I originally intended to pay off the mortgage, 3-5 years into retirement because most of the funds would come from a tax deferred account. We recently refinanced and now the rate is at a point where I'll probably let it run the full term. As others have said, I can probably invest with a higher return than the rate we're paying.
Mortgage(s) in Retirement
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LakeTravis
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Had this very same conversation with my CFO yesterday. At rates of 3.5% or less, many would consider that virtually "free" money. And from a purely financial perspective, it's hard to argue that it makes sense to pay it off when it's entirely possible you can earn a better return somewhere else.
Take into account that a home is normally an appreciating asset (recency effect has led many to no longer believe that!) and it makes even more sense to not pay off a mortgage.
We also debated how anyone would throw funding into the mortgage markets with such a low return, and how that might impact the future. Then we realized that's only an issue if you assume that everyone goes full term with their mortgages. The majority never do, in fact I think he mentioned that the average "life" of a 30 year mortgage is less than 6 years.
But different people take comfort in different things, and many people like the feeling of not having to make a mortgage payment. From a purely emotional perspective, it might make sense to pay it off.
Take into account that a home is normally an appreciating asset (recency effect has led many to no longer believe that!) and it makes even more sense to not pay off a mortgage.
We also debated how anyone would throw funding into the mortgage markets with such a low return, and how that might impact the future. Then we realized that's only an issue if you assume that everyone goes full term with their mortgages. The majority never do, in fact I think he mentioned that the average "life" of a 30 year mortgage is less than 6 years.
But different people take comfort in different things, and many people like the feeling of not having to make a mortgage payment. From a purely emotional perspective, it might make sense to pay it off.
ShortInSeattle
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LakeTravis said:
Good points. We currently list mortgage payoff as last on our priority list.
#1. Save for normal retirement.
#2. Save for early retirement.
#3. Pay off Mortgage.
So basically when we hit our "number" for FIRE if we have any steam left in our careers we'll pay the mortgage down. If we don't, our retirement income should cover the payment.
SIS
traineeinvestor
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Another +1
With the floating interest rate on our mortgage currently hovering at around 1% and local CPI currently above 4%, we intend to keep it in place unless the interest rate rises to the point where we feel early repayments are justified.
I think that having a mortgage after retirement is fine as long as one's income to cover it is bomb proof. If the portfolio can handle a 95% drop in the stock market, State pensions going poof! on account of state insolvency, annuities not being paid because insurance companies have gone belly up and of course, the other insurance companies not being able to cover that much vaunted insurance pool and so on and so on. As long as the world keeps purring along (sort of) mortages are fine. Just remember one of the main reasons for some folks relocating on the old model T during a period of time known as the great depression was being kicked out of their homes due to a lack of ability to pay their debts.
nun
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I'm in the "no mortgage" camp having paid mine off. However, I can see why at 3.75% people would want to keep a mortgage, the tax deduction and put their money to work in other places and hopefully pocket the difference between 3.75% and their investment return. Of course this assumes everything goes according to plan. I think us "pay off types" are essentially pessimists and we are planing for the worst case.
IMHO, the mortgage argument comes down to psychology and asset allocation. Going into ER I want to reduce my expenses as much as possible and move to a more conservative AA that will protect principal. Paying of my mortgage did that for me. My house is a two family and I rent out the ground floor apartment for $1200/month. So with no mortgage, that $1200/month covers real estate taxes, home insurance, health insurance and income taxes. Those are things I MUST pay. I can then manage my investments and the rest of my budget without having to worry about the basics.
IMHO, the mortgage argument comes down to psychology and asset allocation. Going into ER I want to reduce my expenses as much as possible and move to a more conservative AA that will protect principal. Paying of my mortgage did that for me. My house is a two family and I rent out the ground floor apartment for $1200/month. So with no mortgage, that $1200/month covers real estate taxes, home insurance, health insurance and income taxes. Those are things I MUST pay. I can then manage my investments and the rest of my budget without having to worry about the basics.
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Mulligan
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I am in the same camp as chains be gone. I have plenty of cash flow for retirement, but asset base is not built up sufficiently to pay off the note and still have any cushion funds left. My payment is somewhere around 15% of my after tax monthly income, so it is no problem to pay it monthly.
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ShokWaveRider
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Then the "No Brainer" is to pay off your mortgage. Again I am really only talking about retired folk. And Assume that they have the means to pay it off if they want to.
Texas Proud
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If the stock market drops 95%.... having a mortgage or not having a mortgage will not be the issue that most people would be worrying about...
So it's a no brainer to have a mortgage, and also a no brainer to pay it off.
Bestwifeever
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No, if Finance Dave's scenario happened, it would be the worst possible time to pay off the mortgage--you would be selling very low to do so. The "best" possible time to pay off the mortgage if one wanted to not have a mortgage, would be to sell high, at the top of the market, and put the proceeds against the mortgage.
pb4uski
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+1 If the stock market crashed 95% then having a mortgage would be the least of my worries. I suspect that for many individual stocks that their cash and cash equivalents exceeds 5% of their market cap.
Why would it be the least of your worries? If I'm retired and living off my investments withdrawing 4% and part of that 4% goes to pay a mortgage why wouldn't I be better off if I don't have a mortgage in the first place? During the great depression the folks moving out of desperation were not the ones that had their homes free and clear. I can see the decision being one of "running the numbers" under normal circumstances but since we got so close to total collapse in 2008 I'm not so sure that "normality" is what I would use to describe current times. And no, I don't think society would collapse under a 95% drop scenario. After all, it didn't back in 1929 and things went along (more or less) for the 75% that had jobs. The highly leveraged folks and the ones in the 25% unemployed were the ones that had a hard time of it.
pb4uski
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Well to begin with, the whole notion of a 95% reduction in stocks is idiotic.
Even the Great Depression was "only" 89% and there are more protections against such a decline in place today than back then. Also, it seems likely that there would be second order effects on corporate bonds as well so diversification would be of little protection. I differ from you in that I think the society would collapse and that would be much more worrying to me than having a mortgage.
Unless the crash was a one-day event, there would probably come a time where I would do some selling an put the money aside so that I could use it to pay the mortgage. Even if it was a one day event I could sell the remaining 5% and some fixed income assuming those don't crash as well and pay off my mortgage, plant a big garden and continue on. Worst case, I would need to go back to w*rk.
Texas Proud
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Well, just for me, putting food on the table would be more of a concern... and paying the utilities etc. etc..
If your are retired and you lose 95% of your money... then the 4% withdrawal plus inflation is thrown out.... you now have to live on your new standard... so if you were spending $100K per year before, you now are spending $5K... what are the other $95K of spending are you going to cut
I hope that we don't get to test that idiotic 95% drop notion. I wish I had your faith that the powers that be would be smart enough to protect us but frankly I think that is actually the idiocy.
pb4uski
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+1 on the first part.
I'm not sure where you get the idea that I have faith in the powers that be are smart enough to protect us. In fact, it is quite the opposite in that if they even just had common sense we wouldn't be in the predicament that we are. However, the powers that be know that if the stock market dropped 95% that they would no longer be in power, so they wouldn't let it happen as a matter of self preservation.
M Paquette
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ejman said:
The good news is that dividend yield on the S&P 500 index would be something like 50%, and stocks would sell for something less than one year of net earnings, or a month of revenues. Unless you believe that ALL economic activity is going to drop by 95%, in which case there will be... greater concerns...
I'll be opening a ThunderDome franchise...
(The S&P Composite PE ratio reached 32.6 in September 1929, and dropped to a low around 8 with an composite price 86.2% drop, in 1931.)
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militaryman
Recycles dryer sheets
^^^^^^ To me, This is a good answer for the reason to keep the mortgage --- More $$ being made elsewhere means getting rid of mortgage would cost you --- That money difference is what you end up paying for the peace of mind to be debt free if you choose to go ahead and payoff the loan. Some **value** that peace of mind more than others --- To some it is no big deal and for them to not keep the $$ invested and earning them higher returns would feel foolish.
I'm confused (not an unusual situation for me...) At first you disabuse me of the notion that you think the powers that be are smart enough to protect us and then you turn right around and say they will never let it happen because they want to stay in power so which is it?
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ShokWaveRider
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YES, BUT it is situation dependent.
1) If you have the money to pay it off, and if your returns on the money that would be in the mortgage is not bringing you out net positive after all costs and taxes, then paying it off is a no Brainer.
2) If the money that would be in a mortgage is bringing in returns net positive after all costs and taxes then it is a no brainer to have a mortgage.
Of course if this positive or negative number is a fraction of a percent at the end of the day, one may consider it a wash. In my case a wash is not good justification in having a mortgage.
I thought I had already made this clear? sorry if I did not.
The reason you are having trouble understanding it is that you are looking at the situation from the viewpoint of a paycheck-to-paycheck consumer and/or a person retiring on a shoestring. If you were looking at it from the viewpoint of an astute Financially Independent money manager you'd not be puzzled at all. After all, that's what the F.I. stands for in F.I.R.E. This isn't the Retire Early By The Skin Of Your Teeth board.
Don't look at the mortgage in isolation, as if it were the only piece of your financial life. Look at it a just one piece of the picture, and see how it fits in the whole picture. If someone has $1.5 million in stocks & bonds and a $250,000 mortgage, then they have net assets of $1.25 M. In this picture the mortgage is just a very small piece and has a negligible effect on their cash flow and overall risk.
$250K mortgage at 4% and $1.5 M well-diversified portfolio split $900K in stocks and $600K in bonds? Piffle. No risk at all. BTW, that $600k in bonds is earning around 6% and throwing off $3000/mo income while the mortgage payment is around $1300/mo.
The goal for F.I. is to have enough assets that the only question in regard to a mortgage is whether or not you want the bother of sending in a payment every month.
Well, whether or not you have a monthly mortgage payment, you have plenty of other monthly bills -- electric, gas, cable, phone -- so it's not like the mortgage payment is a lot of additional work.
And if you are cleverly lazy, you just set everything up on automatic bill pay and you only have to mess with it once. Set your bonds to deposit the monthly interest to your checking account and set the mortgage payment to come out of the same account.
OP
OP
ShokWaveRider
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What are these bond investments that one can get today that throws off 6%? Are they somewhat safe?
Today? Mostly preferred stocks and various income-related closed end funds. (But you gotta diversify!)
Five-ten years from now? Eventually interest rates will get back up to more typical levels. But that 4.00% FRM will stay at 4% for 30 years.
Of course, you don't get 6% on AAA rated bonds. You have to have a diversified mix of terms and ratings (including some junk bond funds).
As far as preferreds, there is this chart:
http://www.cdx3.net/blog/blog_images/current_snapshot.jpg
Looking at the current table (subscribers only), there are 80 issues that meet all his criteria, and the average yield is 6.73%. Knock out the ones that are more than 4% over par and there are 41 remaining, with an average yield of 6.77% I'm not gonna get into a big debate about preferreds or junk bonds, but just point out that it's possible to get 6% yield with a certain degree of safety.
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See, the great thing about applying astute money managment is that a 4% mortgage will stay 4% forever, and you can earn almost that or more with various fixed-income investments. With the extra margin of safety being that you have plenty of liquid assets & interest income to cover the mortgage.
Five-ten years from now? Eventually interest rates will get back up to more typical levels. But that 4.00% FRM will stay at 4% for 30 years.
Of course, you don't get 6% on AAA rated bonds. You have to have a diversified mix of terms and ratings (including some junk bond funds).
As far as preferreds, there is this chart:
http://www.cdx3.net/blog/blog_images/current_snapshot.jpg
Looking at the current table (subscribers only), there are 80 issues that meet all his criteria, and the average yield is 6.73%. Knock out the ones that are more than 4% over par and there are 41 remaining, with an average yield of 6.77% I'm not gonna get into a big debate about preferreds or junk bonds, but just point out that it's possible to get 6% yield with a certain degree of safety.
===============================================
See, the great thing about applying astute money managment is that a 4% mortgage will stay 4% forever, and you can earn almost that or more with various fixed-income investments. With the extra margin of safety being that you have plenty of liquid assets & interest income to cover the mortgage.
