It provides options and costs very little.
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Old 03-29-2015, 03:04 PM   #18
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When I RE'd I kept the mortgage (actually Home Equity Loan) even though I had the cash on hand to pay it off. The reason that I did this was psychological.

DW is still working for the next several years. Once she RE's we will have a step down in income. It is at that point that I plan to have the mortgage paid off. Having the increase in monthly income not going toward the mortgage payment will be an offset somewhat against the end of DW's regular earned paycheck.

The interest rate for the current HEL is less than 2% so the economic difference (paying off early vs running it out as described above) is not that large.

-gauss
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Old 03-29-2015, 04:17 PM   #19
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Independent of the perenial mortgage/no mortgage debate, I think that retaining the >ability< to go into debt in retirement is important for most retirees. It can be difficult to get a regular mortgage at an attractive rate once the regular paycheck stops, that's why we got a HELOC.

Even if one doesn't want to have a mortgage now, circumstances can change and a slug of money might be darn handy just when it is inconvenient to sell assets (due to tax costs/tax penalties, illiquidity, temporarily depressed prices, etc). So, I'd recommend that even dyed-in-the-wool "no mortgage in retirement" types at least consider the potential value of having a HELOC or other means to get money if needed. It provides options and costs very little.
A good point, Samclem. We will likely get a HELOC, but not draw on it, or just draw the minimum if there is one, right before we pull the plug. I have noticed that most HELOCS have a ten year draw period followed by a 20 year repayment period, so I'm not sure what we'll do about getting another HELOC at the end of the first ten years.
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Old 03-29-2015, 06:24 PM   #20
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Our mortgage is 3.38%. Our total portfolio growth from the start of 2007 (8 years) was 5.8% compounded. So it is working for us. Our investment gains are mostly in retirement accounts so we have a lot of control over taxes until RMD's.

I think the mortgage decision is highly dependent on temperament, taxes, investor's risk preferences, etc.
+1
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