Change in Mortgage Thinking in Retirement

[Texas Proud]

OK... found my error... I was trying to adjust the monthly return to annualize and did it wrong.... which I should not do...


Fixing my error it NOW makes sense... glad i thought about it overnight...


The balances for the last 10 years leaves an investment balance of $66351 with a mtg of $45633 or a GAIN of over $20K.... this includes the 08 downturn...


From when I got the mtg in 2010 it looks MUCH better... my investment balance is UP to $145,666 with a mtg in the $60K range... a whopping $85K gain to have a mortgage....


OK, the universe is now back to making sense to me...


SORRY FOR THE CONFUSION!!!

 

[ERD50]

...

The balances for the last 10 years leaves an investment balance of $66351 with a mtg of $45633 or a GAIN of over $20K.... this includes the 08 downturn...


From when I got the mtg in 2010 it looks MUCH better... my investment balance is UP to $145,666 with a mtg in the $60K range... a whopping $85K gain to have a mortgage....


OK, the universe is now back to making sense to me...

... it NOW makes sense... glad i thought about it overnight...

And now, you can sleep well at night - with a mortgage!

... Here is a link to the portfoliovisualizer run using the numbers I guessed at for your scenario. Portfolio #2 is 60/40 allocation. You can edit in your actual numbers and portfolio and see what it shows:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2008&firstMonth=5&endYear=2018&lastMonth=5&endDate=03%2F14%2F2016&initialAmount=120000&annualOperation=2&annualAdjustment=836&inflationAdjusted=false&annualPercentage=0.0&frequency=2&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTI&allocation1_1=100&allocation1_2=60&allocation1_3=70&symbol2=AGG&allocation2_2=40&allocation2_3=30

Thanks for the link. I was able to duplicate/verify your results before I saw TP's update. Having the actual numbers makes this easier!

-ERD50

 

[ERD50]

The balances for the last 10 years leaves an investment balance of $66351 with a mtg of $45633 or a GAIN of over $20K.... this includes the 08 downturn...

I went back and indeed, that captures almost all the downturn (just 5% down for the peak that I could see going back a few years). It's pretty close to the time that a nay-sayer would cherry pick as the near absolute worst time frame for this analysis - and you still came out ahead! And it looks like you would have even if you picked the worst time for this.

Impressive.

-ERD50

 

[Texas Proud]

You don't give the all the numbers you used. What is the monthly mortgage payment you entered ? I ran your principal and interest rate on a mortgage calculator and got $836/month P&I ?

Running the numbers on Portfolio visualizer using 60/40 VTI/AGG (the actual portfolio I have used on my own mortgage arbitrage account), I come up with a remaining investment account balance of $85,722 and a mortgage balance of $45663 at the 10 year mark going from May 2008 - May 2018. The difference is +$40K to the good.

A couple things I'd look for, did you enter a mortgage payment that includes anything more than P&I ? Escrow ? What was your investment account performance over the period ? Portfolio visualizer says that my example portfolio - 60/40 total USA stock/total USA bond market - had a CAGR over the period of 7.19%. In some ways this is a really tough period for the investment account as it starts in the middle of the 2008 meltdown. When I first looked at your post I thought maybe the sequence of returns risk explains it, but the results I modeled are surprisingly positive.

If you didn't enter incorrect numbers, your investment performance had to be really low. JMO, but 60/40 is as low a portfolio equity allocation as makes sense to arbitrage against mortgage interest rates. It could be argued that it is foolish to have any fixed income in the arbitrage at all since mortgages are sometimes referred to as "negative bonds". A 60/40 allocation is what I have been using though.

Here is a link to the portfoliovisualizer run using the numbers I guessed at for your scenario. Portfolio #2 is 60/40 allocation. You can edit in your actual numbers and portfolio and see what it shows:
https://www.portfoliovisualizer.com...symbol2=AGG&allocation2_2=40&allocation2_3=30

I had not looked at the link when I redid the numbers... heck, just looked now to be honest





Yes, this looks in line with my calculations from my actual returns... who knew I could get the answer without doing all that work...


The interesting thing to me, using your tool, is that even with 100% bond fund (BND) you still would have more money than having no mortgage...


The only downside from this is I do not think they take into account having to pay taxes...

 

[pb4uski]

Wouldn't taxes be a wash since taxable account income is taxable but mortgage interest is tax deductible? As a blanket statement it make sense but in real life it can get tricky... in my case the equity return would be taxed at 0% and bond interest would be 15%/12%, mortgage interest might be 15% or zero benefit depending on whether my deductions other than mortgage interest exceeded the sandard deduction.

I think it is safe to say that the benefit is substantial enough to be positive even if taxes are included.

 

[Texas Proud]

Wouldn't taxes be a wash since taxable account income is taxable but mortgage interest is tax deductible? As a blanket statement it make sense but in real life it can get tricky... in my case the equity return would be taxed at 0% and bond interest would be 15%/12%, mortgage interest might be 15% or zero benefit depending on whether my deductions other than mortgage interest exceeded the sandard deduction.

I think it is safe to say that the benefit is substantial enough to be positive even if taxes are included.

Being retired and at a low tax bracket it does not make a difference... but being at a higher bracket, say 25% then it might.... also, with a low mortgage like I had the deduction was nil... I only got a benefit when I doubled up my property taxes every other year...


No matter what, you will still be ahead of the game having a mortgage than not having one... makes me rethink what I will do if and when we move.... it matter what the mtg interest rate is...

 

[BrianB]

Here's a different perspective: Managing your income after retirement, for taxes and ACA.

Scenario one: We have a paid off mortgage. We live comfortably on $48k / year. We get $8k / year from qualified dividends and take $40k / year from a traditional IRA. Taxable income is $40k (qualified dividends don't count) minus $24k standard deduction = $16k taxable which is in the 10% bracket so $1600 total tax. Effective rate = $1600/$48k = 3.3%.
ACA income is $48k which gets us a premium subsidy.

Scenario two: We have a $18k / year ($1500 / month) mortgage. We still need the $48k to live on so we need $66k total. Taxable income is $66k minus $8k qualified dividends minus $24k standard deduction = $34k. Now almost half our taxable income (the amount over $19050) goes into the 12% bracket. With $19050 at 10% and $14950 at 12% our total tax is $3699. $3699 / $66k = 5.6% effective rate.
ACA income is $66k so we do not qualify for any premium subsidy.

For us, scenario one makes a lot of sense.

Edit to add: The $18k additional income increases our taxes by $2099. Therefore our tax rate on that $18k = $2099 / $18k = 11.7%

 

[daylatedollarshort]

Scenario 3: We have a mortgage and ACA subsidies.

 

[pb4uski]

... For us, scenario one makes a lot of sense. ....

Yes, because you don't have taxable account funds... in most cases where we are keepin the mortgage we have taxable account money as well as tax deferred money and can use them to balance and achieve tax goals.

 

[pb4uski]

Scenario 3: We have a mortgage and ACA subsidies.

We have a mortgage and could easily manage our income to get ACA subsidies too... but we have a unique situation where subsidies are not worth as much so we have decided to prioritize Roth conversions instead.

 

[BrianB]

Scenario 3: We have a mortgage and ACA subsidies.

Yes, every situation is different. I just wanted to show that adding to your taxable income to pay the monthly mortgage payment might have a significant impact on your effective tax rate and insurance costs.

 

[pb4uski]

Which just means that there are some situations where it is suboptimal to carry a mortgage due to factors other than investment income earned compared to mortgage interest paid.

 

[BrianB]

Which just means that there are some situations where it is suboptimal to carry a mortgage due to factors other than investment income earned compared to mortgage interest paid.

Yes, thank you for stating it so succinctly!

 

[Texas Proud]

Here's a different perspective: Managing your income after retirement, for taxes and ACA.

Scenario one: We have a paid off mortgage. We live comfortably on $48k / year. We get $8k / year from qualified dividends and take $40k / year from a traditional IRA. Taxable income is $40k (qualified dividends don't count) minus $24k standard deduction = $16k taxable which is in the 10% bracket so $1600 total tax. Effective rate = $1600/$48k = 3.3%.
ACA income is $48k which gets us a premium subsidy.

Scenario two: We have a $18k / year ($1500 / month) mortgage. We still need the $48k to live on so we need $66k total. Taxable income is $66k minus $8k qualified dividends minus $24k standard deduction = $34k. Now almost half our taxable income (the amount over $19050) goes into the 12% bracket. With $19050 at 10% and $14950 at 12% our total tax is $3699. $3699 / $66k = 5.6% effective rate.
ACA income is $66k so we do not qualify for any premium subsidy.

For us, scenario one makes a lot of sense.

Edit to add: The $18k additional income increases our taxes by $2099. Therefore our tax rate on that $18k = $2099 / $18k = 11.7%

Scenario 3: We have a mortgage and ACA subsidies.

I choose #3 and am doing it... I have taken money out of ROTH to keep the subsidy and also get the lower deductible... I am also spending more money than you...


But, my mtg pmt is about $850....



And for me, I would have to sell something to pay the mtg off creating MORE taxable income or take it all out of ROTH, neither of which I want to do...

 

[daylatedollarshort]

Yes, every situation is different. I just wanted to show that adding to your taxable income to pay the monthly mortgage payment might have a significant impact on your effective tax rate and insurance costs.

You could also takeout a smaller mortgage with lower payments than $18K. Mortgages in particular don't really have any more association to staying under the ACA max MAGI than any other expense would. And for some using after tax or Roth money to pay off the mortgage might make it harder to stay under the MAGI limit.

 

[RunningBum]

You could also takeout a smaller mortgage with lower payments than $18K. Mortgages in particular don't really have any more association to staying under the ACA max MAGI than any other expense would.

I disagree; the size alone makes it different. And all of my other expenses aren't long term debt. I can't "pay off" 15 or 30 years worth of electric bills or car insurance. I suppose I could but those would all be like paying off a 0% interest loan.

My mortgage payoff had nothing to do with ACA since it came around 2000, and I'm recalling that the primary driver is that I would've had to have taken out a construction loan, and then converted it to a mortgage, and that seemed too complicated, and with too many fees. But I also enjoy the advantage of not having to take more income from selling investments to make a mortgage payment. I might be able to make it, but it's close now. Depends on the basis, but all of my holdings have gains now.

Loss of an ACA subsidy, and loss of Roth conversion room, are factors for some that add to the bottom-line calculation of mortgage or not.

btw, I do keep a little more aggressive AA because I have my mortgage paid off. I can't claim that for certain because my I havne't had a mortgage since a few years before I retired, but I have asked myself a few times if I'm too aggressive, and I decide I'm OK in part because of my home equity. I don't include that equity in my AA calculations but I know it's there.

 

[daylatedollarshort]

I disagree; the size alone makes it different. And all of my other expenses aren't long term debt. I can't "pay off" 15 or 30 years worth of electric bills or car insurance. I suppose I could but those would all be like paying off a 0% interest loan.

My mortgage payoff had nothing to do with ACA since it came around 2000, and I'm recalling that the primary driver is that I would've had to have taken out a construction loan, and then converted it to a mortgage, and that seemed too complicated, and with too many fees. But I also enjoy the advantage of not having to take more income from selling investments to make a mortgage payment. I might be able to make it, but it's close now. Depends on the basis, but all of my holdings have gains now.

Loss of an ACA subsidy, and loss of Roth conversion room, are factors for some that add to the bottom-line calculation of mortgage or not.

btw, I do keep a little more aggressive AA because I have my mortgage paid off. I can't claim that for certain because my I havne't had a mortgage since a few years before I retired, but I have asked myself a few times if I'm too aggressive, and I decide I'm OK in part because of my home equity. I don't include that equity in my AA calculations but I know it's there.

A person could have $500 mortgage, $1K in travel and $600 in car payments in their retirement budget. A person with a paid off mortgage may be able to take out a home equity line of credit. A mortgage could theoretically be $100 a month or less, and not make much difference in ACA calculations one way or another. They are all components of the calculations one needs to factor in for the ACA limits.

 

[RetiredAt55.5]

I actually sleep better with my mortgage

I'm only 7 years into my 30 year mortgage, and it's only $472 a month (P&I only). Rate is 3.99% and the current balance is $85K.

I have enough money in taxable 1 year CD's that I could pay off the 85K balance. I do realize I'm getting less in interest than the mortgage rate.

BUT, I'm getting ACA subsidies, and I'm only 2 years into retirement (so I worry about sequence of returns scenarios).

The $85K I have in CD's would pay the mortgage for the next 15 years if I had to. Also, if I have any large unexpected expenses, I can use the CD money without impacting my ACA subsidies or tapping stocks/bonds in a down market.

Similarly, I can be a little more aggressive in my overall asset allocation since again, in a down market, I can use the $85K for living expenses.

So I sleep better since having the mortgage gives me more options with my CD money on the sidelines that I can tap anytime.

BTW, before this latest mortgage, I had the house paid off and at the time it did feel good. Then I lost 2 brothers in 4 years and realized how short life is, and decided to buy a second (vacation) house with a mortgage.

As others have pointed out, money is fungible. I don't think there's a "one size fits all" answer to the paying off the mortgage question, despite what some of the financial pundits proclaim.

 

[james22]

Why discussion of current and expected mortgage rates and inflation, but not of expected equity returns?

I'm buying a condo with cash next week because I do *not* expect historically average equity returns.

I'll finance if the market corrects and I can expect to beat my mortgage rate.

 

[ERD50]

Why discussion of current and expected mortgage rates and inflation, but not of expected equity returns? ....

Because no one knows. And generally, we are talking about a long term decision 15-30 years. So really no one knows, and what happens in the near future may have little bearing on it.

...

I'm buying a condo with cash next week because I do *not* expect historically average equity returns.

I'll finance if the market corrects and I can expect to beat my mortgage rate.

Current mortgage rates are higher than they were a few years ago, and the market has been doing well. So this may not be a time that looks as positive for this. So keep your eyes open, you might find a time more to your liking, or maybe not.

Either way, enjoy the new condo!

-ERD50

 

[audreyh1]

When I was very concentrated in company stock and employed by same company, I decided to take a small amount and pay off our mortgage, about 2 years before we thought we might retire. This was one way to diversify away from company stock in case of a nasty surprise. Now our mortgage at the time was probably around 7% and we were not paying much interest anymore - mostly principal. Plus it wasn't one of these lovely sub-4% mortgages that I would be loath to let go.

One of my coworkers was shocked, as he intended to hold onto all of his company stock come hell or high-water, as he expected it to continue to appreciate. But I don't think he knew how much we had....

It was nice retiring mortgage free. But we took huge chances with company stock. But we were also quite young.....

 

[james22]

Because no one knows. And generally, we are talking about a long term decision 15-30 years. So really no one knows, and what happens in the near future may have little bearing on it.

The good news is that a growing body of research reveals that, in fact, longer-term returns can be predicted to some extent.

https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf

Current mortgage rates are higher than they were a few years ago, and the market has been doing well. So this may not be a time that looks as positive for this. So keep your eyes open, you might find a time more to your liking, or maybe not.

Yeah, I'm expecting a time will come when I can invest the condo equity in the market.

Either way, enjoy the new condo!

Thanks.