Talked to 2 Retired Neighbors .. They didn't pay off mortgage, but both have pensions

[brett]

I would not pay attention to my neighbours when it came to financial advice or personal financial practices.

Why would we care??

 

[Luvtoride]

The only true expenses with a mortgage is the interest. The principal payment doesn't change your net worth. With mortgage rates between 2 - 3%, and these days median home prices in the U.S. under $400K, a $200K average mortgage balance is going to cost around 2.5% X $200K = $5K a year, assuming no income on the invested difference. So it is not a huge amount, and even less net cost if you have the money invested in I-Bonds or TIPS returning at least the inflation rate, which is around 4%. Then you'd make a little money on the difference, 4% -2.5% = 1.5% X $200K = $3K.


$3K is about the same as how much Checkbook.org says a household can save a year by changing where they grocery shop in my area (same food basket, just lower prices at some stores vs. others). I do both the mortgage and shop at the lower priced grocery stores, plus a lot more. All those little arbitrages and expenses savings add up over a 40 year retirement ($6K a year ($3K mortgage arbitrage and $3K grocery savings) X 40 years = $240K).

Well summarized Daylate! And don't forget about the tax deduction from Uncle Sam on the mortgage interest as well. Yes, it is a personal decision that everyone will make based on their comfort level and individual circumstances.

 

[SD-455]

I'm a mortgage lender so we see a lot of retirees that have mortgages and quite a few that take cash out on a home they own free since rates are so low. A recent survey of retirees showed that 37.6% between ages 65-74 still had mortgages, and 27.7% of retirees 75 and over had mortgages. When the stock market has been on a roll, as in the last 10+ year, and mortgage rates are at or close to all time lows, it's hard to justify removing a large amount that may have been earning 8-10% or more per year to pay off something that costs around 3.00%. It's a personal choice and not something that is bad or good across the board as each persons situation is different.

 

[Markola]

When you compare your mortgage interest with your investment returns, you should compare it with the bond part of the returns. Unless you are heavy in stocks and intend to invest the un-payed mortgage part in stocks, I do not think the comparison is fair. For the lenders, the mortgage is a low risk investment, probably similar to bonds. For most people in retirement, they should not be heavy in stocks.

Says who? We have a 50/50 allocation to stocks and bonds and we have a mortgage. If we sold enough of our portfolio to pay the mortgage balance, we’d still want a 50/50 allocation.

 

[FANOFJESUS]

Depends what the pension is also. Some people have a 5k-7k a month pension on this forum. If I had that I could have a mortgage and $0 saved for retirement. Everything would still be fine.

 

[kyzymurgist]

I think this is common unless you simultaneously change your AA so the mortgage is effectively paid from your cash or fixed income components. I recall reading somewhere that the yield on the 10-year Treasury is a good estimate of bond returns. So let's say that the 10-year Treasury is 1.5% and you have a mortgage with a 3% interest rate and your AA is 60/40 and your mortgage is 10% of your nestegg.

If you pay off your mortgage and simultaneously change your AA to 67/33 then you would likely come out ahead. Of course, YMMV.

Yep. Many financial advisors consider a mortgage as a negative bond. If you have bonds or cash savings in your asset allocation earning less than 1.5%, does it really make sense to keep paying a 3% mortgage?

That said, it's difficult to rebalance without sufficient bonds in the portfolio. For this and other reasons like managing ACA subsidy, we did not pay off our 2.75% mortgage.

We actually increased our 3% HELOC limit to take advantage of increased home equity. I consider this a very large emergency fund.

 

[ERD50]

... My thinking at the time I paid off the mortgage was if the markets took a prolonged dip, a long bear market, I’d be forced to sell my assets at a lower price to pay the mortgage. A huge increase in my SORR. ...

Do that SORR calculation again, but consider it with a typically on-the-conservative-side 60/40AA and a sub 3.5% WR.

It would be a long, long time before you ever had to sell any stocks in a down market. A 60/40 AA will kick of ~ 2.X% divs, so you only need to draw down around 1.X%. Hmmm, almost 40 years (over-simplified, but close enough to make the point) of annual expenses in bonds. Even if it's half that after considering the portfolio dwindles as you draw, and less total $ is in bond, so lower total divs, that's still a really, really long bear market.

IOW, that's just not a real concern, let alone a "huge" one.

When you compare your mortgage interest with your investment returns, you should compare it with the bond part of the returns. Unless you are heavy in stocks and intend to invest the un-payed mortgage part in stocks, I do not think the comparison is fair. For the lenders, the mortgage is a low risk investment, probably similar to bonds. For most people in retirement, they should not be heavy in stocks.

Says who? We have a 50/50 allocation to stocks and bonds and we have a mortgage. If we sold enough of our portfolio to pay the mortgage balance, we’d still want a 50/50 allocation.

The studies show that an allocation of ~ 40/60 to ~ 90/10 has provided the best margin of safety for a portfolio in retirement. And 95/5 is safer than 20/80.

So what is your basis for saying retired people "should not be heavy in stocks."?

I have not changed my allocation due to a mortgage or not. I see that ~ 70/30 is in the 'sweet spot' historically, so that's about what I aim for.

-ERD50

 

[ERD50]

... But not having a mortgage has allowed me to not make any Rollover IRA withdrawals until RMD's at age 72. ....

Wait a minute. Where did the money come from to pay off the mortgage?

People seem to act as if the mortgage payoff money was "found money". It came from your portfolio, and your portfolio can pay the mortgage as well.

And having to pay in a lump could mean considerable cap gains tax.

...
When I retired, I retired from many things. I seldom talk on the telephone, for example. And I don't choose to prepare budgets and work in any home office for days on end. Not having that house payment allows me not to have to watch my business so closely. It allows me to just keep life simple.

To each their own, but having a mortgage on auto-pay is pretty simple. OK, I have to make sure I have the extra cash flow, but I'm already doing that for my regular bills, it's a change in amount, not a change in the level of effort.

-ERD50

 

[Romer]

I guess a lot of the decision comes down to how much one is bothered by having "debt".

It wasn't that the debt bothered me. Paying off my house made no difference on my ability to retire one way or the other. My loan was 2.75% 15 year and I had 5 years left to pay. It was $2700 a month

It was more the feeling of accomplishment like you ran a 5K and made it to the finish line. It is the accomplishment of it rather than bothered by the debt.

I know it doesn't make sense to everyone and everyone is in a different scenario and has different things that motivate them

Some people would also call me crazy to buy an 80K Land Cruiser, throw $25K of modifications on it and then go out and offroad it in the rocks, but it works for me

 

[gauss]

A Psychological Trick

DW and I coordinated it so that the mortgage would be paid off upon the retirement of the second of us.

The reason was not necessarily economic in nature, but more of a psychological trick.

With the W2 income coming to an end and replaced by a much smaller company pension for now, the vanishing mortgage payment would tend to "smooth" the cash flow during this transition.

It worked out quite well for us.

-gauss

 

[flyingaway]

On another thought, I might want to have as much a mortgage as I could get in retirement until my death. After I die, I don't need to worry about the mortgage payment.

 

[daylatedollarshort]

With the W2 income coming to an end and replaced by a much smaller company pension for now, the vanishing mortgage payment would tend to "smooth" the cash flow during this transition.

It worked out quite well for us.

-gauss

But to ERD50's point, didn't paying off your mortgage reduce your income, or at least potential income, as well from the money you used to pay off the mortgage?

 

[Romer]

On another thought, I might want to have as much a mortgage as I could get in retirement until my death. After I die, I don't need to worry about the mortgage payment.

That's the approach my Dad took with his Reverse Mortgage and the fact his house was falling apart. We would want to fix something and he would say that "isn't my problem, it will be yours after I am gone".

It wasn't just the mortgage, but the experience of working through all the items that were not his problem made me go through everything to make sure I am making it as easy as possible for my kids

Sorry, I am sure your post didn't mean to imply leaving a situation like that. Paying off a mortgage by the Heirs isn't a big deal

 

[Andre1969]

The only true expense with a mortgage is the interest. The principal payment doesn't change your net worth. With mortgage rates between 2 - 3%, and these days median home prices in the U.S. under $400K, a $200K average mortgage balance is going to cost around 2.5% X $200K = $5K a year, assuming no income on the invested difference. So it is not a huge amount, and even less net cost if you have the money invested in I-Bonds or TIPS returning at least the inflation rate, which is around 4%. Then you'd make a little money on the difference, 4% -2.5% = 1.5% X $200K = $3K.

I dunno...in my mind the whole payment is still an expense, in that I have to budget the money to come up with the whole thing every month, not just the interest. The last payment I made can be broken down into $1,101.38 in interest and $840.32 in principal, but at the end of the day, $1,941.70 was what they pulled out of my checking account.

I mean, I understand that the principal is essentially paying myself, as I'm building equity in the house. But that equity only benefits me when it comes time to sell the house, unless I take it out. But if I do that, there's that pesky monthly payment again. In the end, once the mortgage is paid in full, I have the benefit of no more monthly mortgage. But that entire payment is what I had to fund, for those 15, 30, or whatever amount of years.

One argument I guess I can make for paying the mortgage early, is this. To use my own example, my monthly payment is $1,941.70, or $23,300.40 per year. Even as I build equity, and the principal becomes a larger chunk of that payment, I still need to come up with $23,300.40 per year. If I assume a 4% withdrawal rate, that means I need to have $582,510 tied up, just to throw off $23,300.40 per year. At 3%, it's $776,680. However, if I decided to pay off the mortgage tomorrow, it would only take $458,866, give or take a few hundred bucks in interest.

So on the surface, depending on how you want to twist the logic, it looks like paying off the mortgage now is the way to go. Realistically though, whatever amount I have invested is probably going to increase in value at a higher rate than what gets pulled out for the mortgage payment. Plus, the mortgage payment is static. It doesn't go up with inflation.

Now, years from now, say the outstanding balance is down to around $100K. With my mortgage, I break that barrier after I make my 305th payment. I will be at $99,942.93. Yet it's still costing me $23,300.40 per year to have that mortgage. Once you're this late in the game, I could see paying off the mortgage, just to free up some cash flow, rather than wait another 55 months for it to be paid off. The interest is negligible...paying it off right after the 305th month, versus riding it out all the way to month 360 only saves you about $7,000 in interest, total. But it's the $1,941 in cash flow that's suddenly freed up, that's pretty sweet. And the fact that you don't have to worry about having a large amount of money devoted to funding that $23,300/yr cost.

But, in the end, do what helps you sleep best at night.

 

[gauss]

daylatedollarshort wrote:

But to ERD50's point, didn't paying off your mortgage reduce your income, or at least potential income, as well from the money you used to pay off the mortgage?

The majority of our expenses are paid from corporate DB pensions.

The monthly mortgage payments that I have been sending in all along (well at least in the past 5-10 years) were beyond the minimum such that the mortgage would be paid off at the desired time. There was no lump sum payoff at the end.

This was intentional.

Could I have had more investable assets if I didn't do this (ie. paid the minimum mortgage payment and invested the difference?) -- probably.


The value of my house is a small fraction ( <10% even with the current run up in residential real estate) of my current liquid net worth.

Just as I have mentioned in other threads that I would have no desire to "lump sum" a defined benefit pension to get more investable assets, I would not want to carry a mortgage for this purpose either.

Perhaps a sub 2% WR on our part along with no legal heirs closer than first cousins are making me see this differently than others.

-gauss

 

[street]

To the ones that have a mortgage in retirement, where are you taking the money from to pay the monthly payment? If you didn't have a mortgage, what would you be doing with that money you were spending on that payment?

 

[daylatedollarshort]

Could I have had more investable assets if I didn't do this (ie. paid the minimum mortgage payment and invested the difference?) -- probably.

If you don't spend the money, then it is not probably it is a definite yes. Which is ERD50's point.

Perhaps a sub 2% WR on our part along with no legal heirs closer than first cousins are making me see this differently than others.

-gauss

Our baseline retirement budget has a 0% WR, after pensions and SS. (Higher in years we decide have one time big expenses like a major remodel). I try to just look at decisions like this from a math, risk and probability type of view. My mortgage is under 3% these days. My TIPS are currently returning around 5 - 7%, interest plus inflation factor.

 

[Mountain skier]

we paid off our mortgage before retiring at 55. we have three defined benefit pensions between us and we both took SS at 62. i believe strongly in zero debt and eliminating risk on that side of the ledger.

Pay off the mortgage early....peace of mind is worth a lot

 

[Montecfo]

If you do pay off the mortgage, or have meaningful equity in your home, a standby HELOC is good to have.

I have a mortgage and an HELOC, the latter with zero balance.

 

[Montecfo]

To the ones that have a mortgage in retirement, where are you taking the money from to pay the monthly payment? If you didn't have a mortgage, what would you be doing with that money you were spending on that payment?

My payment comes from my portfolio which I expect to generate mid single digit returns over time. If I did not have a mortgage payment I would need less cash from my portfolio.

But perhaps more importantly, I would have less money since I would have to use investible assets to pay off the mortgage.

And that is how it works for everyone as far as I can tell.

 

[Markola]

Yep. Many financial advisors consider a mortgage as a negative bond. If you have bonds or cash savings in your asset allocation earning less than 1.5%, does it really make sense to keep paying a 3% mortgage?.

Sorry, I need this explained to me like I’m 5. Why must the mortgage payments come from fixed income investments like bonds? This makes no sense to me.

Also, negative bond? What about the guaranteed “negative inflation” leverage from having a fixed payment that never changes over 30 YEARS?

 

[daylatedollarshort]

Also, negative bond? What about the guaranteed “negative inflation” leverage from having a fixed payment that never changes over 30 YEARS?

It is actually a bit better than having a fixed payment that never changes, because the payment can only stay the same or drop, but never go up. If mortgage rates drop one can usually refinance with a zero point, zero cost loan. We did that this year so our expenses dropped, and with inflation heating up our TIPS values went up and SS checks should be higher next year.

 

[RetiredHappy]

If you don't spend the money, then it is not probably it is a definite yes. Which is ERD50's point.





Our baseline retirement budget has a 0% WR, after pensions and SS. (Higher in years we decide have one time big expenses like a major remodel). I try to just look at decisions like this from a math, risk and probability type of view. My mortgage is under 3% these days. My TIPS are currently returning around 5 - 7%, interest plus inflation factor.

Which TIPS are returning 5 to 7% and what are the terms? Thanks.

 

[street]

My payment comes from my portfolio which I expect to generate mid single digit returns over time. If I did not have a mortgage payment I would need less cash from my portfolio.

But perhaps more importantly, I would have less money since I would have to use investible assets to pay off the mortgage.

And that is how it works for everyone as far as I can tell.

Thanks. No mortgage might give more in return over time, but it might not if markets head south. The direction to go is what the rates are at the time of taking the mortgage.

 

[ERD50]

Pay off the mortgage early....peace of mind is worth a lot

What peace of mind does pre-paying a mortgage bring?

I get peace of mind knowing that my money is working for me in a way that has been long term positive in every period of history (at these low rates).

Paying off the mortgage leaves you with lower liquidity, which you may need to cover: property taxes, repairs, insurance,health issues, etc. The way I see it, there are risks to pre-paying a mortgage.

I'd like to hear what this 'peace of mind" is all about.

-ERD50