Paying Down the House Before Retirement

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Paying Down the House Before Retirement

Post by vanbogle59 »

willthrill81 wrote: Sat Oct 16, 2021 6:49 pm The bottom line is that retaining a mortgage so you can invest is leverage
Irrefutable.

All arguments for any particular plan have to acknowledge this.
There is an unending list of scenarios where taking on that leverage was a great idea. Of course the same can be said for it being disastrous.

No matter what the historical ratio of those 2 categories, or future predictions of their likelihood, deciding which is correct for YOU is based on your personal circumstances, and, ultimately, YOUR risk tolerance.

It's not algebra. It's a decision made in the face of an uncertain future.
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: Paying Down the House Before Retirement

Post by EnjoyIt »

vanbogle59 wrote: Sun Oct 17, 2021 1:01 pm
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm The bottom line is that retaining a mortgage so you can invest is leverage
Irrefutable.

All arguments for any particular plan have to acknowledge this.
There is an unending list of scenarios where taking on that leverage was a great idea. Of course the same can be said for it being disastrous.

No matter what the historical ratio of those 2 categories, or future predictions of their likelihood, deciding which is correct for YOU is based on your personal circumstances, and, ultimately, YOUR risk tolerance.

It's not algebra. It's a decision made in the face of an uncertain future.
Sometimes it really is simple math. This is particular true for those looking to keep taxable income as low as possible for ACA subsidies, decreased IRMA payments, or maximizing Roth conversions to minis taxes on RMD withdrawals. Some of those scenarios far outweigh historical market returns.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Paying Down the House Before Retirement

Post by willthrill81 »

Admiral wrote: Sun Oct 17, 2021 11:10 am
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.
Adding additional assets doesn't change the fact that leverage increases downside risk. At best, such analyses would only obfuscate the clear results of the analyses already done.

Interest rate arbitrage is not the only factor involved. Consider that the 30 year SWR has only been around 4% despite average historic returns being much higher. Holding low interest fixed debt would usually have a positive outcome, but in some cases, it would have made a bad outcome even worse. That's just how leverage works. Adding 'side' assets and income to the mix doesn't change this.
The Sensible Steward
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Paying Down the House Before Retirement

Post by vanbogle59 »

EnjoyIt wrote: Sun Oct 17, 2021 1:46 pm
vanbogle59 wrote: Sun Oct 17, 2021 1:01 pm
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm The bottom line is that retaining a mortgage so you can invest is leverage
Irrefutable.

All arguments for any particular plan have to acknowledge this.
There is an unending list of scenarios where taking on that leverage was a great idea. Of course the same can be said for it being disastrous.

No matter what the historical ratio of those 2 categories, or future predictions of their likelihood, deciding which is correct for YOU is based on your personal circumstances, and, ultimately, YOUR risk tolerance.

It's not algebra. It's a decision made in the face of an uncertain future.
Sometimes it really is simple math. This is particular true for those looking to keep taxable income as low as possible for ACA subsidies, decreased IRMA payments, or maximizing Roth conversions to minis taxes on RMD withdrawals. Some of those scenarios far outweigh historical market returns.
I disagree.

It is easy to imagine a scenario where leveraging your house and investing the proceeds swamps any of these: "ACA subsidies, decreased IRMA payments, or maximizing Roth conversions".

Now you might think that scenario is not applicable to YOUR future. Cool. Don't leverage.
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying Down the House Before Retirement

Post by Admiral »

willthrill81 wrote: Sun Oct 17, 2021 2:01 pm
Admiral wrote: Sun Oct 17, 2021 11:10 am
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.



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.
Adding additional assets doesn't change the fact that leverage increases downside risk. At best, such analyses would only obfuscate the clear results of the analyses already done.

Interest rate arbitrage is not the only factor involved. Consider that the 30 year SWR has only been around 4% despite average historic returns being much higher. Holding low interest fixed debt would usually have a positive outcome, but in some cases, it would have made a bad outcome even worse. That's just how leverage works. Adding 'side' assets and income to the mix doesn't change this.
Perhaps I'm confused because you seem to be answering a question not asked. Of course leverage increases risk. Where did I (or anyone else) say it didn't?

The issue here is the level of risk relative to one's entire portfolio, not relative to one small slice of it which one may or may not use to pay off or not pay off a mortgage. Adding assets and income doesn't "obfuscate the clear results of the analyses already done." I see nothing clear in your analysis because any helpful analysis would be based on an individual's entire portfolio and how any debt acts in relation to what they hold.

If I have ten million dollars in 2000 and $24,000 per year in SS payments and choose to invest $100,000 in TSM instead of paying off my mortgage, this "leverage" is pocket lint. I don't care about any downside risk of this leverage because it's immaterial to my total assets.

I'm using an extreme example, yes. But your example is extreme in the other direction: that one who has assets of $100k and invests it instead of paying off their mortgage could end up in a very bad place. Of course that's true. That's because they've taken on too much leverage relative to their total assets. Each person needs to view SORR and the leverage they can accept in the context of how much they have, and how much they can afford to lose (or risk).

Simply saying "you'll face increased SORR going into retirement if you carry a mortgage" is an oversimplification and claiming that they "may not have time to earn back what they've lost" may be true. But for some folks, that may not matter.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Paying Down the House Before Retirement

Post by willthrill81 »

Admiral wrote: Sun Oct 17, 2021 2:53 pm
willthrill81 wrote: Sun Oct 17, 2021 2:01 pm
Admiral wrote: Sun Oct 17, 2021 11:10 am
willthrill81 wrote: Sun Oct 17, 2021 10:27 am
Admiral wrote: Sun Oct 17, 2021 8:22 am

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.
Adding additional assets doesn't change the fact that leverage increases downside risk. At best, such analyses would only obfuscate the clear results of the analyses already done.

Interest rate arbitrage is not the only factor involved. Consider that the 30 year SWR has only been around 4% despite average historic returns being much higher. Holding low interest fixed debt would usually have a positive outcome, but in some cases, it would have made a bad outcome even worse. That's just how leverage works. Adding 'side' assets and income to the mix doesn't change this.
Perhaps I'm confused because you seem to be answering a question not asked. Of course leverage increases risk. Where did I (or anyone else) say it didn't?

The issue here is the level of risk relative to one's entire portfolio, not relative to one small slice of it which one may or may not use to pay off or not pay off a mortgage. Adding assets and income doesn't "obfuscate the clear results of the analyses already done." I see nothing clear in your analysis because any helpful analysis would be based on an individual's entire portfolio and how any debt acts in relation to what they hold.

If I have ten million dollars in 2000 and $24,000 per year in SS payments and choose to invest $100,000 in TSM instead of paying off my mortgage, this "leverage" is pocket lint. I don't care about any downside risk of this leverage because it's immaterial to my total assets.

I'm using an extreme example, yes. But your example is extreme in the other direction: that one who has assets of $100k and invests it instead of paying off their mortgage could end up in a very bad place. Of course that's true. That's because they've taken on too much leverage relative to their total assets. Each person needs to view SORR and the leverage they can accept in the context of how much they have, and how much they can afford to lose (or risk).

Simply saying "you'll face increased SORR going into retirement if you carry a mortgage" is an oversimplification and claiming that they "may not have time to earn back what they've lost" may be true. But for some folks, that may not matter.
The answer is really simple: a lot of leverage results in a big increase in downside risk, and a little leverage results in a small increase in downside risk.

The analysis I did above merely demonstrates that borrowing at then current mortgages rates in order to invest instead (i.e., the same proceeds), even with refinancing along the way, may bite you in the aft end. Precisely how bad that bite is certainly does depend on your total situation, but the point is that such an investor would have been worse off vs. having paid off the mortgage by retiring.
The Sensible Steward
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: Paying Down the House Before Retirement

Post by EnjoyIt »

vanbogle59 wrote: Sun Oct 17, 2021 2:10 pm
EnjoyIt wrote: Sun Oct 17, 2021 1:46 pm
vanbogle59 wrote: Sun Oct 17, 2021 1:01 pm
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm The bottom line is that retaining a mortgage so you can invest is leverage
Irrefutable.

All arguments for any particular plan have to acknowledge this.
There is an unending list of scenarios where taking on that leverage was a great idea. Of course the same can be said for it being disastrous.

No matter what the historical ratio of those 2 categories, or future predictions of their likelihood, deciding which is correct for YOU is based on your personal circumstances, and, ultimately, YOUR risk tolerance.

It's not algebra. It's a decision made in the face of an uncertain future.
Sometimes it really is simple math. This is particular true for those looking to keep taxable income as low as possible for ACA subsidies, decreased IRMA payments, or maximizing Roth conversions to minis taxes on RMD withdrawals. Some of those scenarios far outweigh historical market returns.
I disagree.

It is easy to imagine a scenario where leveraging your house and investing the proceeds swamps any of these: "ACA subsidies, decreased IRMA payments, or maximizing Roth conversions".

Now you might think that scenario is not applicable to YOUR future. Cool. Don't leverage.
Please re-read my response. I will quote myself "sometimes it really is simple math." The key word is sometimes and for some people's scenarios that sometimes is real.

How can can you disagree with "sometimes?"
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Paying Down the House Before Retirement

Post by vanbogle59 »

EnjoyIt wrote: Sun Oct 17, 2021 2:58 pm
vanbogle59 wrote: Sun Oct 17, 2021 2:10 pm
EnjoyIt wrote: Sun Oct 17, 2021 1:46 pm
vanbogle59 wrote: Sun Oct 17, 2021 1:01 pm
willthrill81 wrote: Sat Oct 16, 2021 6:49 pm The bottom line is that retaining a mortgage so you can invest is leverage
Irrefutable.

All arguments for any particular plan have to acknowledge this.
There is an unending list of scenarios where taking on that leverage was a great idea. Of course the same can be said for it being disastrous.

No matter what the historical ratio of those 2 categories, or future predictions of their likelihood, deciding which is correct for YOU is based on your personal circumstances, and, ultimately, YOUR risk tolerance.

It's not algebra. It's a decision made in the face of an uncertain future.
Sometimes it really is simple math. This is particular true for those looking to keep taxable income as low as possible for ACA subsidies, decreased IRMA payments, or maximizing Roth conversions to minis taxes on RMD withdrawals. Some of those scenarios far outweigh historical market returns.
I disagree.

It is easy to imagine a scenario where leveraging your house and investing the proceeds swamps any of these: "ACA subsidies, decreased IRMA payments, or maximizing Roth conversions".

Now you might think that scenario is not applicable to YOUR future. Cool. Don't leverage.
Please re-read my response. I will quote myself "sometimes it really is simple math." The key word is sometimes and for some people's scenarios that sometimes is real.

How can can you disagree with "sometimes?"
Ah. I apologize. I see what you are saying.
However, since future results will determine whether or not the leverage bet pays off, how do I know in advance if this is one of those times?
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: Paying Down the House Before Retirement

Post by EnjoyIt »

vanbogle59 wrote: Sun Oct 17, 2021 3:08 pm
EnjoyIt wrote: Sun Oct 17, 2021 2:58 pm
vanbogle59 wrote: Sun Oct 17, 2021 2:10 pm
EnjoyIt wrote: Sun Oct 17, 2021 1:46 pm
vanbogle59 wrote: Sun Oct 17, 2021 1:01 pm

Irrefutable.

All arguments for any particular plan have to acknowledge this.
There is an unending list of scenarios where taking on that leverage was a great idea. Of course the same can be said for it being disastrous.

No matter what the historical ratio of those 2 categories, or future predictions of their likelihood, deciding which is correct for YOU is based on your personal circumstances, and, ultimately, YOUR risk tolerance.

It's not algebra. It's a decision made in the face of an uncertain future.
Sometimes it really is simple math. This is particular true for those looking to keep taxable income as low as possible for ACA subsidies, decreased IRMA payments, or maximizing Roth conversions to minis taxes on RMD withdrawals. Some of those scenarios far outweigh historical market returns.
I disagree.

It is easy to imagine a scenario where leveraging your house and investing the proceeds swamps any of these: "ACA subsidies, decreased IRMA payments, or maximizing Roth conversions".

Now you might think that scenario is not applicable to YOUR future. Cool. Don't leverage.
Please re-read my response. I will quote myself "sometimes it really is simple math." The key word is sometimes and for some people's scenarios that sometimes is real.

How can can you disagree with "sometimes?"
Ah. I apologize. I see what you are saying.
However, since future results will determine whether or not the leverage bet pays off, how do I know in advance if this is one of those times?
Good question, the best I can gather is using an average with a reasonable standard deviation. ACA subsidies basically equal to about a 9% tax on income. Decreasing taxable income is a guaranteed 9% return. IRMA has its own calculation. In RMDs going from 12% to 22% in taxes is another calculation. Taxes on Social Security is yet another calculation. For the right person the math can easily come up to well over the average return over the historical past.

Now, if the future is going to provide above average returns over long term such as 20% then I will gladly eat my hat and tell you I am wrong.
Last edited by EnjoyIt on Sun Oct 17, 2021 4:32 pm, edited 1 time in total.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Paying Down the House Before Retirement

Post by vanbogle59 »

EnjoyIt wrote: Sun Oct 17, 2021 3:54 pm For the right person the math can easily come up to well over the average returnover the historical past.
I don't disagree.
:beer
Pu239
Posts: 593
Joined: Mon Dec 17, 2018 5:24 pm

Re: Paying Down the House Before Retirement

Post by Pu239 »

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.
Busted. You’re right, of course. Emotions have no place when making financial calculations however, in our case, we were elated to pay off the mortgage and still are. That piece of mind may not be an entry into a spreadsheet or fiscal model, or output as a numerical value, but it has significance nonetheless. I imagine folks who have paid long-term and gone through enough market turmoil, job loss, and the like are the ones who will feel most relieved with a paid off mortgage. Guess that bit of emotional weakness combined with a small amount of precious metals qualifies me only as a 90 to 95% BH. I can live with that which is good since the caliber and quantity of advice from regular members usually far exceeds any compulsion I may have to try and contribute a few words. You guys rock!

OP asked for thoughts about a payoff and I assumed they were looking for a diversity of opinion. The priceless feeling we have is real and, I believe, worthwhile. Of course, the OP may or may not agree after running the numbers and exploring their priorities. Should the OP base their decision primarily on feeling good (aka sleep at night) about paying it off? Certainly not and neither did we but it is an intangible related to risk tolerance that deserves consideration. We have accumulated “enough” income and assets to begin coasting a bit toward the ultimate finish line which is – you guessed it - yet another priceless feeling.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying Down the House Before Retirement

Post by KlangFool »

Pu239 wrote: Sun Oct 17, 2021 6:05 pm
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.
Busted. You’re right, of course. Emotions have no place when making financial calculations however, in our case, we were elated to pay off the mortgage and still are. That piece of mind may not be an entry into a spreadsheet or fiscal model, or output as a numerical value, but it has significance nonetheless. I imagine folks who have paid long-term and gone through enough market turmoil, job loss, and the like are the ones who will feel most relieved with a paid off mortgage. Guess that bit of emotional weakness combined with a small amount of precious metals qualifies me only as a 90 to 95% BH. I can live with that which is good since the caliber and quantity of advice from regular members usually far exceeds any compulsion I may have to try and contribute a few words. You guys rock!

OP asked for thoughts about a payoff and I assumed they were looking for a diversity of opinion. The priceless feeling we have is real and, I believe, worthwhile. Of course, the OP may or may not agree after running the numbers and exploring their priorities. Should the OP base their decision primarily on feeling good (aka sleep at night) about paying it off? Certainly not and neither did we but it is an intangible related to risk tolerance that deserves consideration. We have accumulated “enough” income and assets to begin coasting a bit toward the ultimate finish line which is – you guessed it - yet another priceless feeling.
Pu239,

Not trying to change your mind but would like to put a complete context of your decision.

A) When you pay off your mortgage, your annual expense reduced by how many percents?

If 100% is the before mortgage pay off, what is the number after you pay off the mortgage?

B) How much was the house as part of your net worth when you made that decision? What was the percentage?

C) What was the size of your portfolio in terms of your annual expense after paying off the mortgage? 10X? 15X?

It would be useful to be used as a reference for some other folks facing the same decision.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Zeno
Posts: 1042
Joined: Wed Sep 12, 2018 10:44 am

Re: Paying Down the House Before Retirement

Post by Zeno »

Pu239 wrote: Sun Oct 17, 2021 6:05 pm
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.
Busted. You’re right, of course. Emotions have no place when making financial calculations however, in our case, we were elated to pay off the mortgage and still are. That piece of mind may not be an entry into a spreadsheet or fiscal model, or output as a numerical value, but it has significance nonetheless. I imagine folks who have paid long-term and gone through enough market turmoil, job loss, and the like are the ones who will feel most relieved with a paid off mortgage. Guess that bit of emotional weakness combined with a small amount of precious metals qualifies me only as a 90 to 95% BH. I can live with that which is good since the caliber and quantity of advice from regular members usually far exceeds any compulsion I may have to try and contribute a few words. You guys rock!

OP asked for thoughts about a payoff and I assumed they were looking for a diversity of opinion. The priceless feeling we have is real and, I believe, worthwhile. Of course, the OP may or may not agree after running the numbers and exploring their priorities. Should the OP base their decision primarily on feeling good (aka sleep at night) about paying it off? Certainly not and neither did we but it is an intangible related to risk tolerance that deserves consideration. We have accumulated “enough” income and assets to begin coasting a bit toward the ultimate finish line which is – you guessed it - yet another priceless feeling.
I completely agree with you, Pu239

I wanted to have my financial affairs in order by the time I was roughly 50, by which I meant basically FI (or close to it) and debt-free. Why? My Dad faced early retirement in his 50's decades ago, so I always assumed that the wheels might come off my career in my 50's, too. It was the same reason why I had my children early in comparison to my peers -- to wit, I didn't want to be 61 years old with a child in high school or college. I wanted the kids to basically be launched by the time I was 50 -- and I accomplished that, too.

How did we pay off our mortgage? From current income, via accelerated payment of principal. And we kept saving at roughly the same rate, at least that is my recollection. We merely reduced expenditures even further. It wasn't a choice between "savings" and "paying off the mortgage." We've always saved aggressively, even when we were paying down our mortgage early.

Debt-free is a risk management tool to me. Now that I'm in the SORR window, it is glorious being debt free. I still remember the day when the bank's release of mortgage arrived in the mail. That document represented freedom.

And I understood what you meant by "priceless," too. I feel the same, too, being debt free. "Priceless" means "joy", "relief" or "happiness" -- or "glorious" -- in this context. It doesn't mean, in contrast, the output of an economic model. I'm pretty certain MasterCard meant the same thing when it was running those ads decades ago.

As to "emotion," I don't think it is possible to truly take emotion out of most decisions, even financial ones. We're homo sapiens after all, and we have other relationships that are impacted by our choices. I suspect "emotions" are behind social media, including financial forums -- maybe even this one. I don't think being a BH is about just running a spreadsheet with no consideration of emotions. I may be wrong.

And now we are roughly 47x. Our two properties (residence and a rental) combined represent about 7.5% or our NW. And yes, we are debt free.

Anyway, I'm a fellow traveler with you on this topic, and just wanted to weigh in to express that.
User avatar
hand
Posts: 2201
Joined: Sun May 17, 2009 8:42 pm

Re: Paying Down the House Before Retirement

Post by hand »

a
willthrill81 wrote: Sun Oct 17, 2021 2:57 pm The answer is really simple: a lot of leverage results in a big increase in downside risk, and a little leverage results in a small increase in downside risk.
While I don't disagree with this statement in general, it feels disingenuous to use in the context of a decision to fully pay off housing as it implies paying off housing minimizes downside risk.

While from a market (stock/bond etc.) risk perspective this may be true, it completely ignores the alternate risk of having a significant amount of one's net worth tied up in a single property in a single location in a single market - the polar opposite of the Boglehead orthodoxy in other asset classes. Flood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.

I understand why in the age of 10% mortgages, paying off a mortgage by retirement seemed like a hard and fast rule.
I understand why paying off a mortgage is a good idea for the many people who are not in control of their spending.

In the age of <3% mortgages that may in fact be negative in real terms, I am less clear why paying off the mortgage is a good idea for rational actors. Reducing market risk and increasing housing market risk doesn't seem like a compelling reason to me.
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Paying Down the House Before Retirement

Post by vanbogle59 »

hand wrote: Sun Oct 17, 2021 8:17 pm Flood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.
What cap would a large mortgage add?
Are you implying that you would walk away from a debt you were capable of paying?
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Paying Down the House Before Retirement

Post by willthrill81 »

hand wrote: Sun Oct 17, 2021 8:17 pmFlood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.
That's what insurance is for.

And even if the market price of your home drops substantially and never recovers, it's still the same roof over your head as before.
The Sensible Steward
User avatar
Harry Livermore
Posts: 1937
Joined: Thu Apr 04, 2019 5:32 am

Re: Paying Down the House Before Retirement

Post by Harry Livermore »

WyomingFIRE wrote: Sun Oct 17, 2021 7:07 pm
I wanted to have my financial affairs in order by the time I was roughly 50, by which I meant basically FI (or close to it) and debt-free. Why? My Dad faced early retirement in his 50's decades ago, so I always assumed that the wheels might come off my career in my 50's, too. It was the same reason why I had my children early in comparison to my peers -- to wit, I didn't want to be 61 years old with a child in high school or college. I wanted the kids to basically be launched by the time I was 50 -- and I accomplished that, too.
...
As to "emotion," I don't think it is possible to truly take emotion out of most decisions, even financial ones. We're homo sapiens after all, and we have other relationships that are impacted by our choices. I suspect "emotions" are behind social media, including financial forums -- maybe even this one. I don't think being a BH is about just running a spreadsheet with no consideration of emotions. I may be wrong.
+1 to your excellent thoughts on this. Too often, folks here act like they are Spock. I suspect, given the right sequence of setbacks, many of them would act more like Kirk.
I am either just under the wire, or slightly behind, on both your laudable goals; I am 55, and we are just about 33x (guessed) future expenses. I also have a 15 year old, so if he sticks to the usual schedule, I will be 61 when he graduates college.
Personal finance, folks. It's personal, for each and every one of us.
Oh, and in before the lock, as the topic has clearly run its course!
:sharebeer
Cheers
dknightd
Posts: 3727
Joined: Wed Mar 07, 2018 10:57 am

Re: Paying Down the House Before Retirement

Post by dknightd »

There is no right answer to this. Here is what I did.
While I was working I made required monthly mortgage payments. When interest rates dropped I refinanced. I started at 10% and ended at 3.25%. You can easily find a mortgage rate less than 3.25% today, but that was a crazy dream 30 years ago! Who knows how things will look 30 years from now? A fixed rate mortgage is a wonderful thing, it can not go up unless you move. Essentially I was leveraging my retirement savings by carrying a mortgage. This worked for me. Worse case I'd have to work longer. . .
When I retired, I still owed money on my house. Because I had restarted the clock with every refinance. But after 30 years, the payment was small in relative terms. This was a debt that was not going away unless I paid it (or my estate paid it, or I refinanced - perhaps with cash out.) I had investments paying less than 3.25% so I decided to use those funds to pay off my mortgage and be done with it. It took several years, since I did not want to bump up my tax bracket, but now it is done. Retired - check. Paid off house - check. Now work on Roth conversions before tax rates change. The future is still uncertain, but I feel I have prepared for it the best I can
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
User avatar
hand
Posts: 2201
Joined: Sun May 17, 2009 8:42 pm

Re: Paying Down the House Before Retirement

Post by hand »

vanbogle59 wrote: Sun Oct 17, 2021 9:09 pm
hand wrote: Sun Oct 17, 2021 8:17 pm Flood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.
What cap would a large mortgage add?
Are you implying that you would walk away from a debt you were capable of paying?
My point is that it gives people who can't afford their housing, perhaps because they were tricked into buying housing at inflated prices and borrowing at inflated multiples of income, the ability to walk away. I believe this optionality has value, especially when the cost is so low <3% nominal, that the real cost could in fact be negative - with today's mortgage rates, I believe many are being paid for this flexibility.
hoofaman
Posts: 973
Joined: Tue Jul 14, 2020 3:39 pm

Re: Paying Down the House Before Retirement

Post by hoofaman »

hand wrote: Sun Oct 17, 2021 8:17 pm a
willthrill81 wrote: Sun Oct 17, 2021 2:57 pm The answer is really simple: a lot of leverage results in a big increase in downside risk, and a little leverage results in a small increase in downside risk.
While I don't disagree with this statement in general, it feels disingenuous to use in the context of a decision to fully pay off housing as it implies paying off housing minimizes downside risk.

While from a market (stock/bond etc.) risk perspective this may be true, it completely ignores the alternate risk of having a significant amount of one's net worth tied up in a single property in a single location in a single market - the polar opposite of the Boglehead orthodoxy in other asset classes. Flood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.

I understand why in the age of 10% mortgages, paying off a mortgage by retirement seemed like a hard and fast rule.
I understand why paying off a mortgage is a good idea for the many people who are not in control of their spending.

In the age of <3% mortgages that may in fact be negative in real terms, I am less clear why paying off the mortgage is a good idea for rational actors. Reducing market risk and increasing housing market risk doesn't seem like a compelling reason to me.
If you bought the house, your exposure to the upside or downside doesn't change based on how you paid for it. Unless the mortgage you hold is recourse free, lenders will use a deficiency judgement to recover a shortfall after a foreclosure.
User avatar
hand
Posts: 2201
Joined: Sun May 17, 2009 8:42 pm

Re: Paying Down the House Before Retirement

Post by hand »

willthrill81 wrote: Sun Oct 17, 2021 10:40 pm
hand wrote: Sun Oct 17, 2021 8:17 pmFlood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.
That's what insurance is for.

And even if the market price of your home drops substantially and never recovers, it's still the same roof over your head as before.
Disingenuous at best...

Insurance covers the risk to a single house, but completely fails to address structural risks to a city or region's economy that are devastating to the individual in the case of flood (New Orleans), drought (dust bowl), fire (Chicago), or economic collapse (rust belt). Houses may be built back eventually, but household finances are ruined permanently.

Insurance is worthless when staying employed or continue to progress in one's career requires changing location.

To me, it seems that partnering with a lender on these risks (when the partnership comes at low or no cost) has value for the rational financial actor. Additionally, I believe that pushing these risks from unsophisticated borrowers back to sophisticated lenders will eventually help to address some of the worst abuses of building in risky locations and over lending.
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Paying Down the House Before Retirement

Post by vanbogle59 »

hand wrote: Mon Oct 18, 2021 7:20 am it seems that partnering with a lender on these risks (when the partnership comes at low or no cost) has value for the rational financial actor. Additionally, I believe that pushing these risks from unsophisticated borrowers back to sophisticated lenders will eventually help to address some of the worst abuses of building in risky locations and over lending.
Does your mortgage lender forgive your loan in these cases?
Or are you just walking away and relying on them to not come after you?

I'm ignorant on the legal details. I only know one anecdote. A friend of mine lost a house to a hurricane. He held a very large mortgage, no flood insurance and couldn't pay. He mailed the keys to the bank and moved on. Years later, they are still after him. IIRC, they even reported his failure to pay to the IRS as "1099 income". YMMV
dknightd
Posts: 3727
Joined: Wed Mar 07, 2018 10:57 am

Re: Paying Down the House Before Retirement

Post by dknightd »

hand wrote: Mon Oct 18, 2021 7:00 am
vanbogle59 wrote: Sun Oct 17, 2021 9:09 pm
hand wrote: Sun Oct 17, 2021 8:17 pm Flood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.
What cap would a large mortgage add?
Are you implying that you would walk away from a debt you were capable of paying?
My point is that it gives people who can't afford their housing, perhaps because they were tricked into buying housing at inflated prices and borrowing at inflated multiples of income, the ability to walk away. I believe this optionality has value, especially when the cost is so low <3% nominal, that the real cost could in fact be negative - with today's mortgage rates, I believe many are being paid for this flexibility.
I feel sorry for people that can not afford their housing. I have a tent, and a sleeping bag, just in case.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Nowizard
Posts: 4842
Joined: Tue Oct 23, 2007 5:33 pm

Re: Paying Down the House Before Retirement

Post by Nowizard »

It appears that your decision is primarily one based on personal preference. Some simplify and pay their mortgage, others do not mind the debt who could pay off a mortgage for a variety of reasons. There should be numerous comments that will aid in gaining clarity.

Tim
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Paying Down the House Before Retirement

Post by vanbogle59 »

hoofaman wrote: Mon Oct 18, 2021 7:18 am
hand wrote: Sun Oct 17, 2021 8:17 pm a
willthrill81 wrote: Sun Oct 17, 2021 2:57 pm The answer is really simple: a lot of leverage results in a big increase in downside risk, and a little leverage results in a small increase in downside risk.
While I don't disagree with this statement in general, it feels disingenuous to use in the context of a decision to fully pay off housing as it implies paying off housing minimizes downside risk.

While from a market (stock/bond etc.) risk perspective this may be true, it completely ignores the alternate risk of having a significant amount of one's net worth tied up in a single property in a single location in a single market - the polar opposite of the Boglehead orthodoxy in other asset classes. Flood, drought, fire, economic collapse are all a real (if small) possibility - having a large mortgage caps the downside risk of these events in many cases.

I understand why in the age of 10% mortgages, paying off a mortgage by retirement seemed like a hard and fast rule.
I understand why paying off a mortgage is a good idea for the many people who are not in control of their spending.

In the age of <3% mortgages that may in fact be negative in real terms, I am less clear why paying off the mortgage is a good idea for rational actors. Reducing market risk and increasing housing market risk doesn't seem like a compelling reason to me.
If you bought the house, your exposure to the upside or downside doesn't change based on how you paid for it. Unless the mortgage you hold is recourse free, lenders will use a deficiency judgement to recover a shortfall after a foreclosure.
Interesting. I just learned about these non-recourse loans.
Apparently in certain states all mortgages are non-recourse.
I've never lived in any of them, so I had no idea.

I also have no insight into what happens in the real world when you invoke this (loss of credit rating....).
But it MIGHT be a free lunch for the borrower, imposed by state regulation. IDK.

I'm also unclear on the ethics of using this as a "strategy". Would this be an answer to a question on the CFP exam: "How can you minimize your exposure to forest fire at no cost? ... a) Maintain a large mortgage balance" :confused
User avatar
8foot7
Posts: 4427
Joined: Mon Jan 05, 2015 6:29 pm

Re: Paying Down the House Before Retirement

Post by 8foot7 »

I personally would need at least 33x before I let myself keep a mortgage into retirement. Just a personal comfort level thing. That being said, I certainly don't think carrying a small mortgage under 4% is retirement suicide, and if you're lucky enough to have these sub 2% mortgages I'd have a hard time letting that not ride.
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying Down the House Before Retirement

Post by Admiral »

I would love to get some insight about their mortgages from those who "hate debt" or experience "huge relief" or "a psychological boost" when they pay off their mortgages.

I'm curious to know how large these payments were relative to income, and also how large they were relative to taxes and insurance.

I ask because, while I'm sure it will feel fine to eliminate this debt, my mortgage payment is less than 20% of my take home, and my taxes plus insurance are roughly 50% of my mortgage payment. That is to say, when I eliminate my $2k/mo mortgage payment, I will still owe about $1k per month for taxes and insurance, pretty much forever.

I don't foresee an extra $2k per month as a life-changing experience. But maybe that's simply based on my particular set of circumstances. Perhaps others pay a significantly larger portion of their income to their mortgage, or have very small tax bills.
User avatar
Elsebet
Posts: 1606
Joined: Mon Feb 08, 2016 1:28 pm
Location: Erie, PA

Re: Paying Down the House Before Retirement

Post by Elsebet »

I am not going to pay off my mortgage extremely early but I am making payments on our 30 year mortgage as if it were a 15 year mortgage so it is paid off when we are ready to retire. We are also maxing all retirement accounts before that, if I were unable to do both I would not pay extra on the mortgage.
"...the man who adapts himself to his slender means and makes himself wealthy on a little sum, is the truly rich man..." ~Seneca
dknightd
Posts: 3727
Joined: Wed Mar 07, 2018 10:57 am

Re: Paying Down the House Before Retirement

Post by dknightd »

You are lucky to have to make this decision. Smile and be happy.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Topic Author
Alf 101
Posts: 424
Joined: Wed Sep 01, 2010 11:24 am

Re: Paying Down the House Before Retirement

Post by Alf 101 »

The OP has returned. Personally I had recognized this as a complex and intertwined decision, and have benefitted from the discussion and range of opinions. Naturally I don't expect an online board to decide for me -- it is personal finance -- but this is a learned and quality group I have learned a great deal from.

My decision in this case touches on a host of different questions. One is how much is enough, where we each draw the line between portfolio growth and preservation. Where each of us falls on this spectrum will run the gamut.

I am about to receive an unfortunate windfall. We have employed the services of a highly recommended accountant to help navigate the Secure Act, as my Mother inherited an IRA after my Father's death, which now will be divided between myself and two brothers.

For the purpose of discussion, let's say each of us stands to inherit roughly $750K-1M, dispersed in the most tax sensible and legal way over a ten year period -- gradually or all at once, I do not yet know. There are some moving parts with all this. My wife and I have no children, and sit currently with $1.7M of retirement investments, which we are actively growing, filling all tax advantaged space. If we apply the much scrutinized "4% rule", if nothing grows, that's $68K/annually, which oddly enough was right around the median US household income from the last census. We hope to retire in 8-10 years, and delay taking SS until 70, because that seems the thing to do. Until we're 65, health insurance will be the biggest cost, and most likely afterwards, though we are in fine health at present. I also worked for the government for a spell, and will receive a $2K/month pension starting at age 66.

My thought was whether to use part of this windfall to increase payments toward the mortgage principal, such that the payoff date would be right around when we retired. Let's say, hypothetically, I could do that gradually, or make a one-time payment in the $50-75K range that would do this. Then the rest of the windfall I would invest, or invest and do something that financial success would allow me -- take a trip to Mongolia, get a metal roof, or finally a very nice blender. Oddly, my Mother kind of wanted to do all of these. But paying off the mortgage right about the time we retire, as others have pointed out, would be an expense management strategy. There will be a period when we retire, before we access SSN and the pension, before we can access Medicare and Medicaid, but where we don't want to pull too much out of our investments as we're planning to live awhile. This should take about 8-10 years to figure out.

It is probably a different thread, but I do not have a great sense of how to best manage taxable investments -- besides dumping it into a Total Stock Market Index fund, or similar. I should check the Wiki...
User avatar
BrooklynInvest
Posts: 1183
Joined: Sun Jul 28, 2013 9:23 am

Re: Paying Down the House Before Retirement

Post by BrooklynInvest »

I paid off my mortgage because I wanted to remove the debt cost. 2-family house incurred a few more points so the inverted "guaranteed return" argument was a bit more attractive.

With hindsight it probably cost me money given market returns but it's important to remember the "guaranteed" part of the equation and not compare apples to cumquats.
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying Down the House Before Retirement

Post by Admiral »

Alf 101 wrote: Mon Oct 18, 2021 9:40 am The OP has returned. Personally I had recognized this as a complex and intertwined decision, and have benefitted from the discussion and range of opinions. Naturally I don't expect an online board to decide for me -- it is personal finance -- but this is a learned and quality group I have learned a great deal from.

My decision in this case touches on a host of different questions. One is how much is enough, where we each draw the line between portfolio growth and preservation. Where each of us falls on this spectrum will run the gamut.

I am about to receive an unfortunate windfall. We have employed the services of a highly recommended accountant to help navigate the Secure Act, as my Mother inherited an IRA after my Father's death, which now will be divided between myself and two brothers.

For the purpose of discussion, let's say each of us stands to inherit roughly $750K-1M, dispersed in the most tax sensible and legal way over a ten year period -- gradually or all at once, I do not yet know. There are some moving parts with all this. My wife and I have no children, and sit currently with $1.7M of retirement investments, which we are actively growing, filling all tax advantaged space. If we apply the much scrutinized "4% rule", if nothing grows, that's $68K/annually, which oddly enough was right around the median US household income from the last census. We hope to retire in 8-10 years, and delay taking SS until 70, because that seems the thing to do. Until we're 65, health insurance will be the biggest cost, and most likely afterwards, though we are in fine health at present. I also worked for the government for a spell, and will receive a $2K/month pension starting at age 66.

My thought was whether to use part of this windfall to increase payments toward the mortgage principal, such that the payoff date would be right around when we retired. Let's say, hypothetically, I could do that gradually, or make a one-time payment in the $50-75K range that would do this. Then the rest of the windfall I would invest, or invest and do something that financial success would allow me -- take a trip to Mongolia, get a metal roof, or finally a very nice blender. Oddly, my Mother kind of wanted to do all of these. But paying off the mortgage right about the time we retire, as others have pointed out, would be an expense management strategy. There will be a period when we retire, before we access SSN and the pension, before we can access Medicare and Medicaid, but where we don't want to pull too much out of our investments as we're planning to live awhile. This should take about 8-10 years to figure out.

It is probably a different thread, but I do not have a great sense of how to best manage taxable investments -- besides dumping it into a Total Stock Market Index fund, or similar. I should check the Wiki...
What are your current expenses? How much do you need once retired? You're using 68k, but how much do you plan to actually spend? How much will your SS payments be?

Sounds to me like you could retire tomorrow, especially with this new money. If your withdrawal rate will fall to 1-2% once you have those other income streams, there's no need to spend only 4% in the bridge period.

Not quite sure why you are doing your planning based on your current $1.7m showing zero growth for 8-10 years...? That number is likely to double.

I really recommend you try i-ORP, Flexible Retirement Planner, or another piece of software to model your situation. You do not need to work another decade. You CAN if you want to, but you don't need to.

Worrying about your mortgage strikes me as the tree, not the forest. You need to look at your entire plan and then do what makes sense. In your situation paying it off or not paying it off is likely to make very little difference.
Topic Author
Alf 101
Posts: 424
Joined: Wed Sep 01, 2010 11:24 am

Re: Paying Down the House Before Retirement

Post by Alf 101 »

Thanks. The reason I looked at the 4% withdraw on the current portfolio was as a worst case. What if both my wife and I were laid off? What if we couldn't find adequate work without relocating? I know several people, whose companies downsized, and found themselves out of work in their mid-50s. I feel like we're doing quite well, but don't want to get smug.

As it happens, both of us are in stable positions, in our high earning years, and are hoping to double this (or more). Naturally we'll want to travel in retirement, have peace of mind, and weather any bumps.

Since we came up with the idea of retiring early maybe a year ago, we began a spending analysis. Since we're overpaying on our monthly mortgage, and maximizing our retirement contributions, it's appearing our current expenses are lower than thought. At the same time we're working on identifying any major work the house might need (e.g., new roof), and take care of these while we're still working. At our current expenditure rate, and we've decided to study this over a longer time period, $80K/year, or $2M with a 4% withdrawal rate, would be very comfortable. The caveat is health costs, which I understand tend to increase as people age, but hasn't hit us yet. Otherwise we live in a moderate COL area and don't have expensive tastes (other than travel, which does still count as one). My wife quite likes our space, so relocation in retirement is 50/50 at this point (or less).

Key to the decision to retire is having a plan for it, and only part of that is financial. We are both thinking about a life past working, and how to make best of that time, and how to prepare ourselves psychologically. At the same time, I have also dreamed of being in the position where I could quit after having two bad days in a row...
User avatar
Kickstart1967
Posts: 39
Joined: Sat Sep 11, 2021 10:48 am
Location: Cheshire, UK

Re: Paying Down the House Before Retirement

Post by Kickstart1967 »

Alf 101 wrote: Mon Oct 18, 2021 9:40 am The OP has returned. Personally I had recognized this as a complex and intertwined decision, and have benefitted from the discussion and range of opinions. Naturally I don't expect an online board to decide for me -- it is personal finance -- but this is a learned and quality group I have learned a great deal from.

My thought was whether to use part of this windfall to increase payments toward the mortgage principal, such that the payoff date would be right around when we retired. Let's say, hypothetically, I could do that gradually, or make a one-time payment in the $50-75K range that would do this. Then the rest of the windfall I would invest, or invest and do something that financial success would allow me -- take a trip to Mongolia, get a metal roof, or finally a very nice blender. Oddly, my Mother kind of wanted to do all of these. B
Hi Alf,
There are far more informed commentators to advise you about your investments than me, but all I would want to comment about is life experiences. Back when I was 50 (now 55) I decided to treat myself and go on a long planned/dreamed of 4 week motorbike trip round Southern Africa which was truly life affirming. Back then I assumed my health and the world situation would remain good and that I had plenty of time for other trips such as central America and sailing across the atlantic.

Unfortunately covid and my health has caused quite a change and these types of trips are now unlikely - hence my view would be, that if you do have plans do take a trip to Mongolia (sounds great - watched the Grand Tours episode which if you have not seen is well worth a watch) then I would do it sooner rather than later as like the stock market you can never assume you will be able to take a trip like this years in the future

Have fun
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying Down the House Before Retirement

Post by Admiral »

Alf 101 wrote: Mon Oct 18, 2021 12:10 pm Thanks. The reason I looked at the 4% withdraw on the current portfolio was as a worst case. What if both my wife and I were laid off? What if we couldn't find adequate work without relocating? I know several people, whose companies downsized, and found themselves out of work in their mid-50s. I feel like we're doing quite well, but don't want to get smug.

As it happens, both of us are in stable positions, in our high earning years, and are hoping to double this (or more). Naturally we'll want to travel in retirement, have peace of mind, and weather any bumps.

Since we came up with the idea of retiring early maybe a year ago, we began a spending analysis. Since we're overpaying on our monthly mortgage, and maximizing our retirement contributions, it's appearing our current expenses are lower than thought. At the same time we're working on identifying any major work the house might need (e.g., new roof), and take care of these while we're still working. At our current expenditure rate, and we've decided to study this over a longer time period, $80K/year, or $2M with a 4% withdrawal rate, would be very comfortable. The caveat is health costs, which I understand tend to increase as people age, but hasn't hit us yet. Otherwise we live in a moderate COL area and don't have expensive tastes (other than travel, which does still count as one). My wife quite likes our space, so relocation in retirement is 50/50 at this point (or less).

Key to the decision to retire is having a plan for it, and only part of that is financial. We are both thinking about a life past working, and how to make best of that time, and how to prepare ourselves psychologically. At the same time, I have also dreamed of being in the position where I could quit after having two bad days in a row...
Again: please post your full details if you want specific advice. If you've managed to sock away $1.7m, I'll assume you will receive, between two people and as a highly conservative estimate, $30k per year in SS (current dollars).

So from age 67 (FRA) on, you need 80k-30k, or 50k (not including taxes for simplicity). If you model to 95, that's $1.4m required (28 years x $50k). From ages, say, 60-67 you need 80k/year, or $560k. Total needed: appx $2m. Which you already have, TODAY, with the inheritance.

All of this ignores even minimal growth of your current assets. If your portfolio grows a measly 2% per year, that's ballpark $40k per year. So, in earnings alone, you're making nearly what you'll need to pull out in 17 years.

Let's say your inheritance is $500k. With no growth at all, your current assets (including inheritance and subtracting 80k/year for 7 years) would fall to $1.64m ($2.2m - 560k) by age 67, when you take SS.

$50k/$1.64m is a withdrawal rate of apps 3%.

You see why the mortgage decision is irrelevant?

ETA: corrected WR. If your combined SS will be at any level above $30k, your WR is around 2-2.5%, or less. I.e. you will never run out of money.
Last edited by Admiral on Tue Oct 19, 2021 6:38 am, edited 1 time in total.
arsenalfan
Posts: 1132
Joined: Sun Dec 08, 2013 11:26 pm

Re: Paying Down the House Before Retirement

Post by arsenalfan »

I was/am in a similar situation. maxxing out all tax-advantaged accounts/HSA/529, and extra money. Rental property and primary home loans only debt carried.

I made a surplus money/windfall provision in my investment policy statement.

Any extra money:
X% to housing debt
Y% to aftertax investing.

You may want to consider doing this.

Rest of our story:
In 2019 primary home refinanced to 15-year, 2.125% loan.
In 2020 the after tax account grew to enough to pay off primary home mortgage. Mentally hard to liquidate/take tax hit/payoff primary home.
OTOH, don't want to have market tank and regret not paying off some debt.
We will keep the rentals, but may only be in primary home 10 more years.
So we decided to liquidate some aftertax and payoff 2 rental property mortgages (4-5% rates), so that the rental income covers the primary home mortgage payment.
Last edited by arsenalfan on Tue Oct 19, 2021 6:47 am, edited 1 time in total.
Tdubs
Posts: 1832
Joined: Tue Apr 24, 2018 7:50 pm

Re: Paying Down the House Before Retirement

Post by Tdubs »

Alf 101 wrote: Mon Oct 18, 2021 12:10 pm Thanks. The reason I looked at the 4% withdraw on the current portfolio was as a worst case. What if both my wife and I were laid off? What if we couldn't find adequate work without relocating? I know several people, whose companies downsized, and found themselves out of work in their mid-50s. I feel like we're doing quite well, but don't want to get smug.

As it happens, both of us are in stable positions, in our high earning years, and are hoping to double this (or more). Naturally we'll want to travel in retirement, have peace of mind, and weather any bumps.

Since we came up with the idea of retiring early maybe a year ago, we began a spending analysis. Since we're overpaying on our monthly mortgage, and maximizing our retirement contributions, it's appearing our current expenses are lower than thought. At the same time we're working on identifying any major work the house might need (e.g., new roof), and take care of these while we're still working. At our current expenditure rate, and we've decided to study this over a longer time period, $80K/year, or $2M with a 4% withdrawal rate, would be very comfortable. The caveat is health costs, which I understand tend to increase as people age, but hasn't hit us yet. Otherwise we live in a moderate COL area and don't have expensive tastes (other than travel, which does still count as one). My wife quite likes our space, so relocation in retirement is 50/50 at this point (or less).

Key to the decision to retire is having a plan for it, and only part of that is financial. We are both thinking about a life past working, and how to make best of that time, and how to prepare ourselves psychologically. At the same time, I have also dreamed of being in the position where I could quit after having two bad days in a row...
How about paying the mortgage while in the rest of your portfolio you reduce your allocation to bonds and increase your allocation to stocks?

That way you will get a certain approx. 3.5% return, something you can't get in bonds right now.
Post Reply