carry my mortgage into retirement?

[Scuba]

I was not trying to make a comprehensive analysis in my post - just pointing out that paying off a mortgage often reduces income by close to the same amount. There are often posts here about how can anyone go into retirement with a mortgage without looking at the offsetting decrease in investment income.

Excellent point. I also place a high value on liquidity. We could completely pay off our mortgage and HELOC now, but would prefer to have the money accessible instead. Our mortgage is at 3.375% and HELOC is variable, at 3.99% now. If HELOC rate goes to 5%, will consider paying in full.

 

[Travelfreek]

The answer to whether to pay off the mortgage is so unique to every situation. We want to pay ours off but would not pull the entire amount due ($186k) from IRAs or we would be slammed with big taxes. We live in CA and what we are doing instead is pulling about $20k per year out of IRAs to get it down within 5 years to Zero. We will still have $7000 a year in Real Estate taxes (including some random local bonds attached to the real estate). We want to have a very clear picture of our net worth and our discretionary income. With the budget we have, we need $98k in after tax income right now. Once we pay off the house, we'll be able to drop the annual budget to $74k a year (yes, $2,000 a month is just for our Principal and Interest on our mortgage). Our note is a 10 year, 2.75%. It will be paid off in 5 years as our plan is executed. Then the BIG extended family vacations will commence. Yahoo!

 

[ERD50]

.... We will still have $7000 a year in Real Estate taxes (including some random local bonds attached to the real estate). ...

And you have those with or w/o a mortgage.

....We want to have a very clear picture of our net worth and our discretionary income. ...

Isn't that clear, with and w/o a mortgage? A mortgage is a fixed payment.

...With the budget we have, we need $98k in after tax income right now. Once we pay off the house, we'll be able to drop the annual budget to $74k a year (yes, $2,000 a month is just for our Principal and Interest on our mortgage). Our note is a 10 year, 2.75%. It will be paid off in 5 years as our plan is executed. Then the BIG extended family vacations will commence. Yahoo!

So you are saying that you can afford "BIG extended family vacations" after you took your liquid funds and sunk them into your home? I don't understand. Seems there would be essentially the same amount of $ available either way?

If you are looking at cash flow after the pay-off, it seems like you are ignoring the cash flow you could have from the cash you used to pay off the mortgage. Am I missing something? 2.75% is a fantastic rate - is that a fixed rate? Can I buy it from you?

-ERD50

 

[Travelfreek]

And you have those with or w/o a mortgage.







Isn't that clear, with and w/o a mortgage? A mortgage is a fixed payment.







So you are saying that you can afford "BIG extended family vacations" after you took your liquid funds and sunk them into your home? I don't understand. Seems there would be essentially the same amount of $ available either way?



If you are looking at cash flow after the pay-off, it seems like you are ignoring the cash flow you could have from the cash you used to pay off the mortgage. Am I missing something? 2.75% is a fantastic rate - is that a fixed rate? Can I buy it from you?



-ERD50

We want to be 100% debt free. Then we can use the $24 k a year that used to go to prin + interest for fun money or charity or both! We will always have prop taxes + insurance plus utilities (minus electricity since our solar panels generate all of our electric needs). A lot of our desire to be debt free stems from the peace of mind it will give us.

We are both financially conservative. Our cars are paid for. We paid cash and budgeted in advance for our 2 kids' 5 year college degrees at state college. No student loans. We don't like owing money. Period. We have a good amount of money in IRAs but have to keep taxes in mind as we pull it out. We have pensions that provide over 100% of our expenses. It's a bit of a balancing act.

We missed the Roth IRA boat altogether as we needed to tax shelter our incomes by the time Roths came on the scene.

We retired at age 60 and 59 1/2 (not so early as many of you). I love this forum. We are different from each other but the same in many ways. We all value financial independence!

We got the 2.75 10 year note last October on the internet - the best rate I could find from a St Louis MO company called US Wide Financial. The best thing about it besides the low rate was it was a no cost loan!!!! I kid you not. We sold a rental property in Michigan my husband inherited at that time and decided to roll the 120k equity from that into our principal home to begin the payoff process. We got the new note as a refi on our house which had 26 years to go on it's 30 year note at 3.50%. So, once we paid off both cars and put a big equity pmt on our house, we decided to set up a plan to have it paid off in 5 years. We started off owing $390 k 5 years ago, then $220k last year and now we are at $185k owed. We knock $40 k a year off the balance between regular pmts and the $20 k yearly lump sums.

Our next goal is to manage our taxable income once my husband starts collecting SSA. We won't be itemizing by then so this will get interesting.

 

[pb4uski]

The $20k a year from IRAs that you will be using to pay down the mortgage.... what is that invested in now? How much did it return in 2016? Over the last 12 months?

 

[Sunset]

..... We want to pay ours off but would not pull the entire amount due ($186k) from IRAs or we would be slammed with big taxes. We live in CA and .....

You could move North to Washington State or move East to NV and save paying 10% State tax.

 

[Perryinva]

The $20k a year from IRAs that you will be using to pay down the mortgage.... what is that invested in now? How much did it return in 2016? Over the last 12 months?

Ding ding ding! Exactly. But as they stated, they place a lot of value on not owing money. I place a lot of value on not owing money on depreciating assets. I don’t understand the “missed Roth” boat at all. We are near the same ages and have a good sized Roth and have had it for years. The statement about the vacations starting after the housd is paid off makes zero sense. Unless they only keep their money in conservative fixed incomes like CDs then they should have a drop in income once the house is paid off. But that IS the case for many. I know that is what my wife would do if I was not around. She is scared to death of the volatility stock market. Had anyone on a board like this NOT handily trounce 2.75% every single year of the last 10 years ?

My brother has the same “have to own my house outright” attitude. As it happens, houses in his area have been dropping in value. The real issue is that he should not be in a house so expensive at his income level which is pretty low. No pension and no savings; he will work until he drops. He thinks that with a paid off house once SS hits , they will easily live on their estimated $26k/yr “because I will not have a house payment”. He will not move to a smaller less expensiive house because he flatly refuses to sell his house for a loss. So he had $500k tied up in an asset that earned nothing over the last 10 years. Just a quick look at what $500k made me over the last 10 years minus what a house payment on $500k would have cost, and I would have been up a net of about $150k. Not huge, but way better than zero. The concept of savings throwing off income is totally foreign to him. To him, you save money so that you can spend it on something.

 

[bobandsherry]

Ding ding ding! Exactly. But as they stated, they place a lot of value on not owing money. I place a lot of value on not owing money on depreciating assets. The statement about the vacations starting after the housd is paid off makes zero sense. Unless they only keep their money in conservative fixed incomes like CDs then they should have a drop in income once the house is paid off.

Travelfreek mentioned they had a relatively short loan, so the P&I is $24K/yr. With $186K paydown, even with aggressive 10% return they would only give up $18.5K in earning potential. They are not as far ahead as they seem to think, it's a net $6.5K gain (based on 10% return). I know, return could be more, and it could also be less or even negative.

If I were in their shoes I wouldn't be in a rush to pay off the loan.... I wouldn't have locked into 10 year mortgage at low rates, instead would have gone longer on the term..... I actually was in that position a little over 2 years ago and decided that borrowing @ 3% for 30 years was better than pulling money from my investments. I figure I'm way ahead as pulling funds all at once would have been a killer on taxes, plus by keeping money invested over this time the gains have covered over 1/4 of what I borrowed.

In addition to the increase in my portfolio I also feel better knowing that I have quick access to cash if the need arises, with effective rate of under 3% (with tax deduction). Taking the time now to get LTCG at 0%.

But understand those who feel better with $0 debt, but there's also time to take advantage of favorable rate arbitrage.

 

[Perryinva]

You hit the nail directly center on the head. Nothing wrong with what they are doing, and in the big scheme means little at those dollar amounts if one is only looking at gross income. If one has plenty of income to do everything they want, and still have easy access to plenty of non taxable funds then a paid off home is nice to have.

In my case I made some poor planning decisions and have very little in aftertax accounts (besides Roth) and maximized pretax accounts. My naive thinking was since I will have so much pension and SS, there was little need for after tax accounts, so maximize my tax savings now and pay off my house to minimize costs. In reality it is clear that I will pay more taxes with this approach and the money tied up in my house earns near nothing. With my expenses more than covered by my pensions and SS, I do not have to have yet another conservative investment (money tied up in house ).

So when I sell this house in retirement, I will only put down enough on the next one to avoid PMI and use the rest (maybe $350k) to reduce taxable interim income and allow more tIRA conversion to Roth, while delaying SS filing. The mortgage is incidental to my plan for my income, but the cashed in equity is key to reducing taxes between the deductions, delayed SS filing (with its subsequent reduced tax effect) and taxable income level during the interim. The effective ROI in net income is significantly higher than just the mortgage rate vs earned investment rate, as all home appreciation is essentially tax free income since the house I buy will be about the same price.

As I approach 70 then I will reassess my income and RMD effects and decide if the mortgage is worth keeping. As of now it is just a financial tool since rates are still so low.

 

[bobandsherry]

^^ Yep - no one size fits most or all. Given your position with mostly pretax accounts, taking cash out (and tax free) makes a lot of sense to me.

I had been in similar position, with most of networth sitting in retirement accounts, but as part of my retirement planning about 10 years ago I saw benefit with a balance of pre and post tax. I'm no expert and sure others who are wiser that I would have done things different/better, but so far it's positioned me well for early retirement especially with health care costs.

 

[rodi]

Travelfreek - if it makes you feel better - we tackled the mortgage in a way similar to you with some minor changes... Refi'd to a low rate 15 year fixed (3.25 at the time)... and made extra payments to pay it off in about 7 years... The difference is we got it paid off (with a final lump sum of about $40k) right before I retired. For us it was totally about the cash flow....

Now that we have a lower spend - we can adjust our MAGI as needed to qualify for ACA tax credits, we can adjust our income (to a degree) to lower our EFC for our kids entering college soon... It gives us peace of mind knowing we don't owe on our house and it gives us flexibility to take advantage of tax laws and financial aide rules.

(For those who might get outraged about our EFC calculations - this is about how much Roth Conversion makes sense... .why make an expensive error for a possible future tax savings.)

Oh - and I also live in CA - so I understand the large mortgage and property taxes... Just got my property tax bill yesterday.

 

[Travelfreek]

Our rate of return on our IRAs was between 7% and 25% (average about 15%). Yes, I know that, financially, it makes more sense to stay leveraged on a mortgage to get the higher returns on our investments. But, as I said, peace of mind is our goal. We also lost money in the dot.com/dot.bomb era and we saw very bad returns on our kids 529 plans in the early 2000's. We also saw a lot of short sales in real estate (in our neighborhood) and foreclosures. Several friends and acquaintances had to start over in that section of their life. We never took out equity loans or refinanced unless it made $$ sense. We were always managing our taxable income over the last 12 years to take advantage of tuition tax credits and passive losses with our rental property. During this time, we built up large 401ks and 457s (we each had that opportunity through work). We managed to stay in the 25% tax bracket until now as we are teetering into the 28% but by just a hair (maybe 1 or 2 k). We don't have to worry about ACA credits as our health insurance is almost free for life. We do need to learn more about managing taxable income since our pensions and soon social security is/are fully exposed to fed income taxes and state taxes (except SSA). We took many fantastic family vacations as our kids were growing up (we didn't hold back on that but they were fully paid and budgeted in our income before the trips started). We built our nest egg by deferring our raises into the 401k/457 plans and never missed the money. But we had great luck as far as health goes and no job losses.

 

[ERD50]

We want to be 100% debt free. Then we can use the $24 k a year that used to go to prin + interest for fun money or charity or both! ...

Another fine example of the "one side of the equation" math that many people seem to use as a reason to pay off a mortgage.

You would have to throw a big pile of money at that mortgage to close out a $24K per year loan. So why, oh why, couldn't you use a little of that big pile for "fun money" or charity?

It's as if that $24K just appeared out of thin air. But it took money to get it, money that is no longer easily available to spend.

Pay it off if you want, that's fine. But I would not recommend using fuzzy math as any sort of decision point.

-ERD50

 

[Montecfo]

Probably not a bad time to think about mortgage paydown-after a huge run in stocks.

Trees do not grow so the sky and we experienced a very poor decade on equities that ended less than a decade ago, though some people have clearly forgotten.

 

[pb4uski]

Our rate of return on our IRAs was between 7% and 25% (average about 15%). Yes, I know that, financially, it makes more sense to stay leveraged on a mortgage to get the higher returns on our investments. But, as I said, peace of mind is our goal. We also lost money in the dot.com/dot.bomb era and we saw very bad returns on our kids 529 plans in the early 2000's. .....

That is why we INVEST in broadly diversified portfolios of stocks and bonds, especially in retirement, rather than SPECULATE on narrow market sectors. Graph below compares Total Stock Market with Wellesley and Wellington for the decade ending in 2005.... the latter were much smoother.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart

 

[Perryinva]

It also depends on where you are in your life. As young as Travelfreek sounds, still with kids under roof, (?) the security of a paid off home makes a lot more sense than a pair of empty nester 60year olds where retirement will be 30 or so years not 40-50. Very few 60 year olds have forgotten the crashes and recessions. Most are just overjoyed to have been able to take advauof this amazing bull run. I know I just did not have enough significant funds in my late 30s to take advantage enough of the dot com rise. It helped me a lot, percentage wise, but 50% of $100k is still only $50k, while an only 20% gain with a mil is a hefty $200k.

I know it is not common practice to include ones home as part of their AA, but I do. It is a large percentage of my NW. I’ve bought and sold around 8 homes, plus refied many times as it makes a huge impact on my taxes, savings and cash flow. It is my “most conservative “ asset. As bobandsherry said, there may be a right time depending on your circumstances to use that cash equity. For us, the first couple of years in retirement (62 for me) is the ideal time. CAsh flow is not remotely the problem, taxable income is.

Early in life Roth conversations may not make much sense, but later in life where the benefits are clear cut, tax advantaged conversions can be a large tax game changer, especially if RMDs will be an issue. Having been in the 25% bracket most of my career and savings mostly tax deferred, being in the 28% bracket due to RMDs in retirement would be painful. I had never even heard of RMDs until 2008. Surprise!

 

[bobandsherry]

That is why we INVEST in broadly diversified portfolios of stocks and bonds, especially in retirement, rather than SPECULATE on narrow market sectors. Graph below compares Total Stock Market with Wellesley and Wellington for the decade ending in 2005.... the latter were much smoother.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart

Agree with you in principle. However, those in VTSAX index fund in August 2000 didn't really recognize a gain until September of 2011. 11 years of basically flat overall returns. Even those in July 1997 remained net flat through Feb 2009, another 11 year run of flat returns. Short term bump up in 2007 but then significant drop shortly after.

 

[ERD50]

It also depends on where you are in your life. As young as Travelfreek sounds, still with kids under roof, (?) the security of a paid off home ...

What is this "security of a paid off home" that people speak of? It seems that not only does that appear to be a myth, it seems the exact opposite. Isn't a young person more secure with a mortgage?

A common risk a young person has is a long stretch of unemployment. A $200,000 mortgage has a monthly P&I of ~ $940/month. While unemployed, they still need to pay taxes, ins, utilities, maintenance & repairs.

With $200,000 in the bank, they could pay that mortgage for over 16 years. Maybe less, considering some would be in equities, and might be down when needed. But even an aggressive 75/25% AA would provide many years of cushion, and be available for all those other bills, which could lead to a loss of your home if left unpaid.

[edit/add] - And don't forget that $200,000 invested would likely be kicking off ~ 3% in divs, ~ $500/month. That would pay 1/2 the monthly mortgage w/o selling a thing. Probably some cap gains distribution at end of year as well.

So no, I think a paid off home leads to insecurity for a young person.


Separately:

... I know it is not common practice to include ones home as part of their AA, but I do. It is a large percentage of my NW. ...

If you are in a position to sell (and pay any cap gains due), and downsize, then I think it could make sense to include the portion that you'd have after liquidating in your portfolio. The definition of NW includes all assets & liabilities anyhow, so that should not be debated.

But if you would just replace the house with another of equal value, I don't see the point of treating it as part of your liquid investments.

-ERD50

 

[pb4uski]

Agree with you in principle. However, those in VTSAX index fund in August 2000 didn't really recognize a gain until September of 2011. 11 years of basically flat overall returns. Even those in July 1997 remained net flat through Feb 2009, another 11 year run of flat returns. Short term bump up in 2007 but then significant drop shortly after.

Actually, those who invested in 2011 had recovered by 2005.... then the Great Recession came along and it got back to what it was in August 2000 in September 2011. That is also the beauty of rebalancing... one would have been buying more during the dip of 2000-2002 and 2007-2009 so recovery would be quicker that what is shown on this graph.

So someone with a broadly diversified, balanced portfolio who rebalanced regularly would still have taken a hit but much less severe than stock only investors. Since back then I had a steady job and was in accumulation mode, I was buying during those dips and also lamenting them.


VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart

 

[pb4uski]

+1 to all ERD wrote.... that $200k of taxable account money in his example gives you flexibility and is much more secure in the event of a job loss than a paid-off home.... you can't eat a home and you can't get a HELOC when you are unemployed.

 

[Perryinva]

Except you are all assuming a paid off home at the expense of savings, not as part of savings. I agree totally with what you both suggest from a black and white financial perspective, but that isn’t a very real scenario. I’ve always had a mortgage for the same reasons, net gain and liquidity. But savings and home equity rose together, not one at the expense of the other. Travelfreek sounds the same. I do know people that their NW is almost all home equity, and agree They are not in a smart position. But like Tf I found myself riding the gains of home appreciation in conjunction with paying it off affordably while investments protected me from job loss income possibilities. I passed that point, like most here, many years ago. Once a house is paid off TYPICALLY , the cash flow required to live is significantly less, and rather than decimate retirement savings to survive during a job loss, the lower cash flow required can allow a lower paying job to carry you temporarily or at the least, reduce the withdrawals necessary to survive. We all know it is a lot more complicated than just the numbers suggest , so let’s not be obtuse about it. It is not B&W right or wrong. Security is perception and can not be defined for someone else.

For instance, contrary to ERD50s inference, I have NEVER had savings that throw off income dividends of any appreciable amount, and know very few people that do including many with paid off homes. He is simply assuming his AA is what others typically have. The ER community is an aberration, not typical by any stretch, and you all know it. The vast majority of people, including many intelligent but not income saavy, only save for growth with only a vague concept of whether what they are doing is the best way. They only know that they need to save for “the future “. And we all know that even that percentage is not very large. I was that way for many, even most years.

From Tf’s (and mine) perspective, a healthy pair of pensions , and significant SS reduces the need to worry about income generation in order to live vs much of the RE community that will always depend on their investments to generate their income, because their path to wealth often included LTCGs, RE appreciation etc , vs the more typical work a job for 35plus years that paid into SS and may carry a pension. The house becomes the inheritable safe appreciating asset that requires no financial interference to grow. Not a source for liquid cash. Many people can not successfully invest for growth and income full time.

Its the old question as to what would you rather have, a $100k COLA annuity for life or $2.5mil but not be allowed to touch the principle interest free. It’s a choice of risk and active investing vs complete security. Most here would choose the $2.5mil because they believe they can beat the 4% rule in the long run. The average person would choose the annuity, because the average person has never made $100k/yr, and making it for life would be heaven. On average, both groups would come out close to the same. But there would be more variations in success and failure for the $2.5mil group.

I never worried about my home equity dropping or being unavailable. It was just another investment vehicle. But with todays low rates during this bull run, it made zero sense to me as well to pay it off early.

 

[RunningBum]

Except you are all assuming a paid off home at the expense of savings, not as part of savings.

It's always going to be somewhat at the expense of savings. Travelfreek talks about this $24K windfall as if it just appears, but it is at the expense of depleting some savings. They are in no better position after the house is paid off, having only transferred assets from one account to the house equity. But wheee, we can take nice vacations now (after the house is paid off)! Why not before?

Yes, the most recent discussion drew on examples where savings were severely depleted to pay off a house. In most cases here that's probably not likely, and the decision is usually more or less of a wash. However, it does show that there is a case where it IS pretty close to black&white to favor not paying it off, while I can't think of a case where it's clear that it's best to pay it off.

 

[pb4uski]

Except you are all assuming a paid off home at the expense of savings, not as part of savings. ...

Why would it be foolish to presume that if someone isn't making additional principal payments on their mortgage that they are saving? There is saving and spending... saving can be in home equity (by paying down the mortgage) or in taxable accounts.

.... Once a house is paid off TYPICALLY , the cash flow required to live is significantly less, and rather than decimate retirement savings to survive during a job loss, the lower cash flow can allow a lower paying job to carry you temporarily or at the least, reduce the withdrawals necessary to survive. ...

If you have taxable savings because you have not paid down a low interest mortgage then you can survive a job loss with no sweat.... no need to raid retirement savings.... note that I specifically indicated taxable funds, not tax-deferred retirement savings and ERD50 was referring to taxable savings as well.

.... The ER community is an aberration, not typical by any stretch, and you all know it. The vast majority of people, including many intelligently but not income saavy, only save for growth with only a vague concept of whether what they are doing is the best way. They only know that they need to save for “the future “. And we all know that even that percentage is not very large. I was that way for many, even most years.

But we are responding to a post on the ER forum... so we are already targeted... besides, I had lots of taxable investments long before I ever heard of this forum.

 

[daylatedollarshort]

For instance, contrary to ERD50s inference, I have NEVER had savings that throw off income dividends of any appreciable amount, and know very few people that do including many with paid off himes.

Most posters here have well thought out investment plans and understand the concept of opportunity cost. It is pretty hard to retire early on passbook savings accounts interest these days.

 

[Perryinva]

Again, I agree. It is not found money...it has always been there. There should be no lifestyle change. The perception is what has changed. Many here made their fortunes by leveraging debt. For someone that would never consider that, a paid off home appears more secure. (I agree, it is not). Investors look at a mortgage as cheap money with appreciating collateral. What’s not to like? Most don’t see it that way. They see a mortgage as a necessary evil in order to jump on to the home appreciation bandwagon. I was raised that way and it took time and education to understand the use of the tool. To a savage, a gun is a magic firestick of death, not a tool used to ones advantage.

Don’t preach to the choir here. I do fully understand. But I think it is a bit ingenious to act like it’s absurd to want a paid off home.

No one suggested retirement on PB savings. Just the concept of investment to most is not as intelligently thought out as it is to most on this forum. As PB4uski said, this is the target audience, so expect a smart financial response. But to pretend that there is no justification for the other side of the coin is narrow minded.