Admiral wrote: ↑Tue Jun 15, 2021 10:42 am
EnjoyIt wrote: ↑Tue Jun 15, 2021 9:15 am
afan wrote: ↑Wed Apr 14, 2021 7:02 pm
Pre or post retirement has nothing to do with it.
If you pay off the mortgage, you have less money available to spend in retirement. People pretend that paying it off is somehow free- as if you have the same assets at retirement whether you pay off or keep the loan.
You do not make yourself better off by getting rid of the mortgage. You just shift from a monthly expense to all at once.
Here is how one is better off. It reduces sequence of return risk in retirement by lower one's fixed expenses allowing added flexibility.
I am a big proponent of not paying off one's mortgage until ready to retire or one's wealth is large enough that the arbitrage taking on additional risk is just not worth it.
When we became almost financially independent, we paid off our 2.75% mortgage by funneling dividends from taxable, as well as any potential taxable contributions towards the mortgage. We had no need to take additional risk in arbitraging a mortgage with possible taxable returns of a 70/30 portfolio.
While it's true that if one is relying on market returns to pay one's mortgage and/or support their lifestyle, then there is SORR risk in keeping it.
However, if a person has cash or fixed income investments to pay off a mortgage and still has enough to support their lifestyle, I don't see how paying it off or not paying it off makes any difference. You either reduce your pile and reduce your expenses, or maintain your pile and maintain your expenses at the same level. Having a mortgage if/when the market tanks and not being able to make the payments is a risk. But not if you have the money to pay them.
There is a bit more than what afan alluded to. In retirement, paying a mortgage requires one to take out money to cover that expense. If it comes from a tax protected account, that comes with taxes that need to be paid. If it comes from taxable, it can have capital gains. If the cash is invested, in will be throwing off dividends that require capital gains tax. If one has higher income, they may be subject to paying more for healthcare if one loses some subsidies from the affordable care act. If over 65, it could be higher IRMA payments. And that is on top of the slightly higher withdrawal rate needed to cover the mortgage as Afan described above.
In retirement, there is a lot of benefit in having as low as possible fixed/required expenses and the rest being discretionary. Just as an arbitrary example using 4% withdrawal rates:
If I had to choose between $2 million, spending $80k a year, paying ~$25,000 a year on a $500k 3% mortgage, as well as another ~$36k/year mandatory/living expenses, plus another ~$6k/year covering health insurance (due to loss of subsidy.) Add in an additional ~$2k in taxes, giving you a discretionary budget of $12k/yr.
$1.5 million, spending nothing on mortgage, ~$36k on mandatory living expenses, ~$3k/yr for health insurance, and only ~$1k in taxes leaving you with a discretionary budget leaving you with $20k discretionary budget.
Even if we consider similar taxes and similar health insurance costs. we are still looking at $12k vs $16k in discretionary spending. That difference could be a very big deal during tough economic times if it occurs early on in retirement.
I will admit, if those hard times don't come early on, that would mean investments will outgrow a 3% mortgage and one should do better. The problem is, we don't know what the future will be, and we choose to be slightly safer by being debt free.