Pay off house before retirement or have available cash?

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natchez
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Pay off house before retirement or have available cash?

Post by natchez »

I'm new to this forum so apologies if I'm not posting to the right board or area, and just let me know where to ask instead.

Retirement is either 6 or 11 years off for me. I refinanced the house 3 1/2 years ago and have been making extra principal payments. If I dedicate most of my savings and continued earnings to paying off the house by the time I retire, I can probably do it, but my savings will be depleted and if I retire in 6 years I won't have time to rebuild much in savings.

Ideally I would retire with no house payment, but also ideally I would also have a nice stash of savings. I hope to travel, etc. when I retire.

There is $500,000 left on the mortgage. The house is worth $1.3M (maybe a bit more). But I don't want to sell the house, I want to live in it for as long as I'm physically able. I have $1.5 M in 401(k) and IRA (NOT Roth, so taxes will be due). I'm 59. By the time I retire I will have worked at least the 35 years at compensation that will yield me the maximum SS benefit. Ideally I'd wait until 70 to draw SS, but if I retire at 65 I might start drawing at 67. I have about $200k in non-retirement savings (plus the college fund for the kids, which is earmarked for them and will completely cover that with nothing left over). I have a high enough income that it will allow me to either pay off the house before I retire if I decide to dedicate the money to that, or sock away money to live and travel on after I retire (plus use to keep making the monthly mortgage payments). Note, however, that I am somewhat risk-averse and I'm not sure I would put much of the money to work in investment accounts (other than retirement savings, which I would continue to fully fund, with an 8% match). Right now that $200k is in a money-market account earning a little over 2%. I probably can't be talked into moving that into something that would earn more, for fear it would decline. It provides some peace of mind that at least for now is worth it. ALL of my retirement savings (401(k) and IRA) is in equities, and almost all in the Index 500.

Most of the "internet" advice I find says to keep the mortgage so I won't be cash-poor and so my investments can grow; that advice seems to be given by companies that are in the business of managing peoples' money and investments. I looked up Dave Ramsey, and he's clear that all dollars should be used to pay off debt if there is any and he would say I should take my $200,000 and immediately pay down the mortgage debt. I have no debt other than the mortgage.

I would appreciate your advice. Also, if I WERE to decide to do something more with the $200k, but still want a very low chance of losing money, what would you advise?
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Re: Pay off house before retirement or have available cash?

Post by soccerrules »

Several factors matter

Yearly Expenses in retirement ? (with and w/o Mortgage)
Mortgage interest rate?

Your comments seem to be contradictory -- you are risk averse... all 401K monies in equities, Index 500

Curious why you refinanced 3.5 years ago ? ( 15 yr? 30 yr?)
You currently have over 50% of your net worth tied up in an non-liquid asset. I would say concerning.

quick response.
Keep paying on mortgage and put a plan together of what it looks like to expire mortgage over the next 6 years out of cash flow.
your "all Index 500" assuming US Stocks would not be consider "risk averse" placement. -- determine an AA you can sleep well with at night
Don't let your outflow exceed your income or your upkeep will be your downfall.
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willthrill81
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Re: Pay off house before retirement or have available cash?

Post by willthrill81 »

One thing is for sure: if you'll be paying the mortgage from your investment portfolio, retaining a mortgage in retirement increases your sequence of returns risk. This is because you must make that mortgage payment every month, even if your portfolio suffers. Mortgages, like any form of debt, act as leverage for your investments, and this leverage works in both directions.

If you had no mortgage in retirement, would you take one out in order to have 'available cash'? I doubt it.

Frankly, it sounds to me like your a bit house-poor by owning a home valued at nearly the same amount as your retirement assets at age 59. I know that you don't want to sell the home, but I'm not sure that it will make the best financial sense to keep it in retirement.
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HomeStretch
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Re: Pay off house before retirement or have available cash?

Post by HomeStretch »

You have $1.7 million in savings ($1.5 million in equities and $200k in a money market fund). If you do decide to invest the $200k, consider a total US market bond.

You say you are risk averse but your current asset allocation of 88/12 (equities/cash) is very aggressive for your age/retirement target date.
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natchez
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Re: Pay off house before retirement or have available cash?

Post by natchez »

Thanks for the thoughts ... here are some answers to questions.

The "risk averse" relates to my non-retirement cash, probably partly to balance the 100% equities in which retirement fund is invested. I think as I age I'll need to figure out some other options to diversify the retirement investments, I just haven't figured out yet what they should be. Any suggestions? I don't know anything about bonds. What is a total US market bond? Ideally I'd like to have some tax-free investments but I don't know anything about them either. My income exceeds the cutoff for a Roth IRA and my company doesn't offer a Roth 401(k).

I refinanced the mortgage to drop the interest rate from 4% to 3.3% since I planned (and still plan) to be in the house for a long time to come. At the time a 30-year mortgage had a lower interest rate than a 15-year so I took the cheaper money, but I make extra principal payments and intend to continue doing so, even if not enough to fully repay the mortgage loan prior to retirement.

That question "would you take out a loan and put a mortgage on your house in order to do ______" is the type of question Dave Ramsey asks, and I agree it makes sense to deconstruct some issues like that. And then he says "if it turns out you DO want a mortgage to do ________, well then you can just take out a mortgage later and do it!" If I were certain I could get a 3.3% long-term mortgage in the future (without paying closing costs over again), then I might go ahead and pay it off now.

I don't know my expenses yet post-retirement but my fear is they will go UP because I'd like to travel! I am aware that I have an expensive house and that one source of post-retirement life funding may well be that I downsize to free up money, but at this point I'm hoping to stay there as long as I can and still want to. That may be one factor that keeps me working later.
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willthrill81
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Re: Pay off house before retirement or have available cash?

Post by willthrill81 »

natchez wrote: Tue Aug 27, 2019 5:21 pmThat question "would you take out a loan and put a mortgage on your house in order to do ______" is the type of question Dave Ramsey asks, and I agree it makes sense to deconstruct some issues like that. And then he says "if it turns out you DO want a mortgage to do ________, well then you can just take out a mortgage later and do it!" If I were certain I could get a 3.3% long-term mortgage in the future (without paying closing costs over again), then I might go ahead and pay it off now.
You obviously cannot be sure that you could get a 30 year 3.3% mortgage in the future, but you might find solace knowing that if interest rates rise, then fixed income investments will have higher yields as well.

Again, I would urge anyone to be very careful before purposefully planning to be leveraged, via a mortgage or otherwise, during retirement. It might help you, but it might hurt you. For someone who claims to be risk-averse, it would seem obvious to me to pay off the mortgage before pulling the retirement ripcord.
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PhilosophyAndrew
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Re: Pay off house before retirement or have available cash?

Post by PhilosophyAndrew »

OP, the answer to your question depends, in part, on your expected expenses after retirement.

Do you have a handle on this? If so, what do you expect your spending to be with and without your mortgage payment and with and without the extra travel you anticipate?

Knowing this will also help you get a clearer sense of how likely your investments + social security will meet your expenses without downsizing your house.

If you haven’t dug deep into estimating your retirement spending, that is well worth doing. If you have already done that work, please share your estimates here so you can receive the most helpful advice.

Andy.
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Re: Pay off house before retirement or have available cash?

Post by Goal33 »

My thoughts... you're 59. You can access the 401k money without penalty if needed (job loss, etc). I'd refi right now to a 7/1 arm (if that lowers your rate), and throw the 200k into the loan. I think paying off this house before retirement makes a lot of great sense. You can do those things you've mentioned such as travel via 401k money.

That's my take, congrats and good luck!
delamer
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Re: Pay off house before retirement or have available cash?

Post by delamer »

Have you figured out how much you’ll still owe on the mortgage in 6 years or 11 years if you keep paying at the rate you are now (including extra payments)?

Alternatively, have you figured out exactly how much you’d need to add per month to pay off the mortgage in those time frames?

Here’s a good calculator that allows you to add principal payments: https://www.bankrate.com/calculators/mo ... lator.aspx

Depleting your current savings to pay down a mortgage without paying it off (and so eliminating the payment) isn’t a good idea.

Do some traveling now. Retirement (and the future) isn’t promised to any of us.
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Re: Pay off house before retirement or have available cash?

Post by abuss368 »

I would try to pay off all debt (perhaps except vehicle debt) before retiring.
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Re: Pay off house before retirement or have available cash?

Post by abuss368 »

Being debt free provides so much more in terms of financial flexibility. In addition, your cash flow needs from your portfolio will be less than if you had debt. This is huge when markets pull back (and they always do).
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Pay off house before retirement or have available cash?

Post by HomeStretch »

natchez wrote: Tue Aug 27, 2019 5:21 pm Ideally I'd like to have some tax-free investments but I don't know anything about them either. My income exceeds the cutoff for a Roth IRA and my company doesn't offer a Roth 401(k).
There is a way to start building a Roth IRA account where earning will grow tax-free. It’s called a “backdoor Roth”.
Link to the BH wiki page on the backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth

To avoid the “pro rata rule” when doing a backdoor Roth, you want your IRA pretax balance to be $0 at December 31. If your 401k plan allows rollovers in (and has good funds choices and low fees), you could rollover your pretax IRA balance into the 401k. You could then make a non-deductible IRA contribution of $7,000 and do a backdoor Roth. If you have a spouse (and it sounds like you have enough earned income), you could also do a spousal back door Roth for $7,000.

You could use this process to move $7k - $14k (or more if IRA contribution limits increase) each year until retirement effectively moving $ you would have saved in your Taxable account to a Roth account.
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Re: Pay off house before retirement or have available cash?

Post by Bacchus01 »

There’s not going to be a “right” answer here, but lots of thoughts and information to help you make a very personal decision.

Contrary to those above, I would and will fully mortgage my house through a massive cash out right before going into retirement. Flexibility to me is way more important than a monthly payment or very low interest costs. But I’m not risk averse.
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Watty
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Re: Pay off house before retirement or have available cash?

Post by Watty »

There is not one right answer so you really need to take a look at the details but for me having a paid off house in retirement helps me for these reasons;

1) Not having a mortage payment makes my retirement expenses lower. This means that my withdrawls from my taxable IRA are lower and I can keep in a lower retirement tax bracket.

2) As I neared retirement a larger percentage of my asset allocation was in bonds. Borrowing money with a 4% loan while buying bonds that are paying something like 2% is hard to justify.

3) Investing the money and earning a higher rate of return is harder than it sounds because you have a large sequence of returns risk. Here is a very simplistic example that I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
natchez wrote: Tue Aug 27, 2019 3:23 pm Most of the "internet" advice I find says to keep the mortgage so I won't be cash-poor and so my investments can grow;
Between your retirement accounts and and your cash you have about $1.7 million so if you paid it off you would have about $1.2 million dollars. You would have a lot of your networth in a house but you would not be anywhere near house poor. You are also 59 so you are old enough to have easy access to your retirement funds at 59.5 if something happens like you lose your job.

You are also planning on working at least another five years.

You would want to keep an ample emergency fund for liquidity but overall I don't think that being house poor is big concern.

The big questions is how to raise the money to pay it off if you decide to.

1) Taking money out of your retirement accounts now would be hard to justify.

2) Not maxing out your all your possible retirement accounts so you could pay down the loan would also likely not make sense.

A big question is if you could do something like pay it down by $100K now and then get the rest paid off by the time you retire.
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Re: Pay off house before retirement or have available cash?

Post by grabiner »

It isn't necessary to actually pay off your home before retirement; you are just as well off if you could pay it off but choose not to.

For example, you might have ten years left on your mortgage, and a bond portfolio which paid enough each year to make the mortgage payments. You can keep that bond portfolio and use it to make the mortgage payments, ignoring both from a financial perspective. Alternatively, you can sell the bond portfolio to pay off the mortgage; this might be a better move if the bond portfolio is worth more than the mortgage balance (that is, the bond yield is less than the mortgage rate).

And if you do want to pay off the home when you retire, you don't need to make extra payments now; you can invest the money and then pay off the home in a lump sum if appropriate. Again, whether this is a good or bad deal depends on mortgage rates and bond yields.
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Re: Pay off house before retirement or have available cash?

Post by abuss368 »

grabiner wrote: Tue Aug 27, 2019 8:53 pm It isn't necessary to actually pay off your home before retirement; you are just as well off if you could pay it off but choose not to.

For example, you might have ten years left on your mortgage, and a bond portfolio which paid enough each year to make the mortgage payments. You can keep that bond portfolio and use it to make the mortgage payments, ignoring both from a financial perspective. Alternatively, you can sell the bond portfolio to pay off the mortgage; this might be a better move if the bond portfolio is worth more than the mortgage balance (that is, the bond yield is less than the mortgage rate).

And if you do want to pay off the home when you retire, you don't need to make extra payments now; you can invest the money and then pay off the home in a lump sum if appropriate. Again, whether this is a good or bad deal depends on mortgage rates and bond yields.
All good financial strategies.
Thanks!
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Re: Pay off house before retirement or have available cash?

Post by Northern Flicker »

The more important question is why are you 100% stock in your tax deferred retirement accounts while holding $200K in cash in s taxable account? Your overall stock allocation is very high for a 59-year-old on the home stretch to retirement.

My suggestion would be to keep about 6 months of expenses in an emergency fund in cash in a taxable account, pay down your mortgage with the rest of the cash, and come up with an appropriate asset allocation for your 7-figure portfolio held in retirement accounts.
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Re: Pay off house before retirement or have available cash?

Post by Nate79 »

I would pay it off before retirement. As mentioned above keeping the mortgage actually increases your risk no matter your feelings about the cash in the bank. In the end so far you have made the wrong choice by holding cash vs paying on the mortgage by losing a significant interest spread each year for the tax free return of the mortgage rate vs your after tax return of the mone yuh market accounts or bond funds you may hold. How many years do you plan to continue to lose money vs paying the mortgage?
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Re: Pay off house before retirement or have available cash?

Post by LittleMaggieMae »

How much income do you expect to have in retirement? You should be looking at/thinking about SS there's all sorts of info at ssa.gov site. You can access your info as well. How much can you pull from your 401(k) per year before it hits zero? Do you intend to leave any $$ to your heirs/estate?

How much do you estimate you will be paying for healthcare (medicare gap plans?) I hear it can be 12K per year....

How much does your house cost to "keep" each year - without the Prinicpal and Interest part of your mortgage? Ie: Property Tax, Insurance, and then utilities and anything else you pay for (lawn care, pool care, housecleaning). I would guesstimate about 25K or so...

Do the same thing for your vehicle(s). How much in gas and maintenance do you actually spend? When will you need to replace your vehicle (and how much do you think you will spend? an 18K economy car or 60K sorta luxury vehicle??

Now, think about your house. For some reason I think a 1.5 million dollar house could have some big not often expenses: a new roof, new a/c, new furnace, new water heater, exterior painting? You will need some reserves of $$ for these expenses. Odds are you will have to put a roof, new a/c and a new furnace and a water heater in your house before you leave it feet first. :)

This kind of answers your question - in a round about way. You need to know if you will be able to afford your house in retirement (with or with a mortgage) to determine if you can carry the mortgage into retirement.
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Re: Pay off house before retirement or have available cash?

Post by CurlyDave »

Bacchus01 wrote: Tue Aug 27, 2019 7:52 pm There’s not going to be a “right” answer here, but lots of thoughts and information to help you make a very personal decision.

Contrary to those above, I would and will fully mortgage my house through a massive cash out right before going into retirement. Flexibility to me is way more important than a monthly payment or very low interest costs. But I’m not risk averse.
As a retired old geezer, I can tell you that we have a mortgage on our house, and mortgages on our rental properties. I have been retired for 12 years, and took out at least one mortgage in retirement.

With the CAGR of stocks being 10+ %, the odds are with me on coming out ahead with this plan. AND, I have a contingency plan on what to do if the market tanks.

A mortgage in retirement is not some fearsome beast, there are still a lot of protections for the borrower -- more than any other kind of loan.

I think the OP's real problem is that the house is too great a percentage of her net worth. As nice as the house is, the imputed rent is too high for her asset base.
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Re: Pay off house before retirement or have available cash?

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This topic is now in the Personal Finance forum (whether to pay off mortgage or not).

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Re: Pay off house before retirement or have available cash?

Post by StealthRabbit »

I vote keep the 3.3% mortgage and set aside cash flow investments to cover payment for at least the first 10 yrs of 'active' retirement.

1) travel is great, do you have a plan for your home while gone? (I made an apt in basement, so I have someone in my rural home, rent covers much of the monthly expenses) I am seldom home.

2) If you decide to sell the house within the next 10 yrs, your access to cash / equity is greater keeping the mortgage (You may need a down payment on another.

3) FLEXIBILITY. Having that equity available gives you LOTS more options (if you have the cash flows to cover mortgage)

4) unexpected crisis (many can come) excess cash can be invaluable.

5) If paying off home from "taxable' investments (while working / high income) = mega tax bill - delay such until AFTER retirement (if income will be lower).

How much $$ / yr are you putting into a Roth? (added flexibility, including penalty free disbursements of contributions (Your own 'bank' if you will).)

Personally, I would be funding an acct to cover mortgage. But... what are taxes and upkeep on a $1.3m home?

Likely 'renting' would be a better use of funds if you plan on being gone a lot and RE is 'flat' (low equity growth)

If THAT home ownership is important to you. Figure out how to keep it. Tailor cash flow needs to a sustainable mortgage payment.
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Re: Pay off house before retirement or have available cash?

Post by RickBoglehead »

Entering retirement with no savings makes no sense IMO.

I don't understand those that aim to be debt free in retirement. To me, there is one difference between having $1 million in funds with a $500,000 mortgage at a competitive rate and having $500,000 in funds and no mortgage - that difference is that being more leveraged means I will likely earn more dollars with more cash and a mortgage.

We are less than 2 years from retirement. We may finance our future retirement home, or pay cash, depending on mortgage rates at the time. I will have no concern taking out a 30 year mortgage at say 3%, and earning above 3% yields in the market. Of course, the loss of the ability to itemize, if it holds true in retirement, will be taken into account and impact our decision. Yes, I realize there is a chance that the market won't beat 3% after tax. I accept that risk.

Leverage is a wondeful thing if used intelligently.

Then again, I also buy new cars, never used. :twisted:
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Re: Pay off house before retirement or have available cash?

Post by 3-20Characters »

OP, you’re asking the wrong question. I’m afraid that you may not understand your risk—which is high for sequence of returns. Your portfolio is almost 90% S&P 500. Make sure your AA is one that you’re comfortable with instead of finding out it’s not a couple of years from retirement date—just before the salary spigot turns off abruptly.

Vanguard - Determine your asset allocation
https://personal.vanguard.com/us/FundsInvQuestionnaire

Also, figure out your expenses at retirement and see how much of that your portfolio income has to support (after SS). As for the mortgage, how would you pay it off? I think you’re thinking of cutting back on retirement contributions? If so, are you leaving employer matching funds on the table? That I would never do!
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Re: Pay off house before retirement or have available cash?

Post by Jack FFR1846 »

RickBoglehead wrote: Wed Aug 28, 2019 5:59 am
I don't understand those that aim to be debt free in retirement.
I'm debt free. I have not yet retired.

I don't understand how anyone could retire with a mortgage hanging over their head.
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Re: Pay off house before retirement or have available cash?

Post by hightower »

I didn't read all the responses, but I'm curious if you've ever thought about how much money you have wrapped up in that house and what that could mean for your potential retirement income?
You have a $1.7 million portfolio. Ok, not bad. But not great either, especially considering how much of your net worth is tied up in home equity. Not sure what you're spending is, but a safe withdraw rate of 4% would yield you about $68k a year in pre-tax income, not including SS or any pensions you may have. Is that enough for you? Only you can answer that. To me, it seems that $68k/year isn't very much to be living on in a 1.3 million home or to be considering keeping a $500k mortgage. You're kind of house poor.

Alternatively, you have 800k of equity in that home. If you were to tap into that equity by selling the home and downsizing, you could potentially add another 650k to your retirement assets (assuming 800k-150k for a down payment on a less expensive home at 750k purchase price). That would boost your portfolio to 2.35 million, which would give you the potential for 93k/year at a 4% safe withdraw rate. That's quite a raise you'd be giving yourself. You'd still have a mortgage of 600k, but you'd have a LOT more income to use in retirement. I'd probably consider downsizing even further if it were me. Even at 93k/year you technically can't afford a 750k home either IMO.

I know you say you like the home and if you want to stay there, that's fine. But, if it were me, I'd be looking into downsizing a bit for retirement. That's a very expensive home. And that's a lot of equity to be sitting on when your overall portfolio isn't very big.
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Re: Pay off house before retirement or have available cash?

Post by cherijoh »

natchez wrote: Tue Aug 27, 2019 5:21 pm Thanks for the thoughts ... here are some answers to questions.

The "risk averse" relates to my non-retirement cash, probably partly to balance the 100% equities in which retirement fund is invested. I think as I age I'll need to figure out some other options to diversify the retirement investments, I just haven't figured out yet what they should be.
IMO this is a mistake. You shouldn't choose your allocation based on the type of account (i.e., bottom-up). You need to start from the top down - with what overall allocation are you comfortable? If you are risk-adverse you should probably be at 60/40 or 70/30 for your retirement money. Pots of money with different goals can have different AAs - your emergency fund should be very safe; kid's education funds should be appropriate for number of years until they are used; your retirement funds should be appropriate for years until retirement. You also need to considertax-efficient placement of funds.

natchez wrote: Tue Aug 27, 2019 5:21 pm I don't know my expenses yet post-retirement but my fear is they will go UP because I'd like to travel! I am aware that I have an expensive house and that one source of post-retirement life funding may well be that I downsize to free up money, but at this point I'm hoping to stay there as long as I can and still want to. That may be one factor that keeps me working later.
It is time to get your head out of the sand and start figuring out how much you could afford to spend in retirement. $1.5M will generate just $60K/yr at a safe withdrawal rate (SWR) of at 4%/yr. (From the $60K you will need to cover taxes). That doesn't sound like a lot for someone living in a $1.3M house. I suspect you will need to trim your expenses in retirement, not increase them.

You also need to think about the fact that you are quite vulnerable to either job loss or a health issue that sidelines you from working as long as you want/plan.
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Re: Pay off house before retirement or have available cash?

Post by JoeRetire »

natchez wrote: Tue Aug 27, 2019 3:23 pmI refinanced the house 3 1/2 years ago and have been making extra principal payments.
Why have you been making extra payments?
Ideally I would retire with no house payment, but also ideally I would also have a nice stash of savings.
Can you accomplish both? What does "nice stash" mean to you in terms of numbers? You really need to estimate your expenses in retirement in order to make a rational, rather than emotional, decision.
if I retire at 65 I might start drawing at 67.
Why? Will you need the income at 67? Could you wait the 3 additional years to start your benefits even if you do retire at 65?
Note, however, that I am somewhat risk-averse and I'm not sure I would put much of the money to work in investment accounts (other than retirement savings, which I would continue to fully fund, with an 8% match). Right now that $200k is in a money-market account earning a little over 2%. I probably can't be talked into moving that into something that would earn more, for fear it would decline. It provides some peace of mind that at least for now is worth it. ALL of my retirement savings (401(k) and IRA) is in equities, and almost all in the Index 500.
Is that what is behind the 3.3% rate mortgage fear?

You could really benefit from some advice from a fiduciary fee-only financial planner. You don't have to have them manage your assets for you, but you might want to spend a few dollars for a few hours of their time.
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JoeRetire
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Re: Pay off house before retirement or have available cash?

Post by JoeRetire »

Jack FFR1846 wrote: Wed Aug 28, 2019 6:34 am I'm debt free. I have not yet retired.

I don't understand how anyone could retire with a mortgage hanging over their head.
It's easier to understand once you realize many folks wouldn't use the phrase "hanging over their head". Many would instead say that having the money available gives them far more "flexibility".

Not everyone stays awake at night worrying about a mortgage.
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Re: Pay off house before retirement or have available cash?

Post by cherijoh »

hightower wrote: Wed Aug 28, 2019 6:39 am To me, it seems that $68k/year isn't very much to be living on in a 1.3 million home or to be considering keeping a $500k mortgage. You're kind of house poor.

Alternatively, you have 800k of equity in that home. If you were to tap into that equity by selling the home and downsizing, you could potentially add another 650k to your retirement assets (assuming 800k-150k for a down payment on a less expensive home at 750k purchase price). That would boost your portfolio to 2.35 million, which would give you the potential for 93k/year at a 4% safe withdraw rate. That's quite a raise you'd be giving yourself. You'd still have a mortgage of 600k, but you'd have a LOT more income to use in retirement. I'd probably consider downsizing even further if it were me. Even at 93k/year you technically can't afford a 750k home either IMO.

I know you say you like the home and if you want to stay there, that's fine. But, if it were me, I'd be looking into downsizing a bit for retirement. That's a very expensive home. And that's a lot of equity to be sitting on when your overall portfolio isn't very big.
+1

IMO, keeping a mortgage vs. paying it off before retirement is a matter of personal preference IF you have sufficient assets (i.e., have a house appropriate for your asset base). But I agree that OP has too much house for his situation and stage in life. Having ~1/3 of your net worth tied up in home equity is one thing if you are 30 and have many years to save for retirement ahead of you. But the OP has a risky portfolio plus a short runway to build up additional assets.

OP, I have no idea of how your home value compares to the median home in your area. But if it is significantly above the median, you need to consider how difficult it might be to sell if we are hit by a recession and you lose your job and then decide it's time to sell. When the housing market softens, high-end houses get hit the hardest.
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Re: Pay off house before retirement or have available cash?

Post by delamer »

Jack FFR1846 wrote: Wed Aug 28, 2019 6:34 am
RickBoglehead wrote: Wed Aug 28, 2019 5:59 am
I don't understand those that aim to be debt free in retirement.
I'm debt free. I have not yet retired.

I don't understand how anyone could retire with a mortgage hanging over their head.
Other people’s circumstances are different than yours, that’s how.
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Re: Pay off house before retirement or have available cash?

Post by willthrill81 »

RickBoglehead wrote: Wed Aug 28, 2019 5:59 am I don't understand those that aim to be debt free in retirement.
Yes, you do, since you state why below. You just aren't as concerned about the risk as some others are.
RickBoglehead wrote: Wed Aug 28, 2019 5:59 amYes, I realize there is a chance that the market won't beat 3% after tax. I accept that risk.
The big problem with debt, even very low interest debt, in retirement is that it amplifies sequence of returns risk, something that most retirees who are aware of it are trying to minimize.
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Re: Pay off house before retirement or have available cash?

Post by KlangFool »

OP,

1) You have a 1.3 million house.

2) You have 1.5 million in stock.

3) When we hit a recession over the next few years

A) You are unemployed.

B) The house and the stock drops 50%.

Can you retire?

4) The general rule of thumb is to have 10 to 25 years of expense in fixed income when you retire. How do you plan to achieve that?

Your AA is wrong. Fix that first before thinking of paying off the mortgage.

KlangFool
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onthecusp
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Re: Pay off house before retirement or have available cash?

Post by onthecusp »

Chopping up the original post to just a few things I think are key.
natchez wrote: Tue Aug 27, 2019 3:23 pm Retirement is either 6 or 11 years off for me. If I dedicate most of my savings and continued earnings to paying off the house by the time I retire, I can probably do it, but my savings will be depleted...

There is $500,000 left on the mortgage.
I have $1.5 M in 401(k) and IRA (NOT Roth
I'm 59. By the time I retire I will have worked at least the 35 years ... maximum SS benefit.

I have about $200k in non-retirement savings ...in a money-market account earning a little over 2%.
I have a high enough income that it will allow me to either pay off the house before I retire if I decide to dedicate the money to that, or sock away money to live and travel on after I retire (plus use to keep making the monthly mortgage payments).

It is not clear if you would still be contributing to a 401k or would have to suspend that to pay off the house. I'll assume you have to suspend contributions in your plan.

As an experiment I'll propose the following I'm talking in today's uninflated dollars, and assuming a real return of 4%/yr after inflation.
If you keep half of the 200k for an emergency fund and pay down the mortgage you have 400,000 left to go and you will pay less interest 3.3%, only giving up 2%. Pay off the mortgage aggressively but continue at least the minimum to the 401k to get you match if any. You might still have a minimal mortgage, say 100,000 at the time you want to retire.

If there is a bad sequence of returns your retirement may be 11 years instead of 6. If it is average (4% real) for 6 years your 1.5 million may be 1.9 million. Pay off the rest of the mortgage and you have 1.8. Using the 4% rule give you an annual income from your 401k of 72,000/yr. Max Social security at 70 is about 45,000 right now.

59 plus 6 years gets you to 65. I plan to go to part time (stopping contributions) at 63 with a few hundred thousand less, and plan for full lack of income by 65, spending about 120,000 a year. I have to spend more than the 4% from my savings until age 70. Your expected spending is everything in this calculation and we just don't see that here.

Anyway if you are finding 120,000 or a little more a reasonable assumption then I see paying down the mortgage as fast as possible a way to avoid Klangfool's scenario. And yes you should also work on the Asset Allocation. Lots of work to do here to make your outcome more predictable, but seriously, you have time and are in a very good place from what I see. You also have quite a bit of flexibility with the 6-11 year range of acceptable retirements. Make a decision and revisit you numbers in a couple of years.
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Re: Pay off house before retirement or have available cash?

Post by Sandi_k »

15 year loans are being offered at 2.75% right now. Can you refi and make sure more of your payments go to principal?

I agree that you're house-poor. I would be either increasing my savings rate, or thinking hard about downsizing now.
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Re: Pay off house before retirement or have available cash?

Post by MDfan »

Jack FFR1846 wrote: Wed Aug 28, 2019 6:34 am
RickBoglehead wrote: Wed Aug 28, 2019 5:59 am
I don't understand those that aim to be debt free in retirement.
I'm debt free. I have not yet retired.

I don't understand how anyone could retire with a mortgage hanging over their head.
I'm doing it. And not thinking twice about it.
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Re: Pay off house before retirement or have available cash?

Post by Admiral »

My $.02 (and I agree with others about your asset allocation).

You should not be paying extra principal. Either refi to a 15 year if the rate spread is good and and make the higher payment, or keep making your regular payment and save the rest in taxable. I'd estimate your monthly payment is around $4.5k? Is that correct. P+I? So even with max SS, your entire SS--and then some--will go to the house payment. (You didn't note if you have a spouse). That means you'll be living on 4% on your portfolio balance.

Can you live well on that? Since you don't state your future retirement expenses, we don't know. But if your portfolio grows to $2m, 4% draw would be $80k before taxes. If that's enough, then it's enough. But $54k/year (not including insurance and taxes) for housing in retirement is... a lot.

I'd say that you should keep downsizing at retirement as a likely option.
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natchez
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Re: Pay off house before retirement or have available cash?

Post by natchez »

Many thanks to all for the great points, thoughts, admonishments and cautions. It's a very accurate statement that I do not know what my expenses will be in retirement and that I need to "get my head out of the sand" (well put) and drill down on that. And I haven't figured out an appropriate asset allocation; I've just always had the feeling that nothing outperforms equities over time, and until now I've had time. Turning 59 has made me painfully aware that I don't have as much time as I once did.

On a positive note, my income has increased substantially in the past 3 years, to where it is between $400k -$500k each year. So far my health is good and prospects for me to continue keeping my job are good (knock on wood). I don't hate my job so I don't mind keeping it, and I'm HOPING that the next years bring an opportunity to BOTH pay down the house and add to savings, but I am aware that I cannot count on that. I will absolutely continue to contribute the maximum to my workplace retirement savings plan and receive the employer match, regardless whether I prepay the home mortgage. My existing 30-year mortgage does not have a prepayment penalty so there is no need for me to refinance in order to pay off the mortgage more quickly.

Monthly p&i not counting taxes or insurance is about $2800. My regular payments add taxes, insurance and at least $1000 in extra principal. The house is more expensive than some in the neighborhood and less than many others. There are a number of $2M-plus houses in the neighborhood. Upkeep, taxes, maintenance, etc. are pricey, and that's one reason I'm considering paying off the mortgage early, to free up money that will need to be used for the monthly expenses other than principal and interest. Again, I hope to continue living in the house for as long as I can.

I'm curious -- OTHER than the amount the house costs to keep up (it's an old house), and other than the associated expenses like property taxes, utilities, yard maintenance, etc., why would the VALUE of the house determine whether I could afford to live there or not in retirement? If my other assets besides the equity in the house would be sufficient to cover my monthly expenses by the time I retire, then what difference would it make whether my equity is $0, or $800,000, or $2,000,000? If I am able to cover my life expenses, healthcare costs, taxes, living expenses, etc. with my non-house savings, assets, and Social Security benefits, and if I am able to safely live there until I die, then what's wrong with dying with a lot of equity in the house and passing THAT along to the kids as an inheritance?
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Re: Pay off house before retirement or have available cash?

Post by KlangFool »

natchez wrote: Thu Aug 29, 2019 4:03 pm Many thanks to all for the great points, thoughts, admonishments and cautions. It's a very accurate statement that I do not know what my expenses will be in retirement

If I am able to cover my life expenses, healthcare costs, taxes, living expenses, etc. with my non-house savings, assets, and Social Security benefits, and if I am able to safely live there until I die, then what's wrong with dying with a lot of equity in the house and passing THAT along to the kids as an inheritance?
natchez,

If you do not know what is your retirement expense, how do you know that you have enough? Why is it safe to assume that you have enough? And, is that before or after a 50% drops in a recession?

KlangFool
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Re: Pay off house before retirement or have available cash?

Post by delamer »

natchez wrote: Thu Aug 29, 2019 4:03 pm I'm curious -- OTHER than the amount the house costs to keep up (it's an old house), and other than the associated expenses like property taxes, utilities, yard maintenance, etc., why would the VALUE of the house determine whether I could afford to live there or not in retirement? If my other assets besides the equity in the house would be sufficient to cover my monthly expenses by the time I retire, then what difference would it make whether my equity is $0, or $800,000, or $2,000,000? If I am able to cover my life expenses, healthcare costs, taxes, living expenses, etc. with my non-house savings, assets, and Social Security benefits, and if I am able to safely live there until I die, then what's wrong with dying with a lot of equity in the house and passing THAT along to the kids as an inheritance?
There is nothing wrong with your plan above. I am not sure what prompted your question.

But you said earlier —

“I have a high enough income that it will allow me to either pay off the house before I retire if I decide to dedicate the money to that, or sock away money to live and travel on after I retire (plus use to keep making the monthly mortgage payments).”

That implied that the cost of the house was standing in the way of your achieving other financial goals. And, given that money is fungible, every dollar spent on supporting the house (property taxes, utilities, etc.) is a dollar that can’t be spent on other goals like travel.

Finally, if your income is $400K to $500K a year, then if you prioritize paying off the mortgage you could do so in 3 years.
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Re: Pay off house before retirement or have available cash?

Post by azianbob »

While you should move some of the assets to fixed income as you get closer to retirement, you also shouldnt go all in, no? If he retires at 65, he technically could live another 30 years, so you want some growth.

I personally would pay off the mortgage. It may not be the best decision finanically or mathematically but peace of mind is something you cannot really put a price on.

Plus with the 1.5M you have in retirement accounts, it should be over 2.5M when you retire (assuming you contribute to the max to 401k rest of way). If you can't live off 2.5M + SS + paid off house when you are 70 then I'm not sure what to say.
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Re: Pay off house before retirement or have available cash?

Post by Starfish »

willthrill81 wrote: Tue Aug 27, 2019 4:47 pm One thing is for sure: if you'll be paying the mortgage from your investment portfolio, retaining a mortgage in retirement increases your sequence of returns risk. This is because you must make that mortgage payment every month, even if your portfolio suffers. Mortgages, like any form of debt, act as leverage for your investments, and this leverage works in both directions.
I would say is even worse because he has to generate income which could be taxed. So it's mortgage payment multplied by (1+marginal tax rate).
It depends from case to case but generally in retirement one should not have a mortgage.
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Re: Pay off house before retirement or have available cash?

Post by sergeant »

Bacchus01 wrote: Tue Aug 27, 2019 7:52 pm There’s not going to be a “right” answer here, but lots of thoughts and information to help you make a very personal decision.

Contrary to those above, I would and will fully mortgage my house through a massive cash out right before going into retirement. Flexibility to me is way more important than a monthly payment or very low interest costs. But I’m not risk averse.
Why are you going to do the massive cash out?
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
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Re: Pay off house before retirement or have available cash?

Post by sergeant »

OP's housing costs are about 5% of his income. I don't think he is stretching making his payment. I don't know why he just doesn't pay it off in the next few years with his cash flow. 400-500k a year offers a bunch of options.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
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Re: Pay off house before retirement or have available cash?

Post by JoeRetire »

natchez wrote: Thu Aug 29, 2019 4:03 pm I'm curious -- OTHER than the amount the house costs to keep up (it's an old house), and other than the associated expenses like property taxes, utilities, yard maintenance, etc., why would the VALUE of the house determine whether I could afford to live there or not in retirement?
As you suspect, the value of the house is irrelevant.
If my other assets besides the equity in the house would be sufficient to cover my monthly expenses by the time I retire, then what difference would it make whether my equity is $0, or $800,000, or $2,000,000?
It makes no difference.
If I am able to cover my life expenses, healthcare costs, taxes, living expenses, etc. with my non-house savings, assets, and Social Security benefits, and if I am able to safely live there until I die, then what's wrong with dying with a lot of equity in the house and passing THAT along to the kids as an inheritance?
There's nothing wrong with that.
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Re: Pay off house before retirement or have available cash?

Post by Bacchus01 »

sergeant wrote: Thu Aug 29, 2019 7:08 pm
Bacchus01 wrote: Tue Aug 27, 2019 7:52 pm There’s not going to be a “right” answer here, but lots of thoughts and information to help you make a very personal decision.

Contrary to those above, I would and will fully mortgage my house through a massive cash out right before going into retirement. Flexibility to me is way more important than a monthly payment or very low interest costs. But I’m not risk averse.
Why are you going to do the massive cash out?
Because I like flexibility and am willing to take the risk that I can return a higher rate than the interest rate.
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Re: Pay off house before retirement or have available cash?

Post by hightower »

natchez wrote: Thu Aug 29, 2019 4:03 pm I'm curious -- OTHER than the amount the house costs to keep up (it's an old house), and other than the associated expenses like property taxes, utilities, yard maintenance, etc., why would the VALUE of the house determine whether I could afford to live there or not in retirement? If my other assets besides the equity in the house would be sufficient to cover my monthly expenses by the time I retire, then what difference would it make whether my equity is $0, or $800,000, or $2,000,000? If I am able to cover my life expenses, healthcare costs, taxes, living expenses, etc. with my non-house savings, assets, and Social Security benefits, and if I am able to safely live there until I die, then what's wrong with dying with a lot of equity in the house and passing THAT along to the kids as an inheritance?
Well, if your investments remain stable and thus your income remains stable in retirement, then yes, you are correct, you could retire and keep the house. But, that's a big "IF" in my opinion. 1.5 million is not much to retire on these days. I would be very nervous in your shoes especially given the fact that we haven't had a recession in 10+ years. I'd be looking at that large amount of equity and thinking of the potential it could have to bring me more security/piece of mind, especially in the case of a big recession, which could happen at any time. But, if you love living there and it's become your homestead over the years, I can appreciate that you might not want to part with it.
Maybe that's just me being overly conservative, but your situation wouldn't feel right to me if I were in your shoes. Of course, I'm 37 and nowhere near retirement, so maybe I'll be singing a different tune 20 years from now.
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Re: Pay off house before retirement or have available cash?

Post by SandysDad »

HomeStretch wrote: Tue Aug 27, 2019 5:09 pm You have $1.7 million in savings ($1.5 million in equities and $200k in a money market fund). If you do decide to invest the $200k, consider a total US market bond.

You say you are risk averse but your current asset allocation of 88/12 (equities/cash) is very aggressive for your age/retirement target date.
Actually if you take the 500K in mortage debt as a negative against cash and bonds, the OP is over 100% equities. At 59 this is a very aggressive AA.

The OP should focus on increasing non tax deferred assets a bit, and should not pay off the mortgage, but should aggressively pay it down from earnings IMHO.
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Re: Pay off house before retirement or have available cash?

Post by Dottie57 »

Jack FFR1846 wrote: Wed Aug 28, 2019 6:34 am
RickBoglehead wrote: Wed Aug 28, 2019 5:59 am
I don't understand those that aim to be debt free in retirement.
I'm debt free. I have not yet retired.

I don't understand how anyone could retire with a mortgage hanging over their head.
+1
delamer
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Re: Pay off house before retirement or have available cash?

Post by delamer »

Dottie57 wrote: Fri Aug 30, 2019 9:04 am
Jack FFR1846 wrote: Wed Aug 28, 2019 6:34 am
RickBoglehead wrote: Wed Aug 28, 2019 5:59 am
I don't understand those that aim to be debt free in retirement.
I'm debt free. I have not yet retired.

I don't understand how anyone could retire with a mortgage hanging over their head.
+1
Our mortgage debt is 6% of our liquid net worth.

Our Social Security and pensions will more than cover our expenses in retirement.

Paying off a 2.75% mortgage has no appeal.

I can certainly understand why some people prefer to pay off their mortgages prior to retirement.

What I don’t understand is why people can’t see that our decision makes sense for us?
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