The Value of Debt in Retirement

[daylatedollarshort]

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.

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]

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]

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]

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]

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]

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.

 

[haha]

The answer is "it depends".

But what is most interesting to me is how much more popular on this board is the idea of retaining the mortgage into retirement than it was a few years earlier. There may be some interest rate differences to partially explain this. The rest I think is fashion. IMO if one wants to use this leverage he should not be fooled into thinking that by adding the loan proceeds to his allocation he has not upped his risk.

Asset prices goes up and down, but debt that one owes just sits there demanding to be serviced.

Ha

 

[Cobra9777]

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.

FIRECalc and ******** both gave a success rate of 56%, with pocket change for average ending portfolio. So either way, the money was coming out of my portfolio. With P&I at 15% of the unpaid balance (and rising fast), in my judgment, that's an unreasonably heavy incremental WR burden, right at the most vulnerable point of early retirement. The only viable options were to pay off or refinance.

 

[eta2020]

Borrowing to Invest Does More Harm Than Good - Market Realist

Interesting article I read today.

Mortgage (if one does not need to have it) in a ways is borrowing against house to finance investing.

I still stick with my believe that if you do not have one you are better off.

"Buffett doesn’t borrow to invest"

 

[Dash man]

It's easy to justify the risk of choosing a mortgage to increase investments when times are good. While still working you have the option to continue working to make up for investment losses or less than expected performance. However, once retired, taking on debt to invest is more risk than I'm willing to take. What if we entered a protracted downturn similar to what Japan has experienced over the past few decades. The economy has been at risk of deflation which Japan has suffered through for years. It's is not out of the question it could happen here and in Europe. Leverage is great until it isn't.

 

[W2R]

The answer is "it depends".

But what is most interesting to me is how much more popular on this board is the idea of retaining the mortgage into retirement than it was a few years earlier. There may be some interest rate differences to partially explain this. The rest I think is fashion. IMO if one wants to use this leverage he should not be fooled into thinking that by adding the loan proceeds to his allocation he has not upped his risk.

Asset prices goes up and down, but debt that one owes just sits there demanding to be serviced.

Ha

Good point. I am so glad to have a paid off mortage in retirement. It's one less bare bones (non-discretionary) expense to have to pay from risk free sources. Bank accounts really don't pay much interest these days.

 

[Gatordoc50]

I wouldn't mind carrying a mortgage but it would depend on the amount relative to my portfolio. Theoretically, it doesn't matter as market returns should exceed the mortgage, but I would be really uncomfortable with a mortgage that was more than 10 percent of my NW.

 

[Pilot2013]

I agree with both sides of the argument here, and I disagree with both sides.... Yeah, that's a cop out, but I'll try to explain.

It seems one side is arguing that NO MATTER WHAT, they will only feel comfortable without a mortgage. If I had the proposed "$2.5 Million" that Legg Mason says you have to have in order to retire, AND I had a $100k to $300K mortgage, I think there would be no question that as I ER'd I would pay the mortgage off. Then again, how much of that portfolio is going to be taxable vs non-taxable income, what would the mortgage do for me from Std Deduction vs Itemized, etc, etc. I think the point is you would have options that are pretty much all good in the above scenario.

On the other hand, what if I DON'T have $2.5 million, but have $1 million. And I have $100k or less of mortgage remaining (and of course the house is not just worth $100k, or gulp, less) and I could refinance at that time at todays ~3.375% rate... If that were the case and my retirement WR considering that would allow me to ER rather than work another 5-10 years at MegaCorp JUST to pay off the mortgage, then I think I could sleep like a baby with that mortgage.

Bottom line, some people have been either smarter, luckier, or whatever to be in the first situation, while others are in the second situation. There is no one answer for all. I kind of like the "relative to my NW" statement some have posted.

If we were Warren Buffett, we wouldn't worry about any of this.

Pilot

 

[Dog]

I've already chimed in regarding having the mortgage paid off by retirement. I also hate seeing how much of the monthly payment goes to interest vs the loan balance (even at a low interest rate).


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[daylatedollarshort]

I don't think this is an issue that can be individually financially optimized with a maxim, generic article or emotions. There are many factors to consider including but not limited to taxes, retirement income sources, tax brackets, local appreciation rates, historic interest rates and ACA credits. We run everything in the RIP and our own spreadsheets. Even future RMDs might be impacted by having a mortgage or not in the pre-70 years. I could never do all the calculations in my head. I always get surprising results when I run all the numbers.

 

[gcgang]

I then went to take out a mortgage, but I decided that the fees and hassle were not worth it to me. Also, I need less cash flow to meet my obligations, thus enabling me to keep a closer eye of income tax and Medicare fees.

I had thought that I would definitely want a mortgage at today's rates, but overll I think it turned out to be different for me.

Ha

We just signed purchase agreement on a condo. We have ample cash to pay for, and even more when we sell our house. I met with mortgage guy yesterday. While I think that over 30 years, or however long I live, there is a high probability I would make more than the 3.69% before tax mortgage, the documentation required is a major hassle.

But primarily, I realize I haven't done a good job investing "cash windfalls" in the last couple years. I keep thinking the market is too high, rationalizing, I'm retired now, I shouldn't be so aggressive investing. So this mortgage money might end up sitting in a savings account, and only benefit me if interest rates shoot back up.




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[Pilot2013]

So this mortgage money might end up sitting in a savings account, and only benefit me if interest rates shoot back up.

GCGang- I agree. If you already have all of the cash that you need/feel would be necessary, pay cash. But, if you are not one of the lucky ones in that situation, a little paper work hassle might be worth the cash in hand.

 

[RobLJ]

GCGang- I agree. If you already have all of the cash that you need/feel would be necessary, pay cash. But, if you are not one of the lucky ones in that situation, a little paper work hassle might be worth the cash in hand.

Good discussion--and helpful.
My wife and I are debating it, since we're buying a house in Reno (at 3.1%) and then will sell the Houston home afterwards and move in June/July. We can reamortize the Reno loan within 12 months, but shouldn't quite pay off the loan since the Reno house is more expensive and it would bring available cash lower than I'm comfortable with. It's a question of how much cash we want with a mortgage of 5-8% (at max) of the net worth. Even if I'm investing cash at about the same rate as the mortagage--it adds liquidity. I've also considered the HELOC, also.

Since it's not clear when she will find a job (she's younger and wants to work for 3-5 more years), we'll probably wait to see and then keep about the loan at 8% of NW. We can always pay it off later. We also have a Colorado cabin, which we can also sell.

As several have noted, there is no clear answer--depends on circumstances, psychology, and other factors.

 

[pb4uski]

I've already chimed in regarding having the mortgage paid off by retirement. I also hate seeing how much of the monthly payment goes to interest vs the loan balance (even at a low interest rate).

How much would the monthly investment earnings be on the investments that were liquidated to pay off the mortgage?

 

[Dog]

Hi PB4uski. We won't have to liquidate investments. We plan to sell the house next year. House is worth more than mortgage balance so we will be debt free. We will deposit any additional cash from the home sale into CDs. Our retirement home doesn't have a mortgage.


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[MN317]

I am 5 yrs into retirement and I still have a mortgage on the house. I could pay it off tomorrow but the mortgage is at 2.8% and you would have to hold me at gun point to do so. As always YMMV.