A Not Paying Off the Mortgage Thread

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SJR
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A Not Paying Off the Mortgage Thread

Post by SJR » Sun Jan 28, 2018 10:51 pm

As requested I am editing this post. Updated January 29 around 9:45PM EST.

Portions in parentheses are not integral to assisting me here; I only chose not to remove them because they do offer some insight into my personal situation and because many have already utilized the information to respond to me.

Quite some time has passed since my last "real" post about my personal situation (viewtopic.php?f=1&t=220362&p=3410144#p3410144) and with the significant changes lately, I felt it prudent to post again as part of my reassessment of where I stand. I believe I am a bit disoriented since I initially came up with my plan.

Thanks in advance for bearing with me.

To summarize (slightly updated):

Emergency funds: 1 year+
Debt: Mortgage- 15 year 2.875% with ~13.5 years to go, (low cost car lease ~$200/monthly ending December 2018)
Tax Filing Status: Married filing jointly
Marginal Tax Rate: 35% Federal, 6.85% State- Subject to AMT (2016, unknown 2017)
State of Residence: NY
Age: 28
Desired Asset allocation (Taxable): 50% stocks / 50% bonds
Desired International allocation (Taxable): 30% of stocks
Desired Asset allocation (Retirement): 80% stocks / 20% bonds
Desired International allocation (Retirement): 30% of stocks

1. I am paying extra towards the mortgage monthly as I have been all along. The resulting anticipated term is about 9.5 more years.
2. The plan was to invest 50/50 with leftover cash flow.
3. I have been rebalancing by using new money.

There have been quite a few changes that have affected my plan:
1. Tax reform
2. Steady increase in interest rates on CD's, savings and high yield checking accounts
3. My discovery and extensive research into I-bonds (related to number 2 above)

Here's the story:

(I am quite young, have 1 child (nearly 2 years old) and one on the way, live in a relatively HCOL area, and am self-employed in a 6-year-old business that is in a volatile industry. My wife is a public school teacher (in her second year). There is much about my future (especially expenses) that I am unsure of. I do know that all my children will attend private school which will be a substantial expense. My business is of the sort of nature that people that know me often ask if that is what I do full time or if I do something else as well (they're generally surprised to learn that it is full time). While the business has grown and profits have increased year over year (at first with explosive growth), it is clearly getting harder to maintain that track record.
When I went into this, it was with the notion that I would ride it out for as long as it worked and then move onto something else. That feeling still remains, yet on a daily basis, I do whatever I can to build my company into something that can last for decades. My feelings are therefore split. Some days/weeks when things are well, I'm confident that there is a future here, and other times when things appear bleak, I imagine the worst case scenario and start preparing (I realize that I jump the gun with this feeling) as if it's all over. It's quite the roller coaster to say the least.)

My perspective of the worst case scenario always led me to focus on the moment, to do the best I could now and give it my all. That thought process has had many benefits (maxing 401k/403B plans+backdoor Roth, limiting expenses across the board, causing me to find Bogleheads, among others). The only thing I have not yet done was pay off my mortgage which has been my goal since I purchased my home 2.5 years ago. If things went south, I wanted to own my home free and clear before being tossed into who knows what.

I originally decided not to pay it off after refinancing to a 15-year term and reducing my principal balance. I still think that this is the correct move for me. Over the past weeks/months I have been reading pretty much every thread that discusses early payoff and although I've been intrigued by the number of people that have exclaimed how freeing it is (emotionally), I haven't changed my mind.

Main reasons are as follows:
1. I estimate that with charitable contributions and SALT I will still max out the standard deduction (annually or every other year). Therefore my mortgage interest is still deductible (possibly only on alternating years as I hope to establish a DAF and fund it before the end of 2018 for the full 2019- giving me a much larger deduction this year and only "sacrificing" mortgage interest next year which would together with SALT be less than the standard deduction- seeing that I'm not paying off the mortgage).
2. I value liquidity in light of the above information about myself.
3. A mortgage is an inflation hedge + interest rates are increasing and are almost at my mortgage's interest rate. Good chance in the coming months/years I'll be able to match the rate or beat it.

So here is where I think I lost my way- I stopped consistently investing monthly excess cash flow and instead have established high yield accounts (with some hoops to jump through) which give me somewhere between a 2-3% return. I also have a few 5-year-old CD's maturing soon (February and May) which are yielding 1.76% or 1.84%. I have one other CD (11 month, 1.9%) that matures later this year as well. I plan on rolling over some of the maturing CD's to I-bonds which I believe are a great investment to have. (I anticipate maxing out 20k+5k this year)

My original intention was to invest equally 50-50 (stocks and munis) until I had enough in bonds to cover my entire mortgage (a plan carved out with Grabiner's help and insight according to my 2016 tax rates and old tax laws), and then I would invest all new money into stocks (sort of a glide path if you will) until I hit my retirement allocation at that point in time. (My portfolio would then be one big bucket as many here view theirs)

The bottom line is that I think I got a bit overexcited in the short term (which I'm prone to do), and instead of maintaining my long-term plan, I started tinkering with accounts that are subject to short-term rate increases. I think I can correct this myself, but not sure I trust my instincts to do it correctly as I am still in the proverbial candy shop (I kind of don't want to liquidate all these accounts I set up for myself). Regardless,
I currently have the equivalent of my mortgage invested in a 50/50 taxable portfolio (using Total Intl, Total Stock, and Munis). Counting those bonds and all additional cashlike positions, I already have more than enough to pay off my mortgage (assuming it double counts as my EF- see below). This would dictate that all future positive cash flow go directly into stocks until I hit 80/20. ( I like having bonds in taxable so would keep munis)

Questions for my fellow Bogleheads:
1. Do you agree or disagree with my original plan? Why?
A.If you don't agree, what do you think would be a prudent plan of action going forward?
B. If you do agree, how do you recommend that I rebalance my portfolio (new money all to stocks or change my existing positions immediately)?
B1. Would you double count the substantial amount money in fixed income as an EF fund? (this is a new thought that only occurred to me recently)
B2. Due to the changing environment, I seem to have altered my 50% fixed income position from Munis only to include I-bonds, (CD's) and High Yield Checking/Savings accounts. Would it be ok to continue tinkering without having a fixed plan in place for my fixed income allocation, which would depend on the overall interest rate environment? (I noticed others have also made similar changes across the forums) Or would you consider that a sort of market timing with (muni) bonds?

(One detail I did not mention and that may provide some additional information. I lived through the 2008 meltdown but was too young to have been invested. I have never experienced a bear market in my entire investing "career". I don't really know how I will react (other than I won't sell low). Emotionally, I may kick myself if my portfolio dives and I still have my mortgage humming in the background. I chose a 80/20 allocation for retirement because that is the low end of what has been suggested for my age.)


Thanks for reading.
Last edited by SJR on Mon Jan 29, 2018 10:24 pm, edited 5 times in total.

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Watty
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Re: A Not Paying Off the Mortgage Thread

Post by Watty » Sun Jan 28, 2018 11:03 pm

I'm not really sure just what your question is so you might want to edit your post to clarify that.

One thing that jumped out at me was that you are leasing your car. If you can't deduct it as a business expense then it is almost always better to buy one instead. It would be good to allocate the money to pay cash for your next car when the lease ends in December.

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camillus
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Re: A Not Paying Off the Mortgage Thread

Post by camillus » Sun Jan 28, 2018 11:15 pm

I think you've really distracted yourself and lost focus. I would do everything I can to simplify your plans, goals, and strategy. Your post captures your distracted-ness - it's hard to read :happy

See if you can come up with a financial strategy for yourself in list format, using 10 lines or less.

Agggm
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Re: A Not Paying Off the Mortgage Thread

Post by Agggm » Sun Jan 28, 2018 11:23 pm

camillus wrote:
Sun Jan 28, 2018 11:15 pm
I think you've really distracted yourself and lost focus. I would do everything I can to simplify your plans, goals, and strategy. Your post captures your distracted-ness - it's hard to read :happy

See if you can come up with a financial strategy for yourself in list format, using 10 lines or less.
+1
Way too much going on.

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Tyler Aspect
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Re: A Not Paying Off the Mortgage Thread

Post by Tyler Aspect » Sun Jan 28, 2018 11:30 pm

You are in a high tax bracket with a conservative outlook on investing. I can see that you are matching the mortgage liability with CDs held in the taxable account. I think the problem is that the dividends on the CDs are taxed around 30%, so the dividends and the mortgage interests are unlikely to equalize. Since you are conservative in nature, you could not live comfortably with having lots of stock in your taxable account.

My recommendation remains paying off the mortgage as a way toward simplicity. Decrease bond holding in the taxable account, while increasing bond holding in the tax deferred account.

You should determine a single asset allocation figure for your entire portfolio. That will give you some stability in how you should manage your investments.
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aristotelian
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Re: A Not Paying Off the Mortgage Thread

Post by aristotelian » Sun Jan 28, 2018 11:32 pm

So you are underweight in stocks? Buy stocks.

Do you have an Investment Policy Statement? That might help you simplify things. You should give yourself some "decision rules" and then follow them.

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BolderBoy
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Re: A Not Paying Off the Mortgage Thread

Post by BolderBoy » Sun Jan 28, 2018 11:43 pm

Tyler Aspect wrote:
Sun Jan 28, 2018 11:30 pm
My recommendation remains paying off the mortgage as a way toward simplicity. Decrease bond holding in the taxable account, while increasing bond holding in the tax deferred account.
I agree with this. You seem to be floundering and need to simplify. Also, my impression is that you really don't expect your business to survive. To that end, paying off your mortgage will give you some added wiggle room if the business goes under and a market correction hits - the double whammy.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Finridge
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Re: A Not Paying Off the Mortgage Thread

Post by Finridge » Mon Jan 29, 2018 12:54 am

aristotelian wrote:
Sun Jan 28, 2018 11:32 pm
So you are underweight in stocks? Buy stocks.

Do you have an Investment Policy Statement? That might help you simplify things. You should give yourself some "decision rules" and then follow them.
+1. 50/50 is very low stock allocation for his age.

StealthRabbit
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Re: A Not Paying Off the Mortgage Thread

Post by StealthRabbit » Mon Jan 29, 2018 2:07 am

Debt: Mortgage- 15 year 2.875% with ~13.5 years to go

Personally....@age 28 or 48... I would simplify by ‘thanking my lucky stars’ and KEEPING a <3% mortgage That will be paid off in <15 yrs... and GET busy investing in much higher returns (than a tax privileged <3%. ) :confused

I like your DAF ideas.... I used mine during my earning yrs to stash appreciated stocks, and benefit my tax situations (and more importantly my perpetual gifting strategy. (Heirs get no $$$... only get to distribute future DAF funds)).

Best wishes,
Simplify with a purposeful strategy. Be resilient, as life throws curve balls... ( replace your personal input (hours) / wage income with an inflation protected income source as soon as possible.. it is Great to be home with your kids... rather that away at work ... whatever good that is to them).

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camillus
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Re: A Not Paying Off the Mortgage Thread

Post by camillus » Mon Jan 29, 2018 8:19 am

I disagree with the recommendation to pay off the sub 3%, 15 yr fixed mortgage. If you are conservative and prefer liquidity and have a tendency to hoard cash, paying off your mortgage seems like a bad idea for a variety of reasons.

Personally, I would:
1) Close all but a maximum of 2-3 total checking & savings accounts
2) Pay minimum only towards the mortgage.
3) Identify a level of cash to keep liquid that will allow you to sleep at night

I can appreciate the felt-need to have an exit plan if your business implodes. I believe conventional wisdom is to hold tax-efficient equities in taxable accounts. If you were to hold equities in taxable, and that's the money you'd draw from to start a new business or make other radical life changes, there could be large tax consequences for selling stocks and lows and highs. iBonds are an option. So are tax free municipal bonds.

I would probably engage in some hard-core "mental accounting" or "bucket thinking" (normally not advised) to help me strategize. The buckets would include:
1) General Emergency Fund in cash (say, $50k or 6 months of trimmed living expenses)
2) Vocational Reboot Fund (perhaps another $50k)
3) Long term portfolio with more weight towards equities, since 1 & 2 are providing "sleep at night factor."

An evolution of 1 & 2 above could be you thinking, "I am relatively well protected from emergencies, having two emergency funds. How about I keep only $20k in cash and move the rest into taxable investing and ride the market and pay taxes on gains and harvest losses." Many folks on this forum with large taxable accounts don't feel the need for a large cash emergency fund.

So - once you have these "buckets" established in mind, your strategy can move towards tax-efficient placement of the buckets. Stocks in Roth & taxable, bonds in tax deferred - as a rule of thumb. I'm not an expert in taxable investing.

So my comment way above was an encouragement to simplify. I hope I haven't muddied the waters here. You should be able to end up with just a few accounts:
1) Mortgage that will stick around for a 15-year term
2) 2-3 checking & savings accounts
3) Current employer tax-deferred plans
4) Roths, if possible
5) taxable account
6) Donor Advised Fund (nice)

Keep it simple!

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Watty
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Re: A Not Paying Off the Mortgage Thread

Post by Watty » Mon Jan 29, 2018 8:47 am

Finridge wrote:
Mon Jan 29, 2018 12:54 am
aristotelian wrote:
Sun Jan 28, 2018 11:32 pm
So you are underweight in stocks? Buy stocks.

Do you have an Investment Policy Statement? That might help you simplify things. You should give yourself some "decision rules" and then follow them.
+1. 50/50 is very low stock allocation for his age.
It really depends on what the money will be used for and I suspect that it will not be for retirement since it sound like the business may decline in the near future.

SJR
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Re: A Not Paying Off the Mortgage Thread

Post by SJR » Mon Jan 29, 2018 11:01 pm

Watty wrote:
Sun Jan 28, 2018 11:03 pm
I'm not really sure just what your question is so you might want to edit your post to clarify that.

One thing that jumped out at me was that you are leasing your car. If you can't deduct it as a business expense then it is almost always better to buy one instead. It would be good to allocate the money to pay cash for your next car when the lease ends in December.
edited. Thank you for your feedback. It is deductible but I only put on 4,000 miles a year so considering buying a used car at the end of 2018. Don't know much about buying used cars, or tax implications versus a lease, so will certainly need BH help (and CPA's) later this year.
camillus wrote:
Sun Jan 28, 2018 11:15 pm
I think you've really distracted yourself and lost focus. I would do everything I can to simplify your plans, goals, and strategy. Your post captures your distracted-ness - it's hard to read :happy

See if you can come up with a financial strategy for yourself in list format, using 10 lines or less.
I don't think I could come up with one in 10 lines or less at this point. There are too many unknowns in my life right now (more so than the average person I think). My goal is to work toward that though in the coming years, especially as my company ages and hopefully becomes more stable.

Tyler Aspect wrote:
Sun Jan 28, 2018 11:30 pm
You are in a high tax bracket with a conservative outlook on investing. I can see that you are matching the mortgage liability with CDs held in the taxable account. I think the problem is that the dividends on the CDs are taxed around 30%, so the dividends and the mortgage interests are unlikely to equalize. Since you are conservative in nature, you could not live comfortably with having lots of stock in your taxable account.

My recommendation remains paying off the mortgage as a way toward simplicity. Decrease bond holding in the taxable account, while increasing bond holding in the tax deferred account.

You should determine a single asset allocation figure for your entire portfolio. That will give you some stability in how you should manage your investments.
I am conservative in nature, but even more so due to my employment. I hope that will change in the coming years (due to employment stabilizing). At that time I will also have a better picture of my family related goals. Currently, my goal is to match the mortgage liability with earnings that resemble closely the interest rate I am paying (after deductions). Once that cushion is established, my goal is to increase my stock allocation to something more sensible. The idea behind this is building a strong foundation that I can fall back on at any time if something goes south without warning.
aristotelian wrote:
Sun Jan 28, 2018 11:32 pm
So you are underweight in stocks? Buy stocks.

Do you have an Investment Policy Statement? That might help you simplify things. You should give yourself some "decision rules" and then follow them.
See my revised post for updated questions. I have an IPS, but it's relatively loose and I have been unable to think through enough possibilities to make it "iron clad" for my situation. Hopefully, that will change in the coming years.
BolderBoy wrote:
Sun Jan 28, 2018 11:43 pm
Tyler Aspect wrote:
Sun Jan 28, 2018 11:30 pm
My recommendation remains paying off the mortgage as a way toward simplicity. Decrease bond holding in the taxable account, while increasing bond holding in the tax deferred account.
I agree with this. You seem to be floundering and need to simplify. Also, my impression is that you really don't expect your business to survive. To that end, paying off your mortgage will give you some added wiggle room if the business goes under and a market correction hits - the double whammy.
I am currently 40-60 on my business surviving (a better term for this would be growing) as is, but 60-40 on it surviving by improvising and establishing itself into new channels related to its current one. Either way, there is a good chance that it does survive in one shape or form; the question is what my income would be. I can earn substantially less than I do now and still be in a very good place. One of my strengths is risk analysis and much of what I do for my company relies on that ability. It's also my Achilles heel.
StealthRabbit wrote:
Mon Jan 29, 2018 2:07 am
Debt: Mortgage- 15 year 2.875% with ~13.5 years to go

Personally....@age 28 or 48... I would simplify by ‘thanking my lucky stars’ and KEEPING a <3% mortgage That will be paid off in <15 yrs... and GET busy investing in much higher returns (than a tax privileged <3%. ) :confused

I like your DAF ideas.... I used mine during my earning yrs to stash appreciated stocks, and benefit my tax situations (and more importantly my perpetual gifting strategy. (Heirs get no $$$... only get to distribute future DAF funds)).

Best wishes,
Simplify with a purposeful strategy. Be resilient, as life throws curve balls... ( replace your personal input (hours) / wage income with an inflation protected income source as soon as possible.. it is Great to be home with your kids... rather that away at work ... whatever good that is to them).


I can work from anywhere. So being home isn't the issue. My problem is that I can work from anywhere and often have to check my phone often throughout the evening.
camillus wrote:
Mon Jan 29, 2018 8:19 am
I disagree with the recommendation to pay off the sub 3%, 15 yr fixed mortgage. If you are conservative and prefer liquidity and have a tendency to hoard cash, paying off your mortgage seems like a bad idea for a variety of reasons.

Personally, I would:
1) Close all but a maximum of 2-3 total checking & savings accounts
2) Pay minimum only towards the mortgage.
3) Identify a level of cash to keep liquid that will allow you to sleep at night

I can appreciate the felt-need to have an exit plan if your business implodes. I believe conventional wisdom is to hold tax-efficient equities in taxable accounts. If you were to hold equities in taxable, and that's the money you'd draw from to start a new business or make other radical life changes, there could be large tax consequences for selling stocks and lows and highs. iBonds are an option. So are tax free municipal bonds.

I would probably engage in some hard-core "mental accounting" or "bucket thinking" (normally not advised) to help me strategize. The buckets would include:
1) General Emergency Fund in cash (say, $50k or 6 months of trimmed living expenses)
2) Vocational Reboot Fund (perhaps another $50k)
3) Long term portfolio with more weight towards equities, since 1 & 2 are providing "sleep at night factor."

An evolution of 1 & 2 above could be you thinking, "I am relatively well protected from emergencies, having two emergency funds. How about I keep only $20k in cash and move the rest into taxable investing and ride the market and pay taxes on gains and harvest losses." Many folks on this forum with large taxable accounts don't feel the need for a large cash emergency fund.

So - once you have these "buckets" established in mind, your strategy can move towards tax-efficient placement of the buckets. Stocks in Roth & taxable, bonds in tax deferred - as a rule of thumb. I'm not an expert in taxable investing.

So my comment way above was an encouragement to simplify. I hope I haven't muddied the waters here. You should be able to end up with just a few accounts:
1) Mortgage that will stick around for a 15-year term
2) 2-3 checking & savings accounts
3) Current employer tax-deferred plans
4) Roths, if possible
5) taxable account
6) Donor Advised Fund (nice)

Keep it simple!
1. I only have 6 accounts and they are at 3 institutions. One each for myself and DW. Basically on autopilot already.
3. Please see my revised post. This is something I need help with.

I fully agree with the bucket mentality in my case and I am trying to figure out the correct way to manage "the books". I make large estimated tax quarterly which I prepare for throughout the quarter (money is held in some of the checking accounts). Other than that, I don't really have to think about most other expenses, however, I do have a separate mortgage checking account which always has enough for the next payment and utilities. Since I will likely be changing things up now, I may need some additional buckets as all leftover money will be invested (ie car fund).

PS I already have Roths via the backdoor method for myself and DW.
Watty wrote:
Mon Jan 29, 2018 8:47 am
Finridge wrote:
Mon Jan 29, 2018 12:54 am
aristotelian wrote:
Sun Jan 28, 2018 11:32 pm
So you are underweight in stocks? Buy stocks.

Do you have an Investment Policy Statement? That might help you simplify things. You should give yourself some "decision rules" and then follow them.
+1. 50/50 is very low stock allocation for his age.
It really depends on what the money will be used for and I suspect that it will not be for retirement since it sounds like the business may decline in the near future.
Money is earmarked for whatever needs I may have (likely bigger ticket items). It may be for private school, certain religious events that are costly, home renovations or purchase of a larger residence, or children's weddings. If my business fails, I would possibly need some to start something new or carry me over until I find my place out there (I've never really worked for someone else in a regular job).

The goal is to invest for the long-term (10-25 years, perhaps more), but it's possible I may need access to some money before that. (i.e. My son will enter private school in approximately 4 years; one tuition is feasible, but with other children requiring full-time nanny and/or daycare, those bills may start to get quite costly). My main concern at this time, however, is my business. I am likely over-worried though at least for the short-term. ( I have limited expenses relative to future expenses, and currently, have substantial savings)

KlangFool
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Re: A Not Paying Off the Mortgage Thread

Post by KlangFool » Mon Jan 29, 2018 11:18 pm

OP,

1) So, your plan is to pay off the mortgage and then take a more expensive student loan for your kid? Unless your plan is not to pay for your kid's college, so how does paying off this low-interest mortgage helps you?

2) How much is the rest of your asset/investment versus the house? That is the key question.

3) The house cannot feed you and your family. You need money to feed your family if your business is gone.

KlangFool

SJR
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Re: A Not Paying Off the Mortgage Thread

Post by SJR » Mon Jan 29, 2018 11:34 pm

KlangFool wrote:
Mon Jan 29, 2018 11:18 pm
OP,

1) So, your plan is to pay off the mortgage and then take a more expensive student loan for your kid? Unless your plan is not to pay for your kid's college, so how does paying off this low-interest mortgage helps you?

2) How much is the rest of your asset/investment versus the house? That is the key question.

3) The house cannot feed you and your family. You need money to feed your family if your business is gone.

KlangFool
1)Where did I say that I plan to pay off the mortgage? I once did; that has changed about a half a year ago and is reflected in this thread and my previous thread. As part of my revised post, I did insert a question about whether you agree or disagree with my current plan. Is that what you are referring to?
1A) My kids will all go to local colleges (for undergrad) at a fraction of the cost that you are likely assuming. My real expenses are private schooling through high school.
2) If I had to guesstimate I'd say that the house fully paid off represents 40% of net worth (based on purchase price).
3) Agreed.

perl
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Re: A Not Paying Off the Mortgage Thread

Post by perl » Mon Jan 29, 2018 11:48 pm

You have a year's expenses in your emergency fund. That's enough for that bucket.

Take everything else and invest it according to your allocation. If you've nervous, start with a more conservative allocation like 70/30.

Don't pay down the mortgage. Maintain liquidity instead.

SJR
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Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Jan 30, 2018 9:00 am

perl wrote:
Mon Jan 29, 2018 11:48 pm
You have a year's expenses in your emergency fund. That's enough for that bucket.

Take everything else and invest it according to your allocation. If you've nervous, start with a more conservative allocation like 70/30.

Don't pay down the mortgage. Maintain liquidity instead.
Thanks for your reply. Can you explain your position? I know the above is simple but I personally don't feel simple is the best way for me due to my circumstances.

I do wish simple made the most sense.

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camillus
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Re: A Not Paying Off the Mortgage Thread

Post by camillus » Tue Jan 30, 2018 10:45 am

perl wrote:
Mon Jan 29, 2018 11:48 pm
You have a year's expenses in your emergency fund. That's enough for that bucket.

Take everything else and invest it according to your allocation. If you've nervous, start with a more conservative allocation like 70/30.

Don't pay down the mortgage. Maintain liquidity instead.
FWIW, I agree with perl. Keep it simple. SJR - what do you find troubling about this?

KlangFool
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Re: A Not Paying Off the Mortgage Thread

Post by KlangFool » Tue Jan 30, 2018 5:12 pm

SJR wrote:
Mon Jan 29, 2018 11:34 pm
KlangFool wrote:
Mon Jan 29, 2018 11:18 pm
OP,

1) So, your plan is to pay off the mortgage and then take a more expensive student loan for your kid? Unless your plan is not to pay for your kid's college, so how does paying off this low-interest mortgage helps you?

2) How much is the rest of your asset/investment versus the house? That is the key question.

3) The house cannot feed you and your family. You need money to feed your family if your business is gone.

KlangFool
1)Where did I say that I plan to pay off the mortgage? I once did; that has changed about a half a year ago and is reflected in this thread and my previous thread. As part of my revised post, I did insert a question about whether you agree or disagree with my current plan. Is that what you are referring to?
1A) My kids will all go to local colleges (for undergrad) at a fraction of the cost that you are likely assuming. My real expenses are private schooling through high school.
2) If I had to guesstimate I'd say that the house fully paid off represents 40% of net worth (based on purchase price).
3) Agreed.
SJR,

1) What is your portfolio size in term of the number of years in current annual expense?

2) What is your portfolio size in term of the number of years of saving?

KlangFool

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DaftInvestor
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Re: A Not Paying Off the Mortgage Thread

Post by DaftInvestor » Tue Jan 30, 2018 7:15 pm

I find it interesting that you live in a HCOL area, your wife is a public school teacher, and yet you have concluded that your kids will go to private school. How much will this cost you over the lifetime? An advantage to HCOL area is that the public schools are usually a bit better than average.

SJR
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Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Jan 30, 2018 9:53 pm

camillus wrote:
Tue Jan 30, 2018 10:45 am
perl wrote:
Mon Jan 29, 2018 11:48 pm
You have a year's expenses in your emergency fund. That's enough for that bucket.

Take everything else and invest it according to your allocation. If you've nervous, start with a more conservative allocation like 70/30.

Don't pay down the mortgage. Maintain liquidity instead.
FWIW, I agree with perl. Keep it simple. SJR - what do you find troubling about this?
Worst case scenario- market crash of some variation. Business flounders. Expenses are more than they are now (they will only increase over time).

I'd be forced to sell low if I needed access to the funds. After some more thought though, maybe I just need a larger EF which is what I might be trying to construct in a roundabout way. (Fixed income equivalent to mortgage etc.) Enter mental gymnastics and all.

I'm going to think about this for a few days and try to get to the bottom of what I'm really trying to do here. Writing this all out has been more for me honestly then it has been for all you folks reading it. I was sort of hoping that others would reply with their thoughts which would perhaps help me (read: force me) to think things through (the risk is that instead, those ideas can confuse me further).

By the way- 70/30, 80/20, 90/10. They're all the same to me at this point. Logically I know that in the downturn it will influence the anticipated maximum floor, but it's hard to really know now what I'm ok with. And a 35% drop versus a 40% drop will hardly make a difference to me. So 70/30 doesn't really make things more palatable than 80/20.

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Jan 30, 2018 10:04 pm

KlangFool wrote:
Tue Jan 30, 2018 5:12 pm
SJR wrote:
Mon Jan 29, 2018 11:34 pm
KlangFool wrote:
Mon Jan 29, 2018 11:18 pm
OP,

1) So, your plan is to pay off the mortgage and then take a more expensive student loan for your kid? Unless your plan is not to pay for your kid's college, so how does paying off this low-interest mortgage helps you?

2) How much is the rest of your asset/investment versus the house? That is the key question.

3) The house cannot feed you and your family. You need money to feed your family if your business is gone.

KlangFool
1)Where did I say that I plan to pay off the mortgage? I once did; that has changed about a half a year ago and is reflected in this thread and my previous thread. As part of my revised post, I did insert a question about whether you agree or disagree with my current plan. Is that what you are referring to?
1A) My kids will all go to local colleges (for undergrad) at a fraction of the cost that you are likely assuming. My real expenses are private schooling through high school.
2) If I had to guesstimate I'd say that the house fully paid off represents 40% of net worth (based on purchase price).
3) Agreed.
SJR,

1) What is your portfolio size in term of the number of years in current annual expense?

2) What is your portfolio size in term of the number of years of saving?

KlangFool
1) I'd say about 8x- 9x. (includes all assets besides home equity) Approximately, half is stashed in retirement accounts of one variety or another.
2) Can you explain what you mean?
DaftInvestor wrote:
Tue Jan 30, 2018 7:15 pm
I find it interesting that you live in a HCOL area, your wife is a public school teacher, and yet you have concluded that your kids will go to private school. How much will this cost you over the lifetime? An advantage to HCOL area is that the public schools are usually a bit better than average.
The schools here are considered good. It's for religious reasons. So pretty much non-negotiable. I have to assume that each child will cost between $150-$200k in today's dollars. Obviously, tuition will only increase. Perhaps I will receive a discount for having more than one child in the school. It would all depend on my income throughout.

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Posts: 10633
Joined: Sat Oct 11, 2008 12:35 pm

Re: A Not Paying Off the Mortgage Thread

Post by KlangFool » Tue Jan 30, 2018 10:10 pm

SJR wrote:
Tue Jan 30, 2018 10:04 pm
KlangFool wrote:
Tue Jan 30, 2018 5:12 pm
SJR wrote:
Mon Jan 29, 2018 11:34 pm
KlangFool wrote:
Mon Jan 29, 2018 11:18 pm
OP,

1) So, your plan is to pay off the mortgage and then take a more expensive student loan for your kid? Unless your plan is not to pay for your kid's college, so how does paying off this low-interest mortgage helps you?

2) How much is the rest of your asset/investment versus the house? That is the key question.

3) The house cannot feed you and your family. You need money to feed your family if your business is gone.

KlangFool
1)Where did I say that I plan to pay off the mortgage? I once did; that has changed about a half a year ago and is reflected in this thread and my previous thread. As part of my revised post, I did insert a question about whether you agree or disagree with my current plan. Is that what you are referring to?
1A) My kids will all go to local colleges (for undergrad) at a fraction of the cost that you are likely assuming. My real expenses are private schooling through high school.
2) If I had to guesstimate I'd say that the house fully paid off represents 40% of net worth (based on purchase price).
3) Agreed.
SJR,

1) What is your portfolio size in term of the number of years in current annual expense?

2) What is your portfolio size in term of the number of years of saving?

KlangFool
1) I'd say about 8x- 9x. (includes all assets besides home equity) Approximately, half is stashed in retirement accounts of one variety or another.
2) Can you explain what you mean?
SJR,

Let's assume that your portfolio is 1 million and you save 50K per year, then, your portfolio is 1 million/50K = 20 years of savings.

Quoting the portfolio in term of

A) number of years of expense tell you whether you are close to your FI number

B) The number of years of savings tells you whether you can recover from your losses if the stock market drop by 50%.

<<Desired Asset allocation (Taxable): 50% stocks / 50% bonds
Desired International allocation (Taxable): 30% of stocks
Desired Asset allocation (Retirement): 80% stocks / 20% bonds
Desired International allocation (Retirement): 30% of stocks>>

C) What is your overall AA?

KlangFool

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Jan 30, 2018 10:50 pm

KlangFool wrote:
Tue Jan 30, 2018 10:10 pm
SJR wrote:
Tue Jan 30, 2018 10:04 pm
KlangFool wrote:
Tue Jan 30, 2018 5:12 pm
SJR wrote:
Mon Jan 29, 2018 11:34 pm
KlangFool wrote:
Mon Jan 29, 2018 11:18 pm
OP,

1) So, your plan is to pay off the mortgage and then take a more expensive student loan for your kid? Unless your plan is not to pay for your kid's college, so how does paying off this low-interest mortgage helps you?

2) How much is the rest of your asset/investment versus the house? That is the key question.

3) The house cannot feed you and your family. You need money to feed your family if your business is gone.

KlangFool
1)Where did I say that I plan to pay off the mortgage? I once did; that has changed about a half a year ago and is reflected in this thread and my previous thread. As part of my revised post, I did insert a question about whether you agree or disagree with my current plan. Is that what you are referring to?
1A) My kids will all go to local colleges (for undergrad) at a fraction of the cost that you are likely assuming. My real expenses are private schooling through high school.
2) If I had to guesstimate I'd say that the house fully paid off represents 40% of net worth (based on purchase price).
3) Agreed.
SJR,

1) What is your portfolio size in term of the number of years in current annual expense?

2) What is your portfolio size in term of the number of years of saving?

KlangFool
1) I'd say about 8x- 9x. (includes all assets besides home equity) Approximately, half is stashed in retirement accounts of one variety or another.
2) Can you explain what you mean?
SJR,

Let's assume that your portfolio is 1 million and you save 50K per year, then, your portfolio is 1 million/50K = 20 years of savings.

Quoting the portfolio in term of

A) number of years of expense tell you whether you are close to your FI number

B) The number of years of savings tells you whether you can recover from your losses if the stock market drop by 50%.

<<Desired Asset allocation (Taxable): 50% stocks / 50% bonds
Desired International allocation (Taxable): 30% of stocks
Desired Asset allocation (Retirement): 80% stocks / 20% bonds
Desired International allocation (Retirement): 30% of stocks>>

C) What is your overall AA?

KlangFool
Understood. I don't save the same amount annually (and don't expect my future self to save the same amount consistently). My income and expenses have increased significantly year over year since 2012. I went from single and living at home, to owning a home with a wife and 1.5 children, over that timeframe. Nothing in my life has been consistent or predictable thus far. Luckily the changes have all been positive. :D

Pretty much whatever I have is from 2012 onward. I'm not sure how to give you the number you are seeking.

A) I'm not close yet and don't expect to be. I'm young and just getting started here. I have been more fortunate than many and am taking full advantage of that. At the same time, I won't project at this point how long it will take me to FI as so much is up in the air.

B) Addressed above.

C)
Assuming a 1-year EF and home equity is ignored:
Stocks- 50%
Bonds- 20%
Stable Value- 2.8%
CDs/High Yield Checking/Saving- 21.8%
Alternatives- 5.4%

As stated above, I went overboard with high yield checking/savings accounts and I'm overweight.
PS The cash account includes all short-term needs I may have. ie quarterly estimated taxes, potential savings to finish my basement (wife would like to do that in the near future), and perhaps money for the purchase of a vehicle at the end of this year.

KlangFool
Posts: 10633
Joined: Sat Oct 11, 2008 12:35 pm

Re: A Not Paying Off the Mortgage Thread

Post by KlangFool » Tue Jan 30, 2018 11:07 pm

SJR wrote:
Tue Jan 30, 2018 10:50 pm
KlangFool wrote:
Tue Jan 30, 2018 10:10 pm
SJR wrote:
Tue Jan 30, 2018 10:04 pm
KlangFool wrote:
Tue Jan 30, 2018 5:12 pm
SJR wrote:
Mon Jan 29, 2018 11:34 pm


1)Where did I say that I plan to pay off the mortgage? I once did; that has changed about a half a year ago and is reflected in this thread and my previous thread. As part of my revised post, I did insert a question about whether you agree or disagree with my current plan. Is that what you are referring to?
1A) My kids will all go to local colleges (for undergrad) at a fraction of the cost that you are likely assuming. My real expenses are private schooling through high school.
2) If I had to guesstimate I'd say that the house fully paid off represents 40% of net worth (based on purchase price).
3) Agreed.
SJR,

1) What is your portfolio size in term of the number of years in current annual expense?

2) What is your portfolio size in term of the number of years of saving?

KlangFool
1) I'd say about 8x- 9x. (includes all assets besides home equity) Approximately, half is stashed in retirement accounts of one variety or another.
2) Can you explain what you mean?
SJR,

Let's assume that your portfolio is 1 million and you save 50K per year, then, your portfolio is 1 million/50K = 20 years of savings.

Quoting the portfolio in term of

A) number of years of expense tell you whether you are close to your FI number

B) The number of years of savings tells you whether you can recover from your losses if the stock market drop by 50%.

<<Desired Asset allocation (Taxable): 50% stocks / 50% bonds
Desired International allocation (Taxable): 30% of stocks
Desired Asset allocation (Retirement): 80% stocks / 20% bonds
Desired International allocation (Retirement): 30% of stocks>>

C) What is your overall AA?

KlangFool
Understood. I don't save the same amount annually (and don't expect my future self to save the same amount consistently). My income and expenses have increased significantly year over year since 2012. I went from single and living at home, to owning a home with a wife and 1.5 children, over that timeframe. Nothing in my life has been consistent or predictable thus far. Luckily the changes have all been positive. :D

Pretty much whatever I have is from 2012 onward. I'm not sure how to give you the number you are seeking.

A) I'm not close yet and don't expect to be. I'm young and just getting started here. I have been more fortunate than many and am taking full advantage of that. At the same time, I won't project at this point how long it will take me to FI as so much is up in the air.
SJR,

Why? If your portfolio is 8X to 9X your annual expense and you save regularly, it won't take long for you to reach 20X your annual expense. Then, you will be closed to FI.

KlangFool

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Jan 30, 2018 11:14 pm

KlangFool wrote:
Tue Jan 30, 2018 11:07 pm
SJR wrote:
Tue Jan 30, 2018 10:50 pm
KlangFool wrote:
Tue Jan 30, 2018 10:10 pm
SJR wrote:
Tue Jan 30, 2018 10:04 pm
KlangFool wrote:
Tue Jan 30, 2018 5:12 pm


SJR,

1) What is your portfolio size in term of the number of years in current annual expense?

2) What is your portfolio size in term of the number of years of saving?

KlangFool
1) I'd say about 8x- 9x. (includes all assets besides home equity) Approximately, half is stashed in retirement accounts of one variety or another.
2) Can you explain what you mean?
SJR,

Let's assume that your portfolio is 1 million and you save 50K per year, then, your portfolio is 1 million/50K = 20 years of savings.

Quoting the portfolio in term of

A) number of years of expense tell you whether you are close to your FI number

B) The number of years of savings tells you whether you can recover from your losses if the stock market drop by 50%.

<<Desired Asset allocation (Taxable): 50% stocks / 50% bonds
Desired International allocation (Taxable): 30% of stocks
Desired Asset allocation (Retirement): 80% stocks / 20% bonds
Desired International allocation (Retirement): 30% of stocks>>

C) What is your overall AA?

KlangFool
Understood. I don't save the same amount annually (and don't expect my future self to save the same amount consistently). My income and expenses have increased significantly year over year since 2012. I went from single and living at home, to owning a home with a wife and 1.5 children, over that timeframe. Nothing in my life has been consistent or predictable thus far. Luckily the changes have all been positive. :D

Pretty much whatever I have is from 2012 onward. I'm not sure how to give you the number you are seeking.

A) I'm not close yet and don't expect to be. I'm young and just getting started here. I have been more fortunate than many and am taking full advantage of that. At the same time, I won't project at this point how long it will take me to FI as so much is up in the air.
SJR,

Why? If your portfolio is 8X to 9X your annual expense and you save regularly, it won't take long for you to reach 20X your annual expense. Then, you will be closed to FI.

KlangFool
My expenses are low now in comparison to the future. I hope to have 4 children. That's 4 tuitions. 4 weddings. 4 mouths to feed. And I can't be certain of my future income. I'm front loading now as much as I can but there's a real good chance I'll run out of steam eventually.

Of course I'll continue to save but it'll be at much lower levels. I hope I'm wrong but this is what I need to prepare for.

Also, 20x seems low to me.

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Jan 30, 2018 11:29 pm

I just found this thread: viewtopic.php?t=238432

I think this is what I was trying to do with first having the mortgage covered in safer investments (or just a larger EF essentially) and then to start building up equity towards my desired allocation.

Interesting.

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Re: A Not Paying Off the Mortgage Thread

Post by grabiner » Thu Feb 01, 2018 12:00 am

Tyler Aspect wrote:
Sun Jan 28, 2018 11:30 pm
You are in a high tax bracket with a conservative outlook on investing. I can see that you are matching the mortgage liability with CDs held in the taxable account. I think the problem is that the dividends on the CDs are taxed around 30%, so the dividends and the mortgage interests are unlikely to equalize. Since you are conservative in nature, you could not live comfortably with having lots of stock in your taxable account.
A better way to match the liability would be with New York munis. Admiral shares of Vanguard NY Long-Term Tax-Exempt currently yield 2.39%, free of federal and NY tax. The duration of the fund is 6.6 years. Your mortgage currently has about the same duration (weighted average time for every future payment), and an after-tax rate of 1.67%. That difference is worth the slight risk of the NY bonds; with this large a gap, I wouldn't make extra mortgage payments.

But this assumes that you can still itemize every year (which might happen, depending on the size of your mortgage and your charitable contributions). If you itemize only every other year, your tax rate drops from 41.85% to 20.93% (assuming that NY still requires you to itemize federal taxes in order to itemize NY taxes). That boosts the after-tax return on a mortgage paydown to 2.27%, which is close to break-even. It might be even higher if you run into some of NY's limitations on itemized deductions.
Wiki David Grabiner

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Re: A Not Paying Off the Mortgage Thread

Post by SJR » Thu Feb 01, 2018 12:28 am

grabiner wrote:
Thu Feb 01, 2018 12:00 am
Tyler Aspect wrote:
Sun Jan 28, 2018 11:30 pm
You are in a high tax bracket with a conservative outlook on investing. I can see that you are matching the mortgage liability with CDs held in the taxable account. I think the problem is that the dividends on the CDs are taxed around 30%, so the dividends and the mortgage interests are unlikely to equalize. Since you are conservative in nature, you could not live comfortably with having lots of stock in your taxable account.
A better way to match the liability would be with New York munis. Admiral shares of Vanguard NY Long-Term Tax-Exempt currently yield 2.39%, free of federal and NY tax. The duration of the fund is 6.6 years. Your mortgage currently has about the same duration (weighted average time for every future payment), and an after-tax rate of 1.67%. That difference is worth the slight risk of the NY bonds; with this large a gap, I wouldn't make extra mortgage payments.

But this assumes that you can still itemize every year (which might happen, depending on the size of your mortgage and your charitable contributions). If you itemize only every other year, your tax rate drops from 41.85% to 20.93% (assuming that NY still requires you to itemize federal taxes in order to itemize NY taxes). That boosts the after-tax return on a mortgage paydown to 2.27%, which is close to break-even. It might be even higher if you run into some of NY's limitations on itemized deductions.
Thank you for providing these numbers on paper. It helps to see everything laid out like that. However, these numbers are based on my 2016 marginal rates. Those rates should be significantly different at the end of 2018 so these numbers aren't really accurate to rely on for the best move forward, no?

I am assuming that my rates will be lower and therefore the actual value of deducting the mortgage this year may be somewhat less. As it stands I will only be itemizing every other year. So half of my new rate would likely be less than the 20.93 you indicated. The value of keeping my mortgage due to the deduction would seem to be significantly reduced. (Some might say to pay off the mortgage because of this)

Regardless I do agree that using the NY bond fund is the best way to match. However, with comparable rates using ibonds and the aforementioned high yield savings accounts (that seem to only be increasing in the short term), does it really pay to take the extra risk on a state specific intermediate bond fund (that is losing value in the short term)? That question is part of the reason that I temporarily went cash heavy. I figure I can see where things go from here and readjust as necessary later in 2018.

Additionally, I am somewhat concentrated in NY already. My wife is a public school teacher and the stable fund we use in her 403b is guaranteed to return 7 percent annually according to state law. I would assume her salary and benefits are somewhat tied to NYS as well.
I'm not entirely certain if I should take this all into account or not.

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Re: A Not Paying Off the Mortgage Thread

Post by grabiner » Thu Feb 01, 2018 8:26 pm

SJR wrote:
Thu Feb 01, 2018 12:28 am
grabiner wrote:
Thu Feb 01, 2018 12:00 am
Tyler Aspect wrote:
Sun Jan 28, 2018 11:30 pm
You are in a high tax bracket with a conservative outlook on investing. I can see that you are matching the mortgage liability with CDs held in the taxable account. I think the problem is that the dividends on the CDs are taxed around 30%, so the dividends and the mortgage interests are unlikely to equalize. Since you are conservative in nature, you could not live comfortably with having lots of stock in your taxable account.
A better way to match the liability would be with New York munis. Admiral shares of Vanguard NY Long-Term Tax-Exempt currently yield 2.39%, free of federal and NY tax. The duration of the fund is 6.6 years. Your mortgage currently has about the same duration (weighted average time for every future payment), and an after-tax rate of 1.67%. That difference is worth the slight risk of the NY bonds; with this large a gap, I wouldn't make extra mortgage payments.

But this assumes that you can still itemize every year (which might happen, depending on the size of your mortgage and your charitable contributions). If you itemize only every other year, your tax rate drops from 41.85% to 20.93% (assuming that NY still requires you to itemize federal taxes in order to itemize NY taxes). That boosts the after-tax return on a mortgage paydown to 2.27%, which is close to break-even. It might be even higher if you run into some of NY's limitations on itemized deductions.
Thank you for providing these numbers on paper. It helps to see everything laid out like that. However, these numbers are based on my 2016 marginal rates. Those rates should be significantly different at the end of 2018 so these numbers aren't really accurate to rely on for the best move forward, no?

I am assuming that my rates will be lower and therefore the actual value of deducting the mortgage this year may be somewhat less. As it stands I will only be itemizing every other year. So half of my new rate would likely be less than the 20.93 you indicated. The value of keeping my mortgage due to the deduction would seem to be significantly reduced. (Some might say to pay off the mortgage because of this)

Regardless I do agree that using the NY bond fund is the best way to match. However, with comparable rates using ibonds and the aforementioned high yield savings accounts (that seem to only be increasing in the short term), does it really pay to take the extra risk on a state specific intermediate bond fund (that is losing value in the short term)?
"Losing money in the short term" doesn't matter in your situation. If you have a bond portfolio of bonds maturing from 1-14 years, and a mortgage with 14 years left, then you can use the bond portfolio to make the mortgage payments as they come due. Rising rates won't hurt you, because the bonds will have the value you need when you spend the money. (Another way to look at this is that rising rates will decrease the value of your mortgage to the bank.)

This is why the fair comparison is between funds of the same duration. A portfolio of bonds maturing over the next 14 years would have a 7-year duration, which is also the duration of the NY long-term fund. You could choose to hold shorter-term bonds, which would reduce your interest-rate risk (or take the same amount of interest-rate risk by holding more in bonds than in your mortgage).
Additionally, I am somewhat concentrated in NY already. My wife is a public school teacher and the stable fund we use in her 403b is guaranteed to return 7 percent annually according to state law. I would assume her salary and benefits are somewhat tied to NYS as well.
My usual recommendation for this situation is to put half your bonds in NY Long-Term Tax-Exempt, and half in Limited-Term Tax-Exempt. This gives you an overall intermediate-term portfolio, with only half your bonds in NY, but more than half the interest exempt from NY tax.

Given these considerations, and your risk aversion, it's probably worth paying off the mortgage. If you itemized every year and were more risk-tolerant, it wouldn't be worth paying off.
Wiki David Grabiner

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Posts: 137
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Re: A Not Paying Off the Mortgage Thread

Post by SJR » Sun Feb 04, 2018 9:58 am

grabiner wrote:
Thu Feb 01, 2018 8:26 pm
SJR wrote:
Thu Feb 01, 2018 12:28 am
grabiner wrote:
Thu Feb 01, 2018 12:00 am
Tyler Aspect wrote:
Sun Jan 28, 2018 11:30 pm
You are in a high tax bracket with a conservative outlook on investing. I can see that you are matching the mortgage liability with CDs held in the taxable account. I think the problem is that the dividends on the CDs are taxed around 30%, so the dividends and the mortgage interests are unlikely to equalize. Since you are conservative in nature, you could not live comfortably with having lots of stock in your taxable account.
A better way to match the liability would be with New York munis. Admiral shares of Vanguard NY Long-Term Tax-Exempt currently yield 2.39%, free of federal and NY tax. The duration of the fund is 6.6 years. Your mortgage currently has about the same duration (weighted average time for every future payment), and an after-tax rate of 1.67%. That difference is worth the slight risk of the NY bonds; with this large a gap, I wouldn't make extra mortgage payments.

But this assumes that you can still itemize every year (which might happen, depending on the size of your mortgage and your charitable contributions). If you itemize only every other year, your tax rate drops from 41.85% to 20.93% (assuming that NY still requires you to itemize federal taxes in order to itemize NY taxes). That boosts the after-tax return on a mortgage paydown to 2.27%, which is close to break-even. It might be even higher if you run into some of NY's limitations on itemized deductions.
Thank you for providing these numbers on paper. It helps to see everything laid out like that. However, these numbers are based on my 2016 marginal rates. Those rates should be significantly different at the end of 2018 so these numbers aren't really accurate to rely on for the best move forward, no?

I am assuming that my rates will be lower and therefore the actual value of deducting the mortgage this year may be somewhat less. As it stands I will only be itemizing every other year. So half of my new rate would likely be less than the 20.93 you indicated. The value of keeping my mortgage due to the deduction would seem to be significantly reduced. (Some might say to pay off the mortgage because of this)

Regardless I do agree that using the NY bond fund is the best way to match. However, with comparable rates using ibonds and the aforementioned high yield savings accounts (that seem to only be increasing in the short term), does it really pay to take the extra risk on a state specific intermediate bond fund (that is losing value in the short term)?
"Losing money in the short term" doesn't matter in your situation. If you have a bond portfolio of bonds maturing from 1-14 years, and a mortgage with 14 years left, then you can use the bond portfolio to make the mortgage payments as they come due. Rising rates won't hurt you, because the bonds will have the value you need when you spend the money. (Another way to look at this is that rising rates will decrease the value of your mortgage to the bank.)

This is why the fair comparison is between funds of the same duration. A portfolio of bonds maturing over the next 14 years would have a 7-year duration, which is also the duration of the NY long-term fund. You could choose to hold shorter-term bonds, which would reduce your interest-rate risk (or take the same amount of interest-rate risk by holding more in bonds than in your mortgage).
Additionally, I am somewhat concentrated in NY already. My wife is a public school teacher and the stable fund we use in her 403b is guaranteed to return 7 percent annually according to state law. I would assume her salary and benefits are somewhat tied to NYS as well.
My usual recommendation for this situation is to put half your bonds in NY Long-Term Tax-Exempt, and half in Limited-Term Tax-Exempt. This gives you an overall intermediate-term portfolio, with only half your bonds in NY, but more than half the interest exempt from NY tax.

Given these considerations, and your risk aversion, it's probably worth paying off the mortgage. If you itemized every year and were more risk-tolerant, it wouldn't be worth paying off.
I currently hold 60 percent in NY Long Term and 40 percent in Intermediate Term Tax Exempt. The national fund doesn't concern me as its highly diversified, and since it is being used in part to offset my mortgage, the term is fine for my goals.

I'm hesitant to dump more into NY Long Term, and with rising rates on cd's and certain high yield accounts, I subconsciously allocated new money to them. I also discovered I-bonds. I realize that all these will trail the mortgage slightly (after tax) for the time being but it allows me to maintain liquidity and allows me to "tread water" as things continue to change (interest rates etc). The goal of course being to eventually beat the mortgage with bulletproof fixed income instruments so that I can focus on equities and sleep well.

At this point I need make a few decisions and then firm up my IPS.

1. Do I want to keep separate buckets for retirement and taxable or simplify into one portfolio. If one portfolio I need to decide what I want my allocation for it to be. I'm leaning towards 2 buckets as I originally intended.
2. Assuming that I double count my fixed income allocation as my EF, then I have enough to match the mortgage amount. Therefore I need to move excess cash into equities effective immediately and all new cash flow would he directed to equities going forward (until I hit my desired taxable allocation). I'm leaning towards double counting it but haven't fully decided yet. It's all a question if I feel that my portfolio is big enough to do that. Others seem to to wait until theirs is larger than mine currently is.

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Re: A Not Paying Off the Mortgage Thread

Post by hightower » Sun Feb 04, 2018 10:21 am

SJR wrote:
Sun Jan 28, 2018 10:51 pm
As requested I am editing this post. Updated January 29 around 9:45PM EST.

Portions in parentheses are not integral to assisting me here; I only chose not to remove them because they do offer some insight into my personal situation and because many have already utilized the information to respond to me.

Quite some time has passed since my last "real" post about my personal situation (viewtopic.php?f=1&t=220362&p=3410144#p3410144) and with the significant changes lately, I felt it prudent to post again as part of my reassessment of where I stand. I believe I am a bit disoriented since I initially came up with my plan.

Thanks in advance for bearing with me.

To summarize (slightly updated):

Emergency funds: 1 year+
Debt: Mortgage- 15 year 2.875% with ~13.5 years to go, (low cost car lease ~$200/monthly ending December 2018)
Tax Filing Status: Married filing jointly
Marginal Tax Rate: 35% Federal, 6.85% State- Subject to AMT (2016, unknown 2017)
State of Residence: NY
Age: 28
Desired Asset allocation (Taxable): 50% stocks / 50% bonds
Desired International allocation (Taxable): 30% of stocks
Desired Asset allocation (Retirement): 80% stocks / 20% bonds
Desired International allocation (Retirement): 30% of stocks

1. I am paying extra towards the mortgage monthly as I have been all along. The resulting anticipated term is about 9.5 more years.
2. The plan was to invest 50/50 with leftover cash flow.
3. I have been rebalancing by using new money.

There have been quite a few changes that have affected my plan:
1. Tax reform
2. Steady increase in interest rates on CD's, savings and high yield checking accounts
3. My discovery and extensive research into I-bonds (related to number 2 above)

Here's the story:

(I am quite young, have 1 child (nearly 2 years old) and one on the way, live in a relatively HCOL area, and am self-employed in a 6-year-old business that is in a volatile industry. My wife is a public school teacher (in her second year). There is much about my future (especially expenses) that I am unsure of. I do know that all my children will attend private school which will be a substantial expense. My business is of the sort of nature that people that know me often ask if that is what I do full time or if I do something else as well (they're generally surprised to learn that it is full time). While the business has grown and profits have increased year over year (at first with explosive growth), it is clearly getting harder to maintain that track record.
When I went into this, it was with the notion that I would ride it out for as long as it worked and then move onto something else. That feeling still remains, yet on a daily basis, I do whatever I can to build my company into something that can last for decades. My feelings are therefore split. Some days/weeks when things are well, I'm confident that there is a future here, and other times when things appear bleak, I imagine the worst case scenario and start preparing (I realize that I jump the gun with this feeling) as if it's all over. It's quite the roller coaster to say the least.)

My perspective of the worst case scenario always led me to focus on the moment, to do the best I could now and give it my all. That thought process has had many benefits (maxing 401k/403B plans+backdoor Roth, limiting expenses across the board, causing me to find Bogleheads, among others). The only thing I have not yet done was pay off my mortgage which has been my goal since I purchased my home 2.5 years ago. If things went south, I wanted to own my home free and clear before being tossed into who knows what.

I originally decided not to pay it off after refinancing to a 15-year term and reducing my principal balance. I still think that this is the correct move for me. Over the past weeks/months I have been reading pretty much every thread that discusses early payoff and although I've been intrigued by the number of people that have exclaimed how freeing it is (emotionally), I haven't changed my mind.

Main reasons are as follows:
1. I estimate that with charitable contributions and SALT I will still max out the standard deduction (annually or every other year). Therefore my mortgage interest is still deductible (possibly only on alternating years as I hope to establish a DAF and fund it before the end of 2018 for the full 2019- giving me a much larger deduction this year and only "sacrificing" mortgage interest next year which would together with SALT be less than the standard deduction- seeing that I'm not paying off the mortgage).
2. I value liquidity in light of the above information about myself.
3. A mortgage is an inflation hedge + interest rates are increasing and are almost at my mortgage's interest rate. Good chance in the coming months/years I'll be able to match the rate or beat it.

So here is where I think I lost my way- I stopped consistently investing monthly excess cash flow and instead have established high yield accounts (with some hoops to jump through) which give me somewhere between a 2-3% return. I also have a few 5-year-old CD's maturing soon (February and May) which are yielding 1.76% or 1.84%. I have one other CD (11 month, 1.9%) that matures later this year as well. I plan on rolling over some of the maturing CD's to I-bonds which I believe are a great investment to have. (I anticipate maxing out 20k+5k this year)

My original intention was to invest equally 50-50 (stocks and munis) until I had enough in bonds to cover my entire mortgage (a plan carved out with Grabiner's help and insight according to my 2016 tax rates and old tax laws), and then I would invest all new money into stocks (sort of a glide path if you will) until I hit my retirement allocation at that point in time. (My portfolio would then be one big bucket as many here view theirs)

The bottom line is that I think I got a bit overexcited in the short term (which I'm prone to do), and instead of maintaining my long-term plan, I started tinkering with accounts that are subject to short-term rate increases. I think I can correct this myself, but not sure I trust my instincts to do it correctly as I am still in the proverbial candy shop (I kind of don't want to liquidate all these accounts I set up for myself). Regardless,
I currently have the equivalent of my mortgage invested in a 50/50 taxable portfolio (using Total Intl, Total Stock, and Munis). Counting those bonds and all additional cashlike positions, I already have more than enough to pay off my mortgage (assuming it double counts as my EF- see below). This would dictate that all future positive cash flow go directly into stocks until I hit 80/20. ( I like having bonds in taxable so would keep munis)

Questions for my fellow Bogleheads:
1. Do you agree or disagree with my original plan? Why?
A.If you don't agree, what do you think would be a prudent plan of action going forward?
B. If you do agree, how do you recommend that I rebalance my portfolio (new money all to stocks or change my existing positions immediately)?
B1. Would you double count the substantial amount money in fixed income as an EF fund? (this is a new thought that only occurred to me recently)
B2. Due to the changing environment, I seem to have altered my 50% fixed income position from Munis only to include I-bonds, (CD's) and High Yield Checking/Savings accounts. Would it be ok to continue tinkering without having a fixed plan in place for my fixed income allocation, which would depend on the overall interest rate environment? (I noticed others have also made similar changes across the forums) Or would you consider that a sort of market timing with (muni) bonds?

(One detail I did not mention and that may provide some additional information. I lived through the 2008 meltdown but was too young to have been invested. I have never experienced a bear market in my entire investing "career". I don't really know how I will react (other than I won't sell low). Emotionally, I may kick myself if my portfolio dives and I still have my mortgage humming in the background. I chose a 80/20 allocation for retirement because that is the low end of what has been suggested for my age.)


Thanks for reading.

In my opinion, as long as you are saving aggressively you'll be fine if something happens to your career. Paying off the mortgage early doesn't really matter much. The reason I say this is because you're clearly a very driven, capable person who managed to start and grow your own business and have been quite successful with it. What makes you think this is your one and only shot at success? If your business went south, you will be able to adapt and find something else to do. I think you're splitting hairs worrying about the specifics so much. Keep your spending low and your savings high and focus on your career. If your business tanks, you'll have an even better resume than you did the first time around and you'll be able to transition into something else. Cross that bridge when you get there, but keep saving for a rainy day.
In regards to your portfolio, I would choose an AA and stick with it. Market timing, as you're doing, is risky. You risk either missing out on bull runs or getting hit harder by bear markets. By being 50/50 stocks/bonds, you've already missed out on some gains over the last year or so that the market has shot up. If you feel that 80/20 is what you want for the long run, go ahead and rebalance now. Then, keep adding to it and ignore what it does month to month. Rebalance annually and forget it exists. Your focus should be on earning and saving, not so much timing the market.

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Sun Feb 04, 2018 5:14 pm

hightower wrote:
Sun Feb 04, 2018 10:21 am
SJR wrote:
Sun Jan 28, 2018 10:51 pm
As requested I am editing this post. Updated January 29 around 9:45PM EST.

Portions in parentheses are not integral to assisting me here; I only chose not to remove them because they do offer some insight into my personal situation and because many have already utilized the information to respond to me.

Quite some time has passed since my last "real" post about my personal situation (viewtopic.php?f=1&t=220362&p=3410144#p3410144) and with the significant changes lately, I felt it prudent to post again as part of my reassessment of where I stand. I believe I am a bit disoriented since I initially came up with my plan.

Thanks in advance for bearing with me.

To summarize (slightly updated):

Emergency funds: 1 year+
Debt: Mortgage- 15 year 2.875% with ~13.5 years to go, (low cost car lease ~$200/monthly ending December 2018)
Tax Filing Status: Married filing jointly
Marginal Tax Rate: 35% Federal, 6.85% State- Subject to AMT (2016, unknown 2017)
State of Residence: NY
Age: 28
Desired Asset allocation (Taxable): 50% stocks / 50% bonds
Desired International allocation (Taxable): 30% of stocks
Desired Asset allocation (Retirement): 80% stocks / 20% bonds
Desired International allocation (Retirement): 30% of stocks

1. I am paying extra towards the mortgage monthly as I have been all along. The resulting anticipated term is about 9.5 more years.
2. The plan was to invest 50/50 with leftover cash flow.
3. I have been rebalancing by using new money.

There have been quite a few changes that have affected my plan:
1. Tax reform
2. Steady increase in interest rates on CD's, savings and high yield checking accounts
3. My discovery and extensive research into I-bonds (related to number 2 above)

Here's the story:

(I am quite young, have 1 child (nearly 2 years old) and one on the way, live in a relatively HCOL area, and am self-employed in a 6-year-old business that is in a volatile industry. My wife is a public school teacher (in her second year). There is much about my future (especially expenses) that I am unsure of. I do know that all my children will attend private school which will be a substantial expense. My business is of the sort of nature that people that know me often ask if that is what I do full time or if I do something else as well (they're generally surprised to learn that it is full time). While the business has grown and profits have increased year over year (at first with explosive growth), it is clearly getting harder to maintain that track record.
When I went into this, it was with the notion that I would ride it out for as long as it worked and then move onto something else. That feeling still remains, yet on a daily basis, I do whatever I can to build my company into something that can last for decades. My feelings are therefore split. Some days/weeks when things are well, I'm confident that there is a future here, and other times when things appear bleak, I imagine the worst case scenario and start preparing (I realize that I jump the gun with this feeling) as if it's all over. It's quite the roller coaster to say the least.)

My perspective of the worst case scenario always led me to focus on the moment, to do the best I could now and give it my all. That thought process has had many benefits (maxing 401k/403B plans+backdoor Roth, limiting expenses across the board, causing me to find Bogleheads, among others). The only thing I have not yet done was pay off my mortgage which has been my goal since I purchased my home 2.5 years ago. If things went south, I wanted to own my home free and clear before being tossed into who knows what.

I originally decided not to pay it off after refinancing to a 15-year term and reducing my principal balance. I still think that this is the correct move for me. Over the past weeks/months I have been reading pretty much every thread that discusses early payoff and although I've been intrigued by the number of people that have exclaimed how freeing it is (emotionally), I haven't changed my mind.

Main reasons are as follows:
1. I estimate that with charitable contributions and SALT I will still max out the standard deduction (annually or every other year). Therefore my mortgage interest is still deductible (possibly only on alternating years as I hope to establish a DAF and fund it before the end of 2018 for the full 2019- giving me a much larger deduction this year and only "sacrificing" mortgage interest next year which would together with SALT be less than the standard deduction- seeing that I'm not paying off the mortgage).
2. I value liquidity in light of the above information about myself.
3. A mortgage is an inflation hedge + interest rates are increasing and are almost at my mortgage's interest rate. Good chance in the coming months/years I'll be able to match the rate or beat it.

So here is where I think I lost my way- I stopped consistently investing monthly excess cash flow and instead have established high yield accounts (with some hoops to jump through) which give me somewhere between a 2-3% return. I also have a few 5-year-old CD's maturing soon (February and May) which are yielding 1.76% or 1.84%. I have one other CD (11 month, 1.9%) that matures later this year as well. I plan on rolling over some of the maturing CD's to I-bonds which I believe are a great investment to have. (I anticipate maxing out 20k+5k this year)

My original intention was to invest equally 50-50 (stocks and munis) until I had enough in bonds to cover my entire mortgage (a plan carved out with Grabiner's help and insight according to my 2016 tax rates and old tax laws), and then I would invest all new money into stocks (sort of a glide path if you will) until I hit my retirement allocation at that point in time. (My portfolio would then be one big bucket as many here view theirs)

The bottom line is that I think I got a bit overexcited in the short term (which I'm prone to do), and instead of maintaining my long-term plan, I started tinkering with accounts that are subject to short-term rate increases. I think I can correct this myself, but not sure I trust my instincts to do it correctly as I am still in the proverbial candy shop (I kind of don't want to liquidate all these accounts I set up for myself). Regardless,
I currently have the equivalent of my mortgage invested in a 50/50 taxable portfolio (using Total Intl, Total Stock, and Munis). Counting those bonds and all additional cashlike positions, I already have more than enough to pay off my mortgage (assuming it double counts as my EF- see below). This would dictate that all future positive cash flow go directly into stocks until I hit 80/20. ( I like having bonds in taxable so would keep munis)

Questions for my fellow Bogleheads:
1. Do you agree or disagree with my original plan? Why?
A.If you don't agree, what do you think would be a prudent plan of action going forward?
B. If you do agree, how do you recommend that I rebalance my portfolio (new money all to stocks or change my existing positions immediately)?
B1. Would you double count the substantial amount money in fixed income as an EF fund? (this is a new thought that only occurred to me recently)
B2. Due to the changing environment, I seem to have altered my 50% fixed income position from Munis only to include I-bonds, (CD's) and High Yield Checking/Savings accounts. Would it be ok to continue tinkering without having a fixed plan in place for my fixed income allocation, which would depend on the overall interest rate environment? (I noticed others have also made similar changes across the forums) Or would you consider that a sort of market timing with (muni) bonds?

(One detail I did not mention and that may provide some additional information. I lived through the 2008 meltdown but was too young to have been invested. I have never experienced a bear market in my entire investing "career". I don't really know how I will react (other than I won't sell low). Emotionally, I may kick myself if my portfolio dives and I still have my mortgage humming in the background. I chose a 80/20 allocation for retirement because that is the low end of what has been suggested for my age.)


Thanks for reading.

In my opinion, as long as you are saving aggressively you'll be fine if something happens to your career. Paying off the mortgage early doesn't really matter much. The reason I say this is because you're clearly a very driven, capable person who managed to start and grow your own business and have been quite successful with it. What makes you think this is your one and only shot at success? If your business went south, you will be able to adapt and find something else to do. I think you're splitting hairs worrying about the specifics so much. Keep your spending low and your savings high and focus on your career. If your business tanks, you'll have an even better resume than you did the first time around and you'll be able to transition into something else. Cross that bridge when you get there, but keep saving for a rainy day.
In regards to your portfolio, I would choose an AA and stick with it. Market timing, as you're doing, is risky. You risk either missing out on bull runs or getting hit harder by bear markets. By being 50/50 stocks/bonds, you've already missed out on some gains over the last year or so that the market has shot up. If you feel that 80/20 is what you want for the long run, go ahead and rebalance now. Then, keep adding to it and ignore what it does month to month. Rebalance annually and forget it exists. Your focus should be on earning and saving, not so much timing the market.
I'm saving as much as I can now. Both because of an uncertain future, and because it's always been my nature.
I agree with you that this isn't my only shot and I'll be able to find something else if need be. But new things take a lot of time to develop and grow and my expenses will be considerably more the older I become. That being said, I agree that I'm splitting hairs and am concerning myself with the worst case scenario. Hoping for the best and preparing for the worst has worked well for me thus far; it's hard to flip that switch at will.

I don't think I've been market timing though. I've only switched my fixed income position lately which also ended up skewing the allocation of my taxable portfolio. My retirement accounts are all in order and I'm meticulous with them. There's no lack of discipline there.

In an ideal world I would have the time and opportunity to start something else with some of my savings. I like working with my money and having some element of influence on my success. That would also serve to diversify my income. The stock market works for many here along with a profession and somewhat secure job. I don't have a profession or a secure job.

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Watty
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Re: A Not Paying Off the Mortgage Thread

Post by Watty » Mon Feb 05, 2018 9:04 am

I still don't have a good understanding of your situation.

A couple of things.

Do you have enough in your taxable accounts to pay off your mortgage without depleting your emergency fund? If so then could you live on just your spouse's income if you needed to? (or at least come close to that.)

I have not followed it but it sounds like with the latest tax law changes that a 529 could be used to pay for private grade schools. You should look into that to see if there would be any advantages if you used that.

With your business being unstable and you being so young it is likely a bad idea to start a DAF until your are basically to the point where you could retire today. This is especially important since sending your kids to private school seems to be important to you and it is not clear if you could afford that if you had to shut down your business.

Lafder
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Re: A Not Paying Off the Mortgage Thread

Post by Lafder » Mon Feb 05, 2018 9:58 am

Congratulations on your business continuing to do well, your second child on the way and your overall thoughtful approach to your finances!

I think it is simpler to think of your overall asset allocation rather than breaking up taxable vs retirement. I think of my emergency fund as separate from this asset allocation. You can adjust your emergency fund up or down depending on known expenses. Such as you sound determined to pay tuition, weddings etc. Those could be separate accounts (still in your name and your wife's name) with a shorter time line than your retirement and not counted in your AA since they are earmarked for a specific purpose. (Though all accounts are truly your deep emergency fund since you would spend that money if needed).I hold a higher % bonds in my retirement accounts.

It is also possible to consider those planned expenses as part of your taxable savings and adjust spending based on how much $ there is when the time comes. It just depends. You seem set on planning to pay those expenses. Your kids may surprise you in what they want, or need :)

I agree with looking at 529s, especially with the ability to pay private k-12 now. But take a close look at fees!

You seem to have done a great job of saving money. With the stock market doing so well, and improving bond rates, it is easy to want to invest instead of pay off your mortgage. But, paying off your mortgage is a guaranteed return. Why not reconsider paying off the mortgage. Then you can immediately start investing the equivalent of the mortgage payment into the market each month. I think a paid off home would be a great sense of security and comfort that will ease some of your investing angst. You will still have taxes, insurance, utilities, repairs etc, so your home doesn't become free. But it does end your largest monthly expense, and free that money for investing. Which will be perfect in the next stock market crash since you will keep trickling money in along the way.

For me, there is great distress from selling a holding I already have. So selling my taxable accounts to pay off a mortgage would be uncomfortable..........I suspect this is why you have changed your plan now that you can pay off your mortgage!! Perhaps like me, you rebalance with new money, to avoid the discomfort of selling holdings we already have :)

I have a compromise for you. Keep your current investments. You have put a nice nest egg together in taxable with enough to pay off your mortgage. Let it grow. And you get to "play" with it by moving the CDs and other holdings as they mature to find the best rates available. But, instead of ADDING to your taxable savings at this point, INCREASE the amount of money you are paying to your mortgage each month and you will get it paid off even faster. In a way it is the best of both worlds to keep your large chunk of what was going to pay off the mortgage growing, and paying off the mortgage even faster than you were going to :)

Meanwhile as I type this I am getting sensational newsfeeds across my screen "mass stock sell off continues after Friday's drop" or something to the equivalent. This serves as a reminder to keep in mind what will feel worse....paying off the mortgage and watching the investment returns soar. Or not paying off the mortgage and watching your investments drop to a level below an amount that could have paid off the mortgage? I think watching your investments drop will hurt more.

Bottom line, this is not just a math equation! It is an emotional exercise and you can not accurately predict how you will feel, so you overanalyze it trying to guess how you will feel and arrive at the perfect feeling answer........but there is no perfect answer.

I set my goal AA at 65/35. But it has drifted closer to 70/30 due to stock market returns. Selling to rebalance tends to be too hard for me, unless there is a big enough drop that I will need to sell bonds to get back on track. Hopefully that won't be for awhile, but we never know for sure! As I see those headlines, it makes me with I had sold stocks a week ago to rebalance. But I am too frozen to make any changes now.........

lafder

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Feb 06, 2018 9:57 pm

Watty wrote:
Mon Feb 05, 2018 9:04 am
I still don't have a good understanding of your situation.

A couple of things.

Do you have enough in your taxable accounts to pay off your mortgage without depleting your emergency fund? If so then could you live on just your spouse's income if you needed to? (or at least come close to that.)

I have not followed it but it sounds like with the latest tax law changes that a 529 could be used to pay for private grade schools. You should look into that to see if there would be any advantages if you used that.

With your business being unstable and you being so young it is likely a bad idea to start a DAF until your are basically to the point where you could retire today. This is especially important since sending your kids to private school seems to be important to you and it is not clear if you could afford that if you had to shut down your business.
Forget taxable, I have enough in cash/CDs/checking/saving currently. I would not be depleting my emergency fund, but I'd prefer not to pay it all off using those assets as I expect to have a need for some in the near term. Assuming things continue as is, I could certainly pay it off later this year using cash/CDs etc. without blinking. My spouse's income is nowhere near enough to support us.

I funded $10k into a 529 last year (forgot to include it in my breakdown of assets above) and plan to contribute $10k more this year provided that NYS passes legislation to allow me to keep the NYS deduction for doing so. Otherwise, all I gain is the investment returns which according to my calculations won't be enough to warrant bothering with the 529 short-term (unless I don't use the money for my first child's education and leave it there longer).

For the DAF I would only be front loading one year's contributions right before the end of 2018. So in December, I would load enough for 2019. It's a short-term play for me which I would only do every other year unless something changes. (side note- if I get it up and running early on this year I would contribute then for this year to step up the basis on some of my older equities; I would only contribute in small amounts though and use it right away for ongoing contributions. I'd then invest new money to replace those contributions at the higher cost basis).

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Tue Feb 06, 2018 10:21 pm

Lafder wrote:
Mon Feb 05, 2018 9:58 am
Congratulations on your business continuing to do well, your second child on the way and your overall thoughtful approach to your finances!

Thank you :)

I think it is simpler to think of your overall asset allocation rather than breaking up taxable vs retirement. I think of my emergency fund as separate from this asset allocation. You can adjust your emergency fund up or down depending on known expenses. Such as you sound determined to pay tuition, weddings etc. Those could be separate accounts (still in your name and your wife's name) with a shorter time line than your retirement and not counted in your AA since they are earmarked for a specific purpose. (Though all accounts are truly your deep emergency fund since you would spend that money if needed).I hold a higher % bonds in my retirement accounts.

This sounds more complicated to me. That means I need to decide now on a strategy for each "side account". The amount to contribute monthly, how to invest the funds, etc. I think this would make me into more of a pretzel than I already am. That's why I just wanted to have 2 buckets.
One for retirement which is straightforward and one for mid to long-term expenses which is a bit more complicated. I presume when I would need to liquidate something for an expense, I would try to break even or take a small gain (I have carryforward losses that will keep me busy for years to come so I wouldn't take a loss, especially as I wouldn't be buying into another fund that's similar as part of the TLH process). During those years invested, however, there would be dividends from those shares which would be reinvested. All in all I'd benefit from such a long term plan.


It is also possible to consider those planned expenses as part of your taxable savings and adjust spending based on how much $ there is when the time comes. It just depends. You seem set on planning to pay those expenses. Your kids may surprise you in what they want, or need :)

This would be the case if I did the above.

I agree with looking at 529s, especially with the ability to pay private k-12 now. But take a close look at fees!

NY has one of the best 529 plans in the country. ER's are .15 for most funds (most if not all are Vanguard funds).

You seem to have done a great job of saving money. With the stock market doing so well, and improving bond rates, it is easy to want to invest instead of pay off your mortgage. But, paying off your mortgage is a guaranteed return. Why not reconsider paying off the mortgage. Then you can immediately start investing the equivalent of the mortgage payment into the market each month. I think a paid off home would be a great sense of security and comfort that will ease some of your investing angst. You will still have taxes, insurance, utilities, repairs etc, so your home doesn't become free. But it does end your largest monthly expense, and free that money for investing. Which will be perfect in the next stock market crash since you will keep trickling money in along the way.

Your logic is certainly sound and is very, very enticing. But I refinanced about 1.5 years ago, reduced my principal balance, and paid closing fees for the reduced term and rate, specifically because I decided to invest instead. I'm not sure if anything substantial has changed since then for me to have the right of reconsidering that decision. (If you will say that my business is grounds for reconsideration, then if anything, maintaining liquidity is very valuable at this time) Part of me is trying to stay the course at all costs, and that's the reason for this whole thread actually.

For me, there is great distress from selling a holding I already have. So selling my taxable accounts to pay off a mortgage would be uncomfortable..........I suspect this is why you have changed your plan now that you can pay off your mortgage!! Perhaps like me, you rebalance with new money, to avoid the discomfort of selling holdings we already have :)

Yes, I have been rebalancing with new money. Makes it easier for me than having to decide if I should realize a profit. If I had one bucket, then I could instead just rebalance in my 401k and that would keep things simple.

I have a compromise for you. Keep your current investments. You have put a nice nest egg together in taxable with enough to pay off your mortgage. Let it grow. And you get to "play" with it by moving the CDs and other holdings as they mature to find the best rates available. But, instead of ADDING to your taxable savings at this point, INCREASE the amount of money you are paying to your mortgage each month and you will get it paid off even faster. In a way it is the best of both worlds to keep your large chunk of what was going to pay off the mortgage growing, and paying off the mortgage even faster than you were going to :)

If I do this, then my mortage will be paid off within a few months due to my heavy cash position. That's essentially recommending I pay it off completely as soon as possible, no?

Meanwhile as I type this I am getting sensational newsfeeds across my screen "mass stock sell off continues after Friday's drop" or something to the equivalent. This serves as a reminder to keep in mind what will feel worse....paying off the mortgage and watching the investment returns soar. Or not paying off the mortgage and watching your investments drop to a level below an amount that could have paid off the mortgage? I think watching your investments drop will hurt more.

Definitely watching them drop will hurt more. That just means emotionally I'd enjoy a paid off mortgage more than a mortgage and large stock market gains. I know this already; that doesn't make it the right move for me though.

Bottom line, this is not just a math equation! It is an emotional exercise and you can not accurately predict how you will feel, so you overanalyze it trying to guess how you will feel and arrive at the perfect feeling answer........but there is no perfect answer.

This is precisely what I'm going through. I'm prone to overanalyzing. I'd ask my wife for her opinion, but math is her weakest subject.
I generally make these decisions alone as there's no one else I can share such great problems with. :sharebeer Other than fellow BHers of course.


I set my goal AA at 65/35. But it has drifted closer to 70/30 due to stock market returns. Selling to rebalance tends to be too hard for me, unless there is a big enough drop that I will need to sell bonds to get back on track. Hopefully that won't be for awhile, but we never know for sure! As I see those headlines, it makes me with I had sold stocks a week ago to rebalance. But I am too frozen to make any changes now.........

lafder

JBTX
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Re: A Not Paying Off the Mortgage Thread

Post by JBTX » Tue Feb 06, 2018 11:03 pm

Don't pay off mortgage. Even without mortgage deduction, a sub 3% mortgage for a young person is a pretty good deal.

Liquidity is good.

You don't talk at all about your Retirement accounts. You are self employed. Are you maxing out a solo 401k or comparable plan? At your tax rate, you want to put every penny you can in a traditional tax deferred vehicle.

I really had a hard time keeping up with the rest of the post. Seems like the complexity of your plan is allowing you to overcomplicate it and stray from it.

Ibonds are good for part of a bond position in taxable account or a cash reserve substitute. They shouldn't be taking place of your equity allocation.

SJR
Posts: 137
Joined: Sun Aug 02, 2015 10:51 am

Re: A Not Paying Off the Mortgage Thread

Post by SJR » Wed Feb 07, 2018 9:50 pm

JBTX wrote:
Tue Feb 06, 2018 11:03 pm
Don't pay off mortgage. Even without mortgage deduction, a sub 3% mortgage for a young person is a pretty good deal.

Liquidity is good.

You don't talk at all about your Retirement accounts. You are self employed. Are you maxing out a solo 401k or comparable plan? At your tax rate, you want to put every penny you can in a traditional tax deferred vehicle.

I really had a hard time keeping up with the rest of the post. Seems like the complexity of your plan is allowing you to overcomplicate it and stray from it.

Ibonds are good for part of a bond position in taxable account or a cash reserve substitute. They shouldn't be taking place of your equity allocation.
I agree with you. Thank you for the feedback.

Yes, I have a solo401k and max it out as much as possible (I'm looking into the Mega Backdoor Roth for the rest). My wife maxes out her 403b.

I didn't mention it as this thread is specifically about my taxable accounts. Everything on the retirement side is on autopilot. It's easy for me to

save for retirement and maintain a simple plan as that money is earmarked for 40 years from now. I never had trouble with that.

I plan to purchase I-bonds for the first time later this month as well.

Lafder
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Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: A Not Paying Off the Mortgage Thread

Post by Lafder » Thu Feb 08, 2018 11:30 am

Regarding this "I'd ask my wife for her opinion, but math is her weakest subject."

That is exactly why you should ask your wife what she thinks. This is not a MATH equation, it is an emotional decision! To hear her input could help push you one direction or the other and help you stop waffling on whether to pay down the mortgage or invest. What would make your wife happy?

You have done the math, and clearly.............there is no clear answer since the huge unknown variable is how will the market do. If we had that answer, it would be a no brainer. But, future market performance is an unknown. So try to feel out what makes the most sense for you and stop overanalyzing the numbers and think about the feelings and security either path will bring.

Of course you won't know til you try it and see how it actually feels!

If you pay off the house you can always refi in the future if you decide you prefer a mortgage. But if you invest and the market drops, you can not pull money that is no longer there out to pay off the mortgage.

This is why paying off the mortgage appeals to me. But for me it is theoretical since I do not have enough to pay off my mortgage, so it probably biases my opinions on it :)

In your case, you really are doing well whichever way you choose. You are being careful, and conservative in your investments.

lafder

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