Change in Mortgage Thinking in Retirement

[golfnut]

We have only about $25,000 left to pay on our house. We also have a couple of whole life policies (puchased many moons ago) which are paid up and have about $60,000 cash value between them. I seriously think about taking some this cash value to pay off the mortgage. I understand we could withdraw the nontaxable portion of this cash value to avoid paying income taxes.


Anyone ever do this?

 

[karen1972]

I've debated myself, P&I is $536.04/month or $6,432.48/yr.
I'm factoring in a 3.5% WR, so in order to generate that $6,432.48, I need almost $185K set aside just for the mortgage which if I pay in full today is only $123K.

From a cash flow standpoint, I believe that puts me $2,170/ yr ahead.

However, in our personal situation, we have zero plans to be here beyond 5 years so financing for us still seems the best option.

 

[foxfirev5]

I viewed paying off the mortgage as one less thing to think about. As far as using the funds to invest, I don't see the need. Most of us have plenty of wiggle room by simply upping our AA .

A mortgage in the 3-3.5% range is about on par with a 5 year CD. Anything beyond that and you're taking on some level of additional risk.

The mortgage is the easy part. Now if someone can tell me how to reduce taxes, maintenance and insurance I'm all ears.

 

[RunningBum]

I've debated myself, P&I is $536.04/month or $6,432.48/yr.
I'm factoring in a 3.5% WR, so in order to generate that $6,432.48, I need almost $185K set aside just for the mortgage which if I pay in full today is only $123K.

From a cash flow standpoint, I believe that puts me $2,170/ yr ahead.

However, in our personal situation, we have zero plans to be here beyond 5 years so financing for us still seems the best option.

You won't have a mortgage forever so figuring that you need $185K to cover the monthly/yearly mortgage cost is just wrong.

 

[copyright1997reloaded]

I had a mortgage taken out in 1998 (30 year). As I got closer to the ability to FIRE, and as interest rates worked their way down in the 2000's, I got more aggressive in terms of paying down the mortgage. A few times I considered refinancing to grab a lower rate, but I knew that even with a lower rate having those substantial monthly payments would bother me.

The good news is that I was making good money at that time, and so after maxing out my 401K I attacked the mortgage vs. buying a fancy new car or taking expensive vacations. (I was traveling for work all the time and so the idea of a vacation away from home wasn't very exciting.)

Having the mortgage paid off some one of my FI criteria.

Having said that, I would not want to withdraw tax-deferred funds to pay down a mortgage, especially in a rising rate environment. Hmm, maybe I should do a cash out loan on my house!

 

[COcheesehead]

For us with the new tax law, a mortgage made zero sense. We are not going to have a mortgage on our new build. It will really help with cash flow when we FIRE in 2020.

 

[karen1972]

You won't have a mortgage forever so figuring that you need $185K to cover the monthly/yearly mortgage cost is just wrong.

My mortgage is only 1 year old, so 29 years to go so maybe you'd prefer I use a 4% rule over 30 years which still ends up being $160K.. still more than the $123K I owe. Once I hit 59 1/2 cash flow will not be an issue, its really just up to then that I'm monitoring.

 

[googily]

My in-laws paid cash on a house they had built in a retirement community in 2006, and I think that house still hasn't come anywhere close to regaining that value.

My 85-year-old father, who grew up during the Depression in a very poor family and retired early as a very successful executive, still has a considerable mortgage payment every month, though he did pay down some of the principal a few years ago. (We're talking a $4k/month payment)

I am more on my father's side, especially with a 3.625% mortgage and a monthly payment that most people in my HCOL area would kill to have as an apartment rent let alone a house payment.

I think I might start considering paying it off if another box of money comes my way in a few years, but I'm also doubting that I will grow old in this house. So then I think it wouldn't be worth it.

 

[gcgang]

How much risk do you want?

Paying down/off debt/leverage reduces risk. If you've got enough $, and don't want risk/aren't striving for higher asset values, pay it off.

If you could get a personal loan at 3%, amortized over 15/30 years, would you take it and invest? Once you have more assets than the house is worth, apart from the emotional issues related to housing, that's what having a mortgage does. Since stocks "always" outperform, why wouldn't live your life leveraged to the hilt with the most aggressive allocation available?

I remember attending a Financial Planning presentation a number of years ago. The example couple were falling short of their goals. The presenter's solution was to take on more debt and invest in stocks. Voila! The computer now showed the couple were making their goals. That pretty much soured me on FP software-no recognition of risk in many of the models.

Also, with this new tax act higher standard deduction, mightn't the after tax cost of the mortgage be going up?

 

[harley]

If you could get a personal loan at 3%, amortized over 15/30 years, would you take it and invest?

Yes i would. Especially since pulling a part of the large amount of equity from my home (growing at approximately the rate of inflation) would be a positive diversification move.

Also, with this new tax act higher standard deduction, mightn't the after tax cost of the mortgage be going up?

Yes, that's an issue I need to think about. I think I'll decide it's still worth it, but I haven't done the math.

 

[RunningBum]

My mortgage is only 1 year old, so 29 years to go so maybe you'd prefer I use a 4% rule over 30 years which still ends up being $160K.. still more than the $123K I owe. Once I hit 59 1/2 cash flow will not be an issue, its really just up to then that I'm monitoring.

A 4% WR over 30 years likely leaves you with some money, perhaps a lot of money, though there's a chance you won't have enough. Just like Firecalc shows that in most scenarios you have money left over at the end of the span you're looking it. It depends on the investment returns.

I think you're taking a simple concept and making it complicated by trying to convert it to a SWR. Just look at your mortgage interest rate (adjusted by tax deduction if you'll be taking one), and decide if you can make a better rate by investing that money. Since there is some risk associated with investing, you'd want to make enough more by investing to make the risk worthwhile. If you don't want any risk, pay off the mortgage.

 

[rayvt]

I think that as a quick rule-of-thumb that if you can pay off your mortgage then you don't need to pay it off.

I you have, say, $200,000 that it would take to pay it off, then that same $200,000 is plenty enough to allow you to safely make the monthly payments for a long, long time. The market will have plenty of time to recover before you have used it all up and can't make the payments.

And if the market goes down hard and stays down for10-15 years, then mortgage payments will be the least of our worries. 'cause we'll be in Mad Max territory.

Like many things in life, if you have the resources to do it then you don't need to do it ... and if you need to do it you don't have the resources to do it.

 

[CRLLS]

Thanks for all the valued discussion. I think we have strayed a bit and this has turned into another "do I pay it off or not" thread. I'm guilty of that straying in some of my replies. I explained a lot of detail about how I've changed my plan, why, and how I was enacting the new plan. This probably took the discussion astray.

Upon self evaluation, I was surprised that I have followed a set of plans/expectations for over 40 years and only recently changed those values as I actually entered full retirement. I was not expecting to discuss the benefits of carrying a mortgage or not. We have had plenty of those threads. I was more curious if others have changed their values/goals against their long-held "truths" and acted upon them as they entered into retirement.

 

[rodi]

I understand both sides of this discussion. My plan didn't change... it was divert some of my savings, while working, to extra principal payments. We started out by financing a 15 year mortgage... then when a settlement was being paid to us after a legal dispute - we put 100% of that to our mortgage... When the settlement stopped being paid I managed to scrape a bit of extra cash towards extra principal to continue paying down the mortgage... I really liked seeing that debt go down a lot with every extra payment. When it got down to about $40k, we lump sum paid it off. I retired the next month.

Having less required spending in retirement means we could retire with a smaller nest egg. Our nest egg is big enough to support a bigger spend... but I sleep really well at night with a paid off house and a <3% WR.

That said - we have a HELOC... so I'm not adverse to mortgages.... but the balance is zero.... it's a "just in case" debt tool.

 

[RunningBum]

I think it always makes sense to examine your plans and see if they should change. Your financial situation may have changed, tax and other laws may be different, and you may have simply made mistakes when you set up your plan, or are just more comfortable with another way to do things.

One change I made was to go with VPW to establish my withdrawal target/limit. Another was to heavily fund a DAF for future charitable donations.

So yes, nothing is set in concrete, and I can always learn and adjust.

 

[bobandsherry]

Thanks for all the valued discussion. I think we have strayed a bit and this has turned into another "do I pay it off or not" thread.

Curious, what path did you think this discussion would go? Others just saying "me to"?

 

[CRLLS]

Curious, what path did you think this discussion would go? Others just saying "me to"?

Maybe the end of my original post could answer that question.

"I wonder how many others have changed their retirement financial plans, mortgage or other, as they actually entered RE?"

 

[RunningBum]

Maybe the end of my original post could answer that question.

"I wonder how many others have changed their retirement financial plans, mortgage or other, as they actually entered RE?"

You did spend the first 3 1/2 paragraphs specifically discussing your mortgage though.

 

[CRLLS]

You did spend the first 3 1/2 paragraphs specifically discussing your mortgage though.

Agreed! Perhaps I gave too much background info.

 

[pb4uski]

We have only about $25,000 left to pay on our house. We also have a couple of whole life policies (puchased many moons ago) which are paid up and have about $60,000 cash value between them. I seriously think about taking some this cash value to pay off the mortgage. I understand we could withdraw the nontaxable portion of this cash value to avoid paying income taxes.


Anyone ever do this?

If your whole life policy is anything like mine, it pays a good rate of interest... how much does the cash value increase each year? Mine pays about 3.5%... not bad for negligible credit risk and no interest rate risk.

 

[pb4uski]

Taking a lot of money out of a Roth in order to, in part, put some of it back, has me scratching my head.

It is a rationalization. The conventional advice of tapping taxable accounts first, then tax-deferred, then tax-free still applies... whether one uses the proceeds for expenses, mortgage payoff or geisha girls.

 

[bobandsherry]

Agreed! Perhaps I gave too much background info.

Agreed, and thread subject has little to nothing related as well. Unclear as to what purpose or intent is or was.

 

[Winemaker]

I refinance my own residence to a lower rate, and pay off my higher rate investment mortgages. As long as I properly identify what is paid to a certain property, no problemo. I've done it 3 times over the past 19 years, my tenants pay for my mortgages.

 

[Sunset]

Athena53, our monthly P&I is <$600 but that represents about 15% of our monthly expenses. It is not a "big deal" for us, as you say.

Another example of our change in thinking/simplifying is we have historically paid out real estate taxes in 2 installments a day or two ahead of each installment deadline. This year, we paid the full amount well ahead of the 1st installment deadline. We are now paying bills when they are received rather than scheduling them a couple of days before the deadline. This "delaying payment" mentality of ours may come from way-back when we were earning as much as 15% in MM accounts at our local banks. It sometimes takes a long time to break a habit.

I have just come to realization, that simplification is better than maximization, so where as before I would constantly switch auto-pay bills to different credit cards, I'm now of the mind to put all on 1 CC that has autopay itself, so I don't need to track 6 different bills every month.

 

[Scuba]

I’m in the camp of keeping our 30 year fixed at 3.375%. And I also regularly take advantage of zero % credit cards. If someone else is willing to give me money at far lower cost than I’m earning on our portfolio, I’ll take it.

However, I have changed my philosophy on investing. We’re in the process of transitioning from individual stocks and bonds to a 100% ETF/mutual fund portfolio. I’m feeling good about that. Much simpler and less risky. And because of some other income streams available to us (pension, deferred comp, SS) plus dividend income, we can be more aggressive than I thought in our AA. All good.