How to you model mortgage in ER

[mrWinter]

Curious how most 'model' for lack of a better word, their mortgage in firecalc or other retirement calculators, in relation to their minimum withdrawal, or any other not-indefinite expense for that matter (college for kids, healthcare).

Let's say you have 10 or 15 more years on the mortgage (obviously a moot point for those who paid it off), do you add in that payment as an additional expense for the first 10-15 years or whatever the case may be, and then have a base annual withdrawal rate that doesn't include the mortgage? Or do you just assume you'll always carry a mortgage of some kind and include the mortgage in your base withdrawal amount indefinitely? Or do you average it out between the two, figuring you'll spend more early, but less later so it will be a wash? (Do you not worry about a higher sequence of return risk then?)

Firecalc and others tend to focus on a more consistent desire for money, say 4% or whatever forever. But I'm realizing that if one carries a mortgage into early retirement the beginning of retirement will be much more expensive.

In the beginning you have:

• a mortgage payment
• individual market healthcare to pay for
• no social security income

Once you get to 65 you (may) have:

• no mortgage payment
• significantly reduced healthcare costs (Medicare)
• social security income

It seems to me like the effective withdrawals in the latter could easily be half of the former. Once the roof over your head is paid, and healthcare is nearly paid, you just need food and fun, and you've got SS checks coming in to help pay for that. Looking at my own possible future I see it being likely that expenses would be heavily front loaded.



For those who plan to or are using a constant inflation adjusted withdrawal amount, how do you account for this, or are all of you in the later years where these don't apply?


Maybe these more complicated simulations are more common and people just don't talk about it as much because it can't be summed up simply in a sentence or word like "4% inflation adjusted", "5% constant percentage", "VPW" etc.

 

[USGrant1962]

FIRECalc handles most of your examples through the various tabs.

For a mortgage, assume it is part of your base spending on the "Start Here" tab, then go to the Other Income/Spending tab and enter the annual payment and end date as "Pension Income (or off chart spending reduction)". Turn off Inflation adjustment.

So if you have a $12000/year mortgage ending in 2025, you would click "Pension Income", enter $12000, enter 2025, and uncheck inflation adj.

The same tab is where you enter your SS estimate (make sure you annualize it).

I use the off chart spending reduction to reflect going from unsubsidized ACA to medicare at age 65.

Under the "Portfolio Changes" tab there is space for three one-off expenses. So for example I have DS's last two years of college entered there.

 

[ERD50]

[-]For a mortgage, assume it is part of your base spending on the "Start Here" tab, then go to the Other Income/Spending tab and enter the annual payment and end date as "Pension Income (or off chart spending reduction)". Turn off Inflation adjustment.[/-]

So if you have a $12000/year mortgage ending in 2025, you would click "Pension Income", enter $12000, enter 2025, and uncheck inflation adj.

The strike-out section is not correct. If you enter the mortgage as Base Spending on the Start tab, it will be inflation adjusted. Not Correct.

CORRECT METHOD: Do not include the mortgage payment in your base spending. Then enter a mirror image of the end year offset above. Enter the first year of the mortgage, enter the annual amount and "no inflation adj".

This will give you the correct non-inflation adjusted payment, netted out to zero with the income at the end of the mortgage.

-ERD50

 

[exnavynuke]

Yep, put the mortgage in the off-chart spending, then offset it when it's gone.

 

[tb001]

I’m glad you asked this. If you have a fidelity account, their advanced calculator does a great job of helping with this type of expense, as well as tracking discretionary vs base spend. I’m not sure how it handles inflation on these items though—I’ve been wondering about that myself. For us, mortgage and property taxes are high (about 20% of spend), so having a zero or capped inflation rate on that much spend I would think has to have some impact?

 

[exnavynuke]

I’m glad you asked this. If you have a fidelity account, their advanced calculator does a great job of helping with this type of expense, as well as tracking discretionary vs base spend. I’m not sure how it handles inflation on these items though—I’ve been wondering about that myself. For us, mortgage and property taxes are high (about 20% of spend), so having a zero or capped inflation rate on that much spend I would think has to have some impact?

I include the property taxes and insurance in my "normal" spending on the first page of firecalc. Only the P&I part of the mortgage (which is fixed) is included in the second part. That way the taxes and insurance are continued and adjusted for inflation while the mortgage P&I is tracked separately and without inflation. That's in FireCalc though, not sure about how Fidelity handles it.

 

[corn18]

This is one of the things that helped me not be scared of carrying a mortgage into retirement. I have 23 years left on my mortgage and plan to retire in 3 years. That scared me a lot and I was trying to figure out ways to get that mortgage paid off before I retired. Once you see the non-inflation adjusted P&I travel through 20 years of the model and the amount goes down in inflation adjusted terms, I started looking at the mortgage differently. A $2200 P&I payment today is equivalent to a $1218 P&I payment 20 years from now @ 3% inflation. I may still pay it off, but it isn't a requirement now.

 

[tb001]

This is one of the things that helped me not be scared of carrying a mortgage into retirement. I have 23 years left on my mortgage and plan to retire in 3 years. That scared me a lot and I was trying to figure out ways to get that mortgage paid off before I retired. Once you see the non-inflation adjusted P&I travel through 20 years of the model and the amount goes down in inflation adjusted terms, I started looking at the mortgage differently. A $2200 P&I payment today is equivalent to a $1218 P&I payment 20 years from now @ 3% inflation. I may still pay it off, but it isn't a requirement now.

Agreed, we had the same realization, especially when we looked at interest rate vs mkt returns. For us, property tax base is capped at 2% annual increases, so below inflation as well. We're looking at it as yet another layer of conservatism in our spending model, but I'm surprised the calculators don't seem to account for this.

 

[USGrant1962]

ERD50 is correct - I oversimplified. Though if your P&I is a limited portion of your spending and the remaining mortgage term is limited it is unlikely to significantly change the results. Entered as I described it, you would be making a conservative assumption. If you have 15+ years on a substantial P&I then the double entry would be almost mandatory.

But that is a good lesson in the constraints of FIRECalc. Aside from SS, it only gives you six slots for puts and takes - three in spending changes, and three in portfolio changes. I try to avoid "consuming" two of those for a single transaction. Doing that for a large mortgage is probably worthwhile but you do give up modeling other changes. Note: supporters get to do manual spending changes on the Spending Models tab. I am one but rarely use it.

In your personal FIRECalc model it is important to understand what assumptions and simplifications you are making and how they affect the results. I keep a list of my assumptions and all of them are, IMO, conservative. Examples include 75% of SS, no consulting income, high net tax rate, no diversification beyond U.S. 60/40, no use of real estate equity, no inheritance, etc.

Anyway, I recommend that mrWinter explore the tabs in FIRECalc. When you become familiar with it, it is a darn good model for most people.

 

[tb001]

USGrant, those are good points r.e. really understanding the assumptions and underlying data. I'm sure it's not the case for everyone, but my guess is many on this site err on the side of conservatism. As I've said before, when you're doing that for so many different assumptions, and then take conservative lifespan numbers, high rate of success and a conservative SWR, there can end up being a LOT of play in the numbers.

I've run the super detailed models using spending changes over time, to get comfort with where my assumptions are, but I keep coming back to ~4% w/d rate as being the easy rule of thumb.

Back to the OP, as I mentioned, fidelity's tool is really good for modeling spending changes throughout retirement, as well as prompting you to pay attention to things you may have missed (dental, medical, etc...).

 

[mrWinter]

I understand how to use firecalc to input the mortgage, but appreciate the replies to clarify anyway. I probably wasn't clear enough in my original post. And good point about making the principle and interest non-inflation adjusted.

My question is less about how to input the numbers, but more about how people plan what they can withdrawal in light of a big difference in the beginning and end of retirement due to not just mortgage, but also healthcare and social security, or any other front loaded expenses, like college for kids maybe.

For example as I see it you basically can't reasonably use the VPW method if you have these front loaded expenses, or if you do you'll hay way way excess money being withdrawn once those expenses go away. Same for constant inflation adjusted withdrawals. If your expenses in the first 15 years are significantly higher than after then all these common safe withdrawal methods don't seem to work anymore, or will end up giving you far in excess of what you need in those later years.

So are people accepting that they will be withdrawing maybe 7% for the first 10 years, then 3% after? Or do they still limit themselves to 4% at the start, knowing that they'll probably have a bunch of extra cash coming in later in life? Or do they just spend whatever they need and not worry about it?

 

[tb001]

Our plan has us withdrawing closer to 5% for the first few years, until DH hits 62 and can collect SS, then steps down to 4%. These years include funding 529s, so that's how we're smoothing college costs. I've left it at 4% after, but think it's unlikely we'll actually withdraw that much. It's far enough off for us that my guess is there will be lots of adjustments along the way... The fido calculator helped me get comfortable with modeling a bigger withdrawal rate up front and a lower one later in life. As with most things it seems, way easier to do it this way if you have some built in cushion vs if you're cutting things close.

 

[daylatedollarshort]

I understand how to use firecalc to input the mortgage, but appreciate the replies to clarify anyway. I probably wasn't clear enough in my original post. And good point about making the principle and interest non-inflation adjusted.

My question is less about how to input the numbers, but more about how people plan what they can withdrawal in light of a big difference in the beginning and end of retirement due to not just mortgage, but also healthcare and social security, or any other front loaded expenses, like college for kids maybe.

I made a custom spreadsheet that goes out 50 years with parameters for fields like inflation and real returns. Then I use the Fidelity planner for a second opinion and to validate my basic numbers.