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What mortgage number to use in retirement modelling
Old 01-26-2017, 10:27 PM   #1
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What mortgage number to use in retirement modelling

I've never seen this mentioned and I'm not sure what to enter in retirement modelling software/websites. When figuring out monthly/yearly spending, do I include mortgage principal and interest, or just interest? It seems like I shouldn't include principal since that would just be moving money from one bucket to another and it is only the interest that truly matters. Of course, that means I have to breakdown the interest payments by year, which is a little annoying, but easy enough.
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Old 01-26-2017, 10:32 PM   #2
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I don't include my home equity (or debt) in my retirement plan because I need a place to live and do not plan to sell.
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Old 01-26-2017, 10:39 PM   #3
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I've never seen this mentioned and I'm not sure what to enter in retirement modelling software/websites. When figuring out monthly/yearly spending, do I include mortgage principal and interest, or just interest? It seems like I shouldn't include principal since that would just be moving money from one bucket to another and it is only the interest that truly matters. Of course, that means I have to breakdown the interest payments by year, which is a little annoying, but easy enough.
I use a spreadsheet with year by year interest to track spending. I do not include principal payments as a part of spending as those do not change our net worth. I do track principal payments year by year for cash flow purposes.
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Old 01-27-2017, 07:38 AM   #4
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In Fidelity's Retirement Planner, you can enter the monthly payment with an end date. Most all of the expenses in their planner can be edited with start and end dates. That is what I do. I don't worry about tracking the asset value of the home. It will be what it will be and will not be my problem when the time comes.
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Old 01-27-2017, 07:44 AM   #5
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Quote:
Originally Posted by jazzbo View Post
I've never seen this mentioned and I'm not sure what to enter in retirement modelling software/websites. When figuring out monthly/yearly spending, do I include mortgage principal and interest, or just interest? It seems like I shouldn't include principal since that would just be moving money from one bucket to another and it is only the interest that truly matters. Of course, that means I have to breakdown the interest payments by year, which is a little annoying, but easy enough.
None of the above. There is no need to focus on principal vs interest because the entire mortgage payment is a cash outflow and retirement planning focuses on cash inflows and outflows.

Best practice is to exclude your mortgage payments from your expenses and consider them separately because your expenses increase each year due to inflation whereas yo mortgage payments are fixed... also, your expenses continue for your entre time horizon and your mortgage payments stop at some point.

In Firecalc, I include my mortgage payments as off-chart spending that begins immediately and then input an offsetting pension in the year my mortgage ends. In Quicken Lifetime Planner, it is a separate cash flow that is fixed and ends when my mortgage is paid off (similar to what CRLLS describes above).
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Old 01-27-2017, 07:52 AM   #6
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None of the above. There is no need to focus on principal vs interest because the entire mortgage payment is a cash outflow and retirement planning focuses on cash inflows and outflows.

Best practice is to exclude your mortgage payments from your expenses and consider them separately because your expenses increase each year due to inflation whereas yo mortgage payments are fixed... also, your expenses continue for your entre time horizon and your mortgage payments stop at some point.

In Firecalc, I include my mortgage payments as off-chart spending that begins immediately and then input an offsetting pension in the year my mortgage ends. In Quicken Lifetime Planner, it is a separate cash flow that is fixed and ends when my mortgage is paid off (similar to what CRLLS describes above).
+1
Cash flow issue. Only matters that's there's an outflow of X amount and when it will stop.
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Old 01-27-2017, 08:01 AM   #7
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There is no need to focus on principal vs interest because the entire mortgage payment is a cash outflow and retirement planning focuses on cash inflows and outflows.
+1

It's all part of what you will be spending each month.

Personally, I chose to pay off my mortgage in 2006, before my 2009 retirement. That simplified things.
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Old 01-27-2017, 11:38 AM   #8
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I separate the PITI components because I want to see clearly how much I pay in interest and how much I will still owe in taxes and insurance. I didn't have enough interest to itemize last year.
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Old 01-27-2017, 11:47 AM   #9
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It is a good question. I agree it is really just a transfer from one asset to another. For me the principal amount is important because of the taxes and extra ACA due when I use pre-tax money. Or I could use Roth money and it is not as important.
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Old 01-27-2017, 12:21 PM   #10
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I use Fidelity Retirement Planner to cross check my numbers, but my own spreadsheet is the only one I have that adds in columns for fields like home equity, mortgage balance and total net worth. We find it helpful for modeling events like downsizing to a condo with a much smaller home price but high HOA fees. If we live a long time the HOA fees are a killer because the mortgage interest tapers off over the years but the HOA fees never end and will go up with inflation. We might make the move anyway because we like the idea of a retirement village with lots of activities and amenities, but we find it helpful to see what the year by year numbers are under different scenarios. The condo would likely decrease our initial cash flow out and overall expenses, but might increase our lifetime expenses.

We use matching strategies mainly for investing, so for us a custom spreadsheet with inflation and real returns as parameters is more useful than planners with Monte Carlo simulations.
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