On the Horns of a Dilemma

[willatl]

Hey gang,
Newbie here, first post.

I will be RE this coming Friday. My position (at Mega Corp) is moving to another state. I've known for over a year so not blindsided here. I think it's perfect timing in a way. I'll get a healthy severance to last for most of a year.

My question is about my cash allocation. I currently have the following AA:
Cash 28%
Bond 21%
Stock 51%

The cash amount is $800K+
Thinking I've been a bit conservative in my cash position. It's a mix of tax/non tax with money markets, 401k stable value fund, IRA money market (Vanguard), etc.

I'm 54, spouse is 59 (also retired and we get health insurance from his mega corp).
So should I pay off my mortgage at 3.375%, $1000 pmt per mo, $218K bal, 5/1 with 4 years to go. $750K new construction 1 year old or devote that cash to investing more.

Living expenses of about $90K per year. My thought process was to provide enough years in safe cash to get us to SS.

Am I over thinking this and being too conservative? Any thoughts, questions are welcome.

 

[Aerides]

I keep 3 years in cash and that is conservative for most (by cash I mean CD's and high interest bank accounts). My 3 year idea is to ride out 99% of a recession without needing to touch invested funds (ie a replay of 2008-2011).

800k in cash when you have 90k annual expenses seems like a lot, especially with the HI not being a wild card for you. That's a lot of exposure to inflation.

 

[COcheesehead]

Your payback on paying off the loan is 18 years, so economically that’s a tough one, but you also buy peace of mind with not having to generate another $1000 a month in income to pay for it. The decision is up to you.
Personally I am paying off our mortgage before we enter FIRE in 2 years and I keep a rolling 6 year high quality muni bond ladder as my “cash”. I get 2-3x the return of a money market with little default, credit or duration risk. $800k seems excessive to keep in cash, but you may feel more secure with that.

 

[Dtail]

How much cash is in Stable Value funds? IMHO, this fund can effectively be a low risk alternative to your bond allocation portion of your portfolio.
My SV fund is currently at 3.84% which in this environment is a nice substitute for a bond fund.

 

[RenoJay]

I get a lot of comfort from being debt free. Helps me not stress in times of no income. And I currently have ~25% of total in money markets, savings accounts, etc. It’s not my ideal allocation, but I believe the stock market is quite expensive and that there will be better entry points in the future.

 

[copyright1997reloaded]

Disclaimer: I think that while the market is "up", we haven't seen the cycle peaks.

Having said that, you effectively have 800K - 218K = 584K net of house debt. Given that it is an ARM (5/1), I would want to have at least this amount set aside in case interest rates really go the wrong way on you.

One alternative plan would be to set a target allocation % of how much cash you would want to have @ FRA (assuming the house debt is in addition to that allocation). For example, assume @ FRA you want cash 10%, bonds 30%, stocks 60%. Then set intervals for each year between now and the target year, e.g.
Now 28%
+1 25%
+2 23%
+3 20%
+4 17% ...

That is, slowly stage the cash (as you get closer to SS safety) into equities.

 

[DrRoy]

You can find investment grade bonds that pay more than 3.375%, so you can consider keeping the mortgage and investing the cash.

 

[cooch96]

You can find investment grade bonds that pay more than 3.375%, so you can consider keeping the mortgage and investing the cash.

+1

We’ve enjoyed low inflation for decades now, but that could change any month. this much cash would feel very risky to me.

 

[Dash man]

Personally I’m also keeping a large sum in cash/Savings/CDs. We like to keep at least 5 years expenses to protect against a major downturn in the market. But we also have a large sum in stocks, so we won’t miss out if the market keeps going up. We’ve been debt free since 2010 and sleep well at night. We also have a small pension and rental income.
You need to decide what makes you comfortable. Many on this board believe carrying a mortgage to allow their money to remain invested, which may pay off or may not. I like hedging my bets. You have to decide what’s right for you.

 

[pb4uski]

Hey gang,
Newbie here, first post.

.... So should I pay off my mortgage at 3.375%, $1000 pmt per mo, $218K bal, 5/1 with 4 years to go. $750K new construction 1 year old or devote that cash to investing more.

Living expenses of about $90K per year. My thought process was to provide enough years in safe cash to get us to SS.

Am I over thinking this and being too conservative? Any thoughts, questions are welcome.

Welcome to e-r.org.

On the mortgage payoff, it depends. If your AA will be 50/50 after the mortgage payoff then I don't think it is a good move because it is more likely than not that a 50/50 portfolio will return more than 3.375% per annum even though you are taking some risk that it might not (but in your case the mortgage is a small in relation to your overall portfolio).

OTOH, if your AA will be 55/45 after the mortgage payoff then it may make sense because it is hard to find risk-free fixed income that pays 3.375%.

IOW, if you pay off the mortgage with money from your cash/bond allocation then it may make sense, but if it is from your overall allocation then probably not.

Also, IMO there is no need to get hung up on having enough cash to get you to SS... even with a 55/45 AA you'll have over 13 years of money in cash and bonds, both of which are safe.

 

[willatl]

Thanks all for the feedback. Gives me some options to consider.

 

[stephenson]

I’ll take a bit different perspective.

For a young couple, you have waaaay too much in cash and near cash - this has cost you close to 15% just in the last 18 months.

Given your income and age, I would feel comfortable at 70/30.

 

[GravitySucks]

Delete

 

[Scuba]

I’ll take a bit different perspective.

For a young couple, you have waaaay too much in cash and near cash - this has cost you close to 15% just in the last 18 months.

Given your income and age, I would feel comfortable at 70/30.

I agree with this. Holding a lot of cash has its own risks - inflation.
Also, I am a fan of mortgages as long as one has assets with which it could be paid off. We also have a 3.375% mortgage and have no intention of early payoff. Our portfolio is returning far more than that. But as others have said, it’s all a matter of your risk tolerance. I sleep very well at night with our mortgage because the balance is only about 8% of our financial asset value.

 

[brucethebroker]

Your payback on paying off the loan is 18 years, so economically that’s a tough one, but you also buy peace of mind with not having to generate another $1000 a month in income to pay for it. The decision is up to you.

OP said the mortgage payment is $1000 a month. That would include property tax and insurance, correct? If so, her "housing costs" will only be reduced by the amount of interest/principal paid out each month.

I don't mean to be overly picky, but this a common mistake made by people considering mortgage pay off. There is STILL the amount of tax/insurance to be paid either annually or semi-annually that comes out of your savings or cash flow. With many, that can be as much as half of their monthly payment.

 

[brucethebroker]

Let me be the other side of the argument....keep the mortgage for the first couple of years (maybe until it adjusts in 4 years), then decide. You can currently earn 3% in some FCIC insured bank CD's-which measures up pretty well to what you are paying out on your mortgage.

If you are concerned about your expenses, etc., when FIRE'd, leave the mortgage alone awhile longer-why not? You have the cash to do it at any time. You may feel much better about pulling the trigger in a couple of years. You might sleep better in the early years of retirement.

 

[willatl]

OP said the mortgage payment is $1000 a month. That would include property tax and insurance, correct? If so, her "housing costs" will only be reduced by the amount of interest/principal paid out each month.

I don't mean to be overly picky, but this a common mistake made by people considering mortgage pay off. There is STILL the amount of tax/insurance to be paid either annually or semi-annually that comes out of your savings or cash flow. With many, that can be as much as half of their monthly payment.

Sorry, I should have included that detail. There's no escrow so the $1K per month is just P&I. Property tax and Home Ins run about $10K per year at the moment and included as part of my annual projected expense. With the new standard deduction increase for 2018 for MFJ we won't be itemizing unless I make a large donation to charity or a donor advised fund (both options I'm considering).


I'm thinking to make a one time principal payment large enough to make the P&I roughly equal then see where I am a year from now.