To answer your questions, we've budgeted ourselves $210,000 a year, or $17,500 a month. The money comes from dividends/capital gains from our taxable brokerage account and our tax deferred retirement accounts. Our monthly payments for principal and interest is $2572 for our house and $1712 for the investment property, for a total of $4284 a month. Our daughter pays us $3000 a month in rent. So the net mortgage payments on both properties combined is $1284 a month. Of course, there are also property taxes -- $1500 a month on both properties combined, but we'd have to pay that whether we had a mortgage or not (and the $500 a month that we pay for taxes for the investment property is applied to reduce net rental income). Finally, more than half of our monthly payments are applied to principal, not interest.EnjoyIt wrote: ↑Fri Oct 15, 2021 12:59 pmMay I ask? How much do you spend a year? How much of that is the mortgage? Where is that money coming from and how much in taxes are you paying to cover the mortgage? What about health insurance? Do you get health insurance on the open market? If so, how much subsidy are you missing out on because your taxable income is high since you have to service the mortgage? Are there any other credits or subsidies you are being phased out of because of needing to service the debt?BigLaw Survivor wrote: ↑Fri Oct 15, 2021 10:25 am Personally, I think the obsession to pay off a mortgage before retirement in this age of low interest rates is irrational and short-sighted. In my particular case, I would not have been able to retire as early as I did (53) had I paid off mine, because the end result is, yes, no monthly payment to worry about but also much lower liquidity and often too much of your net worth being tied to one asset -- your home.
I just turned 60, and have been retired for over six years. I have two mortgages -- a $723,000 mortgage on our primary residence worth $1.65 million, and a $423,000 mortgage on an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month. The interest rate on our primary residence is 1.7 percent, and on the investment property it's 1.875 percent. Both loans are adjustable and will begin to fluctuate seven years from now. At the point, I assume they will have nowhere to go but up, at which point I will either pay them off -- or, in the case of the investment property, sell.
I arranged my mortgages them through Schwab/Rocket Mortgage, which was a piece of cake. The mortgage on the primary residence was cost free.
Fees and costs were unavoidable on the investment property, but they can be written off against income. The Schwab/Rocket Mortgage program will reduce your interest rates by up to .75 percent below market rates depending upon the size of your portfolio in your Schwab accounts. I assume other brokerage firms have similar programs.
I currently have a balance of about $5.5 million in my retirement and brokerage accounts combined (all with Schwab). It makes zero sense, in my view, to reduce the balance in those accounts by nearly $1.2 million to pay off mortgages at these ridiculously low interest rates. To the contrary, to coin the old cliche, you need to let your money work for you -- not the other way around. A smart money manager looks for ways to healthily leverage. That applies to mortgages as well.
What about Roth conversions? are you missing out on Roth conversions at lower tax rates today and will be forced into higher tax brackets in the future when taking Social Security and RMDs?
There is a very good reason to be obsessed with being debt free in retirement. Especially early retirement when one is buying their own health insurance on the open market. Health insurance subsidies are worth about 9% (I don't know the exact number.) What this means is having $10k in less taxable income is equivalent to losing 9% or $900 in healthcare subsides (It is a bit off from 9% but 9% is close enough.) Also, if one is jumping from the 12% to 22% tax bracket, that is worth another 10% in taxes for another $1k. Then, by being out of the 12% tax bracket one will be paying 15% tax on capital gains and dividends that can be worth a few hundred more depending on how one's assets are arranged. That additional $10k expense can be easily worth $2500 per year guaranteed which is far better than what the market will give you investing that money.
Now, I don't know your tax brackets or your personal situation but it may be a good idea to look at the whole picture and not just the low interest rate as should everyone else choosing to make this decision.
I don't get health insurance on the open market. I get it through my former employer's group health care plan and pay the full premium of $1300 a month. Most years we end up qualifying to write off some of our health care expenses against income.
I know I need to focus on Roth conversions but haven't gotten around to it.
The bottom line to me is that I see no downside to paying around $2000 a month in interest to have a nice place for my wife and I to live in and another nice one for my daughter's family, while continuing to have $1.1+ million in additional liquidity that I wouldn't have had I paid these mortgages off. But to each his/her own.