Retirement 4 percent withdrawal - mortgage principal

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Retirement 4 percent withdrawal - mortgage principal

Postby cliff » Fri Apr 05, 2013 11:35 am

I am retired and have been using the tried-and-true 4% limit on withdrawals. I have a mortgage and have been counting principal payments against the 4%. However, in reality this is just a different asset. It is not unlike buying gold, artwork, or for that matter a mutual fund. Should I really count principal payment against a 4% withdrawal?

I also own a condominium and the same issue applies. My thinking is that the principal on my main residence should count against the 4% but not on the condo. My reasoning is that for my primary residence the principal is not unlike rent as a living expense although it does not change my net worth. The condo on the other hand in essence becomes an investment.

Your thoughts?
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby Iorek » Fri Apr 05, 2013 11:46 am

I would think about this by considering the reason for the 4% "rule". I think the underlying rationale is that you want to avoid running out of money.

Would you be ok if you ran out of money in your investment accounts but still had your home equity to cover your expenses? My guess is that you want to avoid that, because tapping the equity in your house may be difficult and/or expensive.

Would you be ok if you ran out of money in your investment account but had your condo to cover your expenses? That seems more plausible, as presumably you could at least sell the condo if you needed to, but the amount of equity in the condo can go up or down regardless of whether you made a principal payment that month.

In short, I think I would ignore the house and include a conservative estimate of the condo's equity in your portfolio for purposes of calculating the 4%.
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby dbr » Fri Apr 05, 2013 12:57 pm

The above is correct. The 4% rule is not a rule but rather an answer to the question at what rate one can withdraw from a portfolio with only a minimal chance the portfolio will be exhausted at the end of a specific period of time, thirty years in the typical case.
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby YDNAL » Fri Apr 05, 2013 1:05 pm

cliff wrote:I am retired and have been using the tried-and-true 4% limit on withdrawals. I have a mortgage and have been counting principal payments against the 4%. However, in reality this is just a different asset. It is not unlike buying gold, artwork, or for that matter a mutual fund. Should I really count principal payment against a 4% withdrawal?

I also own a condominium and the same issue applies. My thinking is that the principal on my main residence should count against the 4% but not on the condo. My reasoning is that for my primary residence the principal is not unlike rent as a living expense although it does not change my net worth. The condo on the other hand in essence becomes an investment.

Your thoughts?

Does it matter?

NO - what matters is that you are consuming at a rate that mitigates (NOT guarantee against) the possibility of going broke. I don't understand the reason to have mortgage debt (read: added expense in the form of Interest) while also withdrawing from a portfolio... different strokes and all.
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby cliff » Fri Apr 05, 2013 5:31 pm

The reason to have mortgage debt is because of the low rates and tax deduction of mortgage interest. With interest at 3% or so and I bonds at 5 plus % for those bought back when they were great should I sell the I bonds to pay the mortgage? The stock market - I am betting that I can get more than 3% return. Hence. there is logic having a mortgage even though it could be paid off.

As to the 4% withdrawal. I frankly will not run out of money. I use 4% of my portfolio, net worth hence condo value does not enter into it, as a top level of withdrawal. I do not index for inflartion so that if my portfolio was $1 I could spend 4 cents. I only use the 4% as a form of budgeting.

It would seem that there is logic therefore in counting the mortgage principal on my main residence against the 4%, but not the condo.

Thanks so far for the replies...
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby Peter Foley » Fri Apr 05, 2013 6:15 pm

To the extent that payments on the condo increase your equity, they should not count against a withdrawal. Let's say you had an $800 condo payment of which $200 went to principal and $600 interest. The $200 is the equivalent of investing in REITs each month.
Last edited by Peter Foley on Sat Apr 06, 2013 12:52 am, edited 1 time in total.
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby EmergDoc » Fri Apr 05, 2013 6:28 pm

I agree the principal portion of the condo shouldn't count against you. I also agree that 4% is more of a guideline than a rule.
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby YDNAL » Fri Apr 05, 2013 7:09 pm

cliff wrote:
YDNAL wrote:.... I don't understand the reason to have mortgage debt (read: added expense in the form of Interest) while also withdrawing from a portfolio... different strokes and all.

The reason to have mortgage debt is because of the low rates and tax deduction of mortgage interest. With interest at 3% or so and I bonds at 5 plus % for those bought back when they were great should I sell the I bonds to pay the mortgage?

How about selling Equity & Fixed Income investments - in proportion to your overall AA - to get rid of risk for expected (not guaranteed) return in exchange for getting a risk-free and guaranteed return from eliminating mortgage interest?

See, you are looking a specific parts of your portfolio in isolation, and ignoring risk, in order to justify that selling I-Bonds (at whatever rate) doesn't make sense. We are just going to agree to disagree here.
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby cliff » Fri Apr 05, 2013 8:29 pm

Please explain to me why selling I Bonds returning 5% plus would make sense to pay a mortgage at 3%? I should add that I always sell equities and bonds to retain the allocation that I desire.
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby YDNAL » Sat Apr 06, 2013 8:56 am

cliff wrote:Please explain to me why selling I Bonds returning 5% plus would make sense to pay a mortgage at 3%? I should add that I always sell equities and bonds to retain the allocation that I desire.

Cliff,

To address your question specifically, I have not suggested getting rid of I-Bonds in any way, shape or form. Now, I-Bonds return an Inflation component. What happens to "returning 5%" if we have LOW to ZERO inflation - perhaps deflation - over the next 10 years? You seem enamoured with looking at ONE piece of the portfolio in isolation and that is a mistake.

    First, I seriously doubt that your entire Fixed Income allocation is in I-Bonds that make you feel warm and cozy. You must have significant other Equity/Fixed Income investments in your allocation - use that to get rid of risk, and get rid of debt.

    Second, a liability with X% interest means that this interest would be an X% risk-free and guaranteed return to you if you get rid of the liability.
With regards to the BIG picture, my initial comment stands: I can't understand having extra expenses (interest) when withdrawing 4% from a portfolio (retirement) as you said in the original post. That said, perhaps there are other issues in your portfolio/holdings that we don't know - not that I personally need to know.
For subject of this thread you wrote:Retirement 4 percent withdrawal - mortgage principal
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Re: Retirement 4 percent withdrawal - mortgage principal

Postby G-Money » Sat Apr 06, 2013 9:30 am

Cliff,

In the same vein as Landy's posts, is your ENTIRE fixed income allocation in I Bonds? TBM is yielding less than 2%. I don't know what your tax bracket is or how much you have in tax deferred vs. taxable. But if you have some bonds with an after-tax yield of say, 1.7%, and a mortgage with an after-tax rate of 2.25%, you may want to look into selling the bonds and paying down your mortgage. Your entire portfolio will have the exact same risk exposure (i.e., same amount of equity risk), but with a higher expected return (no drag between lower yielding bonds and higher cost mortgage).
Don't assume I know what I'm talking about.
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