Dying With a Huge Mortgage

[Samsung4321]

Do the math based on whatever set of assumptions you want. All I’m doing is pointing out the potential tax implications of carrying a mortgage into retirement. If you enter retirement with a large mortgage and intend to pay it out of tax-deferred retirement savings (which is mainly the sort of savings that most Americans have) Then you will be generating a larger tax bill for yourself than if you enter retirement mortgage-free.

Australian superannuation is taxed 15% on contribution and income, 10% on capital gain during accumulation mode and 0% on withdrawals after 'condition of release' usually >= age 60. So no tax payable during retirement.

Investment in superannuation is from gross (before tax) income so reduces tax where marginal income tax rate is > 15% (typically income > $21,000). Mortgage interest on home is not tax deductible, home capital gains tax free.

 

[retired1]

From the article, "Dave Ramsey is selling peace of mind, but the cost is too high."
Paid off our Homestead in 1988, Peace of mind is priceless to us.

+1

 

[tulak]

Oh, forgot to mention. By having a big mortgage, I exceed the standard deduction with mortgage interest, allowing me to itemize. This saves me a good chunk every year too, at least one of the mortgage payments.

 

[street]

What I find interesting is key points by the expert financial retirement people always list. Their one point is to have no debt when you retire.

Once again there is so many ways to plan and no right way or wrong way.

 

[iRent2u]

Dying with a huge mortgage.

I thought the FI in FIRE meant Financially Independent.
Having a huge mortgage does sound too independent to me.
I’m all about the FI. Not so sure I’m into RE.

 

[COcheesehead]

Not all the financial experts say retire without a mortgage. Some of the most successful ones say to keep it. A paid off house eliminates a lot of financial flexibility, liquidity, potential tax benefits, the time value of money - paying with future dollars, likely better market returns….

A paid off house however gives someone a feeling of security, but in reality puts more eggs in one basket.

 

[PatrickA5]

Not everyone takes the money they woiuld have used to pay off a mortgage and dumps it into a Vanguard index fund. I would suggest most who choose between a 15 vs 30 year mortgage just spend the extra savings on other things.

+1 People on this board are not the norm. Most people would be better off paying extra principal or refinancing from a 30 year to a 15 year as a means of
"forced savings" (if they can afford it). They most likely would not invest the extra few hundred a month difference in the stock market. They would spend it on consumables.

 

[SecondCor521]

Not all the financial experts say retire without a mortgage. Some of the most successful ones say to keep it. A paid off house eliminates a lot of financial flexibility, liquidity, potential tax benefits, the time value of money - paying with future dollars, likely better market returns….

A paid off house however gives someone a feeling of security, but in reality puts more eggs in one basket.

I agree with most of the above. That being said, a paid off home in early retirement can result in tax benefits as well.

I was fortunate to FIRE before my three kids started college, and chose to pay off my house before retiring. As a result, I have low cash flow requirements, which means I can have a low AGI, which enables ACA subsidies, CSRs, American Opportunity Tax Credits, Pell Grants, and other financial aid, as well as very low cost Roth conversions.

As a very rough swag, the above benefits are equal to $xxxK in after tax dollars over the past six years and the next two years.

 

[captain3d]

Where did the money come from to pay off the lone?

 

[daylatedollarshort]

I agree with most of the above. That being said, a paid off home in early retirement can result in tax benefits as well.

I was fortunate to FIRE before my three kids started college, and chose to pay off my house before retiring. As a result, I have low cash flow requirements, which means I can have a low AGI, which enables ACA subsidies, CSRs, American Opportunity Tax Credits, Pell Grants, and other financial aid, as well as very low cost Roth conversions.

As a very rough swag, the above benefits are equal to $xxxK in after tax dollars over the past six years and the next two years.

We had a mortgage in retirement and kept our AGI under the ACA and financial aid limits. In California the college grant limits were similar to the ACA cliff, so the kids went to public colleges tuition free. (Assets were mainly in exempt classes like retirement accounts and small businesses, which didn't count under FAFSA). Plus we had a HELOC to help when we got close to the ACA cliff.

 

[tulak]

I was fortunate to FIRE before my three kids started college, and chose to pay off my house before retiring. As a result, I have low cash flow requirements, which means I can have a low AGI, which enables ACA subsidies, CSRs, American Opportunity Tax Credits, Pell Grants, and other financial aid, as well as very low cost Roth conversions.

As a very rough swag, the above benefits are equal to $xxxK in after tax dollars over the past six years and the next two years.

This is a good point. I’m still working, so there’s little I can do to manage my income. For me, it’s better to try and itemize and having a sizable amount of mortgage interest helps, otherwise I’d have to take the standard deduction.

But if I was retired, then there could be a benefit in reducing cash flow to minimize realized income. Something to think about when that happens.

 

[brett]

My BIL has been doing this with a HELOC for 15 years.

Has he come out ahead? 3 points net of interest expense in the not so good years. 7-14 points ahead in the good years. And most were good years

On balance...he is a very happy camper who has never once though to pay anything but the interest on his HELOC.

IF he dies, sister MAY sell the equities, pay off the HELOC. Or she many continue as before. Who knows. They are both now it their mid-late 70's.

 

[Perryinva]

Indeed everyone is different. Even whatbis a “large” mortgage is different. Some people think $1000/mo is large. Others $4000/mo. A 100k mortgage is just annoying so I wouldn’t bother. $400k+ and it makes a difference in investing returns, so worth it. It just makes zero sense to be mortgage free for us at these low rates. We gain nothing at all by minimizing income by a mortgage payment a month. There is zero “peace of mind” not having a mortgage for us either, as pensions & SS more than support us. But we also retired at 61, with cheap HI, empty nesters, so that makes a difference.

 

[SecondCor521]

IF he dies, sister MAY sell the equities, pay off the HELOC. Or she many continue as before. Who knows. They are both now it their mid-late 70's.

Sister may or not be eligible to assume the HELOC.

 

[Mulligan]

Indeed everyone is different. Even whatbis a “large” mortgage is different. Some people think $1000/mo is large. Others $4000/mo. A 100k mortgage is just annoying so I wouldn’t bother. $400k+ and it makes a difference in investing returns, so worth it. It just makes zero sense to be mortgage free for us at these low rates. We gain nothing at all by minimizing income by a mortgage payment a month. There is zero “peace of mind” not having a mortgage for us either, as pensions & SS more than support us. But we also retired at 61, with cheap HI, empty nesters, so that makes a difference.

My COLA pension is big reason, I keep my modest $1000 a month mortgage. Its fixed and stays the same. This year my COLA raise alone almost covers half the payment itself. Im more monthly cash liquid, than I am financial asset heavy, so I prefer to keep the stash and pay monthly out of cash flow.

 

[Perryinva]

I see no one asked the OP if they thought a $190k mortgage was huge. One can only assume that a $170k home bought 30 years ago, by a financially successful person (that has an addition added as well) is worth somewhere near, what, $5-600k minimum? (Assuming they don’t live in Detroit). In CA, could be $2M. Regardless, the mortgage is a small percentage of total worth. The longest I’ve ever lived in any home is 11 years. Maybe that has something to do with it. But the simple way I look at it is that $400k earning 10% for 3 years in a Roth made $120k. At a 2.75% mortgage, I’m way ahead with numbers like that, when my fixed income is say, $10k a month.

I certainly agree that if you are a young FIRE & living entirely on investments, then that is a whole other situation, where minimum monthly expenses mean significantly more. But dying with a mortgage is not something I worry about. If it inconveniences my heirs, well, too bad.

 

[sengsational]

I see no one asked the OP if they thought a $190k mortgage was huge. ...

I'm no expert and have nothing to give my opinion any more weight than anyone else (all I did was see what I thought was an interesting quick read that had to do with the finances in retirement).

But that being said, "huge" is relative. My gut feel is if you have a mortgage balance that's less than your annual spending, that's probably not huge. If it's 5x your annual spending, maybe closer to huge. But even then, there's another metric for "huge" and that's a percent of your liquid portfolio (or to be fair to the "annuity rich", liquid portfolio plus NPV of independend income streams). If the mortgage balance is greater than 1/3 of the LP+, I'd say that was pretty huge. From a balance sheet standpoint, if you can decide to pay off your mortgage tomorrow, and your LP+ is so large that you can do so, and not bat an eye, it's not so huge, even though the expected value of the strategy would buy a lot of steak dinners.

 

[dm]

We moved in to our present home two years ago. We took out a 30 yr loan @ 3%. The home cost more than the home we sold, and needed a lot of work. It would have required me to take money out of a IRA to fund. We borrowed 350k so that would have cost us quite a bit withdrawing from a IRA.

The value of the house has gone up a huge amount. No one saw that coming or they would have been buying everything in sight. And no one knows if the value will drop in the future.

I’ll be 90 when the house would be paid off, but most likely neither of us will be around and when one of us are gone the house would be sold anyway. The mortgage payment is not much more than the taxes and insurance, so it’s not like I wouldn’t be making payments of one kind or the other.

Actually with real estate taxes we all are making payments of one kind or the other. And most will also have insurance.