Change in Mortgage Thinking in Retirement

[flintnational]

So you should not be comparing the survival rates, you should be comparing the average ending values. Or perhaps the 25th percentile ending values, if you want to be pessimistic.........

I think the fluctuating survival rates are a measure of the changing risk. And, as you mention, you need to look at ending values as a measure of the potential upside. The survival rates, in this case, are only half of the answer.

 

[ERD50]

Not sure how I contradicted myself. I did not say most posters had a strong opinion, just many.

But in fairness.......

Until I read the second paragraph of your post, I felt you weren't being fair, but with the second, I was OK with it.

But since it's come up, I'll say this:

... so many posters, on both sides of the fence, to be so sure they have the RIGHT answer for everyone ...

I felt the "so many" was maybe misleading? I think there really are just a few, but they get so insistent, that it draws many responses, maybe seeming like "many"?

Now maybe this is my personal bias, but are there really any on the pro-consider-a-mortgage side insisting they "have the RIGHT answer for everyone"? What I see is they are saying essentially 'do the math'.

A bit of history - shortly after I joined this forum, I challenged the many posts I saw where people used all these dancing emoticons about paying off their mortgage, and all the congratulations that followed. I kept saying that it is great if you saved up enough to pay off the mortgage, celebrate that, but why celebrate paying it off? That seems like nothing to celebrate - it might be a good financial move, but very likely not, and probably not a really big deal either way.

Man, I got a lot of flak for that, like I was some sort of party-pooper, kill-joy, dog-kicker. But I thought it was important for people to think this through, and understand just what they were doing. Especially if they were getting dangerously il-liquid in the process. And it also struck me that, if paying off the mortgage was cause for celebration, effectively all these people were saying that anyone who held a mortgage must be in a very bad, sad state of affairs. But that certainly wasn't true.

It's taken years, but I do sense a change here, where for the most part, the mortgage discussion is thought of as more a 6-of-one half-dozen-of the other decision. And I think that is a good thing. Of course, there are exceptions from time to time.

... There is no right or wrong answer. ...

But there are some right and wrong statements being made.

-ERD50

 

[pb4uski]

I think the fluctuating survival rates are a measure of the changing risk. And, as you mention, you need to look at ending values as a measure of the potential upside. The survival rates, in this case, are only half of the answer.

Yes, we have already conceded that we are taking some risk and that we might lose the bet. It looks to me like we would win ~80% of the time and lose ~20% of the time and that the losses are modest but the upside potential is pretty good.

 

[CardsFan]

See comments below in bold

I felt the "so many" was maybe misleading? I think there really are just a few, but they get so insistent, that it draws many responses, maybe seeming like "many"?

Valid point. I think you are correct here. Looking back, there seems to just be a lot of posts from a few people, with the strong opinions

Now maybe this is my personal bias, but are there really any on the pro-consider-a-mortgage side insisting they "have the RIGHT answer for everyone"? What I see is they are saying essentially 'do the math'.

A bit of history - shortly after I joined this forum, I challenged the many posts I saw where people used all these dancing emoticons about paying off their mortgage, and all the congratulations that followed. I kept saying that it is great if you saved up enough to pay off the mortgage, celebrate that, but why celebrate paying it off? That seems like nothing to celebrate - it might be a good financial move, but very likely not, and probably not a really big deal either way.

Man, I got a lot of flak for that, like I was some sort of party-pooper, kill-joy, dog-kicker. But I thought it was important for people to think this through, and understand just what they were doing. Especially if they were getting dangerously il-liquid in the process. And it also struck me that, if paying off the mortgage was cause for celebration, effectively all these people were saying that anyone who held a mortgage must be in a very bad, sad state of affairs. But that certainly wasn't true.

I think there are two issues here. Some, like DW and I simply paid down the mortgage over time until it was gone. We owned 3 homes over this time, but always kept the mortgage low, and stayed within the original 30 year time frame with the new mortgages. Paid off in 30 years, and yes, we considered it a reason to celebrate.

Others had a (significant?) mortgage and decided to pay it off with retirement funds before, or at, retirement. In this case, I agree that it is simply a financial decision based on risk/reward/comfort. Personally, in this situation, I would probably take the mortgage in to retirement. But that is just what I would do in my position.

It's taken years, but I do sense a change here, where for the most part, the mortgage discussion is thought of as more a 6-of-one half-dozen-of the other decision. And I think that is a good thing. Of course, there are exceptions from time to time.

Agreed. It is a personal decision. There are cases I have seen on the forum (but not in this particular thread, that I recall) where the amount needed to pay off the mortgage represented, to me, too large a percentage of the assets. But if we are talking a pay off amount of 5% to 10% I'm not sure it really matters much.

But there are some right and wrong statements being made.
Yep. As always.

-ERD50

 

[flintnational]

Yes, we have already conceded that we are taking some risk and that we might lose the bet. It looks to me like we would win ~80% of the time and lose ~20% of the time and that the losses are modest but the upside potential is pretty good.

I agree. You have me rethinking my decision. We understood the choice when we retired and elected to pay off the mortgage. We probably made the decision based on our apprehension of FIRE (an abundance of caution). Four years in, with more comfort in the process, we might make a different decision.

 

[daylatedollarshort]

So you should not be comparing the survival rates, you should be comparing the average ending values. Or perhaps the 25th percentile ending values, if you want to be pessimistic.

And as erd50 pointed out, the expense you should be using is not the total P&I payment, just the interest. The principal is just shifting part of your net worth from stocks/bonds to the house.

For a $100K 30 yr 4% mortgage, the total payments are $172K. $100K principal and $72K interest. On average, only 42% of each payment is interest. That's the figure you should be using as the expense. Even at 6% rate only 53% of the total payments are interest.

I just looked at an amortization schedule on a $300K loan at 4.5%. The final interest portion of the payment was $5.68 and second to last interest portion was $11.34. I have never really understood people celebrating paying off their mortgages because if their mortgages are nearly paid off, in the last few years they were not paying much in interest anyway and interest is the only true expense. Payments on principal have no impact on net worth.

 

[pb4uski]

^^^^ True, but the benefit is still the spread between investment income and the mortgage interest rate... so for example, if I am in the first year of that $300k loan the benefit is the spread but it is the same thing once that $300k mortgage is paid down to $50k... obviously the dollar amount of the benefit is lower as a 4% spread on $300k is $12k but on $50k is only $2k.

 

[Freedom56]

Just keep in mind that risk tolerance is an illusion until you start losing serious money.
To put things in perspective, just look at where we were 18 years ago with the DOW, NASDAQ, and S&P:

https://www.advisorperspectives.com...s-p-500-dow-and-nasdaq-since-their-2000-highs

Per the article:

"So far the 21st Century has not been especially kind to equity investors. Yes, markets do bounce back, but often in time frames that defy optimistic expectations."

"The total return certainly looks better 18 years later, but the real (inflation-adjusted) purchasing power of that $1,000 is currently only 692 dollars above break-even, a real compounded annual return of 2.93%"

The markets are grossly overvalued today and we know from history what happens after.

There is nothing wrong with being conservative with your approach to investing.

Other than some opportunistic trades, I have been in fixed income (individual bonds, CDs, preferred stocks, treasuries) for the last 30 years. My 401K was invested in stable value and Ginnie Mae. I sailed through all those major market corrections without even a wound and continued to compound. My taxable accounts were holding CDs, individual bonds, and preferred shares. The company I worked for, had a very successful IPO back in 1998 and I cashed out after the lockout period and rolled the money into fixed income. All the stock options I received annually and 401K match in company stock were sold as soon as they vested and invested in fixed income. Every wealth manager/financial adviser that I met told me that I was far too conservative. But I compared what I had with what they had and then there was silence. I learned from working at a Fortune 500 company for over 20 years, that equities benefit certain employees and insiders at the expense of investors. This is a fact.

So while many can tolerate a 10%-20% correction, that's a serious amount of money for me and most of the world. Even 1% drop is a lot of money now.

 

[pb4uski]

Having lived through the great recession in 2008/2009 I think a lot of us have a pretty good understanding of our risk tolerance.

I'm guessing that your WR is very low... so you can afford a very conservative investment strategy... very few people are in your situation... they need some of the long term growth that equities provide to support their WR and keep up with inflation.

Many of us here are seasoned investors and a 10-20% correction would not be welcomed but would not be unexpected or cataclismic... in my case my nestegg would still be much more than where it was when I retired 6 1/2 years ago.

Their numbers don't make any sense.

$10,000 invested in VTSAX on 12/31/1999 would worth $28,721 on 5/31/2018... an annual return of 6.24%.

$10,000 in December 1999 has the same buying power as $14,949 in May 2018... an annual inflation rate of 2.33%

Real return of 3.91%.

http://quotes.morningstar.com/chart...dDay":"05/31/2018","chartWidth":955,"SMA":[]}
https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=10000&year1=199912&year2=201805

 

[Freedom56]

Having lived through the great recession in 2008/2009 I think a lot of us have a pretty good understanding of our risk tolerance.

I'm guessing that your WR is very low... so you can afford a very conservative investment strategy... very few people are in your situation... they need some of the long term growth that equities provide to support their WR and keep up with inflation.

Many of us here are seasoned investors and a 10-20% correction would not be welcomed but would not be unexpected or cataclismic... in my case my nestegg would still be much more than where it was when I retired 6 1/2 years ago.

Their numbers don't make any sense.

$10,000 invested in VTSAX on 12/31/1999 would worth $28,721 on 5/31/2018... an annual return of 6.24%.

$10,000 in December 1999 has the same buying power as $14,949 in May 2018... an annual inflation rate of 2.33%

Real return of 3.91%.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart
https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=10000&year1=199912&year2=201805

They are using the major indices which many index funds track as the benchmark. Cherry picking the best performing fund over that time is not a fair measure. In fact my bond returns were better than that. Many Fidelity funds performed so poorly that they changed their symbols 2010 to reset performance benchmarks. In 2016 I had people telling me how well those funds were doing. But in realty, it was an illusion.

My WR since retirement 3 years ago, has been about 10% of my income from investments, so my portfolio continues to grow. I have a pretty good pension with my last employer. At age 62 a second pension from a past employer starts along with social security. With a conservative investment strategy I worry more about maintaining my full head of hair than inflation and WRs.

 

[mrWinter]

I think the reason that holding a low rate mortgage has the same survivability even though it has lower long-term performance is likely because holding the mortgage provides some hedging against sequence of return risk, taking more money out of equities and effectively making for a less volatile and more conservative portfolio, as mentioned by USGrant1962.

Do you mean instead that paying off the mortgage results in a more conservative asset allocation?

Yes I mistyped here, I meant that paying off a mortgage (not holding it) has the same survivability even though it has lower long-term performance, and is a more conservative asset allocation.

 

[ERD50]

They are using the major indices which many index funds track as the benchmark. Cherry picking the best performing fund over that time is not a fair measure. .....

Before I go any further, am I correct that you are saying that selecting VTSAX, Vanguard Total Stock Market Index Fund, is "cherry picking" a fund?

Your move.

-ERD50

 

[pb4uski]

They are using the major indices which many index funds track as the benchmark. Cherry picking the best performing fund over that time is not a fair measure. In fact my bond returns were better than that. Many Fidelity funds performed so poorly that they changed their symbols 2010 to reset performance benchmarks. In 2016 I had people telling me how well those funds were doing. But in realty, it was an illusion.

My WR since retirement 3 years ago, has been about 10% of my income from investments, so my portfolio continues to grow. I have a pretty good pension with my last employer. At age 62 a second pension from a past employer starts along with social security. With a conservative investment strategy I worry more about maintaining my full head of hair than inflation and WRs.

The problem with their analysis is that indices do not include dividends... if the index was 100 at the beginning of the year and 110 at the end of the year then the return is 10%... so the 2-3 of dividends that was received during the year is ignored. If one wants to measure real return then you have to include dividends.

I'm having a real problem understanding how the Vanguard Total Stock Market Index Fund, the largest mutual fund in the world, is cherry picking.... it is a convenient proxy for the stock market as a whole... more comprehensive than any of the indices that were used.

For a smart guy you write some pretty odd things. Your propensity to ignore facts and inclination to make crazy statements and add to them "That is fact" like your say-so makes it gospel makes me wonder if you are a retired politician. Just kidding!

 

[Freedom56]

Before I go any further, am I correct that you are saying that selecting VTSAX, Vanguard Total Stock Market Index Fund, is "cherry picking" a fund?

Your move.

-ERD50

There are more funds out there than stocks.

A large number of them under-performed cash stuffed in a mattress since the peak in 2000.

He never stated that he even owned VTSAX since 1999.

The benchmark used in the article I quoted are index tracking funds such as SPY, DIA, QQQQ.

I broke my response into separate sentences just for you.

 

[Freedom56]

The problem with their analysis is that indices do not include dividends... if the index was 100 at the beginning of the year and 110 at the end of the year then the return is 10%... so the 2-3 of dividends that was received during the year is ignored. If one wants to measure real return then you have to include dividends.

I'm having a real problem understanding how the Vanguard Total Stock Market Index Fund, the largest mutual fund in the world, is cherry picking.... it is a convenient proxy for the stock market as a whole... more comprehensive than any of the indices that were used.

For a smart guy you write some pretty odd things. Your propensity to ignore facts and inclination to make crazy statements and add to them "That is fact" like your say-so makes it gospel makes me wonder if you are a retired politician. Just kidding!

Was it the largest fund in the world in 2000? Did you buy hold this fund since 1999?

 

[pb4uski]

So you are a retired politician! When wrong, change the subject!

While it was probably one of the largest mutual funds in the world even in 2000, or perhaps even the largest, it doesn't matter.... it is a good and convenient proxy for the US stock market as a whole and the M* data includes dividends and the indices do not so it is relevant data in measuring real stock market returns.

While you say there are more funds out there than stocks and that is true, the authors of the article that you linked focused on stock returns... so stock funds are the only relevant funds.

I probably have held it since 1999... since it is part of uncovered shares I don't have the details... but it has been a core hold for me since 1999 for sure. Are you really so naive as to think that the authors of the article that you linked owned those indices since 1999?

 

[pb4uski]

There are more funds out there than stocks.

A large number of them under-performed cash stuffed in a mattress since the -peak in 2000.

He never stated that he even owned VTSAX since 1999.

The benchmark used in the article I quoted are index tracking funds such as SPY, DIA, QQQQ.

I broke my response into separate sentences just for you.

You forgot "That is fact."

 

[Texas Proud]

Was it the largest fund in the world in 2000? Did you buy hold this fund since 1999?

This is from the same writer as you link.... and it appears that she writes to 'prove' that equities are bad... the site is for FAs...


However, I see good in these charts... the inflation adjusted returns are...

Years ---- Return

5 ---------- 10.99
10 -------- 7.42
15 --------- 7.20
20 --------- 4.20
30 --------- 7.74

Now, this is adjusted for inflation, so real return... I would bet money that you will not get this kind of inflation adjusted return with bonds and CDs...


https://www.advisorperspectives.com...atest-look-at-the-total-return-roller-coaster

 

[Freedom56]

So you are a retired politician! When wrong, change the subject!

While it was probably one of the largest mutual funds in the world even in 2000, or perhaps even the largest, it doesn't matter.... it is a good and convenient proxy for the US stock market as a whole and the M* data includes dividends and the indices do not so it is relevant data in measuring real stock market returns.

While you say there are more funds out there than stocks and that is true, the authors of the article that you linked focused on stock returns... so stock funds are the only relevant funds.

I probably have held it since 1999... since it is part of uncovered shares I don't have the details... but it has been a core hold for me since 1999 for sure. Are you really so naive as to think that the authors of the article that you linked owned those indices since 1999?

I'm no retired politician. I don't even care about politics. Most of them were art students in university that we (in the sciences and engineering) made fun of. They only end up in the public sector because nobody in the private sector would hire them.

"You probably held them"?

The authors are comparing the indices as they are benchmarks for the market. The stocks in those indices are different today than they were 18 years ago. Many have evaporated or are zombies.

 

[Freedom56]

This is from the same writer as you link.... and it appears that she writes to 'prove' that equities are bad... the site is for FAs...


However, I see good in these charts... the inflation adjusted returns are...

Years ---- Return

5 ---------- 10.99
10 -------- 7.42
15 --------- 7.20
20 --------- 4.20
30 --------- 7.74

Now, this is adjusted for inflation, so real return... I would bet money that you will not get this kind of inflation adjusted return with bonds and CDs...


https://www.advisorperspectives.com...atest-look-at-the-total-return-roller-coaster

The author never states equities are "bad".

 

[ERD50]

Originally Posted by ERD50
Before I go any further, am I correct that you are saying that selecting VTSAX, Vanguard Total Stock Market Index Fund, is "cherry picking" a fund?

Your move.

-ERD50

There are more funds out there than stocks.

A large number of them under-performed cash stuffed in a mattress since the peak in 2000.

He never stated that he even owned VTSAX since 1999.

The benchmark used in the article I quoted are index tracking funds such as SPY, DIA, QQQQ.

I broke my response into separate sentences just for you.

Well, as pb4uski mentioned, rather than answer the question, you change the subject. So I'll go out on this, as I sense there is nothing of value to be gained by any discussion with you (other than what I already know!):


There are more funds out there than stocks.- Totally irrelevant. Anyone looking for a proxy for the broad market has a few easy to identify choices, and they all perform almost exactly the same. Ignore the rest.

He never stated that he even owned VTSAX since 1999. - Totally irrelevant again. It's a useful proxy for the market, that's all that matters. You sure like throwing out a diversion, don't you? It's easy to see why, but why you think it's going to fool anyone here is a mystery.

The benchmark used in the article I quoted are index tracking funds such as SPY, DIA, QQQQ.- So? DIA isn't diversified enough to serve as a proxy for the broad market (it just has historical inertia), QQQQ also really isn't broad-based. SPY is fine, though some prefer to have more representation in smaller cap, but overall that hasn't made a big difference. I think pb4uski pointed out that article didn't use total return. Well, that's just wrong, so if true, it says a lot about the level of that article, and your using it as a reference.


I broke my response into separate sentences just for you -


Thank


you


.


And with that, I'm out. As I said, nothing to learn from you, unless I'm looking for 50 ways to not answer a question.

-ERD50

 

[pb4uski]

... The authors are comparing the indices as they are benchmarks for the market. The stocks in those indices are different today than they were 18 years ago. Many have evaporated or are zombies.

You are so not getting it. Indices are NOT a complete benchmark for market returns because the index does not include dividends. Also, changes in the composition of the indices doesn't matter... the Dow is losing GE today and it is being replaced by Walgreens Boots Alliance... the replacement doesn't impact the index one iota... GE's slide from glory is reflected in the index and what Walgreens does from here on out will as well.

If anything Total Stock is a much better proxy for the market because it includes GE and Walgreens both past, present and future... it also includes those zombies that you are so fond to mention.

 

[Texas Proud]

The author never states equities are "bad".

No, but that is the vibe I am getting...



But to be kind, they are talking about diversification.... IOW, do not put all your investment in stocks... well, most of us here are very well aware of diversification... we practice it...


From what I read in your posts you took the opposite extreme position and have not diversified, but are 100% in bonds/CDs or very close to 100%... and I would say that if I had the position that you have on not investing in stocks at all I actually would pay off the mortgage.... which is what this thread is about...

 

[joeea]

There is no right or wrong answer.

Well, yes and no.

There is no one right answer for everyone.

But if one states their goals, it's possible to determine which path meets those goals.

 

[CardsFan]

Well, yes and no.

There is no one right answer for everyone.

But if one states their goals, it's possible to determine which path meets those goals.

Only if you have a crystal ball and KNOW what the market is going to do. Other than that, which ever way you go, you are playing percentages. I have no problem with that, we do it every day we are invested, but you can not know, for sure, which path met those goals until time has passed.

So, IMHO, we are back to risk/reward/comfort. Pick the option that makes YOU comfortable.

Just my 2 cents, and I'm not sure my opinion is even worth that.