**Re: Covering a mortgage without losing your ass(et**
Now that Nords has discussed the issue, I thought I might be able to present some data that is relevant to the mortgage/payoff decision.

Thank-you, Nords.

While none of us can say for sure whether playing the historical odds by not paying off a low interest mortgage will make money in the future or not, we can see whether it would have earned money in the past. A decision not to pay off a 30 year mortgage can reduce portfolio survival risk and increase probable terminal value of a reasonably allocated portfolio. The portfolio survival improvement realized by continuing to make payments rather than paying off the loan can be greater than the survival improvement realized by simply readjusting stock/bond allocation to a higher value.

Here's a case you can analyze with FIRECALC:

First consider the payoff case --

initial portfolio value: $1.0M

initial withdrawal rate: $50K

# of years: 30

Expense Ratio: 0.18

stock/bond ratio: 60/40

Probability of success: 87.9%

average terminal value: $1,943,681

Next consider a case with a 5.25% mortgage on $100K --

initial portfolio value: $1.1M

initial withdrawal rate: $50K + $6626.40 fixed mortgage

mortgage amount: $100K

mortgage rate: 5.25%

# of years: 30

Expense Ratio: 0.18

stock/bond ratio: 60/40

Probability of success: 90.2%

average terminal value: $2,137,980

Now, consider the payoff case with a higher stock/bond allocation --

initial portfolio value: $1.0M

initial withdrawal rate: $50K

# of years: 30

Expense Ratio: 0.18

stock/bond ratio: 66/34

Probability of success: 88.6%

average terminal value: $2,265,408

So, for these fairly reasonable values, keeping the mortgage would historically have resulted in lower risk (higher probability of portfolio survival) and higher average terminal value. Even if one were to consider a mortgage as equivalent to a bond in the portfolio (an assumption that cannot be completely justified), SWR risk is not reduced as much by this increased volatility risk as it is with the mortgage.

The reason for this result is fairly easy to understand. Since worst case survival occurs when poor real returns are realized in the early years of retirement, any strategy that helps to recover rapidly and solidly in the improved performance years that follow increases probability of survival. The mortgage option accomplishes this by maximizing the nest egg that is invested in the market when economic recovery occurs.

Not every situation will result in this kind of conclusion. As mortgage rates are increased, the SWR risk eventually increases rather than decreases. Similarly, as the ratio of loan value to initial portfolio value changes, so do the benefits of the loan.

Not considered in the analysis is the effect on taxes. Both the tax benefit of loan payments and the tax consequenses of higher required withdrawals have been ignored. These issues are more difficult to quantify as a general case, but are not difficult to estimate for your own personal situation. For many individuals the tax implications are negligible compared to the portfolio value.

If a FIRE candidate does not have other overwhelming feelings that dominate their thinking on the payoff decision, it might be worth the effort to run some simulations and work through the tax consequenses before they make their decision. . . like Nords did.

Of course . . . past performance is no guarantee of future results.