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Old 12-04-2016, 03:20 PM   #81
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Since you would be taking money out at 25% or maybe even some at 28%, I would not pay off early. Try to live on enough to only bring you to the top of the 15% tax bracket. You do that and I don't see a reason why you would have to go back to work.
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Old 12-04-2016, 03:32 PM   #82
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Well if all goes by the plan (Expected Changes to federal taxes) standard deduction for couple will go from 12600 to 30000 bucks.

That will make itemized returns disadvantageous for many couples and all the sudden paying of that mortgage may look like a sweet deal.
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Old 12-04-2016, 03:39 PM   #83
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Well if all goes by the plan (Expected Changes to federal taxes) standard deduction for couple will go from 12600 to 30000 bucks.

That will make itemized returns disadvantageous for many couples and all the sudden paying of that mortgage may look like a sweet deal.
That sounds about right. As soon as I buy a house and can itemize for the first time in my life, the standard deduction gets raised to eliminate that option. Not that it matters much. I never pay much in Federal tax, it's self employment tax that kills me.
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Old 12-04-2016, 03:43 PM   #84
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I frankly would like to see such change to tax code since efectively it simplifies tax code.

Now we do not have mortgage for last 15 years and I would not attempt to FIRE if would need one. (Or think that having one makes me money on a level that I would care about)
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Old 12-04-2016, 08:16 PM   #85
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Again I appreciate all the feedback and wanted to add some additional information on my desire to payoff the house. If I do payoff the house my pension will cover most of my expenses. First world problems!

Go with your gut. You want to pay it off and then your expenses will be covered by your pension. Let that sink in for a minute. That's a nice hunk of security to feel.



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Old 12-04-2016, 08:25 PM   #86
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Go with your gut. You want to pay it off and then your expenses will be covered by your pension. Let that sink in for a minute. That's a nice hunk of security to feel.



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Thanks for the reply. Yea, this is not just a math problem for me about tax deductions and tax brackets. It's more about me being able to move on after working 31 yrs in a corporate environment and do the things I enjoy vs. chasing the money so to speak.

I'm ready to move to Phase II and NOT having a mortgage will greatly enhance my ability to do that. Cheers.
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Old 12-04-2016, 08:58 PM   #87
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....A lot of responses say "you can make more than 4% in the stock market" but I would be taking my $100K (plus 20% fed tax) from my bond fund and stable value (currently making 2.4% and 2.1% respectively).

So technically no I'm not making more than 4%. Additionally where I live (Seattle WA) my home value is up 12% this year. My overall 401K is up 6.5%.
....
So are you saying that if you did withdraw $100k or so from your 401k to pay your mortgage that you would make commensurate adjustments to your AA (stock/fixed income ratio)? Most people don't but if you would then I would agree that the difference between 4% paid and 2.1-2.4% earned is the right way to look at it.
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Old 12-04-2016, 11:09 PM   #88
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From what the OP posted it is likely that he over or near the top of the 15% tax bracket based only on his $43k of pension income... so his marginal rate will likely be 25%. Would that change your answer?

So he would need to withdraw $133 and pay $33 in tax to pay $100 of principal. Assuming that he is close to the top of the 15% bracket before withdrawals, doing it over time doesn't really help the tax bite.

.....
I missed where the OP said he was filing single vs married if he even said it.
So yes, if he is filing single, then it becomes expensive to pay off the mortgage due to the high tax rate and I agree it's probably not worth it.

If he is married then he has room possibly about 50K per yr that he could withdraw and remain in the 15% tax rate.
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Old 12-05-2016, 08:43 AM   #89
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A lot of responses say "you can make more than 4% in the stock market" but I would be taking my $100K (plus 20% fed tax) from my bond fund and stable value (currently making 2.4% and 2.1% respectively).

So technically no I'm not making more than 4%.
If you do that, then you are changing your asset allocation to a higher allocation to stocks and reducing your bond allocation. Is that what you want to do?

Money is fungible -- a slippery concept that is easy to lose sight of. It is especially easy to lose sight of if by doing so it helps you "prove" a decision that you already want to make.
That's always a thing to be on guard against -- looking only at evidence that supports what you want to do.

The right way to take a withdrawal to pay off the mortgage is to take it out equally, thereby keeping your stocks/bonds asset allocation the same.

-------------
FWIW, historically the average return for a 50/50 portfolio (S&P500 & 10yr Tbill) for all rolling 10 year periods since 1950 was 8.8%.
That is much more than 4%.

The 5th percentile is 3.8%. That means only 5% of the periods are less than 3.8% and 95% are higher.
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Old 12-05-2016, 09:55 AM   #90
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Actually, many on this forum should qualify based on assets. They do implied income based on your total liquid assets. The total is divided by 30 (years) and multiplied by 75% to show an effective annual distribution.

I did not know that lenders do this and find this very interesting. This is not directly relevant to the question at hand, but this calculation shows that these lending institutions calculate a SWR of 2.5%.

(assets/30)*.75 = assets*(.75/30) = assets * .025 (or 2.5%)

This is what I'm targeting for a SWR, so I thought that was kinda cool...
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Old 12-05-2016, 11:31 AM   #91
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For clarification besides peace of mind of owning the home (you can't put a calculation on that) a big 2nd priority is creating $18K in cash flow for me since I'm not certain I will go back to work yet.
What about just taking out $18k a year out of your 401k to supplement your cash flow? That way you will still have a larger amount in your 401k, house will be paid down on schedule, you will have a smaller tax bite taken out on the withdrawal (maybe even keep you in a lower tax bracket) and you have the flexibility to change your mind later.
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Old 12-05-2016, 01:29 PM   #92
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If you do that, then you are changing your asset allocation to a higher allocation to stocks and reducing your bond allocation. Is that what you want to do?

Money is fungible -- a slippery concept that is easy to lose sight of. It is especially easy to lose sight of if by doing so it helps you "prove" a decision that you already want to make.
That's always a thing to be on guard against -- looking only at evidence that supports what you want to do.

The right way to take a withdrawal to pay off the mortgage is to take it out equally, thereby keeping your stocks/bonds asset allocation the same.

-------------
FWIW, historically the average return for a 50/50 portfolio (S&P500 & 10yr Tbill) for all rolling 10 year periods since 1950 was 8.8%.
That is much more than 4%.

The 5th percentile is 3.8%. That means only 5% of the periods are less than 3.8% and 95% are higher.
Yes, I would most likely re-allocate post withdraw. I'm currently at a 73/27 mix and even though that sounds aggressive my pension is "fixed" so I'm willing to have more in equities than the typical 60/40 mix. Cheers.
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Old 12-05-2016, 01:31 PM   #93
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What about just taking out $18k a year out of your 401k to supplement your cash flow? That way you will still have a larger amount in your 401k, house will be paid down on schedule, you will have a smaller tax bite taken out on the withdrawal (maybe even keep you in a lower tax bracket) and you have the flexibility to change your mind later.
Thanks. Thats an interesting concept but I'd still be paying $4K a year in mortgage interest a yr. If I completely retire not having a mortgage was always my goal. Different strokes I realize. Cheers.
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Old 12-05-2016, 01:42 PM   #94
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Well if all goes by the plan (Expected Changes to federal taxes) standard deduction for couple will go from 12600 to 30000 bucks.

That will make itemized returns disadvantageous for many couples and all the sudden paying of that mortgage may look like a sweet deal.
OK that made me look up the details and made my day;
"Trump, however, would provide a unified business rate of 15%, meaning not only would corporations pay tax at that rate, but all business income -- even the income earned by an individual from an S corporation, partnership, or sole-proprietorship and reported on the individual's tax return -- will be subject to the same 15% rate. This means that a taxpayer earning business income would experience a drop in top tax rate from 39.6% to 15% under the Trump presidency."

If our Sub S income is subject to 15% cap, it makes a huge difference in how we treat our tIRA's, and likely will allow us to pay off the mortgage sooner at a lower tax rate. Who cares about the std deduction change, this is much bigger deal. I suppose we still get to pay tax on our SS but that is pale in comparison.
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Old 12-05-2016, 02:07 PM   #95
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OK that made me look up the details and made my day;
"Trump, however, would provide a unified business rate of 15%, meaning not only would corporations pay tax at that rate, but all business income -- even the income earned by an individual from an S corporation, partnership, or sole-proprietorship and reported on the individual's tax return -- will be subject to the same 15% rate. This means that a taxpayer earning business income would experience a drop in top tax rate from 39.6% to 15% under the Trump presidency."
Yes that would be a God send gift for so called coastal elites (primary owners of equities) resulting in eye-popping returns in equities and dividend growth.
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Old 12-05-2016, 02:42 PM   #96
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Yes, I would most likely re-allocate post withdraw. I'm currently at a 73/27 mix and even though that sounds aggressive my pension is "fixed" so I'm willing to have more in equities than the typical 60/40 mix. Cheers.
I think the AA would actually go the other way.

Let's say that you have $800k in investments that are 73/27, or $584 stocks and $216 bonds. If you take out $100 to pay off the mortgage and it comes out of bonds, then your new AA would be 83/17 (with stocks of $584 and $700 in total). If this is the way you do it then the valid comparison is the 4% you pay on the mortgage vs the 2-2.5% you earn on the bonds that are earmarked to pay off the mortgage.

.......................................Before..... .Payoff........After
Stocks...............................$584......... ..............$584
Bonds..................................216......$( 100).........116
Total.................................$800.......$ (100).......$700

AA....................................73/27.....................83/17

If you keep the AA the same, then the relevant rate to use is the portfolio earnings rate, which is likely more than the 4% that you are paying.
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Old 12-05-2016, 02:50 PM   #97
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"Trump, however, would provide a unified business rate of 15%, meaning not only would corporations pay tax at that rate, but all business income -- even the income earned by an individual from an S corporation, partnership, or sole-proprietorship and reported on the individual's tax return -- will be subject to the same 15% rate.
I'd be very surprised if that happens. If so, wouldn't many here move most personal assets into a "portfolio management" business so they're taxed at only 15%?
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Old 12-06-2016, 01:46 PM   #98
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I think the AA would actually go the other way.

Let's say that you have $800k in investments that are 73/27, or $584 stocks and $216 bonds. If you take out $100 to pay off the mortgage and it comes out of bonds, then your new AA would be 83/17 (with stocks of $584 and $700 in total). If this is the way you do it then the valid comparison is the 4% you pay on the mortgage vs the 2-2.5% you earn on the bonds that are earmarked to pay off the mortgage.

.......................................Before..... .Payoff........After
Stocks...............................$584......... ..............$584
Bonds..................................216......$( 100).........116
Total.................................$800.......$ (100).......$700

AA....................................73/27.....................83/17



If you keep the AA the same, then the relevant rate to use is the portfolio earnings rate, which is likely more than the 4% that you are paying.
Thanks for doing the analysis. I had not done it on paper yet so that is cool. I will need to re-balance yes if I do take $$ out of the bond and stable value fund. Cheers.
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Old 12-06-2016, 09:38 PM   #99
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I'd sell the house, buy a less expensive one for cash, and end up without a mortgage, with less equity tied up in an illiquid asset, and more money in after tax savings for emergencies, not to mention lower RE taxes and probably less maintenance costs. Win-win!
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Old 12-08-2016, 02:38 PM   #100
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I'd sell the house, buy a less expensive one for cash, and end up without a mortgage, with less equity tied up in an illiquid asset, and more money in after tax savings for emergencies, not to mention lower RE taxes and probably less maintenance costs. Win-win!
I love my neighborhood and really don't want to move out of Seattle WA. Downsizing is not really an option either. My place is pretty much entry level home which sounds crazy considering the value but it is what it is.

Amazon.com and other headquarters are just a short transit ride away and prices are up 12% this year alone.

Cheers.
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