$50 a day? No way!

[haha]

Hey Mikey, get a grip!  We're not doing it
($50.00 per day) and don't intend to.  But, we could
and so could everyone else if they were sufficiently
motivated

Hi John,
I admit I am having a bit of fun with this $50 a day business. I can't help it- I regard it as delusional.

Mikey

 

[sgeeeee]

. . . Besides if I borrow at 5-6% and invest, I can't make the mortgage payment on a 4% SWR of that investment.   Sooo, paying off one's mortgage(or any debt at rates higher than SWR) should reduce your SWR needed to meet your retirement expenses.  

Applying a 4% SWR on a fixed mortgage doesn't make sense. The mortgage does not inflate so your safe withdrawal rate is higher than for expenses that do inflate.

You can look at your odds of beating the payoff using FIRECalc. Put in the principle as your nest egg, your annual payments as the initial withdrawal rate and check none for the inflation index. As an example, for a $100,000 30 year loan at 5%, you have an 85% chance of outperforming the payoff option if you use an investment mix of 60% equities, 40% TIPS. Those are pretty good odds, but you also have to consider what is at risk . . .

The worst case risk situation is found by looking for the 100% SWR for the $100,000 loan. You'll find that the amount at risk (by choosing investment over payoff) is about $2, 250 per year. So under the historical worst case situation, your $100,000 investment would produce an average of $2,250 per year less than you need to make loan payments. Of course you could choose to pay off the loan at any time if you decided you didn't like the way your investments were going -- thereby reducing your downside potential.

Also, you would be getting some tax advantage by making house payments which makes the situation slightly better than the example shows.

 

[dory36]

The biggest problem with the mortgage (or other debt) is that it is NOT volatile, while the investment returns are.

What drives the whole SWR issue is volatility -- you need to take out a much smaller percentage of the nest egg than the typical market returns suggest you might be able to, solely to limit the risk created by the threat of a market decline in the first few years of retirement.

We KNOW the market will decline sooner or later, and based on history, we have a pretty good idea of how much it could decline. The only question is WHEN.

If the market goes up the first few years and then declines, no big deal because your portfolio has already grown enough to withstand such a loss.

The debt payment is guaranteed. You have to make those payments.

The income is hoped for.

The hundreds of messages on this topic years ago all boiled down to roughly this: if you can get a loan and pay roughly half the interest rate that you believe you can make on the money you'd otherwise use to pay off the debt, then it's a good thing. Otherwise, it's too risky, based on the collective judgements of the dozens of contributors to the discussion and the fairly thorough research they all did.

Or as Granny used to say -- a bird in the hand is worth two in the bush.

Dory36

 

[John Galt]

This is mostly for mikey! I'm having some fun with the
"$50 per day thing too. I'm not doing it and have no plans to start. I also agree that your average
American would find it extremely difficult to do.
It would add a new meaning to "bare bones lifestyle".
However, I know people personally who live on less
(my son being one - much less in his case) and we
have had posts on this site confirming that it's still
possible. I'm not motivated to look it up, but I'll bet
you a bottle of "Old Stumpknocker" that the government
has stats confirming my assertions vis-a-vis the
$50 per day thing. Any of you doubting Thomases
should look it up. BTW, for me it would be relatively easy to accomplish. I just don't want to.

John Galt

 

[Cut-Throat]

wab mester,

I believe that no one aswered your question on INTJ. This is a personality predicter with only 4 questions. takes about 5 minutes.

http://www.haleonline.com/psych/

If you go the the Retire Early Home Page. All of the types and descriptions are listed in one one links there.

BTW - unclemick - I did the test again and remembered that I was not an INTJ - I am an ESTJ all the way!

 

[rigoletslady]

unclemick here - webtv is on the fritz. INTJ was discovered on a temp job in 95 - a Tulane Phd tested us engineers so we would be better 'team' members.

Revisted the numbers this morning - my mom lived on $30/day in Kelso-Longview 1989-93(no morgasge).

Down here outside the cities north of $30 puts you in the upper crust in a lot of areas. Dam Yankee pensions go a long way down here - thats why we have so many retiree's. But don't tell to many people - send them to arizona.

Anybody finding some gov stats should post - might be revealing.

 

[John Galt]

Retook the personality test for the first time in several years. INTJ big time!

John Galt

 

[John Galt]

Hello cut-throat. I think you are correct that INTJs
are the most likely to ER. Re. getting better than 5%,
I am above that on everything (except my MM money of course), but I had to go out a mile on my maturities and take on some risk
(mostly market risk).

John Galt

 

[sgeeeee]

The biggest problem with the mortgage (or other debt) is that it is NOT volatile, while the investment returns are.

I believe that people should do what they feel comfortable with, but I just don't follow this argument at all. No other expense in your life is as volatile as investment returns either. No one ever seems to want to apply this same logic to food, clothing, insurance, . . . But, in fact, they are harder on your volatile investment returns than the fixed mortgage -- because they actually inflate when you suffer losses to your investment returns.

What drives the whole SWR issue is volatility -- you need to take out a much smaller percentage of the nest egg than the typical market returns suggest you might be able to, solely to limit the risk created by the threat of a market decline in the first few years of retirement.

And that's exactly what the FIRECalc simulation looks at -- the historical volatility. If you just look at the averages for inflation, investment return, etc. the mortgage payoff decision is a no-brainer. There's no way it would make sense to pay off a 5% mortgage early. Only by using the historical results do you see that there is a small chance that you won't come out ahead by sticking to the payments . . . and you can see exactly how great that risk is. Another point to remember is that the strategy of continuing to pay can be changed at any time. You can choose to pay off your mortgage today, you can wait and decide to pay it off 1 year into retirement, or you can decide to pay it off after a decade. But once you've made that decision, it may be very difficult to change your mind. If we hit a spell of high inflation a few years from now, having cash invested will be a much greater hedge against inflation than owning your home will be. When people talk about the safety of paying off their mortgage, they seem to forget about the risk they are taking by having their money tied up in a home instead of invested.

We KNOW the market will decline sooner or later, and based on history, we have a pretty good idea of how much it could decline. The only question is WHEN.

If the market goes up the first few years and then declines, no big deal because your portfolio has already grown enough to withstand such a loss.

That is the risk. I agree. The odds are small (at least for my situation) that this risk is very large.

The debt payment is guaranteed. You have to make those payments.

The income is hoped for.

The same can be said for bond vs equity investments. If we could all ignore inflation as a threat, we would never invest in anything but bonds (I can almost hear John Galt's reply already). But even John admits to using investment real-estate to hedge against inflation.

The hundreds of messages on this topic years ago all boiled down to roughly this: if you can get a loan and pay roughly half the interest rate that you believe you can make on the money you'd otherwise use to pay off the debt, then it's a good thing. Otherwise, it's too risky, based on the collective judgements of the dozens of contributors to the discussion and the fairly thorough research they all did.

Or as Granny used to say -- a bird in the hand is worth two in the bush.

Dory36

Well . . . I've done my own thorough research and presented some of the numbers. I suggest everyone do the same for their own situation. But the result you mention above (needing the loan at a rate that is 1/2 the expected return rate before keeping the loan) makes me question the quality of the research you refer to. At some age, most people could buy an immediated annuity that would more than make the payments on the loan and continue paying after the house is paid off. This approach would effectively reduce the volatility risk to zero and still put the investor ahead.

 

[wabmester]

SG, that's a very clever approach to looking at the risks of carrying a mortgage. I have to admit that I was just going by gut instinct and historical averages.

But I ran FIREcalc to quantify, and for me, keeping the mortgage has about an 80% chance of paying dividends. (Much better odds than I can get in Vegas.)

It's worth noting that the tax savings associated with a mortgage does not improve these odds since FIREcalc uses pre-tax returns in the model.

 

[panhead]

Heh Heh, this $50 per day thing is cracking me up too ! Once again, I am in agreement with John Galt this would be no big deal for me to do, and with style ! I am currently employed and my total spending now amounts to about $72 per day ! That's really not the truth of the matter either, as I have two roomates who contribute much to that, plus some expenses I included are paid for by my current employer (cell phone, isp). When I factor these in, I'm at almost exactly $50 per day. Also, I live in the NE. Now, I don't live in a dumpster, but I did buy a foreclosure house which I have been fixing up myself, that made housing very cheap. Also, if you've read some of my posts, I have lots of fun with travel, motorcycles, hot rods, etc. Don't knock the $50/day thing, it's definitely possible, and without eating somebody elses tossed out PB&J sandwich ! This is my current spending situation, you should see my retirement breakdown !

The mortgage discussion is interesting. I haven't decided how I feel about this yet. My mortage payments are very low ($400/month) so I don't worry about it too much, but I have been doubling payments. The no debt thing does appeal to me, regardless of the opportunity cost. To each his own on this one though.

 

[sgeeeee]

. . . It's worth noting that the tax savings associated with a mortgage does not improve these odds since FIREcalc uses pre-tax returns in the model.

Wabmester,

The tax savings is admittedly quite small -- especially if you have limted income in retirement. But depending on your tax bracket, the state income tax situation you are in, and the number of years you've been paying on the loan, the tax break can help.

If you consider a $100,000 loan at 5%, the first year's payments will primarily be interest payments and the tax break could easily amount to several hundred dollars worth of tax reduction. That amounts to a reduction in your effective tax rate. Of course FIRECalc does not consider your effective tax rate, so you won't see the advantage in those calculations.

 

[haha]

The biggest problem with the mortgage (or other debt) is that it is NOT volatile, while the investment returns are.

In the case where one could perfectly offset a fixed mortgage note obligation with a fixed US govt bond of similar maturity, I don't see how volatility would enter into the equation at all. The bonds would not be part of your stash that you might sell- there are only to immunize your debt.

Practically speaking, this will only be possible to do with some degree of time arbitrage in setting it up. If one has an existing fixed rate mortgage issued or refinanced at a low rate, and has the cash to pay it off, he would have the option of holding onto the cash in something like an Orange account at 2% for some period of time, essentially speculating on a meaningful rise in long term interest rates. There is no capital risk, the mortgagee is only paying a negative monthly spread, in hopes that soon the spread will change to give him an opportunity to lock in a long term meaningfully positive spread.

If there is a problem in this logic I would like to know. In practice it can be difficult. The only real threat that I can think of off-hand is if interest paid on a home loan should become non-deductible. If that happens, then volatility on the bond side could hurt, because you would be stuck with a damaging change in the after-tax spread.

In my mind this gets down to pretty unlikely, but as you point out, the whole problem can be avoided by not being cute, and just paying off the mortgage.

Mikey

 

[wabmester]

SG, I think we're in agreement, but a better approach to using FIREcalc for mortgage analysis might be to include your estimated taxes on investment proceeds offset by your estimated tax savings in the withdrawl amount.

It's probably safe to consider it a wash, but it's unlikely that the tax savings would fully offset taxes on your investment proceeds. So, it's not just a matter of not seeing the difference in FIREcalc -- there's no improvement to see.

I'm picking nits.

 

[dory36]

...No other expense in your life is as volatile as investment returns either.  No one ever seems to want to apply this same logic to food, clothing, insurance, . . .  But, in fact, they are harder on your volatile investment returns than the fixed mortgage -- because they actually inflate when you suffer losses to your investment returns.

In the interest of brevity (of which I have never been accused!) I left out a few items we'd discussed long ago.

Certainly the other items have to be paid, but if you have to accumulate $25 in your preretirement for every $1 in your annual expenses (which is what 4% works out to) before you can retire, and your annual expenses include significant debt payments, then you'll have to delay retirement quite a while to accumulate that extra nest egg.

I am not sure how we can all pretty much agree that 4% is all you can withdraw from a portfolio safely for food, when you could always substitute hamburger for steak if times got tough, but somehow a 6% figure is OK when the payment goes to debt, and there is really not much way you can tighten your belt at all on those payments.

Otherwise, everyone ought to immediately refinance their homes and cars and 1st born children for the maximum possible and invest the proceeds -- that would be the only wise decision. Why accumulate ANY equity in your home, car, etc., if you are confident you can invest better than the borrowing rate?

I said before and I'll repeat now -- if there was any way I could prepay for all my food for life at anything under 25x the annual food bill, I'd sell funds and spend the money in a heartbeat. The same with clothing, soap, and duct tape. But I can't, with anything except a house.

The 2x figure included some average meaure of "comfort zone" as well as actual financial rewards, by the way. Those who had no financial worries seemed to be less concerned, but those starting early retirement with pretty close to just enough to fund an acceptable retirement at 4% seemed to feel that a big liability sitting out there was a bigger threat than the potential rewards could justify.

Dory36, who pays off credit cards when the bills arrive, not waiting until they are due...

 

[Cut-Throat]

As far as the Home Mortage goes. I did pay off mine and it gave me a sense of liberty much like ER did. That is the intangeble part of it.

But as the other poster said. Are you comfortable getting a Home equity loan at 5 1/4 % and investing the proceeds? -

I would not be in this current economy. If you would then, I would not pay off the mortgage.

 

[wabmester]

A question for those who think investing $$ borrowed against a home is a great idea; Do you also invest on margin?

If I could get margin at long-term fixed historically low interest rates with tax deductible interest (and no margin call), I'd probably invest on margin.

 

[sgeeeee]

If investing your money rather than paying off your mortgage worries you, then you should pay off your mortgage. It's the right thing to do. If you've already done it, you did the right thing.

If the downside risk of investing that payoff money would hurt your nest egg so much that you would be uncomfortable, then you should pay off your mortgage. It's the right thing to do. If you've already done it, you did the right thing.

If the probable upside potential of investing your money rather than paying off your mortgage is of no value or no interest to you, then you should pay off your mortgage. It's the right thing to do. If you've already done it, you did the right thing.

My point in these posts is not to convince people to make the choices I've made or to rationalize my decisions. I will play the odds and invest my money because the highly probable upside potential is attractive to me and the downside potential is inconsequential to my current retirement plans. I've determined this by running the numbers through the models and simulators we all use and I understand them.

I just think a lot of folks who are facing this decision should run the numbers, understand the issues and then do what they feel best about. That's what I did.

Peace.

 

[John Galt]

I think this post relates to both the $50 per day issue and
the mortgage/no mortgage thing. As obsessive and anal as I can be about money, I find if I have a lot of
readily accessible cash, it tends to get spent. If my
COH (cash on hand) is low (like at Christmas), I force
myself to economize and be even more parsimonious
than usual. I've been this way my whole adult life.
Thus, locking up my money in illiquid assets has helped me many times by forcing me to be creative and thrifty. On the other hand, in spite of
maintaining huge credit card availability (just in case),
I never pay a dime in CC interest. No, it's the cash
laying around in checking accounts (or my pocket)
that disappears. No suggestions here. Just an
observation.

John Galt

 

[dory36]

My point in these posts is not to convince people to make the choices I've made or to rationalize my decisions.  I will play the odds and invest my money because the highly probable upside potential is attractive to me and the downside potential is inconsequential to my current retirement plans.  I've determined this by running the numbers through the models and simulators we all use and I understand them.  

I just think a lot of folks who are facing this decision should run the numbers, understand the issues and then do what they feel best about.  That's what I did.

Probably the best couple of paragraphs about ANY financial aspect of ER that has been posted on these pages!

Dory36

 

[bongo2]

To get slightly back on topic ten years ago I lived alone on $35/day in Chicago for two years without any great hardship. I did not, however, own a house or car.

Currently there are five people in my family, so $50/person/day > $90k. That shouldn't be too much trouble for most people.

We currently spend about $23/day on food (for five incl rarely eating out). When there were two of us we spent about $15/day. We do not, however, eat steak every day, fruit is the largest expense on our list. Mikey, you need to find a new place to shop! ($1.50 > a head of romaine, $0.40 > a head of garlic, you eat an entire broccoli crown?, $0.40 about 2/3 pound of onions, I've never bought chicken hearts, eggs $1.33 dozen at full price less on sale, etc) And don't eat bacon every day! That stuff has as much nutrition as cigarettes! You eat meat every meal?

My father was recently claiming that he could eat entirely in restaurants for less than the grocery store. Of course, his necessary grocery items include gourmet cheese, olives, etc, that cost a fortune!

Cut-Throat, if you like Byerlys have to ever been to the Kowalski's around 54th and Lyndale? It's more like a luxury food boutique than a grocery store! The warehouse store is more my thing.

 

[John Galt]

Yeah, we frequent the warehouse stores also, or
Walmart. When I was in my "big spender" period,
we bought groceries in the Las Colinas area of Dallas
at a store with a grand piano and live music right
next to the produce dept. Ah, the good old days.

John Galt

 

[Telly]

Drive old cars (ours are 13 and 6 years old).

We best you by a few years, John! Our oldest car in service is 21 years old, the newest is 7 years.

Just some general info... All are "domestics", designed and built in North America (some engines were assembled across the river in Canada). And all the Software to run them was also written and developed in the USA, not some far-off foreign land where labor is cheap. Keeping American workers gainfully employed for many years.

 

[John Galt]

Wow Telly, you do have us beat, car-wise. My 13
year old Jeep looks pretty good for its age (me too .
Doubtful it will last 8 more years though. Even though we drive old cars, I am quite particular about
maintenance and appearance. So, when the time comes
I will pull the plug rather than use heroic life support
or drive around in a rust bucket.

John Galt

 

[5 years to retirement]

Assuming tht Paul wrote the book in 1987, $50 in 1987 would be $80.81 in 2003 (16 years, say); 62% total inflation, or about 3.1% average per year (less than I thought). $4,000 then would be about $6,500 today. Total of about $36,000 per annum. At 4% SWR, the pot should be $900,000 in today's dollars to do that. - Ed

Those figures are right. My plan is to have about $875K invested and work part-time (5 hours per week @ $100 per hour) in my own business after "retirement." I already have my own business, so I will just sell off part of it. I want to gross about $1000 per week for my lifestyle which includes lots of traveling and entertainment, although I can still live comfortably on a gross of $700 a week if I need to scale back. So I figure I can live off the investments with a 4% withdrawal plus my earned income.