An off hand remark by the new lady on the health forum caused me to ponder this question. I have tentatively decided to pay off my mortgage on my second home when DW retires in a year or two. I have $270K in safe fixed investments to cover the pay off. I am choosing to do this because I want to reduce expenses to drive my SWR percentage rate down well below 4%. You don't need to tell me all the reasons not to pay off my mortgage since we have already covered that several times (but feel free to slam in anyway if you can't restrain yourself
Anyway, I ran the numbers against Vanguard's annuity quoter to see how a $270K 26 year fixed annuity with cancellation option would perform. It would deliver $1497.45/mth. My current mortgage (principal and interest only) is $1,065. Vanguard says that 57.9% of the annuity is "excluded." I assume that means 42.1% of the annuity is taxable income.
This sounds like an attractive option. In the early years, the tax deduction on the mortgage interest would more than make up for the tax on the annuity. In the meantime, the annuity would pay the mortgage and the insurance and property tax I would have to pay on my own if I paid the mortgage off in cash. The fact that the insurance and property tax would continue to rise is irrelevant since that will happen if I pay the loan off anyway.
Am I missing anything here? Has anyone evaluated such an approach and, if so, does it make sense to take out a shorter annuity covering years were the mortgage tax deduction is high and reserve the remainder for a future buy-out?
Brewer - what insurance companies should I consider if I get serious about this? Should I include Vanguard in the mix?