Paying Down the House Before Retirement

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BigLaw Survivor
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

EnjoyIt wrote: Fri Oct 15, 2021 12:59 pm
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.
May 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?
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.
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.

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.
BigLaw Survivor
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

vanbogle59 wrote: Fri Oct 15, 2021 5:56 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 5:41 pm
vanbogle59 wrote: Fri Oct 15, 2021 10:42 am
BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am an investment property worth $735,000 that we rent to our daughter and her husband for the fair market rent of $3000 per month.
Why can't you convince your daughter to follow your advice?
Now, now. Let's be fair. My daughter is gainfully employed as is her husband, and they're fiscally responsible. They weren't looking to buy, just to rent a place in our HCOL area that could have accommodated their big, crazy, but lovable dog, and they were having trouble getting a landlord who would sign on. My wife suggested a win-win solution -- to me, not to them, and without any prompting from them -- that we invest in a place in the same neighborhood that they were looking (which is a good one) and rent it to them and their crazy dog for fair market value. I agreed because it's a good investment for us and at the same time will help them. I mean, if they're going to pay rent, isn't it better that the rent be paid to us instead of a stranger?
I applaud you and your daughter. I've done similar for mine and don't regret a minute of it. Best of times!

My objection is with this:
BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am ...the obsession to pay off a mortgage before retirement in this age of low interest rates is irrational ....
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.
Not true for your daughter, right? She is not taking on leverage to provide a home.
Why do you assume it would be true for someone else?
You acknowledge her situation is different from yours.
Why can't you acknowledge that possibility when it comes to others?

It's not just a question of being "a smart money manager". It's more about matching the risk profile of the individual to the entire investment portfolio.
She's not taking on leverage YET. She's 30. They don't know where they plan to settle down YET. An entirely different situation compared to those who already have purchased a house and are grappling with whether to pay off a low interest mortgage loan prematurely.
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vanbogle59
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Re: Paying Down the House Before Retirement

Post by vanbogle59 »

BigLaw Survivor wrote: Fri Oct 15, 2021 6:10 pm She's not taking on leverage YET. She's 30. They don't know where they plan to settle down YET. An entirely different situation compared to those who already have purchased a house and are grappling with whether to pay off a low interest mortgage loan prematurely.
It's almost like you want her to be able to decide for herself what risk she is comfortable taking.
Without someone calling her irrational or obsessive. You know, cuz that would be kinda stinky. Probably make you mad.

That's nice.
Me too.
supalong52
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Re: Paying Down the House Before Retirement

Post by supalong52 »

We refinanced to a 15 year mortgage so similar plan as you. By the time it is paid off, our eldest will be in his sophomore year in high school and our younger one will be finishing up middle school. We wanted a few year break before college started, whether we are retired by then or not.
EnjoyIt
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

BigLaw Survivor wrote: Fri Oct 15, 2021 6:04 pm
EnjoyIt wrote: Fri Oct 15, 2021 12:59 pm
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.
May 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?
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.
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.

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.
Let’s keep the two houses separate as one is an investment property while the other is the home you live. For your primary home you pay $30k/yr on the mortgage. How much do you pay in taxes to withdraw that money? Is that putting you in a higher tax bracket? What will happen when your collecting Social Security? Will your social security get taxed more? Will your Medicare cost go up? What about your RMDs when your 80.

Look, you can afford to keep extra liquidity and a mortgage. There is a cost to it though. Nothing wrong with it. It’s a choice. But do realize why so many want their mortgage paid off in retirement. The obsession as you describe is backed by solid math.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
BigLaw Survivor
Posts: 223
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

vanbogle59 wrote: Fri Oct 15, 2021 6:29 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 6:10 pm She's not taking on leverage YET. She's 30. They don't know where they plan to settle down YET. An entirely different situation compared to those who already have purchased a house and are grappling with whether to pay off a low interest mortgage loan prematurely.
It's almost like you want her to be able to decide for herself what risk she is comfortable taking.
Without someone calling her irrational or obsessive. You know, cuz that would be kinda stinky. Probably make you mad.

That's nice.
Me too.
LOL, ok. Somebody is offended, sorry.
BigLaw Survivor
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

EnjoyIt wrote: Fri Oct 15, 2021 7:05 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 6:04 pm
EnjoyIt wrote: Fri Oct 15, 2021 12:59 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am
Let’s keep the two houses separate as one is an investment property while the other is the home you live. For your primary home you pay $30k/yr on the mortgage. How much do you pay in taxes to withdraw that money? Is that putting you in a higher tax bracket? What will happen when your collecting Social Security? Will your social security get taxed more? Will your Medicare cost go up? What about your RMDs when your 80.

Look, you can afford to keep extra liquidity and a mortgage. There is a cost to it though. Nothing wrong with it. It’s a choice. But do realize why so many want their mortgage paid off in retirement. The obsession as you describe is backed by solid math.
I retired in 2015. In the six years since I've only had to be federal income tax in one year -- last year -- and I paid $6900. That was because my spouse inherited money from her mother and some of it was taxable. Couldn't avoid it.

Yes, I pay 30k a year on the mortgage for my house. 20k of that is principal, and 10 is interest. That means the 20k goes to me, from my right hand to my left, while the 10k in interest is written off from my AGI and lowers my taxable income. As for Social Security, I'm five years away, at least. I'll worry about that then.

You can't look at a mortgage in a vacuum -- rationally, that is. You have to consider a mortgage in context, and the current context is historically low interest rates.
gamboolman
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Re: Paying Down the House Before Retirement

Post by gamboolman »

Alf 101,

We paid off our Home Mortgage about 7 year before we retired.

For us - being out of debt was worth the potential lost monies made by having the monies invested.

I will not argue that smart money with your low Interest Rate is to not pay off the Mortgage.

But for ms gamboolgal and I - the Sleep Good At Night aspect was the deciding factor, and for us the "right" thing to do was to pay off the mortgage.

Well done and good on yawl for your preparations thus far and all the best in your endeavors to Retire Sooner Rather Than Later ! :-D
EnjoyIt
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

BigLaw Survivor wrote: Fri Oct 15, 2021 7:37 pm
EnjoyIt wrote: Fri Oct 15, 2021 7:05 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 6:04 pm
EnjoyIt wrote: Fri Oct 15, 2021 12:59 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 10:25 am
Let’s keep the two houses separate as one is an investment property while the other is the home you live. For your primary home you pay $30k/yr on the mortgage. How much do you pay in taxes to withdraw that money? Is that putting you in a higher tax bracket? What will happen when your collecting Social Security? Will your social security get taxed more? Will your Medicare cost go up? What about your RMDs when your 80.

Look, you can afford to keep extra liquidity and a mortgage. There is a cost to it though. Nothing wrong with it. It’s a choice. But do realize why so many want their mortgage paid off in retirement. The obsession as you describe is backed by solid math.
I retired in 2015. In the six years since I've only had to be federal income tax in one year -- last year -- and I paid $6900. That was because my spouse inherited money from her mother and some of it was taxable. Couldn't avoid it.

Yes, I pay 30k a year on the mortgage for my house. 20k of that is principal, and 10 is interest. That means the 20k goes to me, from my right hand to my left, while the 10k in interest is written off from my AGI and lowers my taxable income. As for Social Security, I'm five years away, at least. I'll worry about that then.

You can't look at a mortgage in a vacuum -- rationally, that is. You have to consider a mortgage in context, and the current context is historically low interest rates.
Bold is my emphasis

I don't think we are disagreeing in generalities, one must look at the whole picture and interest rates alone don't show the whole picture. From my limited view of your picture, it is likely you should be doing pretty large Roth conversions. Maybe up to the top of the 12% tax bracket. Maybe even the top of the 22% tax bracket. It really all depends how large your pretax account is.
BigLaw Survivor wrote: Fri Oct 15, 2021 6:04 pm I know I need to focus on Roth conversions but haven't gotten around to it.
I'm in a different boat than you. About half our wealth is in a pre-tax account and my RMDs plus social security will be forcing us into the higher tax brackets. I need to make large Roth conversions to prevent that. We also don't get employer sponsored plans so we are at the whims of the open market which effectively acts like a 9% tax on income. Even if I had a mortgage at 0.01% interest. It is still in my family's best interest to pay it off to minimize taxes. As I mentioned interest rates alone do not show the whole picture and each person should evaluate their own situation and hopefully not make decisions by emotion alone.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
babystep
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Re: Paying Down the House Before Retirement

Post by babystep »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am My question is when does it ever make sense to pay off your mortgage early. Or in my case, would it make sense to make a one-time chunk payment to reduce the term.

Here is our situation. Sadly my mother passed away. She had inherited a sizable IRA when my father died, and now this will be split between myself and two brothers. My older brother is the executor, and while in no way contentious, lawyers and accountants are involved to ensure we do this properly.

My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.

Where we owe money, like many people, is our home. We closed on our house in November 2017, with a 30 year mortgage at 2.95% If we made the minimum payments, the home would be paid off in December 2047. As it happens, we've been paying extra toward the principal, the equivalent of 15 payments in a year, and if we continue with this our payoff date will be February 2036.

Now let's say we want to retire in January 2030 or 2032. A lump sum payment toward principal, particularly still only five years into the loan, could definitely bring the payoff date forward. On the other hand, the interest rate is 2.95%, and we should be able to invest it elsewhere and get better returns.

The thing is, we've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
Age? Taxable balance? 401k/IRA balance? Roth balance?
Bonds?

If you have bonds then they are likely earning less than 2.95% after tax so better to "convert" bonds into the mortgage payment.

If not sure about pay-off then I would do 50/50. 50% towards reducing the mortgage and 50% towards investment in taxable.
WhiteMaxima
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Re: Paying Down the House Before Retirement

Post by WhiteMaxima »

I would not pay down house before retirement. I would borrow to the maximum and don't plan to leave a lot equity my kids.
4nursebee
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Re: Paying Down the House Before Retirement

Post by 4nursebee »

Alf 101 wrote: Thu Oct 14, 2021 9:05 am My question is when does it ever make sense to pay off your mortgage early. Or in my case, would it make sense to make a one-time chunk payment to reduce the term.

Here is our situation. Sadly my mother passed away. She had inherited a sizable IRA when my father died, and now this will be split between myself and two brothers. My older brother is the executor, and while in no way contentious, lawyers and accountants are involved to ensure we do this properly.

My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.

Where we owe money, like many people, is our home. We closed on our house in November 2017, with a 30 year mortgage at 2.95% If we made the minimum payments, the home would be paid off in December 2047. As it happens, we've been paying extra toward the principal, the equivalent of 15 payments in a year, and if we continue with this our payoff date will be February 2036.

Now let's say we want to retire in January 2030 or 2032. A lump sum payment toward principal, particularly still only five years into the loan, could definitely bring the payoff date forward. On the other hand, the interest rate is 2.95%, and we should be able to invest it elsewhere and get better returns.

The thing is, we've already maximized our tax advantaged space --so any new money invested would go into a taxable account. Also, and this may or may not be entirely rational, I feel having the home paid off would be a plus in retirement -- one less large monthly bill.

Thoughts? How do folks feel about paying off your mortgage before retirement? Is it a priority or not?
It is a financial and emotional choice based upon YOUR values.
We felt better being debt free.
We would have been financially better leaving the money in the market.
no regrets.
Pale Blue Dot
vested1
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Re: Paying Down the House Before Retirement

Post by vested1 »

This subject comes up almost as frequently here as the decision on when to claim SS, and IMHO, personal circumstances make it unlikely that anyone can give you the perfect answer because they're not standing in your shoes. Sorry for the length of this post.

My wife and I retired in 2016 at 62/63 with a mortgage. We had refinanced in 2010 to make further improvements to the house and had refinanced previously several times for various reasons that seemed justified at the time. We had "enough" in retirement savings to make it another 25 years assuming zero gain because we are naturally frugal. We were not concerned about amassing a huge amount in our retirement accounts because my wife had a decent non-cola pension and I was delaying SS until age 70. I was more concerned about eliminating long term debt rather than growing accounts that were already sufficient. My wife's pension and our combined SS benefits (me filing a restricted application at FRA) were large enough to meet expenses with some discretionary spending.

We lived in CA in a tiny 3x2 rancher on a tiny lot, and at retirement had lived there for 22 years. The 2010 refinance was scheduled to be paid off in 2040. I got it in my head to look at the possibility of paying it off much earlier and started playing around with a amortization calculator. Looking at the different options I was intrigued by the immediate drop in interest when regular large lump sums toward principal were paid. We didn't have a roth of any significance so any lump sums would have to come from tira.

Because we lived in CA we were kind of stuck in a dilemma if we wanted to upgrade to a nicer home. If we sold our miniscule home we could only afford to buy a similar one and that made no sense, because if we wanted to upgrade we would have to get another mortgage. I initiated the plan in early 2016 to pay 30k against principal once every year, which moved the pay off date much closer. This still kept us at around 13.5% effective on federal taxation after deductions, which was key. Our state taxes were low and we were no longer adding to investments or paying FICA.

We weren't committed to any plan for relocation, although we were researching it, but I knew that having more equity would give us more options. If we relocated we would have more equity to fund the purchase of a new house, and if we stayed put we would be eliminating a long term bill in retirement. I posted my plan here and was severely criticized. My brother also criticized the plan because it was lowering our portfolio balance, at least it appeared so on paper. After sharing my plan with my CPA daughter, who verified my math, I continued on.

We eliminated about 100k of principal in 2.5 years, and when my 94 year old mil died and left us a modest amount we paid another 30k to principal. When one of our daughters moved to a southern state I started checking out the real estate prices there, as well as the tax situation and we got serious about relocation there. We sold our CA house immediately after listing it for a ridiculous amount 10k over asking and moved to the southeast, paying off the 98k mortgage on the old house and buying a grand lakefront house on a large lot with cash with 6 figures left over in the new state. My brother, who is older than me still had a mortgage too, only one that was nearly 3 times what ours had been lowered to. He moved to the same state a year after we did but his equity was much smaller, so he bought a more modest home out of necessity.

Our home has appreciated in value 50.85% in the two + years we've lived here according to comps, not Zillow or any other website. We have remodeled and improved the house spending 14.3% of it's purchase price, for a net increase of 36.55%. How do I know this? Because we placed it on the market 2 weeks ago and are signing a contract for full purchase price (cash) next Tuesday (fingers crossed). It turns out that the maintenance and physical demands of owning a large lake house are unsustainable for myself personally, and my wife can no longer handle the stairs. We are purchasing a brand new even nicer single story home on a lake where all maintenance is done for you, closer to our daughter with the proceeds, with almost 6 figures left over. Live and learn, it never stops.

This was all possible because we initiated our payoff plan. If we had not we couldn't have afforded the home we now live in, and the dollar amount of the increased equity would have been far less. We still have more than enough in retirement savings for an additional 25 years of life with zero gain, and when I turn 70 next year and file for maximum SS benefits our fixed income will be about 101K without touching retirement savings until RMD's. A booming market certainly helped.

Some of this was luck (investment gain), but some was the result of planning and a commitment to stick to the plan. Bottom line, it's complicated, and all aspects of your finances, as well as your goals should be taken into account before considering a stepped up plan to eliminate your mortgage. No one is qualified to criticize you because their situation and their goals are guaranteed to be different than yours.
invest4
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Re: Paying Down the House Before Retirement

Post by invest4 »

retiredjg wrote: Thu Oct 14, 2021 9:24 am I think this falls into personal preference. You are already paying it at an accelerated rate. I'd just keep that up until it seems clear to you that it is time for the mortgage to go. Then pay it off.
+1
mancich
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Re: Paying Down the House Before Retirement

Post by mancich »

DW and I have almost 4x in taxable vs our mortgage balance. We're 54 and 52. We just refinanced to a 15 yr 1.99%. I can't see taking a large chunk out of taxable, and paying capital gain, to pay off a loan at this rate. But I do understand that some people would do this. To each their own :sharebeer
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Harry Livermore
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Re: Paying Down the House Before Retirement

Post by Harry Livermore »

count damoney wrote: Thu Oct 14, 2021 9:12 am
With 10-12 years until you plan to retire, keep investing in taxable and re-assess a couple years out from retirement.
My guess is you'll have plenty in your taxable to pay off your mortgage at that time.
+1
If you are not struggling to pay it currently, continue as before and let the money from mom grow.
Cheers
BigLaw Survivor
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

EnjoyIt wrote: Fri Oct 15, 2021 9:03 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 7:37 pm
EnjoyIt wrote: Fri Oct 15, 2021 7:05 pm
BigLaw Survivor wrote: Fri Oct 15, 2021 6:04 pm
EnjoyIt wrote: Fri Oct 15, 2021 12:59 pm

Let’s keep the two houses separate as one is an investment property while the other is the home you live. For your primary home you pay $30k/yr on the mortgage. How much do you pay in taxes to withdraw that money? Is that putting you in a higher tax bracket? What will happen when your collecting Social Security? Will your social security get taxed more? Will your Medicare cost go up? What about your RMDs when your 80.

Look, you can afford to keep extra liquidity and a mortgage. There is a cost to it though. Nothing wrong with it. It’s a choice. But do realize why so many want their mortgage paid off in retirement. The obsession as you describe is backed by solid math.
I retired in 2015. In the six years since I've only had to be federal income tax in one year -- last year -- and I paid $6900. That was because my spouse inherited money from her mother and some of it was taxable. Couldn't avoid it.

Yes, I pay 30k a year on the mortgage for my house. 20k of that is principal, and 10 is interest. That means the 20k goes to me, from my right hand to my left, while the 10k in interest is written off from my AGI and lowers my taxable income. As for Social Security, I'm five years away, at least. I'll worry about that then.

You can't look at a mortgage in a vacuum -- rationally, that is. You have to consider a mortgage in context, and the current context is historically low interest rates.
Bold is my emphasis

I don't think we are disagreeing in generalities, one must look at the whole picture and interest rates alone don't show the whole picture. From my limited view of your picture, it is likely you should be doing pretty large Roth conversions. Maybe up to the top of the 12% tax bracket. Maybe even the top of the 22% tax bracket. It really all depends how large your pretax account is.
BigLaw Survivor wrote: Fri Oct 15, 2021 6:04 pm I know I need to focus on Roth conversions but haven't gotten around to it.
I'm in a different boat than you. About half our wealth is in a pre-tax account and my RMDs plus social security will be forcing us into the higher tax brackets. I need to make large Roth conversions to prevent that. We also don't get employer sponsored plans so we are at the whims of the open market which effectively acts like a 9% tax on income. Even if I had a mortgage at 0.01% interest. It is still in my family's best interest to pay it off to minimize taxes. As I mentioned interest rates alone do not show the whole picture and each person should evaluate their own situation and hopefully not make decisions by emotion alone.
This is something I wholeheartedly agree with. And you've obviously dug more into the weeds of this issue than I have. And you ARE being rational in reaching the conclusion that paying off the mortgage makes sense for you. The issue I have is with the "I sleep better at night with the mortgage paid off" argument. I mean, that makes sense when you don't have the money to pay it all off right away, in which case paying it off is more of a goal than it is an option, but when it's an option it more often than not probably doesn't.
BigLaw Survivor
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

mancich wrote: Sat Oct 16, 2021 4:42 am DW and I have almost 4x in taxable vs our mortgage balance. We're 54 and 52. We just refinanced to a 15 yr 1.99%. I can't see taking a large chunk out of taxable, and paying capital gain, to pay off a loan at this rate. But I do understand that some people would do this. To each their own :sharebeer
Yea, I agree. We had to take a pretty big chunk out of our taxable to make an all cash offer on the investment property we bought to rent to our daughter, but that was a case of sometimes you gotta do what you don't wanna do. With the competitive real estate market in our area last spring, there was no other way to get a house!
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Re: Paying Down the House Before Retirement

Post by moneyflowin »

Some people feel more secure after paying off their 3% mortgage but I'd feel the opposite because all that money is tied up in an illiquid asset. To pull equity out of your house is time consuming and can be difficult. And during recessions or job loss, it's almost impossible. In 2008-2010, HELOCs and HELs were extremely hard to qualify for even with 800 FICO and high income. There's no guarantee you can access your home equity when you need it.

Interest rates are higher on cash-out refi's. And the mortgage deduction is more limited with cash-out refi's compared to purchase loans.
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Re: Paying Down the House Before Retirement

Post by frugalecon »

My spouse and I plan to retire at some point in the next 40 months. If we continue paying our mortgage as scheduled, it will be paid off in 54 months. That reflects some prepayment we have already done; we could recast it for a lower payment (for free with Wells Fargo, which permits no-fee recasting if you have paid at least an extra $20k). If we did that it would be paid off in 68 months. The mortgage’s current balance is about 3% of our net (financial) worth (excluding house), so it really doesn’t matter that much. Given the short time horizon (and our ample emergency fund), I view pre-payment to be like buying a fairly short-term CD yielding about 3% tax free, since we no longer itemize. Thus, I expect that we will probably pay if off before retirement, unless short-term interest rates rise more than seems likely. We already have a fairly equity-heavy portfolio (roughly 80:20) that has surpassed our retirement goal by about 20%, so I don’t see much need to put everything into stocks to achieve a goal. And given the relevant timeframe of just a few years, who knows what stock returns will look like?

Once a person is within a few years of retiring the mortgage, and the mortgage is small relative to other assets, it seems much more like just a cash management decision. Given Wells Fargo’s recasting policy, I can always convert the prepayment to a lower mortgage payment if I want to improve cash flow. That has influenced how I have approached the issue.
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

frugalecon wrote: Sat Oct 16, 2021 1:21 pm My spouse and I plan to retire at some point in the next 40 months. If we continue paying our mortgage as scheduled, it will be paid off in 54 months. That reflects some prepayment we have already done; we could recast it for a lower payment (for free with Wells Fargo, which permits no-fee recasting if you have paid at least an extra $20k). If we did that it would be paid off in 68 months. The mortgage’s current balance is about 3% of our net (financial) worth (excluding house), so it really doesn’t matter that much. Given the short time horizon (and our ample emergency fund), I view pre-payment to be like buying a fairly short-term CD yielding about 3% tax free, since we no longer itemize. Thus, I expect that we will probably pay if off before retirement, unless short-term interest rates rise more than seems likely. We already have a fairly equity-heavy portfolio (roughly 80:20) that has surpassed our retirement goal by about 20%, so I don’t see much need to put everything into stocks to achieve a goal. And given the relevant timeframe of just a few years, who knows what stock returns will look like?

Once a person is within a few years of retiring the mortgage, and the mortgage is small relative to other assets, it seems much more like just a cash management decision. Given Wells Fargo’s recasting policy, I can always convert the prepayment to a lower mortgage payment if I want to improve cash flow. That has influenced how I have approached the issue.
If I may, you are the perfect candidate to view a mortgage as a negative bond. I apologize if this is not a new concept for you, but allow me to explain anyways.

A bond is debt that you collect interest.
A mortgage is debt that you pay interest.
In your scenario your mortgage is 3% of your wealth. It makes no sense holding 3% of those bonds that are paying 1.5% or less while paying 3% on your mortgage. Unless of course you have no taxable investments it may be wise to sell some bonds and get your mortgage paid off today.

I would not recommend this if you weren't already financially independent or very close to it.
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Re: Paying Down the House Before Retirement

Post by frugalecon »

EnjoyIt wrote: Sat Oct 16, 2021 2:05 pm
frugalecon wrote: Sat Oct 16, 2021 1:21 pm My spouse and I plan to retire at some point in the next 40 months. If we continue paying our mortgage as scheduled, it will be paid off in 54 months. That reflects some prepayment we have already done; we could recast it for a lower payment (for free with Wells Fargo, which permits no-fee recasting if you have paid at least an extra $20k). If we did that it would be paid off in 68 months. The mortgage’s current balance is about 3% of our net (financial) worth (excluding house), so it really doesn’t matter that much. Given the short time horizon (and our ample emergency fund), I view pre-payment to be like buying a fairly short-term CD yielding about 3% tax free, since we no longer itemize. Thus, I expect that we will probably pay if off before retirement, unless short-term interest rates rise more than seems likely. We already have a fairly equity-heavy portfolio (roughly 80:20) that has surpassed our retirement goal by about 20%, so I don’t see much need to put everything into stocks to achieve a goal. And given the relevant timeframe of just a few years, who knows what stock returns will look like?

Once a person is within a few years of retiring the mortgage, and the mortgage is small relative to other assets, it seems much more like just a cash management decision. Given Wells Fargo’s recasting policy, I can always convert the prepayment to a lower mortgage payment if I want to improve cash flow. That has influenced how I have approached the issue.
If I may, you are the perfect candidate to view a mortgage as a negative bond. I apologize if this is not a new concept for you, but allow me to explain anyways.

A bond is debt that you collect interest.
A mortgage is debt that you pay interest.
In your scenario your mortgage is 3% of your wealth. It makes no sense holding 3% of those bonds that are paying 1.5% or less while paying 3% on your mortgage. Unless of course you have no taxable investments it may be wise to sell some bonds and get your mortgage paid off today.

I would not recommend this if you weren't already financially independent or very close to it.
Good feedback, but as you intuit we don't have a lot of taxable fixed income outside of the emergency fund. Part of the reason I qualify for another recast is b/c I sold a brokered CD which had significantly appreciated and dumped the proceeds into the mortgage.
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Re: Paying Down the House Before Retirement

Post by A-Commoner »

In 2017, we bought a $1 million house in a Los Angeles suburb. I had enough to pay cash for the house at that time, but got enticed into getting a 30 year fixed mortgage at 3.625% at 20% down payment. It was the lowest rate for a jumbo at that time although had we waited a few more months, we could have gotten a much better rate.

4 years later, houses in my subdivision are selling like hotcakes, and Zillow now prices my house at $1.5 million. I think this is pretty accurate given the comps in our neighborhood.

Meanwhile, the $1 million I could have sunk into paying for the house in cash stayed invested in the VTi in our taxable accounts. The VTI has of course done very well over the past 4 years.

This was all just luck, the leverage worked to our benefit. Ymmv.
BigLaw Survivor
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

A-Commoner wrote: Sat Oct 16, 2021 2:44 pm In 2017, we bought a $1 million house in a Los Angeles suburb. I had enough to pay cash for the house at that time, but got enticed into getting a 30 year fixed mortgage at 3.625% at 20% down payment. It was the lowest rate for a jumbo at that time although had we waited a few more months, we could have gotten a much better rate.

4 years later, houses in my subdivision are selling like hotcakes, and Zillow now prices my house at $1.5 million. I think this is pretty accurate given the comps in our neighborhood.

Meanwhile, the $1 million I could have sunk into paying for the house in cash stayed invested in the VTi in our taxable accounts. The VTI has of course done very well over the past 4 years.

This was all just luck, the leverage worked to our benefit. Ymmv.
Agreed. Again, I just don't get why a mortgage is the one thing that so many savvy folks get all crazy about.
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Re: Paying Down the House Before Retirement

Post by Tdubs »

KlangFool wrote: Thu Oct 14, 2021 1:41 pm
Alf 101 wrote: Thu Oct 14, 2021 9:05 am
My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.
Alf 101,

<<<We have started to talk about retiring early, maybe in the next 8-10 years.>>

That means you do not have ENOUGH to retire now. So, how does it makes any sense to pay down your 2.95% mortgage?

Do you believe that your portfolio would return on the average of less than 2.95% per year over the next 8 to 10 years?

Invest in your taxable account and retire earlier. Pay off your mortgage when you have ENOUGH to retire.

KlangFool
His taxable investments will need a return closer to 4%, no?
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Re: Paying Down the House Before Retirement

Post by KlangFool »

Tdubs wrote: Sat Oct 16, 2021 5:24 pm
KlangFool wrote: Thu Oct 14, 2021 1:41 pm
Alf 101 wrote: Thu Oct 14, 2021 9:05 am
My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.
Alf 101,

<<<We have started to talk about retiring early, maybe in the next 8-10 years.>>

That means you do not have ENOUGH to retire now. So, how does it makes any sense to pay down your 2.95% mortgage?

Do you believe that your portfolio would return on the average of less than 2.95% per year over the next 8 to 10 years?

Invest in your taxable account and retire earlier. Pay off your mortgage when you have ENOUGH to retire.

KlangFool
His taxable investments will need a return closer to 4%, no?
Why taxable investment? I believe in ONE portfolio across all accounts. Money is fungible.

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Re: Paying Down the House Before Retirement

Post by Tdubs »

KlangFool wrote: Sat Oct 16, 2021 5:44 pm
Tdubs wrote: Sat Oct 16, 2021 5:24 pm
KlangFool wrote: Thu Oct 14, 2021 1:41 pm
Alf 101 wrote: Thu Oct 14, 2021 9:05 am
My wife and I have done all the Boglehead things: start early, make a plan and follow it, keep it simple, and live below our means. We currently sit with roughly $1.7M in retirement investments, and are maximizing our contributions (401K, Roth). We have started to talk about retiring early, maybe in the next 8-10 years.
Alf 101,

<<<We have started to talk about retiring early, maybe in the next 8-10 years.>>

That means you do not have ENOUGH to retire now. So, how does it makes any sense to pay down your 2.95% mortgage?

Do you believe that your portfolio would return on the average of less than 2.95% per year over the next 8 to 10 years?

Invest in your taxable account and retire earlier. Pay off your mortgage when you have ENOUGH to retire.

KlangFool
His taxable investments will need a return closer to 4%, no?
Why taxable investment? I believe in ONE portfolio across all accounts. Money is fungible.

KlangFool
The return on paying off the 3% mortgage is not taxed. If he invested money instead, the return would be taxed, a combination of taxes on capital gains, dividends, interest from bonds, etc. To achieve the same return, the investment needs to be greater than a 3% return.
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Re: Paying Down the House Before Retirement

Post by KlangFool »

Tdubs wrote: Sat Oct 16, 2021 6:11 pm
The return on paying off the 3% mortgage is not taxed. If he invested money instead, the return would be taxed, a combination of taxes on capital gains, dividends, interest from bonds, etc. To achieve the same return, the investment needs to be greater than a 3% return.
Tdubs,

1) It might be taxed at 0%. Aka, qualified dividend.

2) And, even if that is true, do you believe that a balanced portfolio cannot return on the average of greater than 3% over the next 10 years?

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Re: Paying Down the House Before Retirement

Post by willthrill81 »

Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
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Re: Paying Down the House Before Retirement

Post by jemaz »

I am 66 and paid off my mortgage two years ago. I am still working, but could retire in the next few months or five years from now.

Paying off the mortgage easily was one of the best (and easiest) decisions of my life. It save on interest, improved cash flow and offered a solid return on investment.
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Re: Paying Down the House Before Retirement

Post by KlangFool »

Folks,

Please focus on answering OP's question. Whether he/she should pay down the mortgage 8 to 10 years before retirement. It is NOT whether OP should pay off the mortgage right at retirement.

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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

jemaz wrote: Sat Oct 16, 2021 6:52 pm I am 66 and paid off my mortgage two years ago. I am still working, but could retire in the next few months or five years from now.

Paying off the mortgage easily was one of the best (and easiest) decisions of my life. It save on interest, improved cash flow and offered a solid return on investment.
Congrats. To each his own!
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Re: Paying Down the House Before Retirement

Post by Wanderingwheelz »

DW and I paid off our mortgage just about 10 years before we had any plans to retire. In sports they talk about athletes having “intangibles”. I feel like having a paid off mortgage for an investor is a financial intangible. It makes you better even if it’s not measurable as to how.

Just my 2 cents.
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Re: Paying Down the House Before Retirement

Post by willthrill81 »

Bonds are very unlikely to yield anything approaching 2.95% after taxes (assuming that the OP doesn't deduct the mortgage interest), so using some of the OP's bond holdings to pay off the mortgage right now makes good sense as long as the tax implications of any withdrawals aren't too problematic.
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Re: Paying Down the House Before Retirement

Post by Tdubs »

KlangFool wrote: Sat Oct 16, 2021 6:37 pm
Tdubs wrote: Sat Oct 16, 2021 6:11 pm
The return on paying off the 3% mortgage is not taxed. If he invested money instead, the return would be taxed, a combination of taxes on capital gains, dividends, interest from bonds, etc. To achieve the same return, the investment needs to be greater than a 3% return.
Tdubs,

1) It might be taxed at 0%. Aka, qualified dividend.

2) And, even if that is true, do you believe that a balanced portfolio cannot return on the average of greater than 3% over the next 10 years?

KlangFool
Probably not, I agree. But the return on a paying down a mortgage might not look so bad compared to the bond portion of your portfolio.
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Re: Paying Down the House Before Retirement

Post by KlangFool »

Tdubs wrote: Sat Oct 16, 2021 9:18 pm
KlangFool wrote: Sat Oct 16, 2021 6:37 pm
Tdubs wrote: Sat Oct 16, 2021 6:11 pm
The return on paying off the 3% mortgage is not taxed. If he invested money instead, the return would be taxed, a combination of taxes on capital gains, dividends, interest from bonds, etc. To achieve the same return, the investment needs to be greater than a 3% return.
Tdubs,

1) It might be taxed at 0%. Aka, qualified dividend.

2) And, even if that is true, do you believe that a balanced portfolio cannot return on the average of greater than 3% over the next 10 years?

KlangFool
Probably not, I agree. But the return on a paying down a mortgage might not look so bad compared to the bond portion of your portfolio.
And, why should I ONLY invest in the bond? I don't. I borrowed money to invest in my total portfolio.

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Re: Paying Down the House Before Retirement

Post by Pu239 »

I'll only add that the feeling of being debt free - whether in or before retirement - is priceless. We paid off our mortgage (4%) about 7 years early several years ago and have no regrets. Could we have rolled the dice and invested the money for a better return? Sure, but it felt good simplifying our life and taking some risk off the table. Now that liability is a fading memory. Someone once said (Tobias?) that not-having-to-try so hard is one of the luxuries that being a millionaire should bring. Because windfalls seldom happen and you already have a solid retirement foundation, I vote pay it off.
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

Pu239 wrote: Sat Oct 16, 2021 9:49 pm I'll only add that the feeling of being debt free - whether in or before retirement - is priceless. We paid off our mortgage (4%) about 7 years early several years ago and have no regrets. Could we have rolled the dice and invested the money for a better return? Sure, but it felt good simplifying our life and taking some risk off the table. Now that liability is a fading memory. Someone once said (Tobias?) that not-having-to-try so hard is one of the luxuries that being a millionaire should bring. Because windfalls seldom happen and you already have a solid retirement foundation, I vote pay it off.
It is not priceless. The choice has a cost and that cost can be calculated if you instead invested that cash elsewhere.

Here at Bogleheads we strive to take emotion out of investing. We create an IPS (Investment Policy Statement.) We invest in index funds. We keep a certain percentage of our portfolio in lower risk investments such as bonds. We create rebalancing bands and we don't time the market based on how we feel. Paying off a mortgage should be done by doing your own math and deciding what fits best in conjunction with one's risk tolerance. Some people based on their situation should pay it off ASAP while other people's situation would dictate holding on to the mortgage until a more opportune time. Feeling good as you and so many others like to point out does not belong in this discussion. Especially not here on bogleheads (yet it does way too often,) unless of course you are so wealthy that you can afford to make financial miscalculations to feel good and there is nothing wrong with that.
Last edited by EnjoyIt on Sat Oct 16, 2021 10:10 pm, edited 1 time in total.
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BigLaw Survivor
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

Pu239 wrote: Sat Oct 16, 2021 9:49 pm I'll only add that the feeling of being debt free - whether in or before retirement - is priceless. We paid off our mortgage (4%) about 7 years early several years ago and have no regrets. Could we have rolled the dice and invested the money for a better return? Sure, but it felt good simplifying our life and taking some risk off the table. Now that liability is a fading memory. Someone once said (Tobias?) that not-having-to-try so hard is one of the luxuries that being a millionaire should bring. Because windfalls seldom happen and you already have a solid retirement foundation, I vote pay it off.
See, I don't get this way of thinking. I understand the desire not to be "in debt," but not necessarily the desire to be "debt free." "In debt" means you owe more than you have, while not being "debt free" means that you've concluded that some debt is good debt when part of a broadly diversified portfolio. Because I can easily pay off my mortgages whenever I want to, they are not debts that I view as a burden or that keep me awake at night. It's a debt that I view as helpful and necessary to a diversified portfolio. I don't want 40 percent of my portfolio to be tied up in real estate, which is where I'd be if I paid my mortgages off.
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Re: Paying Down the House Before Retirement

Post by BigLaw Survivor »

EnjoyIt wrote: Sat Oct 16, 2021 10:01 pm
Pu239 wrote: Sat Oct 16, 2021 9:49 pm I'll only add that the feeling of being debt free - whether in or before retirement - is priceless. We paid off our mortgage (4%) about 7 years early several years ago and have no regrets. Could we have rolled the dice and invested the money for a better return? Sure, but it felt good simplifying our life and taking some risk off the table. Now that liability is a fading memory. Someone once said (Tobias?) that not-having-to-try so hard is one of the luxuries that being a millionaire should bring. Because windfalls seldom happen and you already have a solid retirement foundation, I vote pay it off.
It is not priceless. The choice has a cost and that cost can be calculated if you instead invested that cash elsewhere.

Here at Bogleheads we strive to take emotion out of investing. We create an IPS (investment policy statement. We invest in index funds, we keep a certain percentage of our portfolio in lower risk investments such as bonds, we create rebalancing bands, and we don't time the market based on how we feel. Paying off a mortgage should be done by doing your own math and deciding what fits best in conjunction with one's risk tolerance. Some people based on their situation should pay it off ASAP while other people's situation would dictate holding on to the mortgage until a more opportune time. Feeling good as you and so many others like to point out does not belong in this discussion. Especially not here on bogleheads (yet it does way too often,) unless of course you are so wealthy that you can afford to make financial miscalculations to feel good and there is nothing wrong with that.
Well said.
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Re: Paying Down the House Before Retirement

Post by EnjoyIt »

willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
Bolded emphasis is mine.

This is very insightful and well said.

We are semi-retired with the option to pull the plug tomorrow if we so desired. We paid off our mortgage because we wanted to decrease our SORR if we decided to fully retire tomorrow. We did the math and decided that adding more money into bonds paying about 1% at the time made no sense at all when we were still holding a 2.75% mortgage. If and when we quite we will have more room for Roth conversions and increased ACA subsidies.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Tdubs
Posts: 1819
Joined: Tue Apr 24, 2018 7:50 pm

Re: Paying Down the House Before Retirement

Post by Tdubs »

KlangFool wrote: Sat Oct 16, 2021 9:48 pm
Tdubs wrote: Sat Oct 16, 2021 9:18 pm
KlangFool wrote: Sat Oct 16, 2021 6:37 pm
Tdubs wrote: Sat Oct 16, 2021 6:11 pm
The return on paying off the 3% mortgage is not taxed. If he invested money instead, the return would be taxed, a combination of taxes on capital gains, dividends, interest from bonds, etc. To achieve the same return, the investment needs to be greater than a 3% return.
Tdubs,

1) It might be taxed at 0%. Aka, qualified dividend.

2) And, even if that is true, do you believe that a balanced portfolio cannot return on the average of greater than 3% over the next 10 years?

KlangFool
Probably not, I agree. But the return on a paying down a mortgage might not look so bad compared to the bond portion of your portfolio.
And, why should I ONLY invest in the bond? I don't. I borrowed money to invest in my total portfolio.

KlangFool
You don't need to only invest in bonds for the extra mortgage payment to make sense. You can pay the mortgage and allocate less to bonds in your portfolio.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying Down the House Before Retirement

Post by KlangFool »

Tdubs wrote: Sun Oct 17, 2021 5:13 am
KlangFool wrote: Sat Oct 16, 2021 9:48 pm
Tdubs wrote: Sat Oct 16, 2021 9:18 pm
KlangFool wrote: Sat Oct 16, 2021 6:37 pm
Tdubs wrote: Sat Oct 16, 2021 6:11 pm
The return on paying off the 3% mortgage is not taxed. If he invested money instead, the return would be taxed, a combination of taxes on capital gains, dividends, interest from bonds, etc. To achieve the same return, the investment needs to be greater than a 3% return.
Tdubs,

1) It might be taxed at 0%. Aka, qualified dividend.

2) And, even if that is true, do you believe that a balanced portfolio cannot return on the average of greater than 3% over the next 10 years?

KlangFool
Probably not, I agree. But the return on a paying down a mortgage might not look so bad compared to the bond portion of your portfolio.
And, why should I ONLY invest in the bond? I don't. I borrowed money to invest in my total portfolio.

KlangFool
You don't need to only invest in bonds for the extra mortgage payment to make sense. You can pay the mortgage and allocate less to bonds in your portfolio.
Why should I do that? I don't have to. My RISK tolerance set my AA. Prepaying the mortgage doesn't change my AA.

KlangFool
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Admiral
Posts: 5032
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying Down the House Before Retirement

Post by Admiral »

willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
While the math works in this highly specific example, this is not a realistic scenario. Nobody who borrows 100k instead of paying off a mortgage has ONLY 100k to their name. They have other assets, presumably. Social security? Pension? Other savings? And why would someone choose a 30 year mortgage the day they retire? Cherry picking dates/rates/amounts/duration is just that. What matters for most people is their particular set of circumstances, and it's very, very difficult to apply SORR as a general rule of thumb.

I don't plan to hold my mortgage in retirement. But it's such a small piece of my overall budget that I could, quite easily.

I don't disagree with your specific analysis above. I just think that SORR is highly dependent on many other factors.
59Gibson
Posts: 1386
Joined: Mon Dec 07, 2020 7:41 am

Re: Paying Down the House Before Retirement

Post by 59Gibson »

Admiral wrote: Sun Oct 17, 2021 8:22 am
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
While the math works in this highly specific example, this is not a realistic scenario. Nobody who borrows 100k instead of paying off a mortgage has ONLY 100k to their name. They have other assets, presumably. Social security? Pension? Other savings? And why would someone choose a 30 year mortgage the day they retire? Cherry picking dates/rates/amounts/duration is just that. What matters for most people is their particular set of circumstances, and it's very, very difficult to apply SORR as a general rule of thumb.

I don't plan to hold my mortgage in retirement. But it's such a small piece of my overall budget that I could, quite easily.

I don't disagree with your specific analysis above. I just think that SORR is highly dependent on many other factors.
Maybe the above is not the most likely scenario, but it's a relatively recent example of leverage not working in one's favor. The dichotomy on BH is hilarious. On one side Mortgage leverage being successful going forward seems to be fait accompli.
On the same site when discussing SWR there's this pervasive thought of decades of negative growth, everyone living to 106, SS going broke, needing 10 years of LTC in an ocean front room ..etc
Admiral
Posts: 5032
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying Down the House Before Retirement

Post by Admiral »

59Gibson wrote: Sun Oct 17, 2021 9:12 am
Admiral wrote: Sun Oct 17, 2021 8:22 am
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
While the math works in this highly specific example, this is not a realistic scenario. Nobody who borrows 100k instead of paying off a mortgage has ONLY 100k to their name. They have other assets, presumably. Social security? Pension? Other savings? And why would someone choose a 30 year mortgage the day they retire? Cherry picking dates/rates/amounts/duration is just that. What matters for most people is their particular set of circumstances, and it's very, very difficult to apply SORR as a general rule of thumb.

I don't plan to hold my mortgage in retirement. But it's such a small piece of my overall budget that I could, quite easily.

I don't disagree with your specific analysis above. I just think that SORR is highly dependent on many other factors.
Maybe the above is not the most likely scenario, but it's a relatively recent example of leverage not working in one's favor. The dichotomy on BH is hilarious. On one side Mortgage leverage being successful going forward seems to be fait accompli.
On the same site when discussing SWR there's this pervasive thought of decades of negative growth, everyone living to 106, SS going broke, needing 10 years of LTC in an ocean front room ..etc
Well, sure, that dichotomy is always here. Mortgage leverage is in no way a fait accompli. But, we are in a period where loan rates are lower than they have ever been (or we were, that may be ending). All we have to go by is history. And history tells us that investing in the markets is going to crush a 2.x% mortgage rate when investing over decades, which is the length of most mortgages. If you want guarantees, there are none. But it's a pretty safe bet. Again, is that the right choice for every situation? No. That's why it's "personal" finance.
59Gibson
Posts: 1386
Joined: Mon Dec 07, 2020 7:41 am

Re: Paying Down the House Before Retirement

Post by 59Gibson »

Admiral wrote: Sun Oct 17, 2021 9:17 am
59Gibson wrote: Sun Oct 17, 2021 9:12 am
Admiral wrote: Sun Oct 17, 2021 8:22 am
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
While the math works in this highly specific example, this is not a realistic scenario. Nobody who borrows 100k instead of paying off a mortgage has ONLY 100k to their name. They have other assets, presumably. Social security? Pension? Other savings? And why would someone choose a 30 year mortgage the day they retire? Cherry picking dates/rates/amounts/duration is just that. What matters for most people is their particular set of circumstances, and it's very, very difficult to apply SORR as a general rule of thumb.

I don't plan to hold my mortgage in retirement. But it's such a small piece of my overall budget that I could, quite easily.

I don't disagree with your specific analysis above. I just think that SORR is highly dependent on many other factors.
Maybe the above is not the most likely scenario, but it's a relatively recent example of leverage not working in one's favor. The dichotomy on BH is hilarious. On one side Mortgage leverage being successful going forward seems to be fait accompli.
On the same site when discussing SWR there's this pervasive thought of decades of negative growth, everyone living to 106, SS going broke, needing 10 years of LTC in an ocean front room ..etc
Well, sure, that dichotomy is always here. Mortgage leverage is in no way a fait accompli. But, we are in a period where loan rates are lower than they have ever been (or we were, that may be ending). All we have to go by is history. And history tells us that investing in the markets is going to crush a 2.x% mortgage rate when investing over decades, which is the length of most mortgages. If you want guarantees, there are none. But it's a pretty safe bet. Again, is that the right choice for every situation? No. That's why it's "personal" finance.
All true. I think goal #1 in retirement(not FIRE) 65+ is to control for downside risks as much as possible, not squeeze the last drop out of each dollar. Mortgage risk will vary for each individual depending on loan and portfolio size, sure it's "personal" choice. I would highly recommend holding a mortgage for younger/working folks to leverage the market.
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willthrill81
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Re: Paying Down the House Before Retirement

Post by willthrill81 »

Admiral wrote: Sun Oct 17, 2021 8:22 am
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
While the math works in this highly specific example, this is not a realistic scenario. Nobody who borrows 100k instead of paying off a mortgage has ONLY 100k to their name. They have other assets, presumably. Social security? Pension? Other savings? And why would someone choose a 30 year mortgage the day they retire? Cherry picking dates/rates/amounts/duration is just that. What matters for most people is their particular set of circumstances, and it's very, very difficult to apply SORR as a general rule of thumb.

I don't plan to hold my mortgage in retirement. But it's such a small piece of my overall budget that I could, quite easily.

I don't disagree with your specific analysis above. I just think that SORR is highly dependent on many other factors.
I never said that the retirees holding such a mortgage would go broke, but whether that happened or not is totally dependent on what other resources they had available to them. The point is that the downside risk of leveraging one's portfolio with a mortgage would have failed in a big way in relatively recent history. Demonstrating a real world instance of a risk manifesting itself is not 'cherry picking'.

That said, the year 2000 is not the only year in relatively recent history where this type of move would be very unlikely to survive just for the 30 years needed to pay off the mortgage. It's virtually certain to fail for 1999 and 2001 as well, and 1998 isn't looking good at this point. I'm sure that there are many other historic periods where this strategy would have failed.

It's pretty easy to see why leverage via a mortgage in retirement is risky. In the above example, the effective starting withdrawal rate is a whopping 7.2% (i.e., $600 monthly payment x 12). This isn't inflation adjusted though, which is the only reason that this strategy hasn't failed in far more historic instances.
The Sensible Steward
delamer
Posts: 17348
Joined: Tue Feb 08, 2011 5:13 pm

Re: Paying Down the House Before Retirement

Post by delamer »

willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
Agreed.

Right now, 20-year and 30-year Treasuries yield about 2%. If you can get a 1% mortage, then go for it. You’re guaranteed to come out ahead.

And you can probably beat 2% with a moderate portfolio. But you are leveraging, which means there’s risk involved.

As one of the mortgage-less, and retired, there is a minor satisfaction in one less financial institution having its hand in our finances. With constant reports of hacking and other related problems, I’m putting a higher and higher value on privacy and less exposure.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Admiral
Posts: 5032
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying Down the House Before Retirement

Post by Admiral »

willthrill81 wrote: Sun Oct 17, 2021 10:27 am
Admiral wrote: Sun Oct 17, 2021 8:22 am
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm Having one's mortgage paid off is, at the core, a tactic to reduce downside risk. I demonstrated a specific instance of this in a post from another thread, which I'm quoting below.
willthrill81 wrote: Sun Feb 07, 2021 11:30 am The simplest way to see the impact of [retaining a mortgage during retirement on sequence of returns risk] is to model what would happen if an investor borrowed X amount of dollars at a certain interest rate, invested those dollars in the desired AA, and then made the debt payment from the invested portfolio.

Had an investor borrowed $100k in the year 2000 for a 30 year mortgage at a 6% interest rate (the going rate for most of that year was 8%, but this could have been refinanced along the way, so 6% is probably a good average effective rate), the monthly payment would have been $600. Had the investor put this $100k into a 60/40 AA with global equity exposure (50/50 U.S. and ex-U.S.) and then made the mortgage payment via withdrawals from the portfolio, the investor would have completely depleted the portfolio by September of 2019, not even close to making it to the full 30 years of the mortgage.
The bottom line is that retaining a mortgage so you can invest is leverage, and leverage increases both upside potential and downside risk. IMHO, retirees in particular should be extremely careful with leverage as they do not have time on their side to make up for poor returns in the same way that accumulators do.
While the math works in this highly specific example, this is not a realistic scenario. Nobody who borrows 100k instead of paying off a mortgage has ONLY 100k to their name. They have other assets, presumably. Social security? Pension? Other savings? And why would someone choose a 30 year mortgage the day they retire? Cherry picking dates/rates/amounts/duration is just that. What matters for most people is their particular set of circumstances, and it's very, very difficult to apply SORR as a general rule of thumb.

I don't plan to hold my mortgage in retirement. But it's such a small piece of my overall budget that I could, quite easily.

I don't disagree with your specific analysis above. I just think that SORR is highly dependent on many other factors.
I never said that the retirees holding such a mortgage would go broke, but whether that happened or not is totally dependent on what other resources they had available to them. The point is that the downside risk of leveraging one's portfolio with a mortgage would have failed in a big way in relatively recent history. Demonstrating a real world instance of a risk manifesting itself is not 'cherry picking'.

That said, the year 2000 is not the only year in relatively recent history where this type of move would be very unlikely to survive just for the 30 years needed to pay off the mortgage. It's virtually certain to fail for 1999 and 2001 as well, and 1998 isn't looking good at this point. I'm sure that there are many other historic periods where this strategy would have failed.

It's pretty easy to see why leverage via a mortgage in retirement is risky. In the above example, the effective starting withdrawal rate is a whopping 7.2% (i.e., $600 monthly payment x 12). This isn't inflation adjusted though, which is the only reason that this strategy hasn't failed in far more historic instances.
If it’s not cherry picking then it’s a straw man. One’s “portfolio” is not limited to the precise amount one is using to invest with rather then pay off a mortgage. If you want to consider downside risk of that portfolio, you need to look at the entire portfolio. That’s my point. There’s tremendous “downside risk” in investing $100k in bonds paying 2% in the hopes of using the interest to pay your note, and holding a mortgage at 6%. If that’s your entire portfolio, you’ll go broke. If you also hold $500k in stocks that’s a completely different picture.

Isn’t it? Even if you see losses, even sustained losses, you sell stocks and bonds and pay off your mortgage should you need to. The amount of leverage you’re comfortable with is based on your entire portfolio of assets.
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