Mortgage(s) in Retirement

[Animorph]

It is simply incorrect to think of your mortgage as part of your bond allocation.
This is an extension of the fallacy that paying extra principal is the same thing as earning X% on that amount.

Bonds pay interest to you. Your house doesn't.

And, if you are retired and don't get a paycheck, you are not "dollar cost averaging" anything.

Can't rebalance, can't use it for expenses in a bear market, can't take your money out at all (without getting a loan again or downsizing). Our home is not part of our portfolio.

 

[arebelspy]

Can't rebalance, can't use it for expenses in a bear market, can't take your money out at all (without getting a loan again or downsizing). Our home is not part of our portfolio.

Exactly. Having all that trapped equity sucks. Imagine if you had a mortgage and invested that money then you could rebalance, could use it for expenses, could take the money out, and it could be a part of our portfolio (with higher expenses, due to the mortgage).

 

[foxfirev5]

Can't rebalance, can't use it for expenses in a bear market, can't take your money out at all (without getting a loan again or downsizing). Our home is not part of our portfolio.

I agree. Not having a mortgage in early 2009 was a huge help in riding out the investment storm and sticking to my plan. My home and my investments are separate worlds. As a matter of fact my DW and I take it a step further and have set up our own HOA fee structure each month to cover home expenses in the event of a downturn in our investments.
Take care of putting a roof over your head, food on the table etc first.

 

[ShokWaveRider]

I do think that some of the reasons given for paying off a mortgage are, ...not well thought out, or maybe unsubstantiated?

Quite the opposite, Very well thought out and fully substantiated in our case, we despise debt find it for the most part a burden, and do not need it, so why have it? just for a percent or so as mentioned earlier not worth the agro. This could be considered insulting by those of us who took the initiative and payed it off for our substantiated reasons and Based on our own well thought out plans at the time of payoff.

Now if one needs the money or foresees the chance of needing it for anything else that is life sustaining, then that would be a good reason to have a mortgage. But if one can afford to pay it off with no downside to one's standard of living then IMHO it is pointless having one.

But as I've often said, pay-off or not is probably the least important question facing the ER or ER wanna-be. But maybe understanding that is important?

No Debt is good in anyone's eyes, and you get nothing back that you do not give away in the first place. Remember the old Financial planning adage... Pay YOURSELF First.

We save on average $2,899.80 per month and interest payments of $195,951.66 over a 20 year loan at 3.5%. (Based on average mortgages in our area. Simply no contest. That is a lot of disposable income. This figure was hard to come by I looked up a lot of data to get this. Seems like 75% of the people in our development have no mortgages.

SWR

 

[ShokWaveRider]

Exactly. Having all that trapped equity sucks. Imagine if you had a mortgage and invested that money then you could rebalance, could use it for expenses, could take the money out, and it could be a part of our portfolio (with higher expenses, due to the mortgage).

If one needed to use the money for expenses one should not have paid it off.

 

[ShokWaveRider]

Can't rebalance, can't use it for expenses in a bear market, can't take your money out at all (without getting a loan again or downsizing). Our home is not part of our portfolio.

One could refinance later if you have to to pay unforeseen expenses.

 

[Bestwifeever]

Well, I don't think anyone here has suggested that anyone is 'stupid' for paying off their mortgage. That would also violate Community Rules. And I hope you aren't implying that anyone did any such thing. That would be a rather round-a-bout and subtle (or maybe not so subtle?) bit of name-calling in itself.

That said, I do think that some of the reasons given for paying off a mortgage are, ...not well thought out, or maybe unsubstantiated? But as I've often said, pay-off or not is probably the least important question facing the ER or ER wanna-be. But maybe understanding that is important?

-ERD50

Ummm, you've not hear people say "Call me stupid" or "call me crazy," etc.? Then never mind.

Perhaps you missed my first post in this thread where I suggest each person should decide what's best for them: http://www.early-retirement.org/forums/f28/mortgage-s-in-retirement-62111.html#post1211523

 

[ERD50]

Originally Posted by ERD50
I do think that some of the reasons given for paying off a mortgage are, ...not well thought out, or maybe unsubstantiated?

This could be considered insulting by those of us who took the initiative and payed it off for our substantiated reasons and Based on our own well thought out plans at the time of payoff.

Well honestly, I think one would have to go out of their way and be digging pretty deep to find my comment 'insulting'. We have several posts where people mention the negatives (interest payments) w/o any credit for the potential investment gain in the increased portfolio. I think it is fair to say that is not 'well thought out' - maybe 'not fully thought out' would be better, but close enough, no?

No Debt is good in anyone's eyes, ....

That's not true. It may be true for you, but how can you speak for others? I'm may be a minority here in this regard (not even sure of that), but at least some us welcome debt on the right terms. We wouldn't even be having this discussion otherwise.


Now sometimes even I wonder why I continue to engage in this tired old debate But it's funny, sometimes it triggers a new way to look at an old problem, and this just happened to me. Now bear with me, I'm still absorbing caffeine, so maybe this is not 'well thought out', or just plain wrong. But I welcome constructive critique, I would never be insulted by that.

So here's my 'new' thought on this... All along, I've said you have to be reasonably confident that your investments would outpace the cost of the mortgage, or it just doesn't make economic sense (forget the emotional side for now). But I guess it was just a 'gut feel' that I could do better than these historically low rates - is there a way to get data to back that up? Hmmmm, so I looked at a conservative WR over 40 years in FIRECALC - a 3.0% WR gives 100% success (3.4% is on the edge @ 99%), and produces a minimum final portfolio of 56.8% of your starting number (FIRECALC reports this all in 'todays' $). I think it's easier to talk in $s, so I started with a $1,000,000 portfolio and $30,000 Withdraw for the 3%, and that leaves at least $568,000 at the end of 40 years. This is with the default 75% stock AA.

From there, my spreadsheet tells me that in that worst case 40 year scenario, the portfolio would have had to produce an average 2.389% real return in order to support those withdraws and still have $568,000 in 'the bank'. If we add some nominal inflation number to that, say 3%, it seems to tell me that even the worst 40 year markets returned ~ 6.3% for that AA, which is significantly above current 30 year mortgage rates. If that is a reasonable way to look at it, (and maybe it isn't - I think some others on this forum are better with these calcs than I am) it makes me feel even better about holding the mortgage. It might even be time for me to refi to a larger amount and lock in these low rates.

If someone else doesn't feel comfortable with that, then a pay-off is probably the right thing for them. As I have said repeatedly, it probably isn't a big deal either way, but I do think we should frame the problem correctly if we are going to discuss it.

-ERD50

 

[WestLake]

I think holding certain attitudes may determine which side of this one may take - do you have a direct link to someone who lived through the Depression? I did - my father taught me not to carry debt. It worked well for him. He never made more than $30,000 per year (retired in 1983 at 62) and amassed about $2,000,000.

 

[pb4uski]

I would agree with those who say it isn't a big deal in the whole scheme of things and is totally a matter of personal preference.

I happen to have a mortgage of ~ $200k on our house that we pay 3.375%. I figure in the long run that our portfolio will yield 5.5% or more - it is certainly more YTD but you need to look at it over the long term.

So assuming I can hit the 5.5% return, this year I'll come out ahead this year by ~$3,500 and that will decline over the next 15 years as the mortgage is paid off. My risk tolerance is such that I am comfortable playing the odds. I recognize if I don't earn the 3.375% that I could lose, but I think the odds are higher that I'll win and I'm willing to accept the risk.

If others are more comfortable and sleep better at night with a paid off mortgage, then fine, but it isn't a big thing in the whole scheme of things for me - certainly not significant enough to get cross with each other.

 

[Animorph]

We save on average $2,899.80 per month and interest payments of $195,951.66 over a 20 year loan at 3.5%. (Based on average mortgages in our area. Simply no contest. That is a lot of disposable income. This figure was hard to come by I looked up a lot of data to get this. Seems like 75% of the people in our development have no mortgages.

SWR

$2899.80 is the P&I payment for a $500k loan, of which roughly $1458 per month (3.5%/12 of $500k) is the interest cost of your loan. The other $1442 is just paying off the loan, joining your home equity. That's $17,496 per year in interest.

Just to make this easier, lets say you keep refinancing to $500k every year and pay a balloon payment of $500k at the end of 20 years. Can you make more than $17,500 per year on a $500k investment? That is, of course, a 3.5% annualized total return over 20 years in this case.

I'm more than happy to take the risk that my investments could fall short and return less than 3.5% annualized total return. Heck, inflation normally averages 3%, so even if my portfolio just kept up with inflation I'd only be losing 0.5% a year ($2500) compared to having paid off the mortgage early. And what if my portfolio manages an 8% return? That's $40k per year minus $17.5k in expenses for a return of $23.5k per year. I'm being paid that $23.5k per year just for taking on the risk of the loan. That's something worth thinking about at least. An extra $470k over 20 years!

That's our trade off. It's not a no brainer or a no contest, either way. Some will be happy to take on the risk of the loan for the expectation of a return. Some will not be happy to take on additional risk that they don't have to.

 

[ShokWaveRider]

$2899.80 is the P&I payment for a $500k loan, of which roughly $1458 per month (3.5%/12 of $500k) is the interest cost of your loan. The other $1442 is just paying off the loan, joining your home equity. That's $17,496 per year in interest.

Just to make this easier, lets say you keep refinancing to $500k every year and pay a balloon payment of $500k at the end of 20 years. Can you make more than $17,500 per year on a $500k investment? That is, of course, a 3.5% annualized total return over 20 years in this case.

We do not have a loan, but this seems to be the average of those who do in our area. The info is readily available on the internet in Florida. and at the end of the day, unless one has an interest only load one still has to find the full payment form some place.

I guess all being said, what I have learnt from this thread is it is to each his own. Based on the reasoning folks have made here, all valid in their own minds as is mine. Personally I think it is not worth it, if one has the spare cash to pay it off. Not much will convince me otherwise I don't think. We have not had a mortgage since about 1997, and we are not about to go back. I would downsize if I had to before taking out a loan. Just my opinion.

This thread has probably out lived it usefulness, could a moderator please close it. This is the last I am going to say on the matter anyway.

 

[REWahoo]

This thread has probably out lived it usefulness, could a moderator please close it. This is the last I am going to say on the matter anyway.

Meh. There are 319 other open mortgage payoff threads on the forum, makes no difference if this one also stays open...

 

[Mulligan]

Meh. There are 319 other open mortgage payoff threads on the forum, makes no difference if this one also stays open...

I have been on the forum 3 years and they always seem to pop up on a slow news day. The interesting thing is they remain popular. I don't think anyone has been convinced to change their view, with the exception of me. I did change to keeping the mortgage, but only because I would wipe my assets out to do it, so I will continue focusing on that instead of paying it off.

 

[Nords]

This thread has probably out lived it usefulness, could a moderator please close it. This is the last I am going to say on the matter anyway.

Heh- that's pretty funny!

But I'm glad that, once again, all of us posters were able to obtain suitable confirmation for whichever bias we favor.

 

[FreeAtLast]

I retired last year and paid off my mortgage about 7 years ago. It has been nice not having the expense and having the free cash flow. I view having a paid off mortgage being further diversified in my investments, however, I never never never consider my home as part of my net worth.

I had the money and I wanted to simplify my life and reduce my expenses before I retired. I think that it was a good move for me.

 

[Bikerdude]

Heh- that's pretty funny!

But I'm glad that, once again, all of us posters were able to obtain suitable confirmation for whichever bias we favor.

+1. That is funny. After all the "pay off the mtg threads" we have suffered through the answer still remains: It depends.

 

[samclem]

One could refinance later if you have to to pay unforeseen expenses.

Can be harder if you don't have an income (i.e. you are retired--as mentioned in the title of this thread). Going into retirement with a mortgage could prove to be a smart move under the present circumstances.

 

[clifp]

I am so proud of myself. An entire 7 page thread on pay off mortgages and this is my only post. It is amazing what being on the road and having to type on a small keyboard will do to keep me from making lengthy repetitive posts

 

[Ally]

We paid off our mortgage about five years ago. We wanted to not worry about debt. However, I can see others' reasons for doing things differently.

 

[rayvt]

We financed our mortgage 7 years ago when we retired, and have refi'd several times since then. The latest refi was 2 years ago. We wanted to not worry about locking up a large percentage of our net worth into one illiquid asset.
Instead, we put the money we would have used to pay off the mortgage into a diversified portfolio of bonds, preferred stocks, and T-biils. Which overall pays about 1 1/2 times the mortgage rate, so each month we have a net profit.

De gustibus non est disputum.

 

[Animorph]

You lose some of the easy tax deductability of a mortgage if you pay off the original purchase amount. After that there's just the $100k home equity maximum (which is also available while you have the original mortgage). Then you have to be a little more careful to use loan proceeds only for investment, and show enough investment income to pay the interest, in order to deduct the interest as an investment expense.

 

[nun]

Exactly. Having all that trapped equity sucks. Imagine if you had a mortgage and invested that money then you could rebalance, could use it for expenses, could take the money out, and it could be a part of our portfolio (with higher expenses, due to the mortgage).

I would not put all my money into the mortgage. You should have ample funds elsewhere to cover expenses. I take a fraction of my savings and put it towards the mortgage along with investment profits. I now have no mortgage and at 51 could ER today happy that I will never need to pay a mortgage again.

 

[haha]

No Debt is good in anyone's eyes,

SWR

This of course cannot be true. If it were, why would wealthy people and corporations use debt in their finance? It is not need, it is strategic planning.

And more generally, to say <no> whatever is good in <anyone's> eyes is falsified by even a cursory look around at the environment.

Ha

 

[nun]

This of course cannot be true. If it were, why would wealthy people and corporations use debt in their finance?

.......or governments. the financing of debt is a useful too. People, Corporations and Governments do it to invest in the future. People are lucky to be able to borrow at 3.25% and should do so, and the US government should borrow at the fantastically low rates is can right now.

Debt is a necessary evil and can be a useful tool, but paying off debt in good times as a hedge against an uncertain future is a useful diversification. While I have been earning I have paid off my mortgage so that my income requirement will be entirely taken care of by SS. I have diversified my SS streams by qualifying for both US and UK payments and I also have my own equity and bond investments as well as rental income. paying off my mortgage while I have earned income and investments profits might not maximize my financial return, but I believe it to be prudent.