Secrets of Early Retirement

[Teacher Terry]

WE paid off our home before we retired. Also we can Homestead and protect the house from creditors, being sued, etc. I don't think many states have that anymore. Our property taxes are low and we certainly could not rent for what it costs us to live here. I think everyone has to look at their own situation to make the right choice. There is never one choice fits all.

 

[mpeirce]

I view the pay off the mortgage discussion much the same I way I view the Dave Ramsey approach of paying of small debts first regardless of interest rate.

They are both focused on the psychology of the situation. If it were simply a matter of focusing on the cold hard numbers, almost everyone would be out of debt - and retiring early. But most people just don't work that way.

 

[Mo Money]

I'm dumb and happy. My goal was to pay off my mortgage early first -- before I even thought of ER. Did so, and that's when my retirement savings went into hyperdrive.

It wasn't all numbers. It was also peace of mind.

When it comes to the primary residence, another factor is "frequency of moving." Moving is not only costly, it tends to reset everything, including the mortgage treadmill. But I digress.

Mort - gage
Death - measure


Joe, "Dumb and happy since 2000"

+1. There are some things even more important than crunching the #s and saving some quid. No bank able to foreclose, and killing off that seemingly endless monthly payment, greatly outweighed the modest savings. It was, well, priceless.

 

[braumeister]

I'm happy just putzing around in retirement

Since I have been called a putz, does that mean I'm successful?

 

[Walt34]

I do kinda take issue with that as I'm happy just putzing around in retirement

I'm doing well at that too. Framed up a couple of pictures that will make some people smile. That's worth doing and works for me.

Putzing is good.

 

[pb4uski]

From the article:

That's his top advice? Dumb. This is another book I won't need to read.

+1 I refinanced at 3.375% in early 2012 just before I retired (but after I stopped working - I was "on vacation"). Since then my portfolio has averaged a 14.7% annual return so I'm ahead 11.3% a year. Since I retired my portfolio has increased more than my entire mortgage and that is after withdrawals for living expenses.

I realize that living in retirement with a mortgage is not for everyone and that's fine, but so far it has worked out great for me. My comfort is I could write a check and lay off my mortgage at any time I chose to.

 

[ExFlyBoy5]

Wes (the books author) has a radio show here in Atlanta and is a fee only FA. I was curious about the book and his research so I bought it. I read about a third of it and grew quite bored. I give it an overwhelming 'meh'

Sent from my mobile device so please excuse grammatical errors.

 

[Fishingmn]

We moved 2+ years ago and instead of buying our house with cash (previous home paid off) we took out a $400k 15 year loan at 3%. I used that to purchase 5 rental properties that are now earning over 9% cash flow. We get the advantage of being able to write off the mortgage interest as well and when we retire in 2+ years we will use the rental income as our primary income source.

I do play with the numbers to see if it makes sense to pay off the mortgage when we retire but every calculator says we are better off with the rental properties.

 

[eta2020]

+1 I refinanced at 3.375% in early 2012 just before I retired (but after I stopped working - I was "on vacation"). Since then my portfolio has averaged a 14.7% annual return so I'm ahead 11.3% a year. Since I retired my portfolio has increased more than my entire mortgage and that is after withdrawals for living expenses.

I realize that living in retirement with a mortgage is not for everyone and that's fine, but so far it has worked out great for me. My comfort is I could write a check and lay off my mortgage at any time I chose to.

But you are comparing apples with oranges. How much would you earn if you put your money into CDs which CAN be compared to mortgage. You would loose money

Hindsight 20/20.....

 

[pb4uski]

But you are comparing apples with oranges. How much would you earn if you put your money into CDs which CAN be compared to mortgage. You would loose money

Hindsight 20/20.....

I'll agree to disagree with you on this one. Nothing says that I have to compare what I earn to CDs. In fact, if that was my only investment alternative with the proceeds I would not have refinanced.

I'm simply utilizing my good credit rating and home equity collateral that would otherwise just be sitting there earning nothing and using leverage to earn a spread. I'm accepting some duration mismatch risk for potential rewards, which have been quite positive so far and is a historically good bet. Since my mortgage was only about 10% of my portfolio at the time, I wasn't betting the farm, but making a simple side bet.

 

[jimbee]

But you are comparing apples with oranges. How much would you earn if you put your money into CDs which CAN be compared to mortgage. You would loose money

Hindsight 20/20.....

I agree, you need to compare investments with the same risk.

 

[Ronstar]

I spend most of my day putzing. When DW worked, she claimed I was a slacker that got nothing done. Now she's retired and sees just how time consuming putzing is.

 

[eta2020]

I'll agree to disagree with you on this one. Nothing says that I have to compare what I earn to CDs. In fact, if that was my only investment alternative with the proceeds I would not have refinanced.

I'm simply utilizing my good credit rating and home equity collateral that would otherwise just be sitting there earning nothing and using leverage to earn a spread. I'm accepting some duration mismatch risk for potential rewards, which have been quite positive so far and is a historically good bet. Since my mortgage was only about 10% of my portfolio at the time, I wasn't betting the farm, but making a simple side bet.

So for those of us who have paid off houses and good credit (many people here) you recommend us to mortgage out our houses and invest money into equities?

 

[Mulligan]

So for those of us who have paid off houses and good credit (many people here) you recommend us to mortgage out our houses and invest money into equities?

Your posting question exposes my conflicting attitudes and thoughts. When I refinanced several years ago, I did not have the assets to pay off my house. Now that I can, I will not do so. But if it were paid off, I would never consider taking equity out of my house to invest in equities. You could make the case it is the same scenario, minus any transaction costs.


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[zedd]

We're renting right now but looking to buy. If/when we do buy it will be a cash deal. I've run the numbers both ways; rent vs own free-and-clear. For us, owning, even tho it reduces our portfolio balance, reduces our living expenses substantially which in turn reduces our withdrawal rate which in turn increases the survivability of our portfolio. YMMV

 

[brett]

We paid off our home well before I retired early.

But one of the first things we did after retiring was to sell the house. After a fair amount of travel we decided to rent until we found a place-a condo.

Once we started looking I realized that the math did not make sense. The condo we rent is giving the owner a pre tax three percent return. But an assessment wiped out that return for eight years. After 40 years or so of owning, renting seems like a reasonable solution for us. Besides, we are making far, far more money on our investments than we would have on capital appreciation of our home.

We could buy next year after we return from travel. Or we could not. But after being brought up with the 'own you home' syndrome it did not take us long to become relatively happy renters. We came to the same conclusion when looking for a vacation home in which to spend the winters. The math did not work, in some instances there were tax considerations, and we did not wish to be tied down to one location.

 

[Chuckanut]

So for those of us who have paid off houses and good credit (many people here) you recommend us to mortgage out our houses and invest money into equities?

I would think having a paid off house would allow one to be somewhat more aggressive in their investing, such as by increasing their AA of stocks, or adding an REIT fund. IMHO, for most of us that would be a wiser move than mortgaging a paid off house and investing the money in the stock market.

 

[eta2020]

We paid of house in 5-6 years. That was long time ago

I think having no mortgage gave us piece of mind and enabled us to be much more aggressive in our AA. That is in addition to fact that Homestead protects our house from credits and hence serves as Asset Protection within portfolio.

 

[daylatedollarshort]

A doctor in a high risk specialty in a state without any asset protection for personal residences may never want to have a paid off house. Or maybe someone has a business with a high ROI like Fishingmn that needs the capital. Or maybe a mortgage helps a household keep their realized income low and under the 400% poverty level, meaning $10K in ACA subsidies. In real estate bubble markets, renting can be cheaper and much less risky than owning an expensive house destined to go down six figures in value.

I can't see a general rule being helpful. One could say don't use credit cards either but then people who aren't stupid enough to run up thousands of debt in depreciating consumer goods just because they have a high limit might lose thousands of dollars a year on miles and cash back points.

 

[pb4uski]

From the article:

Q: In the book there are 18 habits of happy retirees. Can you narrow your book down to three pieces of advice?


A: No. 1 is financial. Tackle your mortgage. It's such a critical component to all this. Happiness rises as years to pay off mortgage go down. Thus, tackling of the mortgage is really critical.

That's his top advice? Dumb. This is another book I won't need to read.

So for those of us who have paid off houses and good credit (many people here) you recommend us to mortgage out our houses and invest money into equities?

I'm not sure if your followed the entire thread, but the author of the piece cited by the OP indicated that having a paid off mortgage is "really critical" to a happy retirement and I'm just agreeing with samclem that the author's view that a paid off mortgage is critical to a happy retirement is balderdash and explaining why I think it is balderdash.

I'm not recommending anything, but for those who can stomach the minimal risk and who aren't in effect betting their house on it, I think it is a good idea and it has worked out well for me over the years. And it really isn't equities, it is really a 60/40 mix of equities and fixed income. It seems silly to me to think that a prudent mix if investments can support a retirement of 30-40 years but can't similarly support a 15 year mortgage, especially since a mortgage doesn't inflate.

I plugged into firecalc assets equal to my refinance, spending equal to my mortgage payments with no inflation and a 60/40 asset mix - as if I took the refinance proceeds and put it into a 60/40 low cost fund and had the fund make the mortgage payments. Firecalc indicates a 90.7% success rate. The worst case outcome is that the fund would break before the mortgage is paid off and I would have to ante up an amount equal to about half of my refinance proceeds. On average after the mortgage is fully paid off I'll come out ahead by an amount equal to 2/3rds of my refinance amount. Best case is that I'll have 3 times my refinaced proceeds left in the fund after paying the mortgage off. A 90% chance of coming out ahead and a 10% chance of not sounds like a pretty reasonable "bet" to me given that I am by nature an averages player and am not risk averse.

If someone's home equity were 50% of their investable assets I wouldn't recommend it but in my case it is only 10% so it is low hanging fruit to me.

 

[Chuckanut]

If someone's home equity were 50% of their investable assets I wouldn't recommend it but in my case it is only 10% so it is low hanging fruit to me.

I would also add that the person would have to have the investment smarts and attitude of somebody like a pb4uski.

 

[haha]

Your posting question exposes my conflicting attitudes and thoughts. When I refinanced several years ago, I did not have the assets to pay off my house. Now that I can, I will not do so. But if it were paid off, I would never consider taking equity out of my house to invest in equities. You could make the case it is the same scenario, minus any transaction costs.


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This is almost a universal mental bias- a preference for whatever we already have. I have it also, it is comforting.

Ha

 

[Bestwifeever]

USAToday: Wes Moss reveals the secrets of happy retirement

Having a paid off house and income streams seem like the way to go. Now I have to figure where to settle down.

I went to the link (and imho Mr. Moss is quite photogenic so thanks for that ). I think this paragraph is interesting re paid-off house:

Who are people who retire early? In my opinion, it is someone in position to retire at 62. That's early. Sixty-five is traditional age. I like to see people able to do it at 62, when Social Security kicks in.

Note he is indirectly saying to take SS at 62. If one's nest egg is in untaxed accounts, as virtually all of ours is in a traditional IRA, having to take out enough to make mortgage payments (plus enough to pay the deferred income tax on the withdrawals) could trigger taxes on the SS payments being received (not to mention affecting the ACA subsidy some receive but I don't think that is a factor in his discussion). So the earnings on the $$ invested other than in a paid off house would have to be high enough to offset any tax on the SS income, right? So maybe that is Mr. Ross's reasoning.

There should be a second article about secrets to earlier retiree happiness. But the mortgage question is not a no-brainer even if one waits to retire til 62 and takes SS then.

 

[nash031]

I also think it depends on where in the spectrum of retirement you are. I think if you're a couple of years away, focusing on paying down the mortgage is helpful because the time for compounding is much less, but the effect on reducing your expenses (the other half of the equation we at ER.org get, but many others miss) is huge.

For someone like me, still 5+ (and probably more) away from retirement, living in a home that is probably not our "forever" residence, with a 5/5 ARM that's only one year in, paying it down quickly doesn't make much sense. First, the tax deduction helps keep us in the 25% bracket. Second, the 2.875% interest rate vs. "expected historical return" on our portfolio (around 8% incl dividends) with - as mentioned - at least five more years until retirement mandates (to me) that we stay our present course.

While enticing to potentially pay off the mortgage in four or so years (fund tax-advantaged accounts, then apply all else to principal), it doesn't make sense to me to lose those years of additional accumulation and especially compounding while we have stable income in order to possibly lower expenses in the future. Maybe we'll be in the same house... but I doubt it.

Of course, when the market returns -10% over the next five years, I'll regret this decision.

And if we're still in the same house in six years, we'll re-evaluate based on the interest rate change.

 

[Chuckanut]

My secret to successful early retirement is mirrored in today's Pepper ad Salt cartoon in the WSJ. A middle aged man is saying:

" I've decided to enjoy my money now and become a burden to society later."