Retirement vs. Liabilities

[headingout]

FWIW I paid off our mortgage at the earliest opportunity, after selling back some company ownership. Always had maxxed IRA's and 401K's. Didn't do a lot of math to justify the decision. It was a guaranteed 6+% return, simplified my recordkeeping, and meant my family would always have a roof. I would only consider mortgage debt for investment property, and probably will shy away from that, given a propensity for simplicity in financial affairs.

 

[Gardnr]

Its a nice hedge if you[-]'re still earning a living through wage adjusted earnings or [/-]have an inflation indexed pension.

This is my situation (military pension; COLA adjusted, of course) and thus why I've elected to not prepay the mortgage any more. It's currently scheduled to pay off in 2025 and I have an $88,000 balance at 6% fixed. My pension supplies 67-80% of my required income.

If rates drop down again to where I could get 6% or lower on a 30 yr, I'm considering refinancing my balance to spread it out and lower my payment, thus reducing my required draw on assets for the income required over what my pension supplies. I really think the hedge on inflation angle is valuable.

I could also go one step further and take cash out on the refi up to an 80% LTV. It makes sense if I really believe the inflation hedge theory.

Of course who knows when/if we'll see rates drop down again to that level so if may be a moot point.

Thoughts anybody? I know all the standard arguments for/against paying off the mortgage so please don't cover that ground again. I'm just interested in thoughts on the inflation hedge angle that CFB points out.

 

[Nords]

This is my situation (military pension; COLA adjusted, of course) and thus why I've elected to not prepay the mortgage any more. It's currently scheduled to pay off in 2025 and I have an $88,000 balance at 6% fixed. My pension supplies 67-80% of my required income.
Thoughts anybody? I know all the standard arguments for/against paying off the mortgage so please don't cover that ground again. I'm just interested in thoughts on the inflation hedge angle that CFB points out.

CFB and I have been batting this around for over four years now:
http://www.early-retirement.org/forums/f28/new-debate-paying-off-mortgage-not-14632.html
http://www.early-retirement.org/forums/f28/covering-mortgage-without-losing-your-ass-ets-15237.html
http://www.early-retirement.org/forums/f47/should-i-pay-off-mortgage-invest-money-30644.html

COLA pensions are one of the niches optimized for success at investing the mortgage money, although it still requires a tolerance for the volatility of a high-equity asset allocation. You also don't want to be paying more in mortgage interest than you're earning in bonds, so your bond allocation goes to zero. But then your military pension is the equivalent of TIPS or I-bonds so you probably don't want to be holding bonds anyway.

The [-]bet[/-] strategy works best over a 30-year stock market, but it's also handy when CD rates exceed your mortgage. We have a 5.375% mortgage and I'm really gonna miss those PenFed 6.25% CDs when they roll over in another 18 months.

If rates drop down again you may not only want to refinance, you may want to start over. Our 30-year mortgage will be paid off in 2034, when I'll be 74 years old...

 

[Gardnr]

COLA pensions are one of the niches optimized for success at investing the mortgage money, although it still requires a tolerance for the volatility of a high-equity asset allocation. You also don't want to be paying more in mortgage interest than you're earning in bonds, so your bond allocation goes to zero. But then your military pension is the equivalent of TIPS or I-bonds so you probably don't want to be holding bonds anyway.

The [-]bet[/-] strategy works best over a 30-year stock market, but it's also handy when CD rates exceed your mortgage.

Yep, exactly what I was thinking in terms of allocation. I can stomach the high equity allocation.

I am planning on some portion in cash equivalents (ala the bucket strategy) to supply the income I want over and above the pension amount, but I haven't settled on just how much yet. Still working through that.

If rates drop down again you may not only want to refinance, you may want to start over. Our 30-year mortgage will be paid off in 2034, when I'll be 74 years old...

Yep, that's what I was referring to by the cash out refi on a new 30 yr mortgage. I'll have to keep it in mind and watch mortgage rates for a good execution point. Maybe I can beat you and go out to 76 yrs old!

 

[cute fuzzy bunny]

COLA pensions are one of the niches optimized for success at investing the mortgage money, although it still requires a tolerance for the volatility of a high-equity asset allocation.

Or you could pay off the mortgage, let all of the inflation stuff work in your favor instead of neutralizing it, pick any asset allocaion that you like, and drink a shitload of pina coladas with no concerns whatsoever.

Over 30 years of ironman investing you might be up a little bit. Might even cover the cost of all that pineapple juice and sweetened coconut milk....coco lopez is recommended...

 

[Nords]

I am planning on some portion in cash equivalents (ala the bucket strategy) to supply the income I want over and above the pension amount, but I haven't settled on just how much yet. Still working through that.

We keep two years' expenses in a CD ladder going out as long as seems reasonable for the yield curve. (Currently about three years.) We replenish the ladder in up years and consume it in down years. The nice thing about PenFed is that they give the same great rates in smaller CDs so that there's less penalty for breaking one during a semi-decennial bear market. Hasn't happened yet but we'll give this current environment another 18 months.

Or you could pay off the mortgage, let all of the inflation stuff work in your favor instead of neutralizing it, pick any asset allocaion that you like, and drink a shitload of pina coladas with no concerns whatsoever.
Over 30 years of ironman investing you might be up a little bit. Might even cover the cost of all that pineapple juice and sweetened coconut milk....coco lopez is recommended...

All of that money was burning a hole in our pockets in 2004, but four years later I can forecast a lower-volatility trend in our investor psychology. We unexpectedly won the rental lottery when our parents-in-law moved out, and soon those home improvements will be paid off from the tenant's cash flow. But in a couple decades I'll probably be a more conservative investor. I'll be hiking my jams up to my armpits and grumbling at those dang boogie-boarding grommies to get off my wave.

A typical Hawaii mortgage is pretty sizeable, and ours is a sixth of our ER portfolio. If past investment returns are prologue then when our mortgage is paid off we'll need a swimming pool for the coco locos. I'll be happy if our 5.375% nets 6% after taxes... for three decades.

But mortgage arb is a relatively benign vice compared to the trouble we could get ourselves into. It soaks up a lot of UncleMick's testosterone poisoning and gives me pause when I consider what it'd take to do angel investing right. I'm not sure if I'll ever be ready to take that step, let alone trading options.

 

[chinaco]

I was having a retirement discussion with my coworker the other day about spending money in the short term to save money in the long term. I believe liabilities like car payments, mortgage, and other bills should be paid off to a manageable minimum to go into retirement. My coworker has a mortgage that he pays very little into the principle, placing that money instead into an IRA. He believes the IRA is a better investment right now. But I say he's only prolonging his liability, which will bite him down the road. What's your thoughts?

How old is the coworker?

IMO - one key issue depends the person's age. If the coworker is 25... I think holding the mortgage and investing in a IRA is the correct approach. On the other hand, if the coworker is 65... paying off the mortgage would be a priority.

There are a number of variables to consider... including the financial sophistication of the person.

If the person has a large amount of money (other assets) relative to the mortgage principal... then the amount they will gain from investing borrowed money is relatively low (why do it... little benefit). On the other hand if the relative amount of the mortgage principal is high compared to other assets, they are risking their home to invest in the market.


Personally... The older I get, the more important it is for me to own my home free and clear.

 

[cute fuzzy bunny]

But mortgage arb is a relatively benign vice compared to the trouble we could get ourselves into.

I do have to remember that you spent many years in a tin can, underwater, with a live nuclear reaction happening up the hall. Investing risk is pretty low on the totem pole.

 

[Nords]

I do have to remember that you spent many years in a tin can, underwater, with a live nuclear reaction happening up the hall. Investing risk is pretty low on the totem pole.

Good point-- my hedonic treadmill is perpetually uphill...