The Value of Debt in Retirement

[daylatedollarshort]

Quote:

Originally Posted by purplesky Obviously in a perfect world no debt in retirement is what everybody wants

I want to maximize my net worth.

[samclem]

Quote:

Originally Posted by daylatedollarshort I want to maximize my net worth.

Hmmm. Think that through carefully. If someone offered to pay you 3:1 on the flip of a coin if you would wager your entire portfolio, would you take it? If your goal is maximizing your net worth, you definitely would.
There's a lot of nuance in the goals we set, whether we recognize it or not. You goal is probably more like mine, which might read something like "primary objective is to maximize the chance I have enough resources for a comfortable retirement. Consistent with and subordinate to this, a secondary goal is to maximize my net worth to allow marginal enhancements to my quality of life (or a chance to leave legacy funds, etc)"
Sorry--off topic.

[pb4uski]

OK, I guess that DLDS should have said "maximize net worth without taking stupid risks" to cover off samclem's hypothetical.

Give me 3:1 odds where if I lose it isn't financial ruin and I might take you up on it.

[daylatedollarshort]

Quote:

Originally Posted by pb4uski OK, I guess that DLDS should have said "maximize net worth without taking stupid risks" to cover off samclem's hypothetical. Give me 3:1 odds where if I lose it isn't financial ruin and I might take you up on it.

Yes, without taking stupid risks is a addition good. I could also add things like maximizing net worth without being a prostitute, swindling the elderly, getting into derivatives I don't understand or betting on dog fights. But that would take a long time to write all out. So I kept it short and assumed people would understand in the context of this thread it meant I would go with a mortgage if it maximized my net worth.

I can't personally relate to the whole debt is bad kind of thinking. On the fatwallet forum there are threads and threads about where to get 0% credit card money and invest the difference. One of our kids has 0% loans as part of the financial aid package. Why would we ever pay that off before the rate increase kicks in? Why not invest the money and enjoy the returns? It is some easy extra passive income and helps to keep our AGI low for now and lets us qualify for ACA and college tax credits.

[mpeirce]

Quote:

Originally Posted by daylatedollarshort I can't personally relate to the whole debt is bad kind of thinking. On the fatwallet forum there are threads and threads about where to get 0% credit card money and invest the difference.

What happens to those folks when the markets tank 50% and stays there for a while. How do they pay back that "sweet loan". Especially if they lose their job at the same time.

Likely? Maybe not. But certainly a possible scenario.

Quote:

One of our kids has 0% loans as part of the financial aid package. Why would we ever pay that off before the rate increase kicks in? Why not invest the money and enjoy the returns?

If our beneficent government wants to give you low interest money to invest, there nothing illegal in using it. But frankly it doesn't sounds like your kid actually was in "financial need" if the money didn't go to pay for school expenses.

[samclem]

Quote:

Originally Posted by daylatedollarshort Yes, without taking stupid risks is a addition good. I could also add things like maximizing net worth without being a prostitute, swindling the elderly, getting into derivatives I don't understand or betting on dog fights. But that would take a long time to write all out. So I kept it short and assumed people would understand in the context of this thread it meant I would go with a mortgage if it maximized my net worth.

I wasn't trying to be pedantic, sorry for the sidetrack. But the issue goes right to the heart of investing for retirement, and an opportunity to think through the whole issue of "marginal utility" as we try to figure out how to craft a secure income stream for the future. Virtually nobody in this game is really trying to maximize their net worth.

Would I take 3:1 odds on a coin flip? In a minute, but only on a portion of my stash. As favorable as that payout is, the "pain" of losing the entire wad makes taking that risk unfavorable, for me.

[Mulligan]

Quote:

Originally Posted by samclem I wasn't trying to be pedantic, sorry for the sidetrack. But the issue goes right to the heart of investing for retirement, and an opportunity to think through the whole issue of "marginal utility" as we try to figure out how to craft a secure income stream for the future. Virtually nobody in this game is really trying to maximize their net worth. Would I take 3:1 odds on a coin flip? In a minute, but only on a portion of my stash. As favorable as that payout is, the "pain" of losing the entire wad makes taking that risk unfavorable, for me.

I would too, but Im a bit more conservative. But I would insist on the stash being split equally into three separate flips of the coin.


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[brewer12345]

Quote:

Originally Posted by mpeirce What happens to those folks when the markets tank 50% and stays there for a while. How do they pay back that "sweet loan". Especially if they lose their job at the same time. Likely? Maybe not. But certainly a possible scenario.

At one point pre-bust I had 6 figures in 0% advances outstanding. The money was housed in the highest paying online savings account I could find. Easy money for some minor book keeping.

During the depth of the bust I had 50k out on a HELOC I invested in a mix of junk and Baa-rated corporates that was yielding 12% to maturity. I could do the credit work on the bond obligors and did not get too concentrated in any one issue. Scarier money, but extremely profitable.

Invest that scratch in equities? Not me.

[karluk]

I've made investments with borrowed money many times over the years, but have always insisted on betting only on a sure thing. Naturally this has limited both my opportunities and the profit I realize on those opportunities. But even though I haven't grown rich on borrowed money, I've definitely made thousands of dollars in profits, most likely in the low five figure range.

My most common strategem is to borrow money on the 0% teaser rates that credit cards companies offer and invest the money in stocks in my taxable account. Simultaneously I sell the same amount of equites in my 457 plan and transfer it into a stable value fund. My stock allocation hasn't changed, so my profit is simply the interest generated from the extra money in the stable vaue fund minus fees, if any, charged on the 0% loan. I also profit at tax time by having more of my stock profits taxed at favorable LTCG rates.

[bclover]

Quote:

Originally Posted by purplesky I agree with Dave Ramsey about the behavior issue with spending and saving. But Dave Ramsey tells people everyday to pay off their mortgage completely before they retire and he doesn't even ask them for the exact details of their retirement savings situation. Thats kind of important information one should have before they tell a person to spend a huge portion of their nest egg to payoff their mortgage. Many people live several decades in retirement so a paid off house is useless without retirement income to eat and keep the lights on. Not to mention taxes,insurance and maintenance costs.

which is what annoys me with ole dave. NJ has some of the highest property taxes in the nation. I do know a number of neighbors who house rich and cash poor. then when they retired were forced to sell said house and downsize in order to live.

Dave promotes not having a mortgage as the answer to all the financial problems of the world.

I do have a question? people are mentioning the "stress" from having a mortgage? what stress? what difficulty?

[daylatedollarshort]

Quote:

Originally Posted by mpeirce What happens to those folks when the markets tank 50% and stays there for a while. How do they pay back that "sweet loan". Especially if they lose their job at the same time.

At zero percent interest you can make money in an FDIC insured CD or I bond. Some people do invest in equities with 0% credit card loans but I personally would not do that.

I actually do not do the zero loans with credit cards either because I like to keep my FICO score high for sign up bonuses. Our Chase Sapphire last year was worth $500 in cash back.

Quote:

If our beneficent government wants to give you low interest money to invest, there nothing illegal in using it. But frankly it doesn't sounds like your kid actually was in "financial need" if the money didn't go to pay for school expenses.

It did go to pay for school expenses. I don't know of any school that awards financial aid above and beyond the cost of attendance. We just aren't paying off the loan in a hurry out of our savings.

[daylatedollarshort]

Quote:

Originally Posted by karluk I've made investments with borrowed money many times over the years, but have always insisted on betting only on a sure thing. Naturally this has limited both my opportunities and the profit I realize on those opportunities. But even though I haven't grown rich on borrowed money, I've definitely made thousands of dollars in profits, most likely in the low five figure range. My most common strategem is to borrow money on the 0% teaser rates that credit cards companies offer and invest the money in stocks in my taxable account. Simultaneously I sell the same amount of equites in my 457 plan and transfer it into a stable value fund. My stock allocation hasn't changed, so my profit is simply the interest generated from the extra money in the stable vaue fund minus fees, if any, charged on the 0% loan. I also profit at tax time by having more of my stock profits taxed at favorable LTCG rates.

Very clever!

[purplesky]

Quote:

Originally Posted by bclover which is what annoys me with ole dave. NJ has some of the highest property taxes in the nation. I do know a number of neighbors who house rich and cash poor. then when they retired were forced to sell said house and downsize in order to live. Dave promotes not having a mortgage as the answer to all the financial problems of the world. I do have a question? people are mentioning the "stress" from having a mortgage? what stress? what difficulty?

This writer Tom Anderson seems to have some pretty good advice about CC debt and mortgage debt. Strike a balance between paying yourself first and paying off high interest CC debt.

The whole Dave Ramsey movement is fascinating to me. He tells millions of people daily that they should close ALL their accounts and go for a 0 FICO score.

I guess people get mortgages with a 0 credit score but no thanks. My Fidelity and Costco AE cards are very useful.

[Mulligan]

Quote:

Originally Posted by daylatedollarshort At zero percent interest you can make money in an FDIC insured CD or I bond. Some people do invest in equities with 0% credit card loans but I personally would not do that. I actually do not do the zero loans with credit cards either because I like to keep my FICO score high for sign up bonuses. Our Chase Sapphire last year was worth $500 in cash back. It did go to pay for school expenses. I don't know of any school that awards financial aid above and beyond the cost of attendance. We just aren't paying off the loan in a hurry out of our savings.

The early 80s were the Golden Age for student loan borrowing. Dad said he would pay two years and I had to pay two. He paid the first 2, and I loaded up on student loans netting 3 years of 12-15% CDs. The interest accumulated from the loans locked in the CDs paid for my senior year. In fact the CDs continued to pay a higher rate than the loans for many years, so I didn't repay them for quite a while.


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[imoldernu]

Our thinking on home ownership is quite different, and while most here disagree, the purpose of buying our home outright was quite different.

First the qualifier: We are extremely conservative, and without unlimited assets, do not expect a high return on our limited investments. (Monies in IRA's, CD's, IBonds and small annuity, in all, a guaranteed income stream just above 4%)

With an outside possiblity of having our savings depleted because of long term hospitalization or an extended nursing home stay... we opted to buy outright for security.

Should the health reasons deplete our assets, the home would remain safe, with care expenses being borne by medicaid after unprotected assets ran out. In other words, a safety net.

We have watched friends and neighbors who have reached this situation and have either not owned their home, or sold it to finance the extended care. No good outcomes.

Homestead exemption and a senior tax freeze also help here.

The caveat is the time element. The five year lookback for home purchase makes this a forward looking planning necessity. We were very relieved when we passed the 5 year lookback period.

We do understand that this "protection" would not extend to our estate, but would be there for our mutual protection. (ie.clawback from Medicaid)

Age has changed our outlook. No longer "It couldn't happen to us" but more of the "What if's".

[ERD50]

Quote:

Originally Posted by mpeirce What happens to those folks when the markets tank 50% and stays there for a while. How do they pay back that "sweet loan". Especially if they lose their job at the same time. Likely? Maybe not. But certainly a possible scenario. ...

Straw man argument, and can actually be used to show the advantage of holding a mortgage.

First, I say 'straw man', because a thoughtful person isn't doing this with a large % of their portfolio. Even a 50% market drop doesn't put them at risk, in the short term the financials look bad, but they knew that was a possibility.

A 50% market drop affects anyone with equities. Are you saying pay off the market and stay away from equities?

Now consider someone who uses $200K to pay off the mortgage, and then loses their job. They don't have the ~ $1,000 mortgage payment, but they still have utilities, food, taxes, maintenance, etc. That's a lot of bills with no job.

But they $200K, even if it was all in equities and dropped 50%, would pay the mortgage for 100 months. Long before that happens, you've found a job, etc. And you always had a nice buffer to replace a furnace, roof, or any other emergency. The mortgage doesn't add risk to a situation like losing your job, it makes things less risky, it offers options.

Money tied up in your house is, .... tied up in your house.

-ERD50

[freebird5825]

I am firmly in the "it's paid for" camp.

My late husband and I bought a modest starter home for $63K in 1984 when interest rates were 14.5%. The mortgage had a 20 year term. We refinanced down to 10% as soon as that was available, and shortened the loan term to 15 years.
By 1998, we had saved up enough in our bank accounts to pay off the remaining principal with no pre-payment penalty. Hmmmm...what to do ?

I asked a few co-w*rkers what they would do in our position. Most said to put the savings funds in the stock market. One older gentleman, very close to retirement, took out a piece of paper and did a few quick calculations for me. His opinion was to pay off the mortgage now, and then take what had been used for the monthly payment and invest that.

His reasoning was that a fully paid off house was more about a for-sure roof over our heads no matter what, versus the uncertainty of what the market would do.

As a result of satisfying the mortgage loan, we were able to build up a portfolio very quickly via DCA, using the funds previously used for the mortgage payments.

When things went south (husband suddenly passed in 2004), one of the things I did not have to worry about was a mortgage with the household income substantially reduced. I continued to put the maximum into my TSP and the market at a substantial pace for 2.5 years until 2007. I was able to exit my stressful job with zero debt and a decent retirement portfolio at age 48. I had a modest survivor pension and an annuity to cover expenses. All I had to do is control living costs for 7.5 years until I could apply for my own deferred pension.

Every scenario is different. All I know is paying off the mortgage loan way back in 1999 allowed me the financial freedom to FIRE in 2007. I would not have been able to FIRE and carry a monthly mortgage payment on my own.

AND...no matter what the market did, the roof over my head was solid.
I still live in the same house.

[Cobra9777]

We paid off the mortgage right before I ER'd 2 years ago. The annual P&I payments were 25% of total expenses, and 15% of the mortgage balance, with 9 years to go. So, keeping the mortgage would have significantly increased the overall WR at the most vulnerable point of ER. Seems to me, there's an inflection point in every amortization table, where the incremental WR becomes unreasonably high vs the payoff option. Another option I considered was refinancing the remaining small balance at 3.375% for 30 years. But I ultimately concluded that was simply adding unnecessary risk and uncertainty to the retirement plan, which didn't require leverage to succeed. I like having a smaller balance sheet, lower income, lower expenses, and less reliance on market performance. Also, the interest deductions were no longer getting us above the standard deduction, so we gave up no tax benefit.

[CardsFan]

A paid-for house was always our goal, but not an obsession. Our philosophy was that we would NOT buy more house than we needed, just because the realtor said we could, and we would not use the house as an ATM, or to consolidate debt. We bought our first house in 1981 with an assumable mortgage at “only 11%”. New mortgages at the time were 15% to 17%!! We put over 30% down to get that great rate. Three homes later, we have a fully paid Condo, never had a mortgage greater than $60,000, and banked $200k when we downsized.

My point is that there are many ways to get to retirement without a mortgage. It does not mean you need to raid the nest egg. We focused on the original 30 year mortgage (actually 27 when we assumed it) to be our pay-off time- line. So every time we moved, we took a mortgage for about the time remaining on the previous note. If you re-set the mortgage to 30 years every time you sell/buy, or refinance, you are extending the time to pay-off the house. Now, if you have used that reduction in payments to invest, then maybe having a mortgage going into retirement is not that big a deal. But if you just spent that money, well, then that could be a problem.

[samclem]

Quote:

Originally Posted by Cobra9777 So, keeping the mortgage would have significantly increased the overall WR at the most vulnerable point of ER.

And the answer was to draw out a lot of money all at once from the portfolio to pay off the mortgage, just before retiring?

9 years to mortgage payoff - - history may be an unreliable guide, but there hasn't been a period in the modern era when US stocks, with dividends reinvested, took more than 7 years to recover. So, there's some reason to believe the money would have been okay in the stock market.

Again, I recognize that there's no perfect answer.