Pay off the Mortgage at Retirement???

[cute fuzzy bunny]

That's how I ran the simulations I posted here a few years ago. I never ran a simulation with a higher than 60/40 stock/bond ratio. I did run the simulations to consider a shift in the portfolio to keep a constant ratio of stock/(bond + mortgage). I personally don't think that is a reasonable thing to do, but I ran the simulation because you brought up this belief you have that a mortgage is the same as a bond. I also ran simulations that considered 100% of the $$s used to pay the mortgage to be taxable.

No matter how you look at it, there are mortgage rate-mortgage periods-portfolio combinations that have historically favored keeping your mortgage. This is simply a hisrorical fact. That's all FIRECalc can do, simulate what would have happened.

Of course there are scenarios that work. And I have never, ever, ever, ever said a mortgage is the same as a bond.

I said a lack of a mortgage can perform the same FUNCTION that bond holdings do.

One holds bonds to reduce volatility and increase income...primarily to help someone meet their spending requirements without problems. Remove most of the spending, you've removed the need for the higher bond holdings.

If I dont have a mortgage, and my spending drops by 50% or more, I dont need all those bonds to 'smooth out the ride'.

I cant find a reasonable ER scenario where a 70% or better equity allocation and no mortgage doesnt beat a 60% or lower allocation and a mortgage. Try it...pay off your mortgage from your bond holdings, and then take the resulting portfolio size and run it and your new spending needs through firecalc with an 80% equity allocation.

Wowee! Your survival rate goes up, and either your annual spending ability goes up or your portfolio size needed to meet your spending needs goes down. More money to spend or retire earlier with a smaller portfolio and still have a high survival rate...dont throw me in THAT briar patch!

Unreasonable? Arbing hundreds of thousands of dollars into investments is reasonable but removing more than half of your spending risk and raising your investment risk a little bit isnt? Oh PUHLEEEZE!

 

[wabmester]

[Must resist... Oh, no. Ahhhh!]

OK, here's a reductio ad absurdum hypothetical for you. Let's pretend your house was really an ATM, and you could withdraw from it as long as you paid it back.

So, I take $100,000 out of my house and invest it. But I have to pay myself back $1000/month at 0%. My "expenses" have gone up by $1000/month! Oh, no -- my poor SWR! But I'm just paying myself back, so it's not really an "expense." You'd be crazy not to do this, right?

 

[Nords]

[Must resist... Oh, no. Ahhhh!]
OK, here's a reductio ad absurdum hypothetical for you. Let's pretend your house was really an ATM, and you could withdraw from it as long as you paid it back.
So, I take $100,000 out of my house and invest it. But I have to pay myself back $1000/month at 0%. My "expenses" have gone up by $1000/month! Oh, no -- my poor SWR! But I'm just paying myself back, so it's not really an "expense." You'd be crazy not to do this, right?

You're right, it is an absurd example. In yours you neglected to add the $100K to your portfolio (plus the value of any gains). And a 30-year loan of $100K at zero percent would be monthly payments of $278, which equates to an annual withdrawal of about 3.33%. Oh, gee, wait, for a zero-percent loan that works out to 30 years divided into 100%. (And that 360th payment has been depreciated by almost 30 years of inflation.) So it's remotely possible that this $100K (with its 3.33% withdrawal) added to your portfolio would even lower your former 4% SWR.

Can we just agree that there's plenty of variables in this equation with lots of room for equally good & bad decisions? Look at SG's example of a zero-percent loan for 30 years and step the interest rate up until your personal efficient frontier is reached. Or don't. But this type of strawman math isn't adding to the quality of the debate.

And that's just the Vulcan logic without even getting into the equally-valid emotional "sleep at night" heuristics.

C'mon by Hale Nords someday. After we finish the morning surf session we'll sit under a cabana and crunch the real numbers, then decide if FIRECalc's historical perpsective makes it worth the odds. With the gains spouse & I have realized in the last 30 months, it doesn't matter if the next 330 are flat.

 

[wabmester]

But this type of strawman math isn't adding to the quality of the debate.

It might if you understood the example. It was intended to counter CFB's argument about the instablizing force of increased expenses due to a mortgage. It's not really an expense if you're just paying yourself back. But if an example has to be explained, then like a joke that has to be explained, it must be bad.

Never mind.

 

[haha]

If I were to buy a house for my own use I would get the biggest 30 year fixed mortgage I could find, as long as rates are as low as today or lower. This of course is contingent on the house being a bargain. But I wouldn't buy it if it weren't, so the financing is a separate issue.

The reason I would do this is to gain flexibility. Sometime we may get an opportunity to buy assets cheap. When that happens, we want money to do it with.

The American residential mortgage is the best financial product from the POV of the consumer that has ever been devised. Where else does the consumer get to keep the debt for up to 30 years, so long as the rate is advantageous, but put it back to the lender whenever better rates come along? Heads I win, tails you (lender) lose. This is all thanks to MBSs and all the wondrous things that modern financial enginering can do to allow asset/liabilty matching for different classes of bond purchasers.

Just be sure to avoid prepayment penalties.

ha

 

[Nords]

Never mind.

OK, you win.

 

[wabmester]

OK, you win.

Oh, man. Wrong response. Now I have to assume that you didn't even understand my example on reevaluation, and I have to try to explain it again. Because if you didn't understand it, nobody understood it. Here I go. Digging myself deeper.

Here's a different and even more absurd example. Let's say you have $100,000 in your savings account and you move it to your brokerage account. No change in net worth or anything else -- just an account move.

Now, you take $1000/month and move it from brokerage back to savings. It looks like your cash flow from the brokerage account has changed, but again no net worth change or anything else. Just an account move.

Now, substitute "home equity" for "savings account." In essence, that's all a mortgage payment or home equity loan payment is. The principal repayment component is not an expense, just a move from one account to another.

That's one reason why the increased cash flow "burden" from mortgage payments is overstated when you try to model this stuff with firecalc. Even if you get the point right about mortgage expenses not increasing with inflation, leveraged investment returns, reduced taxes, etc.

 

[cute fuzzy bunny]

Wab, that thesis works great if you're actually paying yourself.

However, you're primarily paying the interest on the 'bond' you've issued to the bank, and since most people only stay in the home for 5-7 years, you're going to continue that cycle in your next house.

Of course, if you dont invest in bonds, have a cola'd pension and a working spouse, then the equation is all different.

Back to the future, I still see no reason for an actual retiree to hold a mortgage at over 5.25-5.5%, then hold a bunch of bonds paying less or similar rates to create the safety net of reduced volatility to be able to continue paying the mortgage during a long term downturn, then pay a tax premium on the whole matter.

I'd rather pay the debt off, take the smaller portfolio, invest in more quality dividend paying equities, live off said dividends, pay a minimal tax load, and not give a hoot which way the market turns. Ever.

But like I said...if you're already 80-100% in equities, have a sub 5% mortgage, have an income stream to cover the debt load, or any of the other parameters that makes it a different ballpark...perhaps you should keep the mortgage.

To say that its a simple matter of paying 5% and making 8% and maybe factoring in a little bit about taxes seems...ridiculous.

But these sorts of discussions always seem to rotate towards the predetermined answer, then fill in the data and problem set to accommodate that decision.

 

[runnerr]

Wab, my sentiments exactly. After I retired, I realized I would be spending more time at home so I wanted a nicer place. I sold my house, cleared about $100,000, and put that toward a new house I had built. Sure, I have a mortgage for $140,000 at 6.25 and the payments are about $900 a month. I add $300 more and will have the mortgage paid off in 15 years. I have always been a saver and this gives me the same feeling. I am 58 so at 73 I should be looking good. If things get a little rough, I have the $300 cushion to fall back on. If I go back to work full or part time I will probably wait until 66 to draw SS. I am setting on just under $900,000 and feel good about the situation.

Would I like to have it paid off? Yes, but like Wab said I feel I am just moving the money from one account to another. Great topic I enjoyed reading all the advice.

Bob

 

[Nords]

Oh, man. Wrong response.

I guess so. I thought my response would encourage you to go away happy and find something new (or at least different) to talk about.

However it is impressive that we've managed to rack up six pages without presenting a single new piece of info. I guess the good news is that in another 330 months I'll have satisfied my personal interest in this issue.

But let me clarify my previous statement. I'm done with this thread.

 

[wabmester]

Hmm, good idea. Me too. I officially retire from "pay off your mortgage" threads.

 

[spideyrdpd]

Darn just when it was getting good.
My biggest gripe about paying down a mortage is once the money is in the house you have to borrow it to get it back Todays rates are good. No telling what the rates will be in the future. Even if I break even I rather have it in the bank where it doesnt cost me to get my own money. Of course I hope to do better than 8 % before taxes.

 

[chinaco]

There probably is a way to work the spread between owning a mortgage an investing assets from the loan. That is essentially what is being propose if one has the ability to payoff the mortgage.

But you are still taking on risk. Probably the safest way is to limit the risks which will limit your up side. I do not believe it is worthwhile for a small amount of money.

For example: If I had $100k outstanding principal on my mortgage @ 5%. I might calculate and find that I could buy a 10 year treasury @ 6% (enough bonds to cover the outstanding principal). (I am not including tax implications for simplicity). I could get a 1% spread (with tax it would be less). Since the note is backed by the govt, it will probably be paid back at the end of the term. Now my risk is inflation oriented. (if I wind up in a cash crunch, I could sell the bond and pay off the mortgage). Now I am hoping one asset class outperforms over a long period. To effectively work the spread angle, one needs a large amount of money in play. Once you get past all of the theoretical arguments... The small potential gain on an outstanding mortgage seems hardly worth the risk/effort.

That said if one has substantial assets such that the mortgage principal is small compared to other assets.. deciding to continue making payments on the mortgage probably does not create a large risk. On the otherhand, I would never suggest that someone go and take a home equity loan and invest it. In my book that would be foolish.

Believe it or not I have heard people discuss the same approach with taking cash from a credit card and a teaser rate This elevates boobery to an all time high.

If you are thinking of using home equity from a loan to invest in stock... you might as well open a margin account. At least the broker will shut you down with a margin calls. If you are lucky and things do not shift too quickly, your down-side is your portfolio... not your house.

Final note: If you are asking if this is a good idea... You had better steer clear. Even someone who understands it might experience problems.

 

[Nords]

Believe it or not I have heard people discuss the same approach with taking cash from a credit card and a teaser rate This elevates boobery to an all time high.

No need to hurl invectives, chinaco. The idea is to lay out all the factors and let people make the decisions they're comfortable with.

 

[cute fuzzy bunny]

I believe chinaco was fighting for the rights of boobs to make a quality decision.

I wont take this line of thinking any further, as its implications are rather obvious and the jokes make themselves.