Should I payoff, and/or where to put cash?

[cardude]

I should be able to quit working soon, and I'll get a decent sized lump sum of cash when I do (next 2-3 months if all goes well), and I'm trying to figure out if I should pay off my mortgage or not.

• If I paid off the mortgage I will still have 7 years worth of cash to live on.
• My mortgage is about 8% of my portfolio, including all cash.
• My mortgage rate is currently 6.5%.
• My investment portfolio, not including cash, has gained around 8-10% per year for the last 10 years or so. 100% stocks and a couple of mutual funds, almost all (95%) in after tax investments (non 401K, IRA I'm trying to say).
• I will not have any W2 wages, or if I do they will be 30K or less.

Also, I've always had other uses for cash and never had to worry about where to put it, but now I need to know what the best low risk investments for cash right now. What rates are 'yall getting?

My initial thinking was that I should keep a mortgage (but hopefully refinance at a lower rate) so I didn't tie up so much money in an investment that IMO will gain at best 1-3% due to my location and buy in price (I didn't steal it). Also, I liked the idea of keeping a higher cash level by not paying it off so I could take advantage of opportunities during a recession. Plus, I think my portfolio (but not the cash) will over time earn more than the mortgage cost of 6.5% (or whatever I can refinance it at-- I'm shooting for 5%).

Am I on the right track, or am I missing something completely obvious?

 

[jIMOh]

First, there are several threads on mortgages, rates and to pay down early. Look around the board and FAQs.

I think more information is needed.

mortgage balance
lump sum amount
is lump sum taxable or tax deffered?
what will withdraw rate be if you retire and keep the mortgage?
what will withdraw rate be if you retire and pay off the mortgage?
6.5% is a high rate, what is the length of time left to payoff on normal schedule? More than 15 years?

The longer the time to pay off the mortgage, the more keeping the money invested will make sense. If paying off mortgage would happen naturally over 4 years, then paying off now and lowering withdraws from retirement funds initially might actually increase portfolio survival rates.

What is your expected income need?
What is expected tax rates on the taxable accounts (5 or 15%)?
How old are you?

 

[cardude]

Thanks.

mortgage balance--495,000
lump sum amount--1,000,000 after tax is paid
is lump sum taxable or tax deffered? taxable
what will withdraw rate be if you retire and keep the mortgage?2.9%
what will withdraw rate be if you retire and pay off the mortgage?2.3%
6.5% is a high rate, what is the length of time left to payoff on normal schedule? More than 15 years? 20 years-- it's a pretty new mortgage.

What about refinancing the mortgage to a longer term (and a lower rate) to reduce the withdraw rate? Actually, that would only reduce the withdrawl rate to 2.7% at today's rates.....

 

[jIMOh]

Thanks.

mortgage balance--495,000
lump sum amount--1,000,000 after tax is paid
is lump sum taxable or tax deffered? taxable
what will withdraw rate be if you retire and keep the mortgage?2.9%
what will withdraw rate be if you retire and pay off the mortgage?2.3%
6.5% is a high rate, what is the length of time left to payoff on normal schedule? More than 15 years? 20 years-- it's a pretty new mortgage.

What about refinancing the mortgage to a longer term (and a lower rate) to reduce the withdraw rate? Actually, that would only reduce the withdrawl rate to 2.7% at today's rates.....

My reaction is this-

2.9% starting withdraw rate is awesome, no reason to think of adjusting that at all. Chalk one up for investing and not paying off. If you can live on 2.9% of assets (most of which is in taxable accounts, correct?), then I think sticking with that plan is best. Keep the money liquid.

The 20 year period of repayment is significant. I think you will do better in long run investing the lump sum, because in 20 years, the compounding factor really favors investing. Chalk another one up for investing.

The $1 M lump sum, what would you invest in (100% stocks?). Have you looked into possibly creating a dividend portfolio with this $1 M (which generates close to 20k of income per year). I think dividend investing is most stable way to fund retirement, so I thought I would chime that opinion in.

Combine that 20k with other income sources and you probably have a better retirement portfolio.

I would look to refinance 20 year mortgage to a 15 year fixed, lower the rate and probably keep the same payment you have now. If the loan is considered "jumbo", I would pay down mortgage enough to get a normal rate (non jumbo).