carry my mortgage into retirement?

[Perryinva]

Interest expense on a $237K mortgage at 3.625 a year is $8,591. Investment income on $237K at 3.625 a year is $8,591. Before taxes, it is a wash. Personally, I would not sleep much better at night paying off a mortgage if the financial impact was zero......

That's only for the first year. Every year the investment grows and earns more interest, while the interest cost on the mortgage drops and becomes home equity principal. If you pay cash for a house the investment only earns appreciation, which the mortgaged house also earns. Each year you pay the house with progressively inflated dollars, while the investment grows to match and exceed inflation. This is a very old and tired argument. The reasons to pay off a house when rates are so low are entirely emotional. There is no financial incentive. I'm not discounting the validity of the emotion. It has a fixed cost to it that many find acceptable.

 

[jollystomper]

For the OP, I among the reasons I would not do it is the tax hit one will take on withdrawing additional money from retirement accounts. so to pay off $100K you will actually have to withdraw $115-$125k based on the tax bracket one is in (just a rough guesstimate on my part I did not analyze the tax hit to the final jot or tittle ).

In my case I will be going into retirement with a mortgage, but with a low interest rate and enough in cash to pay it off, I will see how year 1 of retirement goes before I make any changes. I will be more concerned about our health expenses than our mortgage expense.

 

[daylatedollarshort]

That's only for the first year. Every year the investment grows and earns more interest, while the interest cost on the mortgage drops and becomes home equity principal. If you pay cash for a house the investment only earns appreciation, which the mortgaged house also earns. Each year you pay the house with progressively inflated dollars, while the investment grows to match and exceed inflation. This is a very old and tired argument. The reasons to pay off a house when rates are so low are entirely emotional. There is no financial incentive. I'm not discounting the validity of the emotion. It has a fixed cost to it that many find acceptable.

I was not trying to make a comprehensive analysis in my post - just pointing out that paying off a mortgage often reduces income by close to the same amount. There are often posts here about how can anyone go into retirement with a mortgage without looking at the offsetting decrease in investment income.

 

[ERD50]

Paying off early gives you a guaranteed 3.625% return minus the tax benefits. Can you get a higher return guaranteed any where else?

Do you invest all of your funds in instruments with guaranteed returns? If not, why not?

Thank you, joeea.

This argument about "guaranteed returns" always seems hollow to me. Yes, it's true to a point, but is it relevant? I don't think so.

Why do my returns need to be guaranteed? Just because I can look at the mortgage pay off that way, doesn't make it relevant to my investment decision.

30 year Treasuries are ~ 2.8%, as guaranteed as you can get. You can't get that guarantee in the market, so is all your money in 30 year Treasuries? If not, the statement just doesn't hold. And I wouldn't do 100% 30 year treasuries anyhow.

-ERD50

 

[Perryinva]

I was not trying to make a comprehensive analysis in my post - just pointing out that paying off a mortgage often reduces income by close to the same amount. There are often posts here about how can anyone go into retirement with a mortgage without looking at the offsetting decrease in investment income.

I was agreeing with you, and in fact pointing out that it is trade off, and for investors above a certian income, usually smarter to carry a mortgage. If one is living on $50k/yr, then a $1200 P&I is a heck of a higher burden than the same P&I on $100k/yr. Either of those incomes could easily have a mortgage in that range. As mentioned, the taxes, maintenance and insurance never go away, so it becomes a total cost against income equation.

As for the OP, I obviously agree with the posters that said there is no sound financial reason to reduce pretax retirement savings just to have no mortgage, IF the payment is easily handled with your expected income. At least at this time, with current mortgage rates.

 

[traineeinvestor]

With interest rates on our mortgage below what we can earn in interest on reasonably good quality bonds or dividends from an index funds, we decided to not to pay off our mortgage when I FIREd - we had seven years left on it.

Another motivation was that the interest rate on the mortgage is below the local rate of inflation - keeping the mortgage acts as a partial inflation hedge.

Current plan is to remortgage for additional investment when the current mortgage is repaid - assuming the economics make sense.

If I or DW lost any sleep over it, I'd have no problems accelerating payments.

 

[freedomatlast]

Do you invest all of your funds in instruments with guaranteed returns? If not, why not?

Of course not, and the balance of the mortgage is not ALL of his portfolio.

 

[Honeyfill]

I was agreeing with you, and in fact pointing out that it is trade off, and for investors above a certian income, usually smarter to carry a mortgage. If one is living on $50k/yr, then a $1200 P&I is a heck of a higher burden than the same P&I on $100k/yr. Either of those incomes could easily have a mortgage in that range. As mentioned, the taxes, maintenance and insurance never go away, so it becomes a total cost against income equation.

As for the OP, I obviously agree with the posters that said there is no sound financial reason to reduce pretax retirement savings just to have no mortgage, IF the payment is easily handled with your expected income. At least at this time, with current mortgage rates.

this is similar to our situation. Our P&I is 1200 on a 420K house at 3.5% a year. 29 years left on the mortgage. We have an pre retirement income of 180k and expect a post retirement income of 120k(hopefully by mid 2018) . It makes absolutely no sense to pay off our mortgage now. But I do agree if our expected income would only be 50k, I would be very tempted to pay it off first but also to delay retirement a few years so we could pay it off out of income instead of savings.

 

[Out of Steam]

We will probably buy a new house in retirement and carry a small mortgage on it, $150K or less.

I'm not at all concerned about it.

 

[joeea]

Thank you, joeea.

This argument about "guaranteed returns" always seems hollow to me. Yes, it's true to a point, but is it relevant? I don't think so.

Why do my returns need to be guaranteed? Just because I can look at the mortgage pay off that way, doesn't make it relevant to my investment decision.

I agree that it doesn't make sense to isolate money used to pay off a mortgage this way.

If you feel compelled to compare a mortgage payoff only to a guaranteed vehicle, then you seem to be implying that this particular money must be guaranteed for some reason.

But unless you have an unusual asset allocation, I doubt that you would take other money you came by (from salary, or from an inheritance perhaps) and invest it solely in guaranteed-return vehicles.

Money is fungible. There's nothing special about money that is spent to pay off a mortgage versus all the other money you have.

 

[joeea]

Of course not, and the balance of the mortgage is not ALL of his portfolio.

Right. So what is the compelling rationale for requiring that a mortgage payoff be compared to a guaranteed-return investment?

 

[RunningBum]

Right. So what is the compelling rationale for requiring that a mortgage payoff be compared to a guaranteed-return investment?

First, it's an individual choice so it's not required at all. It's up to each person to determine how much risk they want to take in their portfolio.

The fact is, if you've paid off your mortgage, you're no longer paying that mortgage interest, and that is pretty much a guaranteed return. Now, if interest rates drop, you could've refinanced your mortgage to a lower rate (at a refinance cost), so there is some play in that "guaranteed" rate.

With that in mind, if you want to keep the mortgage and invest the money in high risk stocks, that's your choice, but you can't ignore the fact that you are taking a lot more risk. If you want to invest it in the S&P index, there's still some risk. VG Wellesley, still a bit of risk. You may find this an acceptably small risk to take to get a better return. Others may not. Either way is fine, IMO, but don't kid yourself -- you are taking more risk if you invest in anything not guaranteed.

People who want to keep the same level of risk are right to compare a mortgage rate to a guaranteed rate. People who want to leverage their house value to invest that money at the same acceptable risk as their rest of their portfolio are right to compare it to their overall return rate. Hedging in between seems fine too. IMO what's wrong is to insist that someone else has to approach it the same way that you do.

 

[ivinsfan]

The OP is 61 and has 29 years left on a 350K mortgage...he'll be 90 if he doesn't pay early. In his shoes I'd throw some extra money on the early end to try and cut down some of the interest and move the pay-off date closer to 80-85...even if he relocates or one of them passes, they still will save some interest and have less lump sum payout when/if they sell.

 

[pb4uski]

I think that it is rare that people match their mortgage with bonds or similar fixed income investments so similarly, it would be rare the the approriate rate to compare paying off the mortgage to would be the rate of return on fixed income investments. More likely, if someone was to pay off their mortgage then their overall AA would stay the same so the rate comparison is the overall investment return rate. I believe that those who chose to carry a mortgage recognize that the decision is slightly riskier but are willing to accept the risk. Also, in many cases the amount at play (the mortgage) is not terribly significant so if the gamble goes sideways the implications are not risking failure overall. (In my case my mortgage is less than 10% of my portfolio).

In the OP's case they only have tax-deferred funds so taxes are the biggest factor in the decision and IMO it would be unwise to do a huge withdrawl and pay a boatload of taxes just to pay off the mortgage.

 

[joeea]

With that in mind, if you want to keep the mortgage and invest the money in high risk stocks, that's your choice, but you can't ignore the fact that you are taking a lot more risk.

I don't think anyone ever proposed that choice ("high risk stocks").

Instead, most suggest that, rather than depleting your investments, just keep them invested according to your current Asset Allocation plan - just as you would for any other monies.

People who want to keep the same level of risk are right to compare a mortgage rate to a guaranteed rate.

No. People who want to keep the same level of risk would just keep doing what they have been doing all along.

Conversely, people who feel compelled to change their level of risk could take money out of their portfolio (which is already within their asset allocation plan), and put it all in the walls of their house by paying off the mortgage. They are exchanging money within their portfolio to pay off a low-interest loan that they already have.

IMO what's wrong is to insist that someone else has to approach it the same way that you do.

I agree. Nobody should insist that anyone else do what they do. I don't know anyone who would disagree with that.

 

[RunningBum]

No. People who want to keep the same level of risk would just keep doing what they have been doing all along.

Going into debt, or staying in debt, in order to be able to invest more in the market adds to your risk. There's no denying that.

If you invest that at the same AA as what you've been doing because it is a totally acceptable risk to you, that's fine, but it's still a risk. It's like weighing the risk of swimming in the ocean and being attacked by a shark. You may feel the risk is perfectly acceptable and feel fine swimming 4 times a week. If you then decide to swim 5 times a week, you're increasing your exposure so the risk is a little greater, but you may still feel perfectly fine with it. Not sure just how good that analogy is, but it's the best I can think of while watching football right now.

 

[joeea]

Going into debt, or staying in debt, in order to be able to invest more in the market adds to your risk. There's no denying that.

That depends. There are different kinds of risks.

Would you take your last $100k of retirement savings to pay off your mortgage at age 65, and expect your risk to be reduced?

If you invest that at the same AA as what you've been doing because it is a totally acceptable risk to you, that's fine, but it's still a risk. It's like weighing the risk of swimming in the ocean and being attacked by a shark. You may feel the risk is perfectly acceptable and feel fine swimming 4 times a week. If you then decide to swim 5 times a week, you're increasing your exposure so the risk is a little greater, but you may still feel perfectly fine with it. Not sure just how good that analogy is, but it's the best I can think of while watching football right now.

Given the real-world risk associated with shark attacks, swimming once more per week doesn't add any appreciable risk, so I'm guessing that wasn't the analogy you wanted to make. College football?

But my point is that leaving things as they are (i.e., not paying off a mortgage) doesn't add to your risk. And taking a chunk of your retirement assets to pay off a low-interest mortgage may reduce one risk while increasing another.

For most folks, I suspect the financially better choice is to live with a low-interest mortgage and keep the assets invested per your asset allocation plan. But if that keeps you up at night and you aren't taking out too big a chunk of your retirement assets, then do it.

I think this is the difference between good and better.

 

[RunningBum]

That depends. There are different kinds of risks.

Would you take your last $100k of retirement savings to pay off your mortgage at age 65, and expect your risk to be reduced?

No I wouldn't, because that would be the equivalent of being 100% in guaranteed income, which has inflation risks. Plus I wouldn't have any funds for irregular expenses, like if my car needed major repairs.

And if I had $200K in savings with a 50/50 AA and a $100K mortgage, I wouldn't pay off the mortgage and go 100% stocks.

I had been thinking about which side extreme cases like this would support since they tend to make the answer more obvious, but hadn't really gotten around to it. It supports your point, so I guess I'll concede.

I'm still not going out and getting a mortgage though. I don't think the difference is big enough to go to the trouble. I lean toward being a little more aggressive with my AA with a paid off house, but I don't explicitly factor it in.

 

[Winemaker]

I have enough income to cover my mortgage, it has only 7 years left out of 15. Part of my mortgage at 4.375% was a refinance of my 4 unit apartment building mortgage at 7.875%.

One of the advantages/techniques/strategies of real estate investing , if and only if one chooses to go this route, is to refinance every 5 years. One can refinance 80% of appraised value, which may include appreciation and 5 years of mortgage payments and do a taxfree cash out. That taxfree payout can be spent, reinvested as a down payment for another real estate property, or stuffed in a mattress.

Debt, as mentioned earlier, is a personal decision. Some loathe it, some love it, I am in the indifferent group. As with anything financial, there are a lot of tools to use, and mortgage debt is one of them.

 

[Perryinva]

When I give it more thought, if one includes their mortgage as part of their AA risk, then the higher the percentage of NW (based on savings invested plus the savings equivalent of guaranteed income) that the mortgage is, the more it makes sense to carry the mortgage. If it is a small percentage then it really doesn't matter, as the difference to ones income or investment earnings is far less. One of the reasons that that I lean towards carrying a mortgage is that the percentage of my retirement income that is guaranteed, ie not dependent on investments, is high, about 72%, with only 40% needed for enhanced basics, including the mortgage. So it is just plain easy for me to carry one.

As an example, if I use the 4% guideline against my guaranteed income from SS and pensions plus invested amounts, my NW could be $4m. So a $400k mortgage would be 10% of "NW". Or conversely assuming $4m throws out $160k/yr of which $115k is guaranteed, so then $13k/mo income with a $2000/m P&I is not going to cause me any distress, as it is 17% overall or only 20% of guaranteed, or 37% of essential income for enhanced basic living. So even a 50% temporary hit against the 60% investments that are equities in a 60/40, is a drop of maybe $13k the years of the drop. Hardly game changing.

With the money not ties up in the house, so I can earmark more money for riskier down the road investments now (at age 60), knowing the swings will only impact discretionary spending. Having a mortgage only increases that amount as that would be part my bonds investment in a 60/40.

In theory, of course. Make sense?

 

[daylatedollarshort]

I think that it is rare that people match their mortgage with bonds or similar fixed income investments so similarly, it would be rare the the approriate rate to compare paying off the mortgage to would be the rate of return on fixed income investments.

Our fixed rate mortgage is somewhat offset by mostly non-COLA pensions. The pensions won't go up much with inflation but then the mortgage payments and interest rate won't change either. Over time the interest on the mortgage will decrease and when the mortgage is paid off the pension money will just be extra income in the budget. The pension income won't be worth as much as today because of inflation but whatever the payments are worth in the future can go towards discretionary expenses since the mortgage will be paid off.

 

[jw72]

My 2 cents

Banks are not going to give you a loan when you are retired so keep you power dry and do not pay off the mortgage. I have friends who wanted to move to a single level home and found it difficult to get a load to buy the new home. Lenders only want to lend to people who are working or people who do not need the money.
Good luck in your decision.

 

[Perryinva]

Actually, they want "guaranteed " income plus assets. So a solid annuity makes getting a mortgage the same as a paycheck, as do solid pensions and SS. If you FIRE young, living totally off dividends and earnings, then you are correct; getting a mortgage will be much more difficult, especially if you have large buckets of cash.

 

[Scuba]

This is where I agree with pb4uski completely. Did you have a mortgage most of your life before retirement? When a job loss coupled with the mortgage could have been a disaster? Where you on pins and needles with that situation? That is what I don't understand. Either you can afford to own the home or not. I've had a mortgage or two most of my adult life. I dont worry anout it, ever. I monitor rates and when they drop, I refinance. I've refinanced at least 8 times in my life. Minimize unnecessary costs. In retirement, where there is no possibility of "job loss", and wealth accumulation should feasibly allow puchase of the home outright, a mortgage should be of even less concern. If you have to struggle to be retired and make your mortgage payment you are either living above your means or shouldn't be retired. I don't see the point in tying up $100s of 1000s of dollars in a at best, not easily almost inaccessible investment that at best makes 2.7%., based on my current 3% loan. Guaranteed? No, but that's a weak argument, as in the last 20 years I've easily beat that by 3 -30% per year.

Exactly my view. YMMV

 

[daylatedollarshort]

Our local credit unions will approve mortgage loans if we show a history of periodic withdrawals from savings / retirement accounts to show "income". So moving extra money from investments to .001% yielding checking accounts = loan approval, keeping the extra money in stock and bond investments = no loan approval. It seems a bit crazy but it is what it is. Net worth means nothing to them.