I noticed that I had the 'inflation adjusted' options checked (the default) for both of my entries on the Other Income/Spending tab, which I believe was an error, as a mortgage payment doesn't change with inflation. Nod to kite_rider who made mention of this:
The thing no one seems to bring up is that there is an 'inflation risk' to paying down mortgage debt. What if inflation jumps to 4%, or 8%?!? You would be really bummed that you paid off that 3.3% debt. That is what is keeping me from paying off the mortgage now...
Interesting to note that this does apparently make a significant difference.
Second, I think (not certain, need to dig deeper into your numbers), that your analysis ignores the fact that the principal payments on that mortgage payment is not 'spent', it becomes part of your net worth. IOW, those payments didn't all go 'poof', only the interests did.
edit/add: hmmm, maybe that's a wash? In the pay-off case, the full equity is in the home, in the mortgage case, you end up with the full equity in the home - a wash?
Good thought, but I think I agree with your edited conclusion, it's a wash. After 15 years in both scenarios you have a house with full equity. You either paid all principal down up front, or you paid it over 15 years (plus interest).
Can you provide links to each analysis, that makes it easier to check.
I did not know I could do that, how useful! Links below for inputs updated per discovery that I had incorrectly left the 'inflation adjusted' option selected. Very interesting to see that now the compared scenarios show an identical success rate.
First, may I suggest that rather than 'success rate', you use the investigate tab, and either adjust spending or adjust initial portfolio for 100% success.
I've also noted the results of the 'Investigate' tab as suggested as well to provide more info.
Interesting results here, it's almost an exact wash. This makes me wonder, this feels right at a big-picture macro economic scale. Did we really think the banks were getting a raw deal by offering us a loan, and we were coming out ahead? Seems unlikely.
Comparison A:
Simulation 1 - 1 mil portfolio, 30k base spending, plus a 100k mortgage payments for the first 15 years. All defaults except:
Success rate: 100%
Spending rate for 100% success: 30,049
Simulation 2 - 900k portfolio (100k was removed from portfolio to pay down loan), 30k base spending, no mortgage payments . Same as above except:
Success rate: 100%
Spending rate for 100% success: 30,072
Comparison B - higher base spending, lower success rate
Simulation 3 - 1 mil portfolio, 40k base spending, mortgage for 15 years
Success rate: 71.0%
Spending rate for 100% success: 30,049
Simulation 4 - 900k portfolio (100k was removed from portfolio to pay down loan), 40k base spending, no mortgage payments. Same as above except:
Success rate: 71.0%
Spending rate for 100% success: 30,072
Comparison C - initial base spending, but larger mortgage
Simulation 5 - 1 mil portfolio, 30k base spending, plus a 200k mortgage for the first 15 years. All defaults except:
Success rate: 93.5%
Spending rate for 100% success: 26,694
Simulation 6 - 800k portfolio (200k was removed from portfolio to pay down loan), 30k base spending, no mortgage payments. Same as above except:
Success rate: 93.5%
Spending rate for 100% success: 26,730
Wondering how this holds for different mortgage rates, I ran comparison C with some higher interest rates. Perhaps as expected, as interest rates rise, the benefit tilts toward paying it off.
Simulation 7 - initial base spending, large mortgage, 6% mortgage rate
Success rate: 89.7%
Spending rate for 100% success: 25,703
Simulation 8 - initial base spending, large mortgage, 10% mortgage rate
Success rate: 79.4%
Spending rate for 100% success: 22,676
Seems to be tilting the argument towards paying it off for me. Even in historically very low interest rate environments it's about a wash holding the mortgage vs paying it off. In higher rate environments it is beneficial to pay it off.