Change in Mortgage Thinking in Retirement

[samclem]

I took these same numbers over to ******** (what I can't even mention this other tool? That's a bit silly IMO

This other tool has been discussed recently, one thread is here for anyone interested in the answer (as distinct from those just interested in bringing it up again, for whatever reason). mrWinter, you participated in that earlier thread.

 

[Freedom56]

No, but that is the vibe I am getting...



But to be kind, they are talking about diversification.... IOW, do not put all your investment in stocks... well, most of us here are very well aware of diversification... we practice it...


From what I read in your posts you took the opposite extreme position and have not diversified, but are 100% in bonds/CDs or very close to 100%... and I would say that if I had the position that you have on not investing in stocks at all I actually would pay off the mortgage.... which is what this thread is about...

I like bonds for companies that I understand and where their financials are fairly transparent. I have been rolling 8-10 year GE notes for the last 20 years with pretty high coupons. So who has been better off, the common share holder or the bond holder. Same for Pfizer and many others like the banks. I also buy certain high yield bonds. So I do take some risk. But with a bond I have some assurances (assuming I did my homework), that my principal will be returned when it matures or when it gets called. These days I wait for fund induced selling to pick up bonds at a discount with limit orders. Up until December this 2017, I held a large position in investment grade preferred stocks that were trading at about 10% over par and at an average of 17% over my acquisition price. Should they fall below par, I may jump back in.

 

[rayvt]

"The total return certainly looks better 18 years later, but the real (inflation-adjusted) purchasing power of that $1,000 is currently only 692 dollars above break-even, a real compounded annual return of 2.93%"

Okay, you are not arguing in good faith here.

Your mortgage payment is fixed, it is not inflation-adjusted. When it comes to mortgage payments and mortgage payoff, high inflation helps you, not hurts you.

Before I go any further, am I correct that you are saying that selecting VTSAX, Vanguard Total Stock Market Index Fund, is "cherry picking" a fund?

Ditto.
Further evidence that Freedom56 is not arguing in good faith.

 

[ERD50]

Only if you have a crystal ball and KNOW what the market is going to do. Other than that, which ever way you go, you are playing percentages. I have no problem with that, we do it every day we are invested, but you can not know, for sure, which path met those goals until time has passed.

.... .

I understand what you are saying, and maybe I'm digging a little too deep into semantics here, but I will mildly disagree (or maybe better to say that I will offer a little different perspective).

It's true that one will only know if the investment versus mortgage worked to their benefit in hindsight.

But that doesn't mean your goals were not met. While I hope, and have a reasonably high expectation that my investments will outperform my low-rate mortgage costs, I know it's not a sure thing. So my goal isn't stated in absolutes. I guess I could say my goal is to take as many good bets as I can when I see them. And in doing that, I hope on average to come out ahead. But not every 'bet' will be a winner.

Maybe that distinction is too subtle to warrant this post, but there, I did it!

-ERD50

 

[CardsFan]

I understand what you are saying, and maybe I'm digging a little too deep into semantics here, but I will mildly disagree (or maybe better to say that I will offer a little different perspective).

It's true that one will only know if the investment versus mortgage worked to their benefit in hindsight.

But that doesn't mean your goals were not met. While I hope, and have a reasonably high expectation that my investments will outperform my low-rate mortgage costs, I know it's not a sure thing. So my goal isn't stated in absolutes. I guess I could say my goal is to take as many good bets as I can when I see them. And in doing that, I hope on average to come out ahead. But not every 'bet' will be a winner.

Maybe that distinction is too subtle to warrant this post, but there, I did it!

-ERD50

I get what you are saying, and I think we actually are pretty much in agreement. I agree that the "bet" that over the long run most investors can achieve a higher ROR on investments than the mortgage rate they have. And if I had a significant mortgage, I would probably take that bet rather than paying it off, particularly considering there would be tax consequences. Since I don't have a mortgage, the question would be, do I want to take out a mortgage/HELOC (which at most would be 5% of our invested assets) and invest that money to achieve a small marginal gain? Since I already have enough to support our retirement with a WR less than 3% (and less than 2% when SS kicks in) my goals are relatively modest and not worth any risk in this department.

 

[Texas Proud]

I get what you are saying, and I think we actually are pretty much in agreement. I agree that the "bet" that over the long run most investors can achieve a higher ROR on investments than the mortgage rate they have. And if I had a significant mortgage, I would probably take that bet rather than paying it off, particularly considering there would be tax consequences. Since I don't have a mortgage, the question would be, do I want to take out a mortgage/HELOC (which at most would be 5% of our invested assets) and invest that money to achieve a small marginal gain? Since I already have enough to support our retirement with a WR less than 3% (and less than 2% when SS kicks in) my goals are relatively modest and not worth any risk in this department.

That is one of the arguments that some people who are on the pay off the mortgage use for their side... IOW, if it is so much better to have a mortgage and earn more on the investments then you should always have a mortgage and invest.... you need to refi, take money out and invest...


I think that is a straw man.... I have a mtg and do not want to pay it off for the reasons we have given.... BUT, when it is paid off I am perfectly happy to NOT have a mortgage... this is the middle ground that IMO most people here reside...


Now, if I move and buy another place should I get a mortgage? It all depends on the mtg rate and what I think I can earn with investments... IOW, if I had a 6% mortgage I would not want to keep it... but a 3% I want to keep as long as I can..


The question is where is that break? I can say that I had a choice of a 30 year loan at 3.625 or a 15 year at 3.125... I chose 15 year... so for me it was right around there....

 

[ERD50]

That is one of the arguments that some people who are on the pay off the mortgage use for their side... IOW, if it is so much better to have a mortgage and earn more on the investments then you should always have a mortgage and invest.... you need to refi, take money out and invest...


I think that is a straw man.... I have a mtg and do not want to pay it off for the reasons we have given.... BUT, when it is paid off I am perfectly happy to NOT have a mortgage... this is the middle ground that IMO most people here reside...


Now, if I move and buy another place should I get a mortgage? It all depends on the mtg rate and what I think I can earn with investments... IOW, if I had a 6% mortgage I would not want to keep it... but a 3% I want to keep as long as I can..


The question is where is that break? I can say that I had a choice of a 30 year loan at 3.625 or a 15 year at 3.125... I chose 15 year... so for me it was right around there....

I would not say it is a straw-man argument, I think it is valid. If it is a good deal, we should be going for it.

But it also fits that if we see the advantage as marginal, and not a sure thing, maybe we don't want to go through much effort, like a re-fi to another 30 year, or wherever.

I'm sort of on the fence on this now myself. My ARM rate has increased a bit, the tax deduction won't mean anything to me going forward, so maybe I should pay it off? But that takes a little bit of effort, I'm on auto deduct, so it's easy for me to just do nothing (like most of my investments!).

-ERD50

 

[CardsFan]

I think that is a straw man.... I have a mtg and do not want to pay it off for the reasons we have given.... BUT, when it is paid off I am perfectly happy to NOT have a mortgage... this is the middle ground that IMO most people here reside...

I would not say it is a straw-man argument, I think it is valid. If it is a good deal, we should be going for it.

But it also fits that if we see the advantage as marginal, and not a sure thing, maybe we don't want to go through much effort, like a re-fi to another 30 year, or wherever.

-ERD50

I agree that most of us probably exist in the middle ground. I know that I do.

So, in the end, it is not JUST the math and probabilities. Ultimately, one should CONSIDER the math and probabilities, and then do what they think is the best for their circumstances at the time.

 

[Texas Proud]

I would not say it is a straw-man argument, I think it is valid. If it is a good deal, we should be going for it.

But it also fits that if we see the advantage as marginal, and not a sure thing, maybe we don't want to go through much effort, like a re-fi to another 30 year, or wherever.

I'm sort of on the fence on this now myself. My ARM rate has increased a bit, the tax deduction won't mean anything to me going forward, so maybe I should pay it off? But that takes a little bit of effort, I'm on auto deduct, so it's easy for me to just do nothing (like most of my investments!).

-ERD50

I mean it as a straw man as either/or.... like if someone asks if you like ice cream and you say no.... they can jump to that you hate ice cream... but no, you might not hate it either... the straw man is that you either have to like it or hate it... there is a middle ground....

 

[ERD50]

I mean it as a straw man as either/or.... like if someone asks if you like ice cream and you say no.... they can jump to that you hate ice cream... but no, you might not hate it either... the straw man is that you either have to like it or hate it... there is a middle ground....

OK, gotcha - yes, it's probably a small enough deal in most cases that it just isn't something we need to jump on or off.

Which kind of gets back to me challenging those threads from some years ago (rarer now), where people 'celebrated' using their savings to pay off the mortgage. Fine, do what you (the 'you' being the celebrators in those threads) want, but unless there's some extenuating circumstances, it's not a big deal financially, so don't make it out to be one.

-ERD50

 

[daylatedollarshort]

Even with a 4.5% mortgage and a 2.5% return, 2% less return by having the mortgage, the difference is still only -$6K a year on a $300K mortgage ($300K X -2%). For many posters here that is one cruise difference a year, not a make or break retirement amount.

 

[COcheesehead]

Even with a 4.5% mortgage and a 2.5% return, 2% less return by having the mortgage, the difference is still only -$6K a year on a $300K mortgage ($300K X -2%). For many posters here that is one cruise difference a year, not a make or break retirement amount.

But over even 7 years, 10 years... It adds up.

 

[daylatedollarshort]

But over even 7 years, 10 years... It adds up.

It adds up, but if interest rates go down mortgages can be refinanced and if they go up then those low fixed mortgages, especially the ones made when mortgage rates were at historic lows, are good to hang on to and invest the difference. It is playing the odds the spread will be positive, but personally I think they are good odds, especially with long term stock market returns added to the mix. And fixed rate mortgages can usually be paid off penalty free at any time if the spread game doesn't pan out, with minimal losses.

 

[rayvt]

Which kind of gets back to me challenging those threads from some years ago (rarer now), where people 'celebrated' using their savings to pay off the mortgage.

We once had a neighbor who struck it rich when his company got bought out, who threw a "mortgage burning party". At the end of the evening he went outside tossed the mortgage papers on the fireplace. He couldn't get anybody to go outside and watch. Nobody cared.

 

[CRLLS]

Even with a 4.5% mortgage and a 2.5% return, 2% less return by having the mortgage, the difference is still only -$6K a year on a $300K mortgage ($300K X -2%). For many posters here that is one cruise difference a year, not a make or break retirement amount.

Alternatively, for some of us, that $6k might represent 10-20% of our non-discretionary expenses. There is no one size fits all.

 

[pb4uski]

But over even 7 years, 10 years... It adds up.

Posts #151 and #156 can give you a good idea of how it adds up.

For a hypothetical $150k, 4% 15 year mortgage using firecalc.

... So, there is a 19.7% chance that I will lose the bet and that my loss will be between $0 and $107,211. OTOH, there is a 80.3% chance that I will win and my winnings will be between $0 and $510,186.

Or another way to look at it is if you invest and pay the mortgage payments that at the end of 15 years that on average (of 132 trials) you will have $104,627 left of your $150,000 beginning portfolio balance... the other alternative is to pay cash and have nothing (and no mortgage payments). ...

An approximation of my personal experience since January 2012:

I was curious about how I have done on the 3.375% mortgage that I took out in January 2012 at the same time that I retired. I used Portfolio Visualizer setting up a portfolio equal to my mortgage as of Jan 2012 with monthly fixed withdrawals equal to my mortgage payments and ran it through May 2018. I used VSCGX (Vanguard Life Strategy Conservative Growth fund) as the investment as that is my benchmark and has a similar AA to my target AA (and in fact I've generally done a bit better).

It shows that the portfolio value after making all the mortgage payments through the end of May 2018 is ~132% of my mortgage balance... so I am way ahead so far.... a gain of about 44% of a year's spending. ....

 

[ERD50]

... An approximation of my personal experience since January 2012:

Quote:
I was curious about how I have done on the 3.375% mortgage that I took out in January 2012 at the same time that I retired. I used Portfolio Visualizer setting up a portfolio equal to my mortgage as of Jan 2012 with monthly fixed withdrawals equal to my mortgage payments and ran it through May 2018:

Interesting. I'd need to dig out some paperwork, as I've refi'd a few times since I bought my current home in 1992.I could have paid cash at the time (had a large gain in the previous two homes, and were not moving 'up' all that much). But if I plug that date into Portfolio Analyzer with a 70/30 AA, it shows that $100,000 would have grown to $885,415. Pretty sure I have not paid anywhere near that in mortgage expense.

Am I allowed a dancing emoticon or three?

Wow, for a quick check, I used my original 1992 interest rate of a (now) ridiculous 8.5% - and that was near break-even with no re-fi (which would be crazy-stupid), losing just ~ 6.3%, but I've been paying far less than that for many years, below 3% for a few years, rising the last 2 years to 4.25% now (and I am considering paying it off with this higher rate, and loss of tax deduction for me in 2018).

So a possible $6,300 loss for being stupid/lazy and not re-financing, versus a several hundred thousand dollar gain in real life? I wish I had more bets like that come my way!


-ERD50

 

[pb4uski]

I have refinanced a number of times as well... sometimes with cash out and sometimes not... but usually just to reduce rate... since it would have been more complicated to extend the analysis backwards from my current mortgage I didn't bother.... I'm guessing that the savings for those prior periods would be lower because the mortgage interest rate was higher.

 

[RunningBum]

I'm not going to pull out my paperwork but the stock I sold to buy my current stock plunged about 80%. I'd like to think that if I had taken on a mortgage instead that I would've invested differently, but who knows? If I had not exercised the stock options, I almost certainly would've sold the house (at a loss) and downsized, or would've sold stock after the dotcom bubble burst at a low. A big mortgage would've been difficult to swing on my salary alone.

My situation was pretty unique, with stock options and the dotcom bubble and bust, but I'm quite certain that going with no mortgage worked out far better for me, especially since I wasn't well-versed in diversification back then. I knew it was dangerous to have most of my eggs in one basket, but what a glorious basket it was!

 

[Gumby]

We refinanced 5 times over the course of our mortgage years, always seeking a lower rate and a shorter term. We never took any cash out. Now, it's paid off. It is unlikely that we would take out a new mortgage loan and invest the money, even if the expected return was higher than the mortgage loan rate. I have never used leverage for investments before and am very unlikely to start now. Just a personal preference, albeit one that I think has kept me out of trouble in the past.

 

[pb4uski]

That is a dilemma.... while I am a strong advocate of keeping a low rate mortgage rather than redeeming investments to pay it off, I'm not sure that I would be so quick to refinance and invest once our mortgage is paid off even though I know it makes sense. But our pay off will not be to 2027 and I'll be 72 then, so I doubt that I'll care to get another mortgage.

 

[ERD50]

That is a dilemma.... while I am a strong advocate of keeping a low rate mortgage rather than redeeming investments to pay it off, I'm not sure that I would be so quick to refinance and invest once our mortgage is paid off even though I know it makes sense. But our pay off will not be to 2027 and I'll be 72 then, so I doubt that I'll care to get another mortgage.

Texas Proud touched on this a few posts back. Since on average, we expect it provide a benefit, but realize it might be a modest one, with no guarantee, it isn't something we feel so strong about that we must do it, or that we would be fools to not do it. So the motivation to do it might be weak, and our tolerance for the paperwork to get anew one might be growing. Better things to do.

And mortgage rates are not as attractive as they were a few years back, and probably won't be in time for us to take advantage of them. I'm feeling like I should have locked in a low 30 year rate while I could. Really just didn't feel like jumping through the hoops .

We once had a neighbor who struck it rich when his company got bought out, who threw a "mortgage burning party". At the end of the evening he went outside tossed the mortgage papers on the fireplace. He couldn't get anybody to go outside and watch. Nobody cared.

Well, many people aren't in a position to pay off their mortgage, or haven't put themselves in that position. So they may have thought it was "showing off", and wanted no part of it?

Personally, I would not have a 'mortgage burning 'party. It's nobody's business.

-ERD50

 

[Texas Proud]

OK... I decided to actually do a calculation to see....


I am using real return from my Vanguard account for the past 10 years by month...


My thinking.... I have $120,000 to pay off a mortgage or invest that money... if I pay off the mortgage then I have nothing left to invest but also no mortgage to pay... sot that is basically zero...


Now, I can also invest that money... use money from my account to pay the monthly mtg payments... there is no need to figure out P&I because at the end of the loan I will have put in $120,000 of equity under both options...


So, $120,000 loan, interest rate of 3.125 for 15 years (close to what I have)..


Now the surprising finding to me...



If I started 10 years ago, Jun 2008, invested my $120,000 and started to pay off the mortgage.... I would be DOWN just about $23,000..... I would have $22,621 invested but a remaining mortgage of $45,663.... It would not have been a good decision to hold onto my money and invest it...


So, I said let me do one starting in Jan 2010.... close to when I actually got the mortgage... well, I would be DOWN about $18,000..... investment balance of $40,896 and a mortgage of $58,938....


It seems strange to me, but the math I am doing shows it is a losing game.. the problem is taking out that monthly payment... it is very rare that you make enough for the full payment, only 3 times in 10 years... so the remaining invested balance drops on the bad months and the good months never bring you back up....


So, what am I doing wrong? Or have I been thinking about this wrong the whole time?




To add... just did one from Jun 12 as there were a number of up months... so I thought THAT would do it... NOT... still have $12K less in the account than the mortgage....

 

[ERD50]

So, what am I doing wrong? Or have I been thinking about this wrong the whole time?

I can't say, without seeing the actual calculations. Maybe nothing wrong - we don't know what your investments returned. It won't be a plus in all cases, but the odds are pretty good if you got a low rate mortgage, and made sensible, long term investments.

A better way to illustrate is with that site:

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1988&firstMonth=1&endYear=2018&lastMonth=5&endDate=03%2F14%2F2016&initialAmount=100000&annualOperation=0&annualAdjustment=1800&inflationAdjusted=false&annualPercentage=0.0&frequency=4&rebalanceType=0&showYield=false&reinvestDividends=true&symbol1=VFINX&allocation1_1=100&allocation1_3=70&symbol2=VBMFX&allocation2_2=100&allocation2_3=30

plug in the time frame, plug in your payment.

Maybe what you are seeing is the effect of not taking the mortgage to its full term? It's too late for me to test this, but since the principal payments are back-end loaded, unless you go near to full term, you still owe much of the principal, and maybe have not made that up in returns (yet)? I don't know, lots to look at there. First, enter a full term case, and provide the link from that site so we can compare.

What were 15 year mortgages going for in 2003? And were there re-fi opportunities?

When you say "real return", do you mean 'actual', or 'inflation adjusted'? Your mortgage isn't inflation adjusted, so use actual returns, not 'real' (after inflation) returns.

-ERD50

 

[bada bing]

OK... I decided to actually do a calculation to see....


I am using real return from my Vanguard account for the past 10 years by month...


My thinking.... I have $120,000 to pay off a mortgage or invest that money... if I pay off the mortgage then I have nothing left to invest but also no mortgage to pay... sot that is basically zero...


Now, I can also invest that money... use money from my account to pay the monthly mtg payments... there is no need to figure out P&I because at the end of the loan I will have put in $120,000 of equity under both options...


So, $120,000 loan, interest rate of 3.125 for 15 years (close to what I have)..


Now the surprising finding to me...



If I started 10 years ago, Jun 2008, invested my $120,000 and started to pay off the mortgage.... I would be DOWN just about $23,000..... I would have $22,621 invested but a remaining mortgage of $45,663.... It would not have been a good decision to hold onto my money and invest it...


So, I said let me do one starting in Jan 2010.... close to when I actually got the mortgage... well, I would be DOWN about $18,000..... investment balance of $40,896 and a mortgage of $58,938....


It seems strange to me, but the math I am doing shows it is a losing game.. the problem is taking out that monthly payment... it is very rare that you make enough for the full payment, only 3 times in 10 years... so the remaining invested balance drops on the bad months and the good months never bring you back up....


So, what am I doing wrong? Or have I been thinking about this wrong the whole time?




To add... just did one from Jun 12 as there were a number of up months... so I thought THAT would do it... NOT... still have $12K less in the account than the mortgage....

You don't give the all the numbers you used. What is the monthly mortgage payment you entered ? I ran your principal and interest rate on a mortgage calculator and got $836/month P&I ?

Running the numbers on Portfolio visualizer using 60/40 VTI/AGG (the actual portfolio I have used on my own mortgage arbitrage account), I come up with a remaining investment account balance of $85,722 and a mortgage balance of $45663 at the 10 year mark going from May 2008 - May 2018. The difference is +$40K to the good.

A couple things I'd look for, did you enter a mortgage payment that includes anything more than P&I ? Escrow ? What was your investment account performance over the period ? Portfolio visualizer says that my example portfolio - 60/40 total USA stock/total USA bond market - had a CAGR over the period of 7.19%. In some ways this is a really tough period for the investment account as it starts in the middle of the 2008 meltdown. When I first looked at your post I thought maybe the sequence of returns risk explains it, but the results I modeled are surprisingly positive.

If you didn't enter incorrect numbers, your investment performance had to be really low. JMO, but 60/40 is as low a portfolio equity allocation as makes sense to arbitrage against mortgage interest rates. It could be argued that it is foolish to have any fixed income in the arbitrage at all since mortgages are sometimes referred to as "negative bonds". A 60/40 allocation is what I have been using though.

Here is a link to the portfoliovisualizer run using the numbers I guessed at for your scenario. Portfolio #2 is 60/40 allocation. You can edit in your actual numbers and portfolio and see what it shows:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2008&firstMonth=5&endYear=2018&lastMonth=5&endDate=03%2F14%2F2016&initialAmount=120000&annualOperation=2&annualAdjustment=836&inflationAdjusted=false&annualPercentage=0.0&frequency=2&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTI&allocation1_1=100&allocation1_2=60&allocation1_3=70&symbol2=AGG&allocation2_2=40&allocation2_3=30