The Value of Debt in Retirement

[MildlyEccentric]

The Washington Post ran an interview with Tom Anderson, the author of the book The Value of Debt in Retirement. In the interview he argues that it can make economic sense to carry debts such as a mortgage into retirement.

As part of the "keep the mortgage" group, I found it a refreshing change from the typical advice seen in media. The danger is in hearing only the part about holding onto the mortgage without implementing the offsetting part of the strategy which is to save/invest the money which would have been used to pay off the mortgage.

 

[Marc]

Thanks for the link! We decided last week that we would get a 30 year loan for our retirement home; for the reasons stated in this article.

Marc

 

[eta2020]

Makes sense if mortgage is fully deductible and you can find guaranteed investment that pays more than mortgage rate.

CDs are guaranteed investments and I do not believe CDs pay higher rate then mortgage.

Hence having mortgage in retirement is humbug

I do not margin purchase of equities against my house....even though we had always been 100% in equities and they do pay more then mortgage rate (over a long period of time)

 

[eta2020]

Let me put another spin on it.

Lets say I have 24k a year mortgage. So 50 year old couple without mortgage who has income 50k a year has same money as 50 year couple with income of 74k a year. (because second couple bought lets say annuity)

Guess who is financially smarter? Couple without mortgage because they will get Obama-care subsidies.

 

[Dog]

Read the article and some of the comments. My understanding is he assumes you are using savings to pay off your mortgage and risking liquidity. He doesn't even address the folks out there that have built up a large emergency savings fund outside of their retirement accounts and can afford to pay off their mortgage - meaning they need less monthly income since they don't have a mortgage payment. How are they less liquid? Why would they need more liquidity?
I didn't understand his example of his relative going into nursing home either. How would having a mortgage have helped in that situation?
Just my thoughts


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[Onward]

Intriguing book. I'm going to check it out.

 

[daylatedollarshort]

I don't think there is a one size fits all answer. If you have a part-time retirement job involving fireworks, and live in a state with no asset protection for personal residences, it might be a good idea to keep a mortgage. In a different state the opposite might be true. There are many factors to consider.

 

[ERD50]

Makes sense if mortgage is fully deductible and you can find guaranteed investment that pays more than mortgage rate.

CDs are guaranteed investments and I do not believe CDs pay higher rate then mortgage.

Hence having mortgage in retirement is humbug

I do not margin purchase of equities against my house....even though we had always been 100% in equities and they do pay more then mortgage rate (over a long period of time)

Your choice, but your arguments are deeply flawed.

A) Fully deductible or not is a consideration and part of the calculation, it is not binary.

B) The investment does not need to be 'guaranteed' - it only needs to fit your overall risk profile.

For example, if you inherited some CDs (say from a joint account), does that mean you could never invest that money in the market, because you could never get the same 'guaranteed' rate in the market (even though it might just be 1%)? Nope, just invest it to match your overall risk profile.

During any time that you had any money in equities (even a single $), did you hold a mortgage? Or did you pay the mortgage off before buying anything other than guaranteed investments that paid more than your mortgage rate (beyond an emergency fund)?

-ERD50

 

[eta2020]

Your choice, but your arguments are deeply flawed.

A) Fully deductible or not is a consideration and part of the calculation, it is not binary.

B) The investment does not need to be 'guaranteed' - it only needs to fit your overall risk profile.

-ERD50

If mortgage interest rate is not fully tax deductible then I would need to earn enough to cover mortgage interest PLUS to cover income taxes. So I would need even higher earnings....

If I start buying something that carries risk then in effect I bought investment on margin against my house.

BTW we payed of mortgage in 6 years. That was long long time ago. We pretty much did not buy anything except 401ks and IRAs while having mortgage.

 

[Lsbcal]

Our mortgage is 3.38%. Our total portfolio growth from the start of 2007 (8 years) was 5.8% compounded. So it is working for us. Our investment gains are mostly in retirement accounts so we have a lot of control over taxes until RMD's.

I think the mortgage decision is highly dependent on temperament, taxes, investor's risk preferences, etc.

 

[wolf]

Makes sense if mortgage is fully deductible and you can find guaranteed investment that pays more than mortgage rate.

CDs are guaranteed investments and I do not believe CDs pay higher rate then mortgage.

Hence having mortgage in retirement is humbug

I do not margin purchase of equities against my house....even though we had always been 100% in equities and they do pay more then mortgage rate (over a long period of time)

+1

There are FA's, who promote carrying a mortgage, and other who do not,
when retired. Simple fact, Life is much easier mentally and financially with the house paid for.

Assuming you can make more money, by carrying a mortgage, take an
interest deduction, and invest the "mortgage" money for a better return
(equities, etc), seems to be to risky. Especially when retired.

 

[eta2020]

Our mortgage is 3.38%. Our total portfolio growth from the start of 2007 (8 years) was 5.8% compounded. So it is working for us. Our investment gains are mostly in retirement accounts so we have a lot of control over taxes until RMD's.

I think the mortgage decision is highly dependent on temperament, taxes, investor's risk preferences, etc.

Now my angle is like this. We have no debt no mortgage.

That allowed us with ease to be 100% in equities. That in turn resulted in pretty good returns.

If we had carried mortgage we would not had been so aggressive in our portfolio over a last 15 years.

 

[ERD50]

If mortgage interest rate is not fully tax deductible then I would need to earn enough to cover mortgage interest PLUS to cover income taxes. So I would need even higher earnings....

Exactly what I said. It is a consideration/calcualtion, not a yes/no.

If I start buying something that carries risk then in effect I bought investment on margin against my house.

Money is fungible. You have a mortgage or not, you invest one way or another, it isn't 'against the house', it's all part of your pot.

BTW we payed of mortgage in 6 years. That was long long time ago. We pretty much did not buy anything except 401ks and IRAs while having mortgage.

You didn't answer the question.

-ERD50

 

[Lsbcal]

Now my angle is like this. We have no debt no mortgage.

That allowed us with ease to be 100% in equities. That in turn resulted in pretty good returns.

If we had carried mortgage we would not had been so aggressive in our portfolio over a last 15 years.

That works for you and is fine with me.

The 100% equity position is not enabled just by a payed off mortgage. You felt that that was a reasonable risk just like most of us come to our position by our personal risk profile and net worth + income.

I'm guessing that there is more to your story that enables the 100% equity position. Some possibilities that come to mind:
1) High portfolio value compared to yearly spending, i.e. low withdrawal percentages so you can take a 50% portfolio hit.
2) Pension + SS covers much of the spending.
3) You are fine with a high level of risk.

 

[eta2020]

Exactly what I said. It is a consideration/calcualtion, not a yes/no.



Money is fungible. You have a mortgage or not, you invest one way or another, it isn't 'against the house', it's all part of your pot.



You didn't answer the question.

-ERD50

You have a point as well. There is no exact good choice here. People should do whatever works for them.

I guess I view house as extremely safe bucket of money which I would not want to move into less safe bucket. Kinda like giant CD with benefit of providing home.

 

[ERD50]

... There is no exact good choice here. People should do whatever works for them. ...

Agreed, I just have an aversion to absolutes and one-size-fits-all statements. Hard for me to let them stand w/o a challenge.

I guess I view house as extremely safe bucket of money which I would not want to move into less safe bucket. Kinda like giant CD with benefit of providing home.

And I would not say there is anything 'wrong' with that view, I think it is fair to say that it is a 'guaranteed' return. And if you feel that way, act accordingly (but I'd still separate the 'providing a home' statement - the home is there whether mortgaged or not, and assuming adequate liquidity - again, fungible accounting).

But I do think the 'safety issue' might be a bit of a limiting view, and it is better to take an overall risk/volatility view. But that is in the eyes of the beholder.

As an example, I think a few past posts have said they had $X funds sitting in a money market, and no way in hell-or-high-water would they put that money in anything more volatile. They just wouldn't do it. At the same time, they are paying a higher rate on their mortgage, and they could pay it off with those funds and still have sufficient liquidity. Given those constraints, then clearly the answer is to pay off the mortgage.

Personally, I think the constraints should be reconsidered, but if that is how it is, the decision is clear.

-ERD50

 

[samclem]

Independent of the perenial mortgage/no mortgage debate, I think that retaining the >ability< to go into debt in retirement is important for most retirees. It can be difficult to get a regular mortgage at an attractive rate once the regular paycheck stops, that's why we got a HELOC.

Even if one doesn't want to have a mortgage now, circumstances can change and a slug of money might be darn handy just when it is inconvenient to sell assets (due to tax costs/tax penalties, illiquidity, temporarily depressed prices, etc). So, I'd recommend that even dyed-in-the-wool "no mortgage in retirement" types at least consider the potential value of having a HELOC or other means to get money if needed. It provides options and costs very little.

 

[gauss]

When I RE'd I kept the mortgage (actually Home Equity Loan) even though I had the cash on hand to pay it off. The reason that I did this was psychological.

DW is still working for the next several years. Once she RE's we will have a step down in income. It is at that point that I plan to have the mortgage paid off. Having the increase in monthly income not going toward the mortgage payment will be an offset somewhat against the end of DW's regular earned paycheck.

The interest rate for the current HEL is less than 2% so the economic difference (paying off early vs running it out as described above) is not that large.

-gauss

 

[Gumby]

Independent of the perenial mortgage/no mortgage debate, I think that retaining the >ability< to go into debt in retirement is important for most retirees. It can be difficult to get a regular mortgage at an attractive rate once the regular paycheck stops, that's why we got a HELOC.

Even if one doesn't want to have a mortgage now, circumstances can change and a slug of money might be darn handy just when it is inconvenient to sell assets (due to tax costs/tax penalties, illiquidity, temporarily depressed prices, etc). So, I'd recommend that even dyed-in-the-wool "no mortgage in retirement" types at least consider the potential value of having a HELOC or other means to get money if needed. It provides options and costs very little.

A good point, Samclem. We will likely get a HELOC, but not draw on it, or just draw the minimum if there is one, right before we pull the plug. I have noticed that most HELOCS have a ten year draw period followed by a 20 year repayment period, so I'm not sure what we'll do about getting another HELOC at the end of the first ten years.

 

[bclover]

Our mortgage is 3.38%. Our total portfolio growth from the start of 2007 (8 years) was 5.8% compounded. So it is working for us. Our investment gains are mostly in retirement accounts so we have a lot of control over taxes until RMD's.

I think the mortgage decision is highly dependent on temperament, taxes, investor's risk preferences, etc.

+1

 

[traineeinvestor]

Another FIREee who is carrying a mortgage after abandoning my career.

For us, the interest rate on the mortgage was not only less than the expected return on what we would invest the money in but it is less than the local rate of inflation. And this is before we take into account the tax deductibility. That said, we recognize that expected rates of return may (and often are) very different from actual rates of return, so while we expect that carrying the mortgage will leave us better off, there is a non trivial risk that we will end up being worse off.

We also have a different mortgage market here in that mortgages are at floating rates based on the short end of the yield curve - it makes for very cheap borrowing (currently below 1% on average) but exposes us to the risk of rising interest rates. If that happens, we will start to accelerate our repayments.

As a final thought, when the home mortgage is repaid (about 6.5 years from now), we would seriously consider borrowing against our home to invest in another property or some equities (assuming the numbers made sense at the time and that we could get a bank to lend to a retired guy in his fifties).

 

[samclem]

. . . so I'm not sure what we'll do about getting another HELOC at the end of the first ten years.

Yes, the window appears to be limited. And another thing: as some folks found during the housing meltdown, HELOCs aren't perfect as a source of emergency cash--the bank can decide to do a re-appraisal on a property if home values become questionable. But, the cost for a HELOC is low, so we've got one as cheap insurance. If we need access to a chunk of money in the next decade, it will be probably be better than paying 15% of LTCG (compared to our "normal rate" of zero).

 

[brewer12345]

Yes, the window appears to be limited. And another thing: as some folks found during the housing meltdown, HELOCs aren't perfect as a source of emergency cash--the bank can decide to do a re-appraisal on a property if home values become questionable. But, the cost for a HELOC is low, so we've got one as cheap insurance. If we need access to a chunk of money in the next decade, it will be probably be better than paying 15% of LTCG (compared to our "normal rate" of zero).

HELOCs are balance sheet products for lenders rather than stuff that is originated for sale to Fannie/Freddie, so to some extent the lenders on HELOCs can do actual underwriting and make rational credit decisions (as opposed to just making sure all the boxes are ticked off with agency lending). A 50% LTV HELOC to a multi-millionaire retiree is about as sweet as it gets for lenders, so I imagine you would not have a lot of trouble getting a new HELOC after the original goes away.

 

[purplesky]

The Washington Post ran an interview with Tom Anderson, the author of the book The Value of Debt in Retirement. In the interview he argues that it can make economic sense to carry debts such as a mortgage into retirement.

As part of the "keep the mortgage" group, I found it a refreshing change from the typical advice seen in media. The danger is in hearing only the part about holding onto the mortgage without implementing the offsetting part of the strategy which is to save/invest the money which would have been used to pay off the mortgage.

This sounds like the advice Ric Edelman has been giving for years.

And the opposite advice of what Dave Ramsey tells his millions of followers
daily.

Whatever helps you sleep at night is the right answer. But liquidity is a must if you do payoff your mortgage sooner than later.

Dave Ramsey tells people daily to pay off their mortgage as they head into retirement and these people are using a huge chunk of their overall retirement nest egg to do it. Thats just irresponsible.

I get the whole "slave to the lender" thing but a well funded diversified portfolio will outperform a 3% mortgage and will also provide a retirement paycheck to make the house payment.

 

[Backpacker]

A good point, Samclem. We will likely get a HELOC, but not draw on it, or just draw the minimum if there is one, right before we pull the plug. I have noticed that most HELOCS have a ten year draw period followed by a 20 year repayment period, so I'm not sure what we'll do about getting another HELOC at the end of the first ten years.

Assuming the HELOC is the only debt or at least that other debts are small and managable, I doubt you'd have any trouble qualifying for a renewal of the HELOC. Surely you'd be able to show some sort of income stream. We;ve even used the total portfolio divided by actuarial life expectancy chart to get a potential monthly income for those folks that do not want to draw off of retirement funds quite yet.

Most lenders cry uncle at about 40%+/- Debt to Income; where debt = contractual loan payments (not the cell bill, etc.)