Should I pay off the mortgage before I quit my job?

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time916
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Should I pay off the mortgage before I quit my job?

Post by time916 » Thu Apr 30, 2015 12:44 am

I am thinking of staying home with my school-aged children. I'd like to do so many other things besides working full time.
Without my income, we could pay all our bills, but would suspend all retirement contributions. If we used money in our taxable account to pay off mortgage, we could still max out our ROTHs and I would feel less stressed about our cash flow. The balance is 96K right now at 3% for the next 5 years and the taxable account is all VTSMX/VTIAX.

We have an emergency fund, 550K in 401ks/ROTHs, and my partner plans to work until full retirement (20 more years) with a defined benefit pension.

Any advice on the psychological benefits of paying off the mortgage in order to quit working would be appreciated! Thanks!

HIinvestor
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Re: Should I pay off the mortgage before I quit my job?

Post by HIinvestor » Thu Apr 30, 2015 1:16 am

How are your assets for your kids educations? Any other debt? Your mortgage rate is nice and low! Any emergency fund? Big expenses in the horizon?

Personally, we LOVED paying off the mortgage just before H retired. It really helped with our cash flow and peace of mind. We had finished paying off all our kids' college expenses too.

I personally like funding Roth IRAs, and if paying off the mortgage will allow you to maximally fund your Roth IRAs going forward, that sounds great.

I'm sure others have great perspectives.

ralph124cf
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Re: Should I pay off the mortgage before I quit my job?

Post by ralph124cf » Thu Apr 30, 2015 1:26 am

Do you like your job or hate your job? Would you go back to work after the kids are in high school? Would you take a big hit on future career progression if you took ten years out of the workforce? What percentage of your current after tax income goes to child care? How much would your expenses go down if you quit work to stay home with the kids? Some people love doing this, others go out of their minds after a few months.

Best wishes,

Ralph

time916
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Re: Should I pay off the mortgage before I quit my job?

Post by time916 » Thu Apr 30, 2015 2:15 am

We have not funded college savings. We have maxed our 403b/401k/ROTHs instead of setting up 529s. No debt other than mortgage. I'm a middle school teacher and I don't know if I'll like not working, but would appreciate the flexibility to pursue other interests and maybe different career paths. Any earnings from part time work could go to college savings. In 10 years when my oldest is in college I could work again to help offset college costs, but after being out for that long it would take some adjusting. I enjoy teaching, but it is very stressful and I have very little energy to spend quality time with my own children when we're all home.

Our expenses wouldn't change much. My mom helps with the kids and I'd save money on clothing and by cooking more, but I'd also probably spend a little more on leisure. I like to take classes and garden.

I realize this is a very personal decision. I have some anxiety about quitting work, but I also have anxiety about sleepwalking through life. I'm wondering if paying off the mortgage will help nudge me to take the risk of leaving a very stable, but demanding job.

johnz1001
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Re: Should I pay off the mortgage before I quit my job?

Post by johnz1001 » Thu Apr 30, 2015 5:48 am

time916 wrote: We have an emergency fund, 550K in 401ks/ROTHs, and my partner plans to work until full retirement (20 more years) with a defined benefit pension.

Any advice on the psychological benefits of paying off the mortgage in order to quit working would be appreciated! Thanks!

There is a psychological benefit to paying off your mortgage. Your monthly expenditures can be cut substantially, and it takes pressure off. I note that you do have some nice backup with an emergency fund, a nice amount saved in your retirement funds, and the prospect of a defined benefit pension for your partner. If your partner is really okay with you quitting your full time job, and you feel that it's in your best and children's best interest, and you feel confident that not having a mortgage would allow you to be more comfortable with quitting, I would do it. You could always go back to work full time and rebuild your taxable account if you so desired. You may or may not have capital gains to pay, and you never know what the indexes will do in the future, though it's not unreasonable to expect some sort of pullback in the US markets.

It is a cheap mortgage though and a long view of a 96 grand in stock indexes will probably net more than you save in interest on your mortgage by paying it off. That's the other side of it.

There's a quality of life component that means a lot to you to explore. And that has weight. But if you have decided to stop working full time, and you are wondering whether, when you do quit, it's better to have the mortgage over your head or not, I'd say that not having a mortgage has a lot of psychological value.

The Wizard
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Re: Should I pay off the mortgage before I quit my job?

Post by The Wizard » Thu Apr 30, 2015 6:38 am

I'd say it all depends.
Your mortgage rate is low. I can get a guaranteed 3% to 3.65% in TIAA Traditional, plus possibly more in other investments, so I'm in no rush to pay off my remaining HELOC balance.
Look at the principal amount and the monthly payment as well; hopefully they are both low compared to your means.
Compare your projected net retirement income to your net employment income; if roughly comparable, then there's less of a problem to overcome.

When I refied my mortgage with a HELOC prior to retirement, my required monthly payment fell to just $400/month.
If/when I pay off that HELOC balance, it will be a nice inflation fighting bump in my net monthly income...
Attempted new signature...

Grt2bOutdoors
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Re: Should I pay off the mortgage before I quit my job?

Post by Grt2bOutdoors » Thu Apr 30, 2015 7:26 am

Do you have a years expenses in taxable left after you draw down the account to pay off the mortgage?
Sometimes folks think they will have a lot in cash flow savings, but if your mortgage payment includes escrowed taxes and insurance, you may find the proportion of the actual mortgage to overall payment is not that significant. Usually, this occurs on the coasts where property taxes are significant. You say you have 96K left on a 3% mortgage for 5 years - annual interest charges are $1,500, the remainder is principal payments. If you are able to take itemized deductions, your net interest cost is likely to be on the order of $1K per year. $100K in the bank at 1% taxable, so say 0.75% is $750 - net out of pocket insurance expense (I say insurance because that will be the cost to you for the privilege of keeping the liquidity handy if you so choose) is roughly $250-300 per year. Your call - you have to be able to sleep at night.

Just one question - if you stop working but you can pay your bills, how will you pay for classes and gardening expenses/leisure expenses?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Lafder
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Re: Should I pay off the mortgage before I quit my job?

Post by Lafder » Thu Apr 30, 2015 8:04 am

The last time I asked myself "should I pay off my mortgage with money from my taxable account" I waited a little too long and the market crashed to the point it was no longer an option (2008). I was upset at the time since it felt like the money "disappeared" yet my mortgage balance still existed. We had run calculations on the financial difference of paying off the mortgage over 10 years, vs paying it off lump sum and then investing the mortgage payments monthly. My memory is that with the assumptions we made on the market, the difference was less than $10,000. (our mortgage was closer to 200k at the time).

Bottom line of my experience: the dollar amount between the 2 options is probably closer than you think, so do what feels the best to you ? How will you feel if the money you have to pay it off drops in value ?

Consider opening a HELOC while you still have a job. There is likely an annual fee to keep it open, ours is $50/year, but you are only charged interest if you use it. This could be a deeper emergency fund and will be easier to get while employed. Ours was available 10 years for withdrawls and then we have 10 years to pay it off.

The bigger factor if you quit your job is that it will be harder to get a new mortgage. You can always quit your job now then decide whether to pay off your mortgage later. What will be harder is to quit the job, then decide you want a HELOC or a refi unless your partner's income alone will qualify.

Deciding whether to pay off a mortgage is not a bad problem to have :)

lafder

Rebecca_S
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Re: Should I pay off the mortgage before I quit my job?

Post by Rebecca_S » Thu Apr 30, 2015 9:18 am

If you did not pay the mortgage, why would you not max out tax deferred accounts still using the taxable dollars?

time916
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Re: Should I pay off the mortgage before I quit my job?

Post by time916 » Thu Apr 30, 2015 9:38 am

If we didn't pay off the mortgage and I stopped working, we could pay the mortgage through the taxable account and continue to fund my partner's 401k by using the taxable account also for cashflow, but I'd be robbing Peter to pay Paul at that point.

I've been thinking about what lafder said about the 2008 crash and what others have been saying about how would I feel if there was a market pullback and I all of a sudden didn't have enough to pay off my mortgage. Would that affect my mental ability to stop working?

Thanks for all the replies! I appreciate your perspectives.

Dulocracy
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Re: Should I pay off the mortgage before I quit my job?

Post by Dulocracy » Thu Apr 30, 2015 9:47 am

I would not. I would instead wait to see if this is something you really want to do long term. If you change your mind, you just keep assets as they are now. If, however, you decide to go for a second year as a stay at home parent, then I would consider paying it down. You can contribute to a Roth either way (either through income or by simply taking some of the money you have invested and applying it to a Roth. If you decide you want more stability at the expense of potential growth, then make that call after you have tried it out and are certain you will stay at home. Again, there is really no wrong decision. One offers greater stability. The other offers greater potential growth. You need to decide which is your priority. Again, I would not make that decision until you have tried it out to make sure it is what you want to do.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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goingup
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Re: Should I pay off the mortgage before I quit my job?

Post by goingup » Thu Apr 30, 2015 10:02 am

Peace of mind is a big consideration. So is having a liquid $96K as you settle in to living on one income. On a related note, if you're overly concerned about the effect of a market pullback on your taxable account, it may be time to vet your asset allocation. I'd probably pay off the mortgage for the peace of mind that it affords you.

Luke Duke
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Re: Should I pay off the mortgage before I quit my job?

Post by Luke Duke » Thu Apr 30, 2015 10:05 am

Why not wait another year and put all of your take home pay towards your mortgage? At least that way you will know that you can live on one income and if you do decide to use your taxable account to pay off your mortgage the balance won't be nearly as high. You won't know if you will like staying home everyday until you do it.

john94549
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Re: Should I pay off the mortgage before I quit my job?

Post by john94549 » Thu Apr 30, 2015 11:38 am

We still have a mortgage well into our 60's (68, actually). We could pay it off, but at 3.4% with many years to go (a re-fi a couple of years back), inertia has set in.

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Re: Should I pay off the mortgage before I quit my job?

Post by Grt2bOutdoors » Thu Apr 30, 2015 11:54 am

john94549 wrote:We still have a mortgage well into our 60's (68, actually). We could pay it off, but at 3.4% with many years to go (a re-fi a couple of years back), inertia has set in.
What relevance does your situation have to the question posed by the OP? The OP is in her prime earning years, still raising a family with continual ongoing financial needs (high school and college looms in the near future). In your situation, you are either in or going into retirement in the near term, it's likely your taxable portfolio dwarfs your mortgage by multiples, you have other sources of income that permit you to either keep or pay it off at your leisure. If you were down to one income, with no other sources available and that income was just enough to "pay the bills" with limited income upside going into the future with the likelihood of increasing expenses associated with children, would you still keep the mortgage?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: Should I pay off the mortgage before I quit my job?

Post by Grt2bOutdoors » Thu Apr 30, 2015 12:01 pm

time916 wrote:If we didn't pay off the mortgage and I stopped working, we could pay the mortgage through the taxable account and continue to fund my partner's 401k by using the taxable account also for cashflow, but I'd be robbing Peter to pay Paul at that point.

I've been thinking about what lafder said about the 2008 crash and what others have been saying about how would I feel if there was a market pullback and I all of a sudden didn't have enough to pay off my mortgage. Would that affect my mental ability to stop working?

Thanks for all the replies! I appreciate your perspectives.
If you had the funds to pay off the mortgage in cash and not exposed to principal risk, the answer from an economic point of view would be easy - pay it off. If you have the funds to pay the mortgage off but it currently is invested in the market, I would not wait too long to start liquidating and moving to cash as Lafder pointed out the consequences of that strategy. I like the suggestion presented by one of the other posters, try living off of one salary adjusting for the current mortgage payment. How would you feel if you had no mortgage, but at the same time have your liquidity decline by the same amount? That's another mental exercise, because you won't be able to replace that liquidity in the near or intermediate term short of you winning the lottery. Some place a heavy premium on having it available at all times, more or less. Some are fine with having $5 in the bank.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

dgdevil
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Re: Should I pay off the mortgage before I quit my job?

Post by dgdevil » Thu Apr 30, 2015 12:03 pm

From personal experience, a HUGE psychological boost. One less thing to worry about when/if you encounter setbacks down the road. Your reasoning sounds great, and you will be the envy of all your peers. Just make sure your family's life insurance is fully updated.

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Watty
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Re: Should I pay off the mortgage before I quit my job?

Post by Watty » Thu Apr 30, 2015 3:54 pm

Since you have over a half a million in your retirement accounts and at least a 100K in a taxable account, paying off the mortgage or not is not really going to make a significant difference in your overall financial picture --- as long as you save your "mortgage payment" if you pay it off. Your net worth will be the same either way so the only difference would be any future investing return. If you are investing with an asset allocation of anywhere near "your age in bonds" then a large part of that $96K would be invested in bonds that are paying less than 3% which makes it pretty hard to come out ahead after taxes.

As long as you have a good emergency fund like you said then I would pay it off.

Be sure to know how much capital tax you will need to pay if you sell things out of your taxable account in order to pay off the mortgage. That could make paying it off not worthwhile.
Without my income, we could pay all our bills, but would suspend all retirement contributions. If we used money in our taxable account to pay off mortgage, we could still max out our ROTHs and I would feel less stressed about our cash flow.
A couple of things;

If you didn't pay off the mortgage you could still make Roth contributions with money out of your taxable account.

If you are not married then in future years you will not be able to make a Roth contribution in your name unless you have at least that much earned income.

If you are filing separate tax return, both as single, then any mortgage interest deduction may need to be split between you(but you need to look at how the names are on the mortgage) This could mean that itemizing your mortgage interest on your deduction would be worth very little.

If you are filing as a single while you are not working that could be a very good time to do Roth conversion of your 401k money if you spread it out over a number of years to keep in a low or zero tax bracket.

time916
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Re: Should I pay off the mortgage before I quit my job?

Post by time916 » Thu Apr 30, 2015 4:13 pm

Again, thanks for the posts.

If I do resign, does it make sense to continue paying the mortgage while slowly selling off stocks in a taxable account to pay for monthly expenses and to fund ROTH IRAs?

Is the main benefit of that strategy perserving liquidity?

Grt2bOutdoors
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Re: Should I pay off the mortgage before I quit my job?

Post by Grt2bOutdoors » Thu Apr 30, 2015 4:23 pm

time916 wrote:Again, thanks for the posts.

If I do resign, does it make sense to continue paying the mortgage while slowly selling off stocks in a taxable account to pay for monthly expenses and to fund ROTH IRAs?

Is the main benefit of that strategy perserving liquidity?
You play a dangerous game if "slowly selling off stocks in a taxable account to pay for monthly expenses". Bad sequence of returns has potential to put a serious crimp on your ability to pay, again, dependent on overall size of portfolio to expenses.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

malloc
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Re: Should I pay off the mortgage before I quit my job?

Post by malloc » Thu Apr 30, 2015 4:40 pm

" I teach middle school", "I have little energy left"

Cause and effect?
Perhaps a job change would help.

time916
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Re: Should I pay off the mortgage before I quit my job?

Post by time916 » Thu Apr 30, 2015 4:49 pm

Haha... yes, I get that a lot about middle school teaching! A career change may happen eventually.

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Watty
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Re: Should I pay off the mortgage before I quit my job?

Post by Watty » Thu Apr 30, 2015 8:42 pm

time916 wrote:Again, thanks for the posts.

If I do resign, does it make sense to continue paying the mortgage while slowly selling off stocks in a taxable account to pay for monthly expenses and to fund ROTH IRAs?

Is the main benefit of that strategy perserving liquidity?
Using the taxable account for the monthly expenses and the Roth are very different things.

For the Roth if you sold $1,000 of a mutual fund, then you could buy $1,000 of the exact same mutual fund in the Roth so you would be better off since your net worth could be the same but your your stock would be in an account with better tax advantages. (There may be some current capital gains taxes to consider)

If you sold $1,000 of a mutual fund to pay this months bills then your new worth would decrease so you would need to be careful that you did not sell too much too soon and end of running out of money.

http://www.bogleheads.org/wiki/Safe_withdrawal_rates

If by expenses you were talking about your mortgage payment this is still a problem since a few bad investing years early on will be hard to recover from. For example if you invest the money you might expect to earn 8%(a made up number) so your should come ahead of the the 3% mortage. The problem is that if your mortgage was for $100K and you have a $100K portfolio, and the mortgage payment is $500 a month($6,000 a year), then if you get unlucky and your investments decline by 15% the first year, then the portfolio is down not just that $15K but the $6k in mortgage payments so it would be down to just $79K at the end of the first year. Your mortgage would then be about $97K so you would be unlikely to ever catch up.

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Re: Should I pay off the mortgage before I quit my job?

Post by Lafder » Thu Apr 30, 2015 10:13 pm

This caught my eye " If I do resign, does it make sense to continue paying the mortgage while slowly selling off stocks in a taxable account to pay for monthly expenses and to fund ROTH IRAs? "

Are you saying your partner's income will not cover your monthly expenses ? This would be a huge concern to me.

Unless you have vast savings, you may not be able to afford quitting work. Sorry if I am misunderstanding. Have you considered working part time ?

When I mentioned a HELOC, I meant that it allows you to pay off the mortgage which has huge psychological benefits, but it still gives you quick access to the money if something came up and you needed it.

lafder

psychoslowmatic
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Re: Should I pay off the mortgage before I quit my job?

Post by psychoslowmatic » Thu Apr 30, 2015 10:50 pm

Your partner's feelings about it matter a lot more than ours. You seem like you're financially secure for a while if you'd like to quit and evaluate new career choices but you don't have quite enough to be done with paid work forever. I would put off doing anything with the mortgage until you have a plan to return to work.

time916
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Re: Should I pay off the mortgage before I quit my job?

Post by time916 » Thu Apr 30, 2015 11:36 pm

My husband's income will cover living expenses, but we wouldn't be able to contribute much to retirement savings if we still had a mortgage. I like the idea of having a heloc available just in case. THanks!

rgs92
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Re: Should I pay off the mortgage before I quit my job?

Post by rgs92 » Fri May 01, 2015 12:05 am

It's crazy to give up a gov't job with a pension that these days is like a pot of gold at the end of the rainbow; a rare prize. Unless you find your job intolerable to the point where it's damaging your health or well-being,
don't do it. What happens if neither of you have a job? Private sector jobs are very insecure, no matter what you think. My wife and I and lot and lots of folks I know personally felt secure and were marched out and never really recovered.

cherijoh
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Re: Should I pay off the mortgage before I quit my job?

Post by cherijoh » Sat May 02, 2015 8:35 am

time916 wrote:I am thinking of staying home with my school-aged children. I'd like to do so many other things besides working full time.
Without my income, we could pay all our bills, but would suspend all retirement contributions. If we used money in our taxable account to pay off mortgage, we could still max out our ROTHs and I would feel less stressed about our cash flow. The balance is 96K right now at 3% for the next 5 years and the taxable account is all VTSMX/VTIAX.

We have an emergency fund, 550K in 401ks/ROTHs, and my partner plans to work until full retirement (20 more years) with a defined benefit pension.

Any advice on the psychological benefits of paying off the mortgage in order to quit working would be appreciated! Thanks!
If you go from being a two-income family to a 1-income family then the need for an emergency fund becomes more critical and you may need to set aside more money into it. How many months' of expenses does it currently hold? You may need to liquidate some of your taxable funds to beef up your emergency fund. Or tighten your belts and work another year to fund it.

If you paid off the mortgage would it wipe out your taxable account or would there still be money available in taxable? If the latter were the case, you could use the excess taxable account to fund your Roth each year - as Watty pointed out there is little risk to selling in taxable and then buying back the same funds in Roth.

Because you are contemplating a life change that would impact cash flow, you are looking at an "either/or" situation - either pay off the whole mortgage or stick to the current amortization schedule. Making extra payments doesn't really help you, since you would still have a mortgage payment. The biggest risk to paying off the mortgage is if your partner lost his job before you could rebuild your liquid assets.

claudia
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Re: Should I pay off the mortgage before I quit my job?

Post by claudia » Wed May 13, 2015 4:30 pm

I am in a very similar situation. Mortgage is our only debt. We already have some decent size retirement accounts for our age. Husband is happy with his job and wants to work until he drops. I don't want to work and haven't decided if I will quit my job and stay at home with my child yet. One suggestion I want you to consider is to work a couple more years and pay down (but not pay off) your mortgage to a level that you feel comfortable to have....like paying it down to $40k or $50k. To do that, you will need to save extra to pay the mortgage and start adjusting your life style to how it would be with only one income. I think this may help ease some of the stress you may have after you quit your job. Hang in there mama!
Last edited by claudia on Thu May 14, 2015 10:08 am, edited 1 time in total.

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Toons
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Re: Should I pay off the mortgage before I quit my job?

Post by Toons » Wed May 13, 2015 5:03 pm

Pay off the mortgage :happy
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Re: Should I pay off the mortgage before I quit my job?

Post by talltodd » Thu May 14, 2015 12:49 am

Pay off the mortgage. I did and the psychological benefit is enormous.

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