Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Mortgage-keep or payoff---with dollar amounts
Old 05-18-2008, 03:08 PM   #1
Thinks s/he gets paid by the post
Join Date: Sep 2007
Posts: 1,100
Mortgage-keep or payoff---with dollar amounts

Much of the debating about paying off the mortgage or not does not
include any hard numbers.  I put together a comparison using
some hard numbers using actual figures from a personally-known
situation.  I assumed a very generous desired retirement income--no reason
to retire early if you can't live large!
Under these conditions, starting with about $1 million portfolio
plus this pension and SS income, if you pay off the mortgage
your net worth 25 years later will be about $1 million less than if
you keep the mortgage. 
This is with same net spendable per month (after mortgage pymt).
Even with an average investment return of 8% instead of the historical
average of 10%, paying off the mortgage falls behind.
In all cases "net worth" means investable net worth, excluding
your house, cars, etc.
The required networth is what you need to draw from to make up 
the shortfall of income requirement in excess of pension & SS.          
Paying off the house or not, with early and normal retirement age incomes.      
Note that the pension starts 3 years earlier than SS, so there's a gap          
in the total income.  To cover this, you need $60,876 extra.            
Income Source                 Early (age 59)  Age 65
Pension (@ 59)                  $28,465       $44,662
SS (@ 62)                       $20,292       $25,602
Total                           $48,757       $70,264
Assume desired annual retirement income is $90,000 ($7500/mo)           
........ Including a mortgage P&I payment of $2000/mo.          
........ 30yr FRM @6.0%, 25 years remaining, balance $300,000.          
Desired retirement income       $90,000      $90,000
Shortfall                       $41,243      $19,736
Req networth @ 4% SWR           $1,031,076   $493,397
Req networth @ 5% SWR           $824,861     $394,717
(SWR = safe/starting withdrawal ratio)          
Without the mortgage (desired retirement income is $5500/mo)            
Desired retirement income       $66,000      $66,000
Shortfall                       $17,243      -$4,264
Req networth @ 4% SWR           $431,076        
Req networth @ 5% SWR           $344,861        
NW req before paying off @ 4% SWR:      $731,076 ($431,076 + $300,000)
Using the 4% SWR and the early retirement income figures,               
if you have $1,031,076 and pay off the mortgage you have $731,076
If your NW is $1,031,076 and you want to retire at 59, you can either   
keep the mortgage and keep investing the $1,031K, or    
pay off the mortgage and keep investing the remaining $731K.    
Assume a 25 year period, assume long-term average gain of 10%   
assume constant 4% withdrawal, leaving a net LT return avg of 6%.       
Caveat: this ignores the risk due to variations in annual gains/losses, 
but using a low 4% SWR the risk is virtually eliminated.        
Using a simplifying assumption that the networth remains constant--that's       
the reason for using the "safe" SWR of 4%.      
$1,031K at 6% grows to $4,425K  + fully paid off house
$731K at 6% grows to $3,137K    + fully paid off house
If average growth is only 8%, net LT avg return is therefore 4%.        
$1,031K at 4% grows to $2,748K  + fully paid off house
$731K at 4% grows to $1,949K    + fully paid off house
Using an even lower assumed growth rate, $1,031K at 2.5% grows to $1,911K.
This would be the same 4% withdrawal with an assumed avg gain of 6.5%,          
or a 6.5% withdrawal (over 50% more) with an avg gain of 8%.            
$731K at 2.5% grows to $1355K.          
So paying off the house exposes you to more risk and/or         
substantially lowers withdrawal amounts.
rayvt is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-18-2008, 06:12 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,702
Heres the other times we talked about this, with different approaches, different assumptions, different results and different conclusions...
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote

mortgage, payoff, retirement

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
mortgage payoff from investing jIMOh Young Dreamers 15 02-07-2008 09:31 AM
Questions, strong dollar or weak dollar ? frayne FIRE and Money 7 10-01-2007 07:59 PM
Analyzing the mortgage payoff option sgeeeee FIRE and Money 43 06-22-2005 09:29 PM
Another payoff the mortgage outlook dm FIRE and Money 12 10-13-2004 12:27 PM
Dollar cost average large amounts currently? Natalie FIRE and Money 2 07-16-2003 10:51 AM

» Quick Links

All times are GMT -6. The time now is 05:55 PM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2023, vBulletin Solutions, Inc.