Eliminating debt is my main FIRE goal

[nun]

Is anyone taking some or all of the gains they are getting in this little market run up and using them to pay down the principal on their mortgage?
That's what I've been doing. I'm locking in some of my gains.

The only debt I have is $200k left to pay on a two family house currently valued at $550k. So things are pretty good, but the $2500 monthly mortgage payment means that I have to keep turning up at work each day. Once the mortgage is gone the $2000/month rent that the house generates will go a long way to covering my expenses and I can FIRE.

 

[W2R]

(There are many past threads on the advisability of paying off a mortgage, but I think there are always new thoughts on these topics.)

Some years ago my spreadsheet told me that there was no way I could retire with a mortgage or rent to pay. So, I bought a house and paid it off.

Apparently many here feel that paying off a house is not advantageous from the viewpoint of long term financial gain. This is especially true if you are expecting a bull market right now. However, it does make sense for some of us.

 

[nun]

My "calculation" was that a year ago I looked around and 4.5% (my mortgage rate) seemed like a good return so I started putting 50% of my after tax savings towards extra principal. I've kept doing that and taken 50% of my recent gains towards the mortgage too. This hasn't maximized my gains, but I'll be happy at my approach if we have a double dip recession or if things keep improving.

At the peak of the market I could have paid off the mortgage. I wish I'd done what I'm doing now back then as I'd be 2 years closer to FIRE. Now I'm looking at 2013.

 

[tuixiu]

Allow me to be the first of the inevitable "it's a great move for the mental satisfaction" wave of posters that pop up in these threads.

Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.

 

[W2R]

Allow me to be the first of the inevitable "it's a great move for the mental satisfaction" wave of posters that pop up in these threads.

Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.

So true, and for those of us that don't drink, the beer and electricity is optional in a doomsday scenario.

When investing, lower risk gives you lower return. Paying off a mortgage is lower risk than investing in just about anything, IMO. So, that is how I justify the lower return (plus the fact that my spreadsheet said that this would work best in my case).

 

[nun]

Allow me to be the first of the inevitable "it's a great move for the mental satisfaction" wave of posters that pop up in these threads.

Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.

How well we do at investing is so dependent on the time scale over which we choose to measure our success. Two years ago we were doing just fine. One year ago, Oh the pain, now hey it's not so bad we've seen our 401ks etc grow a bit. For me I'm applying the "bird in the hand" philosophy. Riding the wave up again is predicated on that wave not breaking on the shores of a double dip. Anyway isn't FIRE all about financial independence and by eliminating that mortgage I'm free of the market and it's ups and downs.

 

[Lusitan]

Being debt-free is, in my opinion, the first step toward FIRE. Especially for us younger folks still working toward FIRE, it's difficult to predict how things will go over the next decade or so, but one thing is certain -- having little or no debt gives you many more options, both financially and otherwise.

It may not always be precisely the best option from a numbers perspective, but it's rarely a bad move to pay off debt and free yourself financially.

 

[ERD50]

Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.

The problem I have with statements like this is that they completely ignore one side of the equation. And I don't see how that helps anyone. We should look at both sides in order to make a more fully informed decision.

Here's the other side of that statement:

If you invest the money rather than lock it up in your house, then... if the shiit goes down you have the liquidity you need to pay the mortgage, the property taxes, buy beer, and pay the electrical bill to keep the beer cold for a long, long, long time.

Before you tell me it is "risky" to have that money invested, do some FIRECALC runs, and see what they say. The runs I've done show a *slight* advantage to keeping the debt. Not a big deal either way, and the numbers may be different for your profile, but I doubt it would be very much different.

Lusitan: having little or no debt gives you many more options, both financially and otherwise.

Remember, having liquidity also provides options.

-ERD50

 

[nun]

The problem I have with statements like this is that they completely ignore one side of the equation. And I don't see how that helps anyone. We should look at both sides in order to make a more fully informed decision.

Remember, having liquidity also provides options.

-ERD50

Yes it does, and I wish I'd used my liquidity to pay off my mortgage two years ago. Knowing when to use your liquidity for something other than mental masturbation is the key. We all know how difficult and dangerous it is to time the market, hence my approach of taking 50% of my gains to pay off the mortgage and letting 50% ride in the market.

 

[ERD50]

y. We all know how difficult and dangerous it is to time the market, ...

Who mentioned market timing? I suggested doing a FIRECALC run for a reference point - no market timing there.

-ERD50

 

[nun]

Who mentioned market timing? I suggested doing a FIRECALC run for a reference point - no market timing there.

-ERD50

Sorry

However, for me FIRE calcs are just the beginning. They are part of planning and as you say there is another side of the equation. I know that I'll feel happy when I have no mortgage, But I also want to get some returns, but I'm not going to trust everything to a Monte Carlo simulation, that's what fund managers have been telling us for the past 20 years. No, take a portion of your gains as they arise. For me this is just like keeping a balanced portfolio. As we balance risk in our investing we should also balance the amount of our gains we leave in the market, it's similar to rebalancing a portfolio but rather than redistributing gains from equities to say bonds I'm putting them towards a 4.5% mortgage.

 

[Helena]

One of my main goals before retirement was to get completely out of debt.

I retired two years ago with no debt - no mortgage, no car payment, no cc debt - nothing, nada.

It certainly makes retirement, and life, a whole lot easier, happier and more affordable.


~

 

[ERD50]

Sorry

However, for me FIRE calcs are just the beginning. ..... I'm not going to trust everything to a Monte Carlo simulation

FIRECALC is not Monte Carlo simulation. It is a report on all past scenarios. Monte Carlo is a randomization of inputs to determine a range of outputs.

As we balance risk in our investing we should also balance the amount of our gains we leave in the market, it's similar to rebalancing a portfolio but rather than redistributing gains from equities to say bonds I'm putting them towards a 4.5% mortgage.

OK, I can see that view. However, the FIRECALC runs I've done show that you can lower your risk by keeping that mortgage money invested at your chosen AA, rather than putting it all in bonds. Apparently, the larger portfolio buffers the downturns better than a more conservative AA. Plus, if I rebalance into bonds, I can rebalance out later. How do I rebalance out of a mortgage?

Remember, if "safer, more conservative" *really* meant "lower risk", the highest success rates in FIRCALC would be from the "safer, more conservative" portfolios. But that is not the case. A range around ~ 70% equities appears to provide the best outcomes. Again, this may vary depending upon your profile, but FIRECALC can show you how you would do across a range of AA (see the "investigate" tab).

-ERD50

 

[nun]

FIRECALC is not Monte Carlo simulation. It is a report on all past scenarios. Monte Carlo is a randomization of inputs to determine a range of outputs.



-ERD50

I was being ironic about the returns we can expect form the stock market.....sorry physicist's joke, glad someone caught it though.

 

[tuixiu]

Before you tell me it is "risky" to have that money invested

It is risky to have that money invested.

 

[ERD50]

It is risky to have that money invested.

You are correct. And it is also risky to *not* have it invested. The only way I know to eliminate risk is to die.

Do a FIRCALC run and see how the risk compares for you.

-ERD50

 

[Running_Man]

You are correct. And it is also risky to *not* have it invested. The only way I know to eliminate risk is to die.

Do a FIRCALC run and see how the risk compares for you.

-ERD50

Does Firecalc take into consideration the possibility of getting a reverse mortgage at a later point in time?

 

[beowulf]

I like nun's idea of taking 50% of gains and using them to pay down the house and leaving 50% in the market. My problem is that I'm not retired and nearly all of our assets are in I Bonds, IRAs, 401Ks and 403bs, meaning that any attempt to take out money will result in a nasty tax scenario (I'm over 60, so no penalty, but it's all fully taxable income).

 

[Moemg]

I agree with the eliminating debt . I've been mortgage free since 1996 and it is so freeing . I also have not had a car payment since then but I'm rethinking that idea since a lot of the car dealers are offering 0% or 2.4% depending on the length of the loan . So I would just make the payments and leave my money invested where it will hopefully make more than 0%.

 

[tuixiu]

So I would just make the payments and leave my money invested where it will hopefully make more than 0%.

Money market account will beat zero, barely.

 

[ERD50]

Does Firecalc take into consideration the possibility of getting a reverse mortgage at a later point in time?

Not sure if this is a rhetorical question or not.

If you have used FIRECALC, you'd know that it can only "take into consideration" what you input. So, if you want to input the possibility of getting a reverse mortgage at a later point in time, I guess you could give that a go. A couple things to consider:

1) Typically, one would consider a reverse mortgage late in the cycle, right? I mean, if everything is going well, portfolio is intact, you just would not bother, I would think.

2) Since the runs I've done show that holding the mortgage improves your success rate, the odds of needing to do a reverse mortgage would be less if you held a mortgage (again, your data may provide a different result).

3) By the time you might need to consider to go reverse, the mortgage would probably be paid off or paid down to a small amount - probably not a big diff either way.

4) I'm not sure how you would input a reverse mortgage at say, year 28 of a 35 year FIRECALC run. The rates you receive today may be far different from the rates that would be offered under whatever the scenario is that trashes a portfolio after 28 years. High inflation might mean high rates paid out, low rates under other conditions?


-ERD50

 

[friar1610]

I'm late to this discussion, but I am completely debt free and like it that way.
It's not clear to me that I would be better off having a mortgage and a correspondingly larger portfolio, but there are probably mathematical models which could show I would be. But the mental freedom of no mortgage is worth a lot to me.

 

[Zoocat]

If Nun is calculating that the 4.5% mortgage rate is a good investment then what about keep that liquidity handy in case interest rates go up. What about investing that money at 6% instead of paying off the mortgage?

If one is basing one's investment decision on the likelihood of a double dip in the stock market, then shouldn't one also consider the likelihood of interest rates going up?

 

[ERD50]

The recent (and past) comments about how "freeing" it is to be debt free are very fascinating to me, I guess that is why I keep coming back to this.

I mean, I understand that different things appeal to different people. One person's idea of the perfect vacation is to sit on the beach and get caught up in a book, but that might be hell on earth for the adventure seeker. Different strokes and all.

But when it comes to financial decisions, I just don't get that there is anything else to consider other than the likely financial outcome. I understand that people have different risk tolerance levels, but the FIRECALC runs I have done show that holding the debt provides (slightly) *less* risk, (slightly) *less* volatility, and (slightly) *higher* success rates.

So do you see why I am confused that people describe a path that may entail (slightly) *more* risk as "freeing"? It is cognitive dissonance for me.



Maybe one more parallel story to illustrate:

I've known people who would rev up their car real good just before shutting it off. It made them "feel good" - they thought they were "burning off carbon", or "getting oil everywhere for the next start". But most car guys know that this is *not* recommended, it is likely to increase wear on the engine, and most car manuals recommend against it (esp if turbo).

So, do you suggest to them that maybe this isn't as helpful as they think, and may actually be harmful? They should appreciate the helpful advice. Or, do you decide that you don't want to disturb their "feel good" mood, and just keep quiet when their turbo freezes up?

Now, if you have mentioned it and they just insist on doing it, sure, let them be, it is their decision, it may not hurt their car anyway. But, if every time you see them at a get together, they are telling other people how good it makes them feel to rev up the engine before shutting it down, isn't it reasonable to inform those people that they may want to read their manual, and check for themselves?

Sorry for the long post, just trying to cover as many bases as I can. As I say, this is fascinating to me.

-ERD50

 

[Meadbh]

But when it comes to financial decisions, I just don't get that there is anything else to consider other than the likely financial outcome. I understand that people have different risk tolerance levels, but the FIRECALC runs I have done show that holding the debt provides (slightly) *less* risk, (slightly) *less* volatility, and (slightly) *higher* success rates.

So do you see why I am confused that people describe a path that may entail (slightly) *more* risk as "freeing"? It is cognitive dissonance for me.

It's behavioural finance. We don't always make "rational" decisions. Sometimes the decisions we make are not about the math, they are about how we see the world.