Why not always take debt if it’s sub 4% / SWR discussion

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LFKB
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Why not always take debt if it’s sub 4% / SWR discussion

Post by LFKB »

Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by sailaway »

I don't think the interest rate and SWR correlate at all, do they? If I want a 4% SWR and ibonds are paying 6%, it makes sense to take on debt at 5%.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by EnjoyIt »

LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
If I could get a 2% mortgage while still getting 4.6% from money market funds I would take that exchange all day long.

Problem is that one can’t get a 2% mortgage today.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by David Jay »

LFKB wrote: Wed Mar 29, 2023 7:50 pmI get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low.
2% mortgages were a short term aberration. If you have one, enjoy!
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by bmcgin »

How can debt be categorized as an asset dollar for dollar? SVB accounting, maybe.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by CletusCaddy »

David Jay wrote: Wed Mar 29, 2023 7:57 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pmI get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low.
2% mortgages were a short term aberration. If you have one, enjoy!
1.5% here but only 3 years left...
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by coolasadog »

LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
I wish I had an answer for you because I go back and forth on this personally. I am very close to retiring and the flexibility of having liquidity (and a 2.75% rate) has kept me from parking the money in the house. But not an easy decision. Probably as much psychological as financial
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by CletusCaddy »

One reason to shelter cash in your home equity is to hide it from college financial aid officers.

My wife and I intend to quit our jobs and pay off our >$1M mortgage before my kids apply for college in order to qualify for financial need based aid.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Ben Mathew »

LFKB wrote: Wed Mar 29, 2023 7:50 pm The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.
If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
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LFKB
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by LFKB »

bmcgin wrote: Wed Mar 29, 2023 8:11 pm How can debt be categorized as an asset dollar for dollar? SVB accounting, maybe.
Umm if you take $1.6 million of debt on you can invest $1.6 million in stocks or whatever else
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by LFKB »

Ben Mathew wrote: Wed Mar 29, 2023 9:31 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pm The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.
If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
No you can’t take it there. 1) I said taking on debt within reason and 2) you can’t get an infinite amount of debt, and certainly not at low rates
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by JoMoney »

Taxes...
You have to realize more income to pay a mortgage payment. That additional income might put you into a higher tax bracket and/or reduce other income related benefits.
Also, we're in a rather unique situation of many people with mortgages well below available interest rates on bonds and other safe investments. That would have been a pretty unique situation further back in time. People believe stocks will have higher returns, but it's not a given, there's more risk involved trying to arbitrage stocks against a fixed interest rate, and outside of a mortgage you're not going to find 30 year fixed-rate government subsidized borrowing opportunities.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Ben Mathew »

LFKB wrote: Wed Mar 29, 2023 9:52 pm
Ben Mathew wrote: Wed Mar 29, 2023 9:31 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pm The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.
If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
No you can’t take it there. 1) I said taking on debt within reason and 2) you can’t get an infinite amount of debt, and certainly not at low rates
1) What's "within reason"? The logic in the OP implies that infinite leverage is optimal. Why would it not be reasonable?

2) Sure, you can’t get an infinite amount of debt. But hypothetically, to check the logic in the OP, suppose that someone has access to as much leverage as they want at a reasonable interest rate. Can this person take on infinite debt and increase safe withdrawals?
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by tibbitts »

LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
By using the example of a primary residence home loan aren't you complicating the issue with taxes? Maybe a $1.6M car loan?
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by JBTX »

Ben Mathew wrote: Wed Mar 29, 2023 10:19 pm
LFKB wrote: Wed Mar 29, 2023 9:52 pm
Ben Mathew wrote: Wed Mar 29, 2023 9:31 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pm The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.
If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
No you can’t take it there. 1) I said taking on debt within reason and 2) you can’t get an infinite amount of debt, and certainly not at low rates
1) What's "within reason"? The logic in the OP implies that infinite leverage is optimal. Why would it not be reasonable?

2) Sure, you can’t get an infinite amount of debt. But hypothetically, to check the logic in the OP, suppose that someone has access to as much leverage as they want at a reasonable interest rate. Can this person take on infinite debt and increase safe withdrawals?

Since we are in the purely hypothetical, if you can borrow 2% after tax and invest it in an extremely safe investment asset that earns 3% after tax then yes do that to infinity. But obviously the world doesn’t work like that so it’s a meaningless hypothetical.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by JBTX »

LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
The problem is the 4% withdraw rate is based on a mixed portfolio of risky assets so success is not 100% guaranteed at 4%.

Having said that, I’d borrow all day long at 2%, and invest in safe assets yielding more than 2%, so all else equal that should increase your probability of success. Why do people pay off 2% mortgages at this point? Because it has been burned in their head that debt is bad and they experience anxiety until it is paid off. I on the other hand will hang on to my modest remaining 2.4% mortgage as long as I can.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Ben Mathew »

JBTX wrote: Wed Mar 29, 2023 10:28 pm
Ben Mathew wrote: Wed Mar 29, 2023 10:19 pm
LFKB wrote: Wed Mar 29, 2023 9:52 pm
Ben Mathew wrote: Wed Mar 29, 2023 9:31 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pm The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.
If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
No you can’t take it there. 1) I said taking on debt within reason and 2) you can’t get an infinite amount of debt, and certainly not at low rates
1) What's "within reason"? The logic in the OP implies that infinite leverage is optimal. Why would it not be reasonable?

2) Sure, you can’t get an infinite amount of debt. But hypothetically, to check the logic in the OP, suppose that someone has access to as much leverage as they want at a reasonable interest rate. Can this person take on infinite debt and increase safe withdrawals?

Since we are in the purely hypothetical, if you can borrow 2% after tax and invest it in an extremely safe investment asset that earns 3% after tax then yes do that to infinity. But obviously the world doesn’t work like that so it’s a meaningless hypothetical.
Yes, that would be a meaningless hypothetical.

I'm assuming OP is referring to borrowing at low interest rates to invest in higher yielding risky assets.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by LFKB »

Ben Mathew wrote: Wed Mar 29, 2023 10:19 pm
LFKB wrote: Wed Mar 29, 2023 9:52 pm
Ben Mathew wrote: Wed Mar 29, 2023 9:31 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pm The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.
If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
No you can’t take it there. 1) I said taking on debt within reason and 2) you can’t get an infinite amount of debt, and certainly not at low rates
1) What's "within reason"? The logic in the OP implies that infinite leverage is optimal. Why would it not be reasonable?

2) Sure, you can’t get an infinite amount of debt. But hypothetically, to check the logic in the OP, suppose that someone has access to as much leverage as they want at a reasonable interest rate. Can this person take on infinite debt and increase safe withdrawals?
1) Within reason means up to a level where you can still get cheap debt, have good coverage of assets to liabilities, etc. I have an example in my post of $1.6M of debt against $8 million of assets. That’s within reason.

2) Yes, so long as you’re borrowing at a better rate than your SWR and even more so because they can just borrow more if needed. If I had infinite debt capacity I could spend infinitely because I could always repay old debt with new debt.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by LFKB »

JBTX wrote: Wed Mar 29, 2023 10:28 pm
Ben Mathew wrote: Wed Mar 29, 2023 10:19 pm
LFKB wrote: Wed Mar 29, 2023 9:52 pm
Ben Mathew wrote: Wed Mar 29, 2023 9:31 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pm The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.
If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
No you can’t take it there. 1) I said taking on debt within reason and 2) you can’t get an infinite amount of debt, and certainly not at low rates
1) What's "within reason"? The logic in the OP implies that infinite leverage is optimal. Why would it not be reasonable?

2) Sure, you can’t get an infinite amount of debt. But hypothetically, to check the logic in the OP, suppose that someone has access to as much leverage as they want at a reasonable interest rate. Can this person take on infinite debt and increase safe withdrawals?

Since we are in the purely hypothetical, if you can borrow 2% after tax and invest it in an extremely safe investment asset that earns 3% after tax then yes do that to infinity. But obviously the world doesn’t work like that so it’s a meaningless hypothetical.
It’s not a hypothetical. The question is shouldn’t you borrow if you can borrow below your SWR. It’s very relevant to many folks on here who could take on a mortgage below their SWR at some point.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by JBTX »

LFKB wrote: Wed Mar 29, 2023 11:08 pm
JBTX wrote: Wed Mar 29, 2023 10:28 pm
Ben Mathew wrote: Wed Mar 29, 2023 10:19 pm
LFKB wrote: Wed Mar 29, 2023 9:52 pm
Ben Mathew wrote: Wed Mar 29, 2023 9:31 pm

If we take this logic further, we can conclude that infinite leverage leads to infinitely high safe withdrawals in retirement.

There must be something wrong with that logic. That something is the SWR methodology being assumed.

- If you go beyond the pass/fail grading used in the SWR methodology, failures in a leveraged strategy will be harder (i.e. you will run out of money sooner)

- If you go beyond the fixed spending assumed in SWR methodology and allow variable spending, more stocks will make spending more uncertain and volatile. See amortization based withdrawal (ABW).

Using a more realistic withdrawal strategy than SWR will show more clearly why leveraging (and more stocks in general even when not leveraged) increases risk to spending.
No you can’t take it there. 1) I said taking on debt within reason and 2) you can’t get an infinite amount of debt, and certainly not at low rates
1) What's "within reason"? The logic in the OP implies that infinite leverage is optimal. Why would it not be reasonable?

2) Sure, you can’t get an infinite amount of debt. But hypothetically, to check the logic in the OP, suppose that someone has access to as much leverage as they want at a reasonable interest rate. Can this person take on infinite debt and increase safe withdrawals?

Since we are in the purely hypothetical, if you can borrow 2% after tax and invest it in an extremely safe investment asset that earns 3% after tax then yes do that to infinity. But obviously the world doesn’t work like that so it’s a meaningless hypothetical.
It’s not a hypothetical. The question is shouldn’t you borrow if you can borrow below your SWR. It’s very relevant to many folks on here who could take on a mortgage below their SWR at some point.
No because it is apples and oranges. The 4% SWR is based upon a domination of risk assets and isn’t necessarily 100% guaranteed.

Let’s say you have 2 years left to live. You have 8% left over, or two years at 4%. Now you are given the opportunity to borrow another 4% at a very low rate. You do so, and the next day your portfolio loses 50% of its value. Was that the wise thing to do?

If you can borrow and reinvest at a higher risk free rate, then yes there is no downside. But even if you borrow for free, if you invest it in risky assets there is a chance you can lose money.

You are treating 4% as a risk free guarantee. It is not.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by invest4 »

I have a 30 year mortgage @2.625%.

I value the benefits it provides:

* Hedge against inflation

* Liquidity

* Leverage for further investment during accumulation

I am happy to maintain this debt and pay it back with inflated dollars until its conclusion (paid off or sold).

Of course, I grant there could be a set of circumstances that would suggest an alternate course at some point in the journey (having more money than I need for example)…will wait and see.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Ping Pong »

The mortgage payment is higher than the interest rate because you’re required to pay down principal. So using your example, the payment rate, not the interest rate, needs to be less than 4%.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Ping Pong »

The mortgage payment is higher than the interest rate because you’re required to pay down principal. So using your example, the payment rate, not the interest rate, needs to be less than 4%.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by fyre4ce »

I am not understanding the reference to SWR. The appropriate comparison is the after-tax interest rate on the loan to the after-tax rate of return on the corresponding investment. If you can earn a higher return with the investment, borrow money and invest. Risk is a factor, so the appropriate comparison is a low-risk investment.

If someone wants to lend me money at 2%, I’ll take as much as they will give me, invest the money in treasuries, and pocket the spread.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by tphp99 »

LFKB wrote: Wed Mar 29, 2023 11:08 pm
It’s not a hypothetical. The question is shouldn’t you borrow if you can borrow below your SWR. It’s very relevant to many folks on here who could take on a mortgage below their SWR at some point.
I've borrowed for (personal residence) 3-4 times so far and the rates have been in the 6-9% range, my business loan was 8.5%.

Yes, I suppose if you have one of those 2% long term loans or can get one in the future, it makes sense to keep it. But here's the thing though, a few years back when interest rates were that low, CDs and bonds were even lower. I remember wanting to get those low interest rates - sub 2%, but everything I had was paid off, and HELOCs were not that low.

It takes some lucky timing I suppose. I keep hearing "that if you retire in year ____, you could have spent 6-8% or more and would have done fine."
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by 8foot7 »

I agree that it’s weird and probably not useful to tie debt interest rates to your withdrawal rate. That said, I really don’t understand anyone paying off sub-3% mortgages when you can get 4+% in FDIC-insured savings accounts (at multiple banks). There should really be no peace of mind argument when a risk-free bank product is making over 100bps more than your non-callable mortgage.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by kd2008 »

OP, this was discussed in reverse in this thread of mine:

What X are we at? [Multiple of future years' expenses]

We are at 27X now with a mortgage and 9yrs to spouse's SS at 70 yrs (only one person out of a couple; I didn't consider my SS)

If we pay off mortgage and fund an SS bridge, then the remainder portfolio results in 74X for the residual expenses ( annual expenses - SS - principal - interest)

Our mortgage is 2% 😃 so we are not paying it off.

People here will debate endlessly with their anchored (or biased in my opinion) views. The forum allows it. Enjoy the rehashed discussion.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by EnjoyIt »

JBTX wrote: Wed Mar 29, 2023 10:34 pm
LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
The problem is the 4% withdraw rate is based on a mixed portfolio of risky assets so success is not 100% guaranteed at 4%.

Having said that, I’d borrow all day long at 2%, and invest in safe assets yielding more than 2%, so all else equal that should increase your probability of success. Why do people pay off 2% mortgages at this point? Because it has been burned in their head that debt is bad and they experience anxiety until it is paid off. I on the other hand will hang on to my modest remaining 2.4% mortgage as long as I can.
We paid off our 2.75% mortgage a few years ago because it got low enough compared to our wealth that the arbitrage between mortgage and expected returns of 70/30 asset allocation was not that much. Also bonds were paying sub 2% if my memory serves me right. So paying it off made a whole lot of sense at the time.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by White Coat Investor »

LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
One nice thing about being wealthy is you no longer have to try to optimize every little financial thing. For instance, I don't need to use debt to reach any of my financial goals, so I don't. When you've won the game, stop playing. Nobody ever went bankrupt without debt.

We paid off our 2.75% mortgage 6+ years ago. Today, that remaining mortgage amount would be less than 0.5% of our net worth. Carrying that would not have moved the needle on our financial life. You tell me why I should bother with the hassle of dealing with that. The same argument can be applied to a car loan or even a microwave loan but at a certain point everyone recognizes it's just silly.

I'm not understanding the connection between interest rate and withdrawal rate either. I mean, if I were withdrawing 10% of my portfolio I'm okay carrying 10% debt? Seems bizarre. Or if I'm only taking out 1% of my portfolio now it no longer makes sense to borrow at 4% and earn at 6%? It's a weird argument.

But if you want to read an interesting treatise on the use of debt (for the rare few who can handle that behaviorally), check out The Value of Debt book series.

https://www.amazon.com/Value-Debt-Retir ... 1119019982

He recommends you only borrow an amount equal to 15-35% of your assets.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by quantAndHold »

Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by LFKB »

White Coat Investor wrote: Thu Mar 30, 2023 9:28 am
LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
One nice thing about being wealthy is you no longer have to try to optimize every little financial thing. For instance, I don't need to use debt to reach any of my financial goals, so I don't. When you've won the game, stop playing. Nobody ever went bankrupt without debt.

We paid off our 2.75% mortgage 6+ years ago. Today, that remaining mortgage amount would be less than 0.5% of our net worth. Carrying that would not have moved the needle on our financial life. You tell me why I should bother with the hassle of dealing with that. The same argument can be applied to a car loan or even a microwave loan but at a certain point everyone recognizes it's just silly.

I'm not understanding the connection between interest rate and withdrawal rate either. I mean, if I were withdrawing 10% of my portfolio I'm okay carrying 10% debt? Seems bizarre. Or if I'm only taking out 1% of my portfolio now it no longer makes sense to borrow at 4% and earn at 6%? It's a weird argument.

But if you want to read an interesting treatise on the use of debt (for the rare few who can handle that behaviorally), check out The Value of Debt book series.

https://www.amazon.com/Value-Debt-Retirement-Everything-Wrong/dp/1119019982

He recommends you only borrow an amount equal to 15-35% of your assets.

Like I said, it’s psychological for many people. But if instead of you paying off the mortgage that was 0.5% of your NW, you had levered up to 80% LTV at a 2.75% rate, you would be better off financially IMO.

I don’t understand why you mention “the hassle” of a mortgage. Mine auto debits from my checking and is no hassle at all.

A $1 million mortgage at 2.75% over 30 years vs a 70/30 portfolio that generates say 6-8% over that time period will add millions to your portfolio, but to each his own. I know the returns aren’t guaranteed but over a 30 year period history says you’ll do well.

No one in their right mind uses a 10% SWR unless they are at the end of their life. My point was more geared to those that are younger (say 45-65) and seem to often be focused on reducing their mortgage when in certain rate environments, they shouldn’t be.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by LFKB »

quantAndHold wrote: Thu Mar 30, 2023 9:51 am Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
Fair point, but you’d also have to factor in the tax savings on your mortgage interest
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by TheTimeLord »

LFKB wrote: Thu Mar 30, 2023 10:46 am
quantAndHold wrote: Thu Mar 30, 2023 9:51 am Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
Fair point, but you’d also have to factor in the tax savings on your mortgage interest
I think of my house as the source of funds for LTC.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by EnjoyIt »

In general terms (not in all cases) one is better off having lower fixed expenses in retirement. Doing so lowers taxes, increases ACA subsidies if one is in that world, allows for Roth Conversions if needed, and usually decreases sequence of return risk.

Sequence of return risk can show up where one has to pay down their mortgage by selling depressed shares and although the returns on average may eventually be higher, that money is now gone and it doesn't average to 4% and depletes the portfolio prematurely. There are several studies that show lower fixed expenses in retirement decrease this risk. WIth that in mind I can see someone paying off a mortgage that is 3.5% or maybe 3% before retiring. I doubt the math works out for a 2% loan, but then again, you can't get a 2% loan these days. Only legacy loans like that exist, and as long as you can get a money market fund or other safe asset to pay out more, I would hold that debt until that changes.

As another example of the above, it may be beneficial (based on the math) for a home owner to add renewal energy to their home and installing geothermal heating. This would lower fixed expenses for a price and decrease sequence of return risk.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by EnjoyIt »

TheTimeLord wrote: Thu Mar 30, 2023 10:49 am
LFKB wrote: Thu Mar 30, 2023 10:46 am
quantAndHold wrote: Thu Mar 30, 2023 9:51 am Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
Fair point, but you’d also have to factor in the tax savings on your mortgage interest
I think of my house as the source of funds for LTC.
Our house is our back up plan when our original back up plan fails. The good ol' reverse mortgage or outright sale to fund our last remaining years in assisted living or nursing home.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by HomerJ »

quantAndHold wrote: Thu Mar 30, 2023 9:51 am Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
This.

Paying off the mortgage means I need to withdraw less from my IRA, so my "income" is lower, which lowers my taxes, allows me to do Roth conversions and/or qualify for ACA subsidies.

Plus peace of mind if things go south...

Borrow $1.6 million on your house, 2008 happens, your stock investments are cut in half, your house loses value too, so now you're underwater, and let's say it takes 5-10 years before you get to the recovery this time.

Yes, technically today, if you have a 3% $1.6 million mortgage from a couple of years ago, you could put $1.6 million in a 4% money market, and make money pretty safely.

But usually these plans entail investing the money in stocks to make more money than the interest rate on the loan, but then you take on sequence of return risk.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by TheTimeLord »

EnjoyIt wrote: Thu Mar 30, 2023 11:08 am
TheTimeLord wrote: Thu Mar 30, 2023 10:49 am
LFKB wrote: Thu Mar 30, 2023 10:46 am
quantAndHold wrote: Thu Mar 30, 2023 9:51 am Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
Fair point, but you’d also have to factor in the tax savings on your mortgage interest
I think of my house as the source of funds for LTC.
Our house is our back up plan when our original back up plan fails. The good ol' reverse mortgage or outright sale to fund our last remaining years in assisted living or nursing home.
Just to be clear I expect to liquidate the house and those funds would be added to SS benefits and the portfolio funds already generating the dollars that would be covering my annual expenses.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Caduceus »

There's a point where a rational investor would definitely borrow. I mean, if I could borrow at 1%, I'd borrow as much as the counterparty would loan me without batting an eyelid. Whether I'd borrow at 4% depends on what I'm looking to invest in. If it's really compelling, sure, why not?
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Juice3 »

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Last edited by Juice3 on Mon Jul 17, 2023 9:01 am, edited 1 time in total.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by EnjoyIt »

TheTimeLord wrote: Thu Mar 30, 2023 11:21 am
EnjoyIt wrote: Thu Mar 30, 2023 11:08 am
TheTimeLord wrote: Thu Mar 30, 2023 10:49 am
LFKB wrote: Thu Mar 30, 2023 10:46 am
quantAndHold wrote: Thu Mar 30, 2023 9:51 am Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
Fair point, but you’d also have to factor in the tax savings on your mortgage interest
I think of my house as the source of funds for LTC.
Our house is our back up plan when our original back up plan fails. The good ol' reverse mortgage or outright sale to fund our last remaining years in assisted living or nursing home.
Just to be clear I expect to liquidate the house and those funds would be added to SS benefits and the portfolio funds already generating the dollars that would be covering my annual expenses.
Since we are early semi-retired and SS is 20+ years away, SS is our back up plan if things go south. Currently SS will likely end up covering a good chunk of our taxes on SS and RMD income. That is if we are unable to Roth convert a significant amount to cut those RMDs (This is a good problem to have.) If our portfolio starts to collapse, then SS will cover most of our needs and some of our wants.

If we get into some sort of trouble and our spending exceeds the above that is when our house value comes into play. It is a back up back up plan.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by mtnman125 »

quantAndHold wrote: Thu Mar 30, 2023 9:51 am Retirees living off of savings pay taxes based on what they actually withdraw from their accounts, not what their SWR is. So this investment also has to be able to overcome the tax drag of both the extra withdrawals to pay the mortgage, and the taxes paid on the investment gains.

If someone already has a 2% mortgage, it might be doable right now. But in general, you’re not going to find a safe investment that will beat the rate on a new mortgage, especially not by enough to overcome the tax drag.
This is my concern as well, specifically the "tax drag" of ACA subsidies. For our spending, we'd be looking at 6% of income for silver plan, adding $24k of extra withdrawals would push that to 8.5%. That's a $5k swing, in addition to potentially higher out of pocket costs.

I'm struggling to model this better, but love the 28yrs we have left on 2.5% mortgage. We're ~10yrs out from retirement, so lots can change in that time. Plan for now is to invest any prepayment and evaluate with 1yr to go- but if I need to adjust my FIRE target to accommodate, I'd like to plan for it now.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by JBTX »

White Coat Investor wrote: Thu Mar 30, 2023 9:28 am
LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
One nice thing about being wealthy is you no longer have to try to optimize every little financial thing. For instance, I don't need to use debt to reach any of my financial goals, so I don't. When you've won the game, stop playing. Nobody ever went bankrupt without debt.

We paid off our 2.75% mortgage 6+ years ago. Today, that remaining mortgage amount would be less than 0.5% of our net worth. Carrying that would not have moved the needle on our financial life. You tell me why I should bother with the hassle of dealing with that. The same argument can be applied to a car loan or even a microwave loan but at a certain point everyone recognizes it's just silly.

I'm not understanding the connection between interest rate and withdrawal rate either. I mean, if I were withdrawing 10% of my portfolio I'm okay carrying 10% debt? Seems bizarre. Or if I'm only taking out 1% of my portfolio now it no longer makes sense to borrow at 4% and earn at 6%? It's a weird argument.

But if you want to read an interesting treatise on the use of debt (for the rare few who can handle that behaviorally), check out The Value of Debt book series.

https://www.amazon.com/Value-Debt-Retir ... 1119019982

He recommends you only borrow an amount equal to 15-35% of your assets.
Again the moving the needle arguments. By those definitions, mortgage doesn’t move the needle. Ibonds don’t move the needle. Credit card and bank bonuses don’t. TLH doesn’t move the needle. Backdoor Roth doesn’t move the needle. Maybe even 401k doesn’t move the needle at some point.

Seems like doesn’t move the needle is used when someone doesn’t want the perceived hassle of one of these strategies.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by CletusCaddy »

JBTX wrote: Thu Mar 30, 2023 7:08 pm
White Coat Investor wrote: Thu Mar 30, 2023 9:28 am
LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
One nice thing about being wealthy is you no longer have to try to optimize every little financial thing. For instance, I don't need to use debt to reach any of my financial goals, so I don't. When you've won the game, stop playing. Nobody ever went bankrupt without debt.

We paid off our 2.75% mortgage 6+ years ago. Today, that remaining mortgage amount would be less than 0.5% of our net worth. Carrying that would not have moved the needle on our financial life. You tell me why I should bother with the hassle of dealing with that. The same argument can be applied to a car loan or even a microwave loan but at a certain point everyone recognizes it's just silly.

I'm not understanding the connection between interest rate and withdrawal rate either. I mean, if I were withdrawing 10% of my portfolio I'm okay carrying 10% debt? Seems bizarre. Or if I'm only taking out 1% of my portfolio now it no longer makes sense to borrow at 4% and earn at 6%? It's a weird argument.

But if you want to read an interesting treatise on the use of debt (for the rare few who can handle that behaviorally), check out The Value of Debt book series.

https://www.amazon.com/Value-Debt-Retir ... 1119019982

He recommends you only borrow an amount equal to 15-35% of your assets.
Again the moving the needle arguments. By those definitions, mortgage doesn’t move the needle. Ibonds don’t move the needle. Credit card and bank bonuses don’t. TLH doesn’t move the needle. Backdoor Roth doesn’t move the needle. Maybe even 401k doesn’t move the needle at some point.

Seems like doesn’t move the needle is used when someone doesn’t want the perceived hassle of one of these strategies.
Not to mention that you can’t really judge needle moving at the end of a mortgage’s life. Of course it doesn’t move the needle at that point.

OP is asking about carrying a $1M+ interest only mortgage, I.e. no principal pay down. I bet that would move the needle for most people.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by snowday2022 »

LFKB wrote: Thu Mar 30, 2023 10:44 am
White Coat Investor wrote: Thu Mar 30, 2023 9:28 am
LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
One nice thing about being wealthy is you no longer have to try to optimize every little financial thing. For instance, I don't need to use debt to reach any of my financial goals, so I don't. When you've won the game, stop playing. Nobody ever went bankrupt without debt.

We paid off our 2.75% mortgage 6+ years ago. Today, that remaining mortgage amount would be less than 0.5% of our net worth. Carrying that would not have moved the needle on our financial life. You tell me why I should bother with the hassle of dealing with that. The same argument can be applied to a car loan or even a microwave loan but at a certain point everyone recognizes it's just silly.

I'm not understanding the connection between interest rate and withdrawal rate either. I mean, if I were withdrawing 10% of my portfolio I'm okay carrying 10% debt? Seems bizarre. Or if I'm only taking out 1% of my portfolio now it no longer makes sense to borrow at 4% and earn at 6%? It's a weird argument.

But if you want to read an interesting treatise on the use of debt (for the rare few who can handle that behaviorally), check out The Value of Debt book series.

https://www.amazon.com/Value-Debt-Retir ... 1119019982

He recommends you only borrow an amount equal to 15-35% of your assets.

Like I said, it’s psychological for many people. But if instead of you paying off the mortgage that was 0.5% of your NW, you had levered up to 80% LTV at a 2.75% rate, you would be better off financially IMO.

I don’t understand why you mention “the hassle” of a mortgage. Mine auto debits from my checking and is no hassle at all.

A $1 million mortgage at 2.75% over 30 years vs a 70/30 portfolio that generates say 6-8% over that time period will add millions to your portfolio, but to each his own. I know the returns aren’t guaranteed but over a 30 year period history says you’ll do well.

No one in their right mind uses a 10% SWR unless they are at the end of their life. My point was more geared to those that are younger (say 45-65) and seem to often be focused on reducing their mortgage when in certain rate environments, they shouldn’t be.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by Exchme »

Remember the 4% SWR included portfolio depletion, anything greater than zero balance was a success. Over 30 years, that was a 1.1% CAGR. Obviously taking on a loan at 4% if ithat turned out to be your fate would be a mistake.
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by White Coat Investor »

JBTX wrote: Thu Mar 30, 2023 7:08 pm
White Coat Investor wrote: Thu Mar 30, 2023 9:28 am
LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
One nice thing about being wealthy is you no longer have to try to optimize every little financial thing. For instance, I don't need to use debt to reach any of my financial goals, so I don't. When you've won the game, stop playing. Nobody ever went bankrupt without debt.

We paid off our 2.75% mortgage 6+ years ago. Today, that remaining mortgage amount would be less than 0.5% of our net worth. Carrying that would not have moved the needle on our financial life. You tell me why I should bother with the hassle of dealing with that. The same argument can be applied to a car loan or even a microwave loan but at a certain point everyone recognizes it's just silly.

I'm not understanding the connection between interest rate and withdrawal rate either. I mean, if I were withdrawing 10% of my portfolio I'm okay carrying 10% debt? Seems bizarre. Or if I'm only taking out 1% of my portfolio now it no longer makes sense to borrow at 4% and earn at 6%? It's a weird argument.

But if you want to read an interesting treatise on the use of debt (for the rare few who can handle that behaviorally), check out The Value of Debt book series.

https://www.amazon.com/Value-Debt-Retir ... 1119019982

He recommends you only borrow an amount equal to 15-35% of your assets.
Again the moving the needle arguments. By those definitions, mortgage doesn’t move the needle. Ibonds don’t move the needle. Credit card and bank bonuses don’t. TLH doesn’t move the needle. Backdoor Roth doesn’t move the needle. Maybe even 401k doesn’t move the needle at some point.

Seems like doesn’t move the needle is used when someone doesn’t want the perceived hassle of one of these strategies.
A fair criticism.
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White Coat Investor
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by White Coat Investor »

LFKB wrote: Thu Mar 30, 2023 10:44 am
White Coat Investor wrote: Thu Mar 30, 2023 9:28 am
LFKB wrote: Wed Mar 29, 2023 7:50 pm Take someone near retirement with a $2 million, debt free home

Liquid assets of $5M
Total NW = $7M
4% withdrawal rate = $200k per year

Now take the same person and give them a $1.6M mortgage at 2% interest only
Liquid assets: $6.6M
Total NW: $7M

4% withdrawal rate = $264k less $32k of added interest from mortgage = $232k per year

I get that debt is psychological for most people but I don’t understand the need/desire for many to pay off their house later in life if rates are low. The math always argues for taking debt (within reason) so long as the interest rate is below the SWR.

Thoughts?

Note: this is not meant to be a discussion on if 4% is the right SWR or not. The point holds regardless of your view on what an appropriate SWR is.
One nice thing about being wealthy is you no longer have to try to optimize every little financial thing. For instance, I don't need to use debt to reach any of my financial goals, so I don't. When you've won the game, stop playing. Nobody ever went bankrupt without debt.

We paid off our 2.75% mortgage 6+ years ago. Today, that remaining mortgage amount would be less than 0.5% of our net worth. Carrying that would not have moved the needle on our financial life. You tell me why I should bother with the hassle of dealing with that. The same argument can be applied to a car loan or even a microwave loan but at a certain point everyone recognizes it's just silly.

I'm not understanding the connection between interest rate and withdrawal rate either. I mean, if I were withdrawing 10% of my portfolio I'm okay carrying 10% debt? Seems bizarre. Or if I'm only taking out 1% of my portfolio now it no longer makes sense to borrow at 4% and earn at 6%? It's a weird argument.

But if you want to read an interesting treatise on the use of debt (for the rare few who can handle that behaviorally), check out The Value of Debt book series.

https://www.amazon.com/Value-Debt-Retir ... 1119019982

He recommends you only borrow an amount equal to 15-35% of your assets.

Like I said, it’s psychological for many people. But if instead of you paying off the mortgage that was 0.5% of your NW, you had levered up to 80% LTV at a 2.75% rate, you would be better off financially IMO.

I don’t understand why you mention “the hassle” of a mortgage. Mine auto debits from my checking and is no hassle at all.

A $1 million mortgage at 2.75% over 30 years vs a 70/30 portfolio that generates say 6-8% over that time period will add millions to your portfolio, but to each his own. I know the returns aren’t guaranteed but over a 30 year period history says you’ll do well.

No one in their right mind uses a 10% SWR unless they are at the end of their life. My point was more geared to those that are younger (say 45-65) and seem to often be focused on reducing their mortgage when in certain rate environments, they shouldn’t be.
You're looking at this in isolation but in reality, our lives don't work that way. Because I don't have a mortgage, I can take on more risk with my career and business that I might not feel comfortable taking on and those risks may (and actually have) paid off dramatically better than a little arbitrage from a mortgage.

Plus, most people don't invest the money that would have paid down the mortgage. They spend it. Few of us are as Spock-like as this strategy requires.

In my case, I knew the debt was fungible just like everything else in finance. I was starting to loosen purse strings and "waste" a lot of money on consumption. It didn't feel right to me to borrow to buy a boat, yet by not paying off my mortgage, that is in essence what I was doing. I was borrowing for everything in my life. That's fine for needs, but I was way beyond needs so it made sense to me to pay off the mortgage.

And no, even the arbitrage of earning 6% while paying 3% on a million dollars won't change my personal financial life in a meaningful way. Might help some charity down the road though. Maybe I don't like charities enough to take on that risk for them. Too bad for them.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
aristotelian
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by aristotelian »

Because you would be taking more risk, potentially putting your allocation over 100% stock. Be very, very careful about leverage unless you have back tested the leveraged allocation. And even then, be careful.
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HomerJ
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by HomerJ »

TheTimeLord wrote: Thu Mar 30, 2023 11:21 am Just to be clear I expect to liquidate the house and those funds would be added to SS benefits and the portfolio funds already generating the dollars that would be covering my annual expenses.
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TheTimeLord
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Re: Why not always take debt if it’s sub 4% / SWR discussion

Post by TheTimeLord »

HomerJ wrote: Thu Mar 30, 2023 10:35 pm
TheTimeLord wrote: Thu Mar 30, 2023 11:21 am Just to be clear I expect to liquidate the house and those funds would be added to SS benefits and the portfolio funds already generating the dollars that would be covering my annual expenses.
Where are you going to live?
The LTC facility.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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