Another pay off the mortgage thread

[donheff]

This article does a nice job of graphically laying out the historical impact of taking a mortgage in retirement and investing the difference. The author shows the substantial differences in outcome when the mortgage is paid off from the portfolio vs paid of from salary (leaving the portfolio untouched). I suspect that he doesn't figure in the fact that the person who pays off from salary could have/would have invested the equivalent amounts over time absent the mortgage so the differences may be overstated. Nevertheless it is a useful article for those contemplating the pay off or not decision. Here is a chart showing the outcomes:

 

[rayvt]

He's really putting a thumb on the scale.

First thing that popped out is that he's taking a 5.7% withdrawal from the portfolio. Unsurprisingly, he finds that this is not safe. Duh.

Second thing that popped out is that he's tapping a portfolio which has the same initial balance as the mortgage. This is like going sailing in a boat with zero freeboard. Any little wave is going to flood the boat.

You don't retire with a 100K mortgage counting on a 100K investment portfolio to fund it. You retire with a 100K mortgage with a 200K portfolio to fund it. Or 300K. That's enough freeboard to survive quite handily. 2.85% withdrawal will work just fine.

His post should be titled "Doing stupid financial stuff is risky"

 

[CaliforniaMan]

Paying off your mortgage changes your asset allocation. That is why I did it. I had enough risk in stocks and bonds and having a paid off house is an opportunity for place to live cheaply (if necessary) for the remainder of your life. The potential returns of one v.s. the other did not fit into the equation.

 

[clifp]

I've read Don's stuff before I really think he missed the mark on this.

A huge factor in paying of mortgage is after tax return. This is even more important now with the ACA subsidies.

You really need to figure out the after tax interest rate on your mortgage and compare it the after tax return on your potential.

A guy in 15% tax bracket who is just taking the standard deduction, and has most of his investment in bonds or CDs is good candidate for paying of the mortgage.

A California person in the 33%tax bracket and 12%+ CA bracket,with a lots of other deduction, lots of real estate and stock investment the real interest rate is much lower and that person has a lot of potential have their investment taxed at 15% federal. That person is a much better candidate for keeping mortgage.

As Ravvt say the ratio of mortgage to total liquid assets isn't 1:1 1:3 or even 1:10 is far more typical.

Sequence of returns matters but frankly I trust FIRECalc simulations of this a lot more than I do the authors.

 

[ERD50]

I didn't analyze everything in the back-up article, but I did notice that this is (correctly) based on the prevailing mortgage rates for that time period.

That is as it should be, but for those of us who suggest that you are likely to see an advantage long term with a mortgage, the caveat is (usually stated but always implied) 'at the current historically low mortgage rates'. I sure wouldn't suggest it at the high teen mortgage rates that I've seen in my life.

Bottom line, for that and many other reasons, I don't think that is a useful report. Just goes to show that fancy charts and loads of data don't always tell the story, you need to apply some intelligent filtering and context.

I did see him claim that a mortgage 'increases the likelihood of foreclosure', but I didn't see his back up for that. I've shown how that extra liquidity can provide a lot of protection against a string of bad luck (unexpected expenses, job loss, etc).

-ERD50

 

[rodi]

I've read Don's stuff before I really think he missed the mark on this.

A huge factor in paying of mortgage is after tax return. This is even more important now with the ACA subsidies.

You really need to figure out the after tax interest rate on your mortgage and compare it the after tax return on your potential.

A guy in 15% tax bracket who is just taking the standard deduction, and has most of his investment in bonds or CDs is good candidate for paying of the mortgage.

A California person in the 33%tax bracket and 12%+ CA bracket,with a lots of other deduction, lots of real estate and stock investment the real interest rate is much lower and that person has a lot of potential have their investment taxed at 15% federal. That person is a much better candidate for keeping mortgage.

As Ravvt say the ratio of mortgage to total liquid assets isn't 1:1 1:3 or even 1:10 is far more typical.

Sequence of returns matters but frankly I trust FIRECalc simulations of this a lot more than I do the authors.

As a counter to this - if you're early retired, even in CA, you want to keep your budget low. And that in turn keeps your MAGI low for the ACA. Hard to do that with a CA size mortgage. We would not be able to live on a small enough figure to qualify for ACA subsidies if we still have a mortgage...

But - if your house debt is still high - it may make sense to keep it in high tax areas like CA...

Way before the ACA came along I realized that we could live on a lot less if we didn't have a big mortgage - and made a point of paying down the mortgage. We're on track to pay it off this year... and for me to retire next year. Our expenses are planned to get us *just* under the threshold for the subsidy.