Hi! I'm LRS

Wab - arent you losing money to inflation and taxes by putting the amount in a fixed income instrument that equals the mortgage?  What fixed income instruments produce 5% after tax and inflation with low risk?
I'm not sure what you mean by losing money to inflation.  My mortgage payment doesn't go up with inflation, why should the returns?  I just try to stay even until it's clear whether or not I can come out ahead (so far, I am).

As far as taxes go, I assume that my mortgage deduction pretty much offsets my investment income taxes (at least that's how things have gone so far; ask me again if the personal exemption keeps rising).

As far as the investments go, I keep an amount about 4x my mortgage in an 8-year bond/CD ladder with rungs yielding from 4.75% to 9.25%  (the weighted average is around 7%).   Basically, in any given year I can make the choice to reinvest a maturing rung or pay down the mortgage.

My mortgage is at 5.25%, and while interest rates are still dropping, I can still find yields > 5.25% without going out more than 5 years (such as a PenFed CD; and my ladder is structured to let me go out 8 years if I need to).

Of course, this mapping of mortgage money with my investments is somewhat imaginary -- I wouldn't necessarily change my allocation based on whether or not I have a mortgage, but as long as my overall portfolio returns are greater than my mortgage interest costs, I consider keeping the mortgage a win.

If I ever decide that my longer-term investment prospects look more dismal than 5.25%, then I just might exercise the free put option that came with my mortgage.
Wab - I must have misunderstood something in between your posts...I was addressing this element:

" 2) Put the money that could have paid off your mortgage in a mid-term fixed rate instrument that pays about the same rate as your mortgage. "

Presuming the mortgage is 5%, putting the cash into an instrument that pays the same rate wont keep you even, because you have to pay taxes on the returns of that instrument and inflation reduces the "real" return each and every year. Hence you'd need 5%+taxes+inflation (say about 7.5-8%), or something like a fed + state tax free TIPS paying a yield of 5%+. The 5% "return" by not having a mortgage is 100% guaranteed risk free.

See what I mean?

SG - You didnt address either of my points.

Here they are again:

Do you feel confident that during the next 30 years there wont be a 30-50% drop in the market followed by a short term (5-7 years) of zero to modest returns?

If you feel good about that, do you feel that investment returns, after taxes and inflation, will exceed 5%? And if so, in a manner as risky as a 5 year treasury? And please tell me where, because all my money is headed there first thing monday!!!
See what I mean?
Senator, that depends on what you mean by "mean."

If you pay off your 5% mortgage today, your "guaranteed risk-free return" is 5% less whatever additional taxes you'll need to pay without the mortgage deduction.   That 5% is not inflation adjusted. Those future dollars you no longer need to pay are worth less than the present dollars you gave back to your bank.

When I pick an investment to stay even (or better), I include the consideration that my mortgage interest is both nominal and tax deductable (and that the principal gets paid down with future dollars that will be worth less than the present dollars loaned to me).
Hello GDER and all. GDER, I will "pass" as well
(on mortgaging our paid off home to invest). I have a bunch of issues besides the obvious which led me to this
decision (and I've thought about it plenty). For one thing our home is in a flood plain and any lender would
require me to buy flood insurance, which I have never carried. One thing that has worked for me is borrowing
on those promo credit card deals and investing that
money short term. You have to stay on top of the
fees you pay to take the cash and the expiration dates
of the low CC interest, and of course you need to shop
hard to find a home for the cash.

John Galt
I'm at the threshold of the tax issue; this year I barely made it over the standard deduction, and I think next year I'll end up better off taking that, so the mortgage interest deduction (unless I took out a very big one) wouldnt help my tax situation.

Gder: Senator Blutarski? I'm afraid I'm not full of doody enough to get into politics.
Re. taking the standard deduction, what a relief that is!
My records are lousy and not itemizing is a real treat.
Even so, I find tax law almost unintelligible. I also
notice that the annual tax guides they put out now are about twice the size they used to be. What ever happened to tax simplification?? On the bright side,
it makes work for accountants. I was one in a former life.

John Galt

Here's a way to use FIRECALC to look at a specific mortgage payoff situation vs continuing to pay your loan including a method to look at how reducing spending temporarily in bad times can effect the results:

BASELINE CASE (payoff and spend normally)

1) Subrtract the mortgage payoff amount from your current nest egg and use this amount in FIRECALC as the starting portfolio value.
2) Enter your initial withdrawal rate
3) Use 30 years (assumed mortgage length) for lifespan of the portfolio.
4) enter remaining data as it applies to you.

PAYOFF IN BAD TIMES(Reduce spending for five years)
1) Enter data as before,
2) But now you assume the first N number of years in retirement are bad enough that you reduce your retirement budget to your bare bones budget. This is accomplished by using withdrawal changes 1 and 2.
2a) Make withdrawal change 1 start in year 0 and reduce your withdrawals by the amount you believe you could reduce your budget by.
2b) Make withdrawal change 2 start in year N and be the negative of withdrawal change 1.

KEEP MORTGAGE (spend normally)
1) Use total nest egg starting portfolio value
2) Use your spending minus mortgage payments as initial withdrawal rate.
3) Use withdrawal change 1 to increase your annual withdrawal by your annual mortgage starting in year 0 and uncheck the box so that you do not use inflation adjusted dollars here.
4) Use 30 years (assumed mortgage length) for lifespan of the portfolio.
5) enter remaining data as it applies to you.

KEEP MORTGAGE (Reduce spending for five years)
1) Enter data as above
2) But now you assume the first N number of years in retirement are bad enough that you reduce your retirement budget to your bare bones budget. This is accomplished by using withdrawal changes 2 and 3.
2a) Make withdrawal change 2 start in year 0 and reduce your withdrawals by the amount you believe you could reduce your budget by.
2b) Make withdrawal change 3 start in year N and be the negative of withdrawal change 1.

Results . . . I'll put some specific results in a post to follow.
I think these are the numbers we've been throwing around. The $42888 initial withdrawal of the second mortgage case incudes $12888 which is what I calculated to be the payment on a 30 yr. 5% loan on $200,000.

Nest Egg.....680000..........680000
Init Withd .....30000............30000 -18000 for 1st 5 years
Prob of Suc.....94.7..............99.2
term val.....1,540,607........2,088,218

Nest Egg.....880000..........880000
Init Withd......42888 ...........42888 -18000 for 1st 5 years
Prob of Suc.....97.................99.2
term value..1,989,441......2,550,746
SG -

Still didnt answer either question, and the problem with continuously going back to the calculator is that you're using historical return factors that some experts, and myself, dont believe we're going to see again.

Bernstein says 3.5% equities return after taxes and inflation, a 'real' return. Bogle says 6-9%, or by my rough calc 3.5-6.5 after taxes and inflation. I see very expensive investments in almost every category. Hence I agree with both of them and dont think returns will be as good as the historical returns generated by firecalc, at least until valuations return to normal. Because of todays valuations, I also think we may be in the vicinity of either a sharp downturn or a long slide. Or a lot of years of little or no return on investments.

Hence I'll take the 5.whatever% sure thing investment that also provides me free shelter as an intended byproduct. But thats me.

I think this is simply a matter of preference and we can craft whatever scenario makes us feel comfortable with our respective decisions.

I also think we beat this to death enough that anyone can pick whichever preference suits them and adopt the line of thinking and/or numbers that makes them comfortable with that decision.
SG -

Still didnt answer either question, and the problem with continuously going back to the calculator is that you're using historical return factors that some experts, and myself, dont believe we're going to see again.
Yeah, if you believe that we are likely to face times worse than anything we've seen since 1871, then you can't really use a historical simulator for anything.

I'm skeptical that Bernstein or anyone else can develop a reasonable case for why the next 30 years is likely to be worse than anything we've ever seen, so I do place value on the results. I've never seen any quantitative analysis projecting financial results for a 30 year time frame. I don't know what numbers and projections you could possibly use with any confidence. And based on what I've read, I see no reason to believe our economy today is really in worse shape than they were in 1929 or even 1965.
Well, without a substantial portfolio and a very small withdrawal, most people wouldnt have survived ER in those time periods whether they owned their home or not.

I would suspect that in the nth year of a multi-year drop, not having to make the mortgage might be a comfort though.

I guess you'd have to read the bernstein book to comment on his methodology, but his take isnt far from Bogles. I imagine at least one of them knows what they're talking about, but then again we are talking about the future.

I think to summarize Bernsteins point, and with gross simplification because I am a simpleton, overall market returns over long periods of time tend to follow a fairly straight path of their future income production. When that rate is discounted by a risk adjusted discount rate into todays dollars, you get todays value. Over 20+ year periods, this calculation rings true for every civilizations equity and bond markets going back through recorded time. Deviations from that trend in periods shorter than 20 years are simply speculative gains and losses.

His assertion is that due to high current prices and low current dividend rates (the source of a substantial piece of historical return), that would suggest much lower returns going forward.

A good analogy he uses talks about a guy walking his dog on a straight line from his apartment to central park. The dog is on a 20' leash and as dogs do, it runs all over the place. His take is that by watching the man (the trend of discounted future income of a company or the risk adjusted interest rate of a bond), you get an idea of long term market movement. However most people watch the dog and try to make bets as to which direction the dog will go next. In other words, buying the total market index vs market timing.

His approach observes markets from europe of 500 years ago to today, with the acknowledgement that the US equities market is a shining star in the history of investment for its duration.

He lays out a whole chapter (#2) which outlines the idealogy. Plenty of math and numbers, all possibly arguable, once again because we simply cant guess the future.

He does include an interesting article that really captures the mindset of todays american: the ability to obtain anything, invest anywhere, travel anyplace, with obstruction to these efforts considered a major annoyance to the impeded. Except the article was written by a Londoner just prior to WWI, following which the English investment markets were hammered for about 50 years by unstable world conditions invoked by two world wars and ripple effects from the depression in the US.

In other words, when things look pretty good, look out. When things look pretty bad, might be time to get your checkbook out and buy some beaten out stocks. If you have a 20+ year horizon that is.

A secondary effect is the lifecycle of a market/civilization. Most are characterized early on by higher risks, high interest rates, highly speculative and risky corporate equities markets and the like, with appropriate discounted current values of those risky assets. Eventually they settle down until the risk becomes very low, interest rates bottom out, bonds return below inflation, and equities barely outperform those due to relatively marginal additional risk.

Except for the equities underperforming (so far), doesnt that sound a little familiar? Maybe the US equities/bond markets will perform differently going forward than the dozens of strong civilizations/markets that Bernstein outlined: the romans, the greeks, the portugese, the english.

Maybe its all different now.

So with these things in mind, I'll take my $250k off of that table, put it in an appreciating asset that is relatively decoupled from the finance markets (that I can also live in and that also gives me nearly complete control of my withdrawal rate), and keep the other mil asset allocated to about 50% us stocks and bonds and the rest to foreign and emerging markets, other real estate, and oil and gas pumpers.

You've got half of it though, historical calculators can help people get a handle on what to do and when to do it. The only problem is that if the markets moved in a manner that was calculable, this would be easy. The fact is that the market moves as a socialogical function of expectations and reactions. Faced with the same set of criteria, sometimes people move it up, sometimes down. That factor of unpredictability makes me want to increase the predictability.

But thats because it makes me feel good, I can afford to do it, and because I want to.
I think I deserve a whole box of dryer sheets for providing a forum for the mortgage pay-off debate.

My situation is not exactly like the hypotheticals, so I am still mulling the best option for my mortgage. I'll spring the dilemma on my tax lady when I see her this week and get yet another opinion.

Actually, I think I can achieve a good result by quitting my job now, thereby reducing our marginal tax rate, AND paying off the mortgage with a portion of our investment money. Husband will have to keep on working, poor devil, but it's only for 6 more years.

Nah, that would be mean.

Thanks for explaining the mortgage terms. I think a fixed would be better for me, if I do a re-finance.

I think I deserve a whole box of dryer sheets for providing a forum for the mortgage pay-off debate.

Ah newbie, newbie, newbie...you have it backwards...you owe a small fee for out having chosen your welcome thread as a place for discourse. Say about $25 worth of dryer sheets?

Mikey - no problem. Fixed 30 years are pretty good deals right now. Rates have nowhere else to go but ^
Historically low P/E's and very high interest rates - if it were to occur would be a screaming buy. I.e. up stock allocation and go long on bond durations. Of course some foolish people might get upset over Mr Market's repricing portfolio value.

The two greatest financial guru's of all time offer guidance:

Charles DeGaul: 'God Looks After Drunkards, Fools, and The United States of America'. Bogle's corrallary - buy the appropriate balanced index and press on regardless.

Mrs Stevenson(aka the Norwegian widow): Wait by the mailbox for your dividend checks. Of nowadays you can have your div/interest electronically deposited.

As for the mortgage debate, still in the bleachers enjoying the posts. My interest warms up every hurricane season (june to december). Renting looks better than buying around here - even with the low rates. Only as a back up strategy.
Re. " greatest financial gurus of all time", I was saddened to see my name left off the list. Anyway,
I also pretty much advocate "waiting at the mailbox
for your dividend checks", except for my heavy
reliance on real estate which I suppose looks pretty
risky to the untrained eye.

John Galt
Take Heart John

My guru's have passed on. The new millenium awaits. Perhaps a breakthrough theory on dryer sheets and real estate. Remember what the spreadsheet did for retirement calculators.
High interest rates and low P/E's do indeed entice.

Its the process of getting where we are now (the inverse) to that other place thats rather painful.

The transition to higher rates will badly dent intermediate and long term bonds, and even shock stocks (although they'll both benefit in the long run; the bonds from higher dividend rates and the stocks from the inflation that will undoubtedly be accompanying the interest rate hikes). Lowering of P/E's to anything near historical levels will drop prices of the total market by roughly 40-50%. Growth stocks will take it worse.

When I see things like "lowest rates in 40 years" and "very tame inflation" and "highest P/E rates in history", I can but assume we're heading in the other direction at some point. Either fast or slow.
A couple of basic questions.
1. How is the internet access there?
2. What are you doing for health insurance? USA company or foreign.
I lived in Hong Kong for awhile and liked that area of the world.

Did you get all your hepititisus shots? I'm not sure what letter they are up to for it.
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