Should We Sell Short Term Bonds to Pay Off Mortgage?

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KlangFool
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by KlangFool » Wed Mar 27, 2019 11:06 am

EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
EnjoyIt,

<<I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.>>

Please note that OP's plan is to pay off the mortgage with the short-term bond when he has 1.26 million. So, he would be at 5% bond when he pays off the mortgage in 2 years. Do you still think that it is a good idea?

KlangFool

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willthrill81
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 11:09 am

corn18 wrote:
Wed Mar 27, 2019 11:00 am
Haven't seen anyone mention the mortgage as a negative bond (might have missed it).
I did.
corn18 wrote:
Wed Mar 27, 2019 11:00 am
The 40 part of my 60/40 portfolio is equal to what I owe on my mortgage right now. So if I consider my mortgage a negative bond, I am actually 100/0. I would never actually go to 100/0 with a paid off house, so why am I willing to go 60/40 with a negative 40 in my mortgage?
Yes, you're effectively 100/0 right now. The reason that many choose a strategy similar to yours is because they want the liquidity* it offers, even if it costs them in terms of interest rates (i.e. their post-tax mortgage rate being higher than their post-tax bond yield). That's definitely a reason, but that strategy is absolutely not appropriate for every situation. If it were, we would be telling 80 year old widows with a paid off home to do a cash-out refinance and invest the proceeds.

*Interestingly, many who favor this option do not care for paying off the mortgage but then taking out a HELOC that can be used on an as-needed basis. Some state that the bank may close the HELOC, but I've never heard of this happening on a paid-off home, only where the homeowner's equity vanished due to declining home values, which happened to millions in the last recession.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JBTX
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 11:22 am

willthrill81 wrote:
Wed Mar 27, 2019 10:35 am
JBTX wrote:
Wed Mar 27, 2019 2:52 am
I think I better understand what OP is proposing. He is keeping his mortgage until he retires, for some of the reasons I have articulated, but at the point of retirement paying it off. I can see some merit in that. Ultimately to me it would really come down to the spread of the mortgage rate over the rate of fixed income investments whether I pay it off or not.

....

The thin after tax savings scenario is similar to ours in that most of our savings are in tax advantaged. But we are close enough to 59.5 and still working so it isn't an issue.

Having the mortgage in retirement can allow you to keep in a taxed advantaged account longer, which has multiple benefits and may more than offset the interest premium of the mortgage. It may help to pay tax bills for Roth conversions.

As to bond rates increasing, I would even extend that further in that even if the mortgage rate is a bit higher, it still may be worth holding on to it. However if are trying to optimize you worst case SWR you wouldnt put much in stocks or intermediate term bonds. More short term and inflation adjusted variety.
Reading your post made me realize why some think that paying off the mortgage before retirement reduces sequence of returns risk and some think that it's merely a question of taking advantage of interest rates. It actually comes down to whether the retiree is willing to hold a dynamic asset allocation with regard to managing the mortgage payments. If the retiree is willing to pay the mortgage in retirement from selling either stocks that are 'up' or from the bonds that are earning a higher post-tax interest rate than the post-tax mortgage rate, then retaining the mortgage and the associated bonds is fine. However, this requires that the retiree has enough bonds in their portfolio in order to keep covering the mortgage payment in the event that stocks are down for an extended period of time, several years at least. If the retiree always holds enough in bonds to completely pay off the mortgage balance and would be content with the resulting AA if they had to sell enough bonds to do so, then there's no mathematical reason to pay off the mortgage early.

If the retiree wants to maintain a 'fixed' (i.e. non-dynamic) AA in retirement, then retaining the mortgage certainly does increase sequence of returns risk because there is now a definite possibility that they will need to sell stocks that are in a slump in order to cover at least part of their mortgage payment. This is the case even if their bonds are yielding a higher rate than their mortgage rate.

However, this is not directly relevant to the OP because (1) he's planning on paying off the mortgage before retirement and (2) bond yields are well below 3.75%.

What some in this thread have suggested is that retaining a mortgage with a rate higher than your bond holdings basically allows you to gain cheap leverage into stocks at a lower cost and less risk than is typically the case with leverage. While this is true, it does not negate the fact that this plan increases sequence of returns risk for retirees by some degree (i.e. it helps you if stocks go up but it hurts you if they don't), although precisely how much is unknowable.
JBTX wrote:
Wed Mar 27, 2019 2:52 am
Good discussion. You've forced me to flex my brain a bit and think through some new scenarios.[/color]
Ditto! :beer
Totally agree with what you just said. You summarized it nicely.

One scenario could be to set aside a "sinking" fund for the bonds, and while the rates are lower than your mortgage, keep the investments in short term maturities. If and when rates go materially higher than your mortgage rate, you go long, and essentially lock in the profit over the mortgage rate (in theory you would go long varying durations to offset). Of course it is possible that rates never go higher than the mortgage rate, but with 28 years ahead there is a good chance they will.

Also one problem I see with these fixed SWR examples is they look at history and assume you stay the course, no matter how harrowing the experience. You may start out at 4.0 SWR but the market tanks badly and then you are at 6-7% WR. You are supposed to rebalance back into stocks and further deplete your fixed income, and have faith that via mean reversion the markets will bail you out, because they always have (unless you lived in Japan of course). Having a cash or fixed income cushion from a mortgage may make it easier to stay the course, rebalance into stocks, and wait it out.
Last edited by JBTX on Wed Mar 27, 2019 11:25 am, edited 1 time in total.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 11:32 am

EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
You can debate paying off a 3.875 mortgage at retirement, but paying off a 2.75% mortgage seems like giving away free money. You could hold the amount of mortgage in short term securities and currently come close to 2.75%, and it is almost certain sometime in the next 20 years rates will go materially higher than 2.75%, then you can go long bonds and "lock in" the profits.

KlangFool
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by KlangFool » Wed Mar 27, 2019 11:35 am

donebyforty wrote:
Wed Mar 27, 2019 11:23 am
KlangFool wrote:
Wed Mar 27, 2019 11:06 am
EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
EnjoyIt,

<<I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.>>

Please note that OP's plan is to pay off the mortgage with the short-term bond when he has 1.26 million. So, he would be at 5% bond when he pays off the mortgage in 2 years. Do you still think that it is a good idea?

KlangFool
This is incorrect. This is neither of the proposed plans.

In the scenario where we'd get to $1.26M and then pay off the mortgage all at once (roughly in two years) the AA described in Bernstein's Simpleton's Portfolio would be maintained.
donebyforty,

If you are using your AA to pay off your mortgage, why are you comparing your mortgage interest rate of 3.75% against short-term bond interest rate? It should be 3.75% against your portfolio return. Do not make the mistake of making the decision and then manipulate the data to support your decision

Do you think that your portfolio return is much less than 3.75% per year?

KlangFool

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corn18
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by corn18 » Wed Mar 27, 2019 11:43 am

willthrill81 wrote:
Wed Mar 27, 2019 11:09 am
corn18 wrote:
Wed Mar 27, 2019 11:00 am
Haven't seen anyone mention the mortgage as a negative bond (might have missed it).
I did.
corn18 wrote:
Wed Mar 27, 2019 11:00 am
The 40 part of my 60/40 portfolio is equal to what I owe on my mortgage right now. So if I consider my mortgage a negative bond, I am actually 100/0. I would never actually go to 100/0 with a paid off house, so why am I willing to go 60/40 with a negative 40 in my mortgage?
Yes, you're effectively 100/0 right now.
Yikes! I thought I knew that, but never really accepted the reality of it. I was thinking that dumping a boatload of my windfall this year into FZDXX for a house fund (pay off or just stay in FZDXX) was tilting me towards the remarkably conservative side. Seems I would be doing myself a favor and coming off of 100/0. Paying it off or keeping enough to pay it off results in my desired AA of 60/40. The question comes down to liquidity, rate arbitrage and SORR. I guess I take comfort in the fact that I don't have to be right, just don't want to be wrong. First world problems, I guess.
willthrill81 wrote:
Wed Mar 27, 2019 11:09 am
The reason that many choose a strategy similar to yours is because they want the liquidity* it offers, even if it costs them in terms of interest rates (i.e. their post-tax mortgage rate being higher than their post-tax bond yield). That's definitely a reason, but that strategy is absolutely not appropriate for every situation. If it were, we would be telling 80 year old widows with a paid off home to do a cash-out refinance and invest the proceeds.

*Interestingly, many who favor this option do not care for paying off the mortgage but then taking out a HELOC that can be used on an as-needed basis. Some state that the bank may close the HELOC, but I've never heard of this happening on a paid-off home, only where the homeowner's equity vanished due to declining home values, which happened to millions in the last recession.
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JoeRetire
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JoeRetire » Wed Mar 27, 2019 12:01 pm

corn18 wrote:
Wed Mar 27, 2019 9:10 am
For us, we haven't decided what to do yet. We are slowly collecting enough to pay it off the day before we retire.
I've always felt it was smart to maintain as much flexibility as possible while pushing off decisions that don't need to be made now into the future.

The day before you retire you can assess your current financial situation, and make the decision that feels right at that time.
Don't be a lemming.

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JoeRetire
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JoeRetire » Wed Mar 27, 2019 12:03 pm

dknightd wrote:
Wed Mar 27, 2019 9:15 am
another thought. Going into retirement with a fixed expense, with a known ending date, might be a good idea.
It gives you some certainty of your expenses. You can't predict what your gains might be. But if at least part of your expenses are known, that could be an advantage
To be fair, going into retirement with a fixed $0 expense in this category doesn't change your argument at all. If it's an advantage to know that you have a fixed expense of $X/month in this category, it's also an advantage to know that you have a fixed expense of $0/month in this category.

It's a difference without a distinction.
Don't be a lemming.

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Wiggums
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by Wiggums » Wed Mar 27, 2019 12:10 pm

JoeRetire wrote:
Wed Mar 27, 2019 12:01 pm
corn18 wrote:
Wed Mar 27, 2019 9:10 am
For us, we haven't decided what to do yet. We are slowly collecting enough to pay it off the day before we retire.
I've always felt it was smart to maintain as much flexibility as possible while pushing off decisions that don't need to be made now into the future.

The day before you retire you can assess your current financial situation, and make the decision that feels right at that time.
Flexibility was key for us. We plan, make reasonable assumptions and learn as much as we can. Our goal is to be prepared to make decisions in the future.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by MindBogler » Wed Mar 27, 2019 12:37 pm

willthrill81 wrote:
Tue Mar 26, 2019 10:26 pm
So it's better for him to borrow at 3.75% in order to lend at 2.4% and pay taxes on that 2.4%, just in order to maintain additional liquidity beyond $1 million in stocks? :confused
What's up with the straw man arguments? I never commented on the OP's choice of fixed income. The OP could get a better return using a CD ladder which might even match or beat his mortgage rate.

The premise that has been stated is that heading into retirement with a mortgage increases sequence of returns risk. I disagree and I believe liquidity is more important to portfolio longevity. So I fundamentally think about this problem in a different way.

How long will $260k in cash sustain a $1200 mortgage payment?

Worst case scenario, given a 0% return:
260,000 / 1200 = 216 months or 18 years.

In reality the $260k will be growing at some non-zero rate of return which makes the math even more favorable to my position. By keeping the liquidity, the OP has a substantial cash position that can be a buffer in case of emergencies or during a market downturn. If the market crashes 50% in year 1 of retirement, would you rather have a paid off house or $260k in liquid cash at your disposal? The extra cash would buy ~5 years of safety without being forced to dip into stocks. That could mean the difference during a sustained downturn. Meanwhile, within 5 years the OP could sell or rent the house and make other living arrangements.

It seems to me that the sequence of returns risk is increased by depleting the portfolio in order to pay off the mortgage. The sequence of returns risk is only lowered if the mortgage is paid down through some other means which does not deplete the portfolio (e.g. paying it down with cash flow).

YMMV

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 12:47 pm

KlangFool wrote:
Wed Mar 27, 2019 11:35 am
donebyforty wrote:
Wed Mar 27, 2019 11:23 am
KlangFool wrote:
Wed Mar 27, 2019 11:06 am
EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
EnjoyIt,

<<I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.>>

Please note that OP's plan is to pay off the mortgage with the short-term bond when he has 1.26 million. So, he would be at 5% bond when he pays off the mortgage in 2 years. Do you still think that it is a good idea?

KlangFool
This is incorrect. This is neither of the proposed plans.

In the scenario where we'd get to $1.26M and then pay off the mortgage all at once (roughly in two years) the AA described in Bernstein's Simpleton's Portfolio would be maintained.
donebyforty,

If you are using your AA to pay off your mortgage, why are you comparing your mortgage interest rate of 3.75% against short-term bond interest rate? It should be 3.75% against your portfolio return. Do not make the mistake of making the decision and then manipulate the data to support your decision

Do you think that your portfolio return is much less than 3.75% per year?

KlangFool
KF,

While I also lean to holding the mortgage post retirement, the calculations change somewhat post retirement vs pre retirement.

At retirement, you can choose to payoff.

Or, you can choose to keep mortgage and invest it:
- in a sort of sinking fund of fixed income instruments used to pay off mortgage
- or invest it according to your asset allocation.

If you invest the money in bonds, you are losing a little on the spread, with that chance that interest rates may go up in the future. This gives you flexibility and some upside but at 3.75 there will mostly likely be a minor drag on the portfolio.

If you put it the same as your asset allocation, chances are you will earn more in the average scenario, but at the same time there is more risk in that the worst case scenario causes a lower SWR than paying it off up front. The reason is you may hit a scenario where stocks and bonds go down, but you still have to pay off a fixed mortgage.

Now there are probably ways to mitigate that risk if you are willing to vary your withdrawal rate or asset allocation, but if you maintain a rigid SWR and rigid asset allocation, you potentially increase your risk.

It would be helpful if you read through and studied the ERN link and the examples. That is what I did so I better understand the construct.

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willthrill81
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 12:54 pm

MindBogler wrote:
Wed Mar 27, 2019 12:37 pm
willthrill81 wrote:
Tue Mar 26, 2019 10:26 pm
So it's better for him to borrow at 3.75% in order to lend at 2.4% and pay taxes on that 2.4%, just in order to maintain additional liquidity beyond $1 million in stocks? :confused
What's up with the straw man arguments? I never commented on the OP's choice of fixed income. The OP could get a better return using a CD ladder which might even match or beat his mortgage rate.
A straw man is a form of argument and an informal fallacy based on giving the impression of refuting an opponent's argument, while actually refuting an argument that was not presented by that opponent.
https://en.wikipedia.org/wiki/Straw_man

You are stating that it's better to hold the 3.75% mortgage and some type of corresponding fixed income instead of eliminating both. Unless that's not what you're stating, then there's no 'straw man' here.
MindBogler wrote:
Wed Mar 27, 2019 12:37 pm
The premise that has been stated is that heading into retirement with a mortgage increases sequence of returns risk. I disagree and I believe liquidity is more important to portfolio longevity. So I fundamentally think about this problem in a different way.
I addressed that in this post above, namely, that holding a mortgage in retirement can be a good move if (1) the yield on your fixed income holdings is higher than your mortgage rate, (2) you are willing to use a dynamic asset allocation strategy (i.e. pay the mortgage from stocks if they are 'up' and from the fixed income holdings otherwise), (3) you have enough fixed income holdings to cover the mortgage payments for at least several years, and (4) you would be comfortable with the AA that would result from you covering the mortgage payments exclusively from your fixed income holdings for at least several years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 1:03 pm

donebyforty wrote:
Wed Mar 27, 2019 12:44 pm
Yeah, same to you. Here's to hoping this is the last time you spread incorrect information, troll, or derail an honest conversation about options.

But something tells me you'll be back to add more 'helpful comments' to the discussion.
Not sure if you followed Will and my side conversation but for us I think it helped converge our point of views.

Paying off the mortgage at retirement may or may not work better than keeping it and investing it. I did go to the ERN link and went through the examples and they generally made sense. But here are some scenarios it does not address:

- It doesn't address where your money is. Holding the mortgage may allow you to keep a traditional or Roth IRA or 401k funded longer, which could shield some investment earnings or more easily allow you to do Roth conversions if they made sense.

- It could be possible that different portfolio constructions give different results. Rising intersest rates didn't help because even though you are paying a below market rate mortgage, your bonds are diminished due to the rise in interest rates. If the bonds were in shorter term maturities that may not be the case.

- in reality you wouldn't follow a rigid SWR. With a more dynamic approach and flexibility you may able to do better by holding the mortgage. Keeping the mortgage and investing using your allocation gives you a better result most of the time, but not the worst case scenarios. That could be mitigated by going with a more conservative allocation, optimizing use of tax deferred accounts, modifying your withdrawal rate if the market tanks, and varying your bond portfolio based upon prevalent interest rates.

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donebyforty
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by donebyforty » Wed Mar 27, 2019 1:14 pm

I have been following and it's a good conversation.

I'm trying to listen more rather than commenting a lot, but I just have to jump in if the information being put out there isn't accurate: we can't have a discussion of the benefits & risks of a plan if even the high level understanding of the plan isn't right.

Agree that the ERN post doesn't exactly include my situation (or retirement accounts as you noted) but I can't fault the guy too much if he's making eight different models to compare. :) As to your last point, I'm more concerned with mitigating the bad scenarios (esp. where CAPE is now) than I am with maximizing returns via leverage while in retirement. But most of the time, indeed, I probably will not run into the very bad SORR so using leverage will probably be better most of the time.
Last edited by donebyforty on Wed Mar 27, 2019 1:15 pm, edited 1 time in total.

EnjoyIt
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Wed Mar 27, 2019 1:15 pm

JBTX wrote:
Wed Mar 27, 2019 11:32 am
EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
You can debate paying off a 3.875 mortgage at retirement, but paying off a 2.75% mortgage seems like giving away free money. You could hold the amount of mortgage in short term securities and currently come close to 2.75%, and it is almost certain sometime in the next 20 years rates will go materially higher than 2.75%, then you can go long bonds and "lock in" the profits.
Please re-read what I wrote. My plan is to invest the money right now and then, reevaluate my options. If I retire my goal is to retire with as low a fixed expenses as possible to allow for maximum Roth conversions with minimum tax paid. $28,000 a year on a mortgage are Roth conversions that I will not be able to do.

Remember these decisions are not in a vacuum.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by Ketawa » Wed Mar 27, 2019 1:29 pm

Lots of people comparing apples and oranges in this thread. Sequence of returns risk reduced by paying off the mortgage? Who cares. That is not really the analysis that should be made. In my opinion, it's merely a byproduct of interest rate arbitrage, or failing to account for mortgage as a negative bond. There are a lot of possible steps on the margin before deciding on a binary between paying off a 30 year mortgage vs holding short bonds. Note that I am firmly in the camp of looking at a mortgage as a negative bond.

Assuming adequate liquidity to pay off the mortgage now by selling bonds, here are a whole lot of other options:

1. Refinance into a 20 year fixed mortgage
2. Refinance into a 15 year fixed mortgage
3. Refinance into a 10 year fixed mortgage
4. Refinance into a 7 year ARM
5. Refinance into a 5 year ARM
6. Refinance into a 3 year ARM
7. Refinance into a Home Equity Loan
8. Do one of the above, then do one of the above again in the future
9. Do one of the above, then pay off the mortgage in the future

Another consideration, if your strategy is to bank on mortgage rates going up in the future, you shouldn't be comparing 30 year rates now vs 30 year rates then. Let's say you're 5 years into a mortgage. 10 years from now, rates are higher and your 30 year rate is a good deal. Well, the 30 year rate isn't relevant. You should be looking at the 15 year rate, which will be lower. Are you betting that rates will go so much higher that the guaranteed savings now on a larger principal will be outweighed by the hypothetical savings of your current rate vs higher rates on a lower principal?

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by MindBogler » Wed Mar 27, 2019 1:56 pm

willthrill81 wrote:
Wed Mar 27, 2019 12:54 pm
You are stating that it's better to hold the 3.75% mortgage and some type of corresponding fixed income instead of eliminating both. Unless that's not what you're stating, then there's no 'straw man' here.
The statement above was derived by inference and not from anything I actually wrote, arguing against that is a straw man. It's all good. :)

The difference between the rate of return of the cash and the mortgage rate is a cost. With conservative investments, like a CD ladder, that difference can be only a few basis points. I don't think it has been demonstrated that this small cost justifies giving up the flexibility that having an extra $260k in cash affords. I'd happily pay that tax for the option of keeping my money in the bank. There are a variety of scenarios under which having more cash is beneficial. I choose the path with more options.

As I said, YMMV. This is just what I would do.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 3:07 pm

EnjoyIt wrote:
Wed Mar 27, 2019 1:15 pm
JBTX wrote:
Wed Mar 27, 2019 11:32 am
EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
You can debate paying off a 3.875 mortgage at retirement, but paying off a 2.75% mortgage seems like giving away free money. You could hold the amount of mortgage in short term securities and currently come close to 2.75%, and it is almost certain sometime in the next 20 years rates will go materially higher than 2.75%, then you can go long bonds and "lock in" the profits.
Please re-read what I wrote. My plan is to invest the money right now and then, reevaluate my options. If I retire my goal is to retire with as low a fixed expenses as possible to allow for maximum Roth conversions with minimum tax paid. $28,000 a year on a mortgage are Roth conversions that I will not be able to do.

Remember these decisions are not in a vacuum.
So under what scenario would you pay off a 2.75% mortgage? Frankly I can't think of any. I doubt we will pay off our 3.25% mortgage with a modest balance.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 3:13 pm

MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
willthrill81 wrote:
Wed Mar 27, 2019 12:54 pm
You are stating that it's better to hold the 3.75% mortgage and some type of corresponding fixed income instead of eliminating both. Unless that's not what you're stating, then there's no 'straw man' here.
The statement above was derived by inference and not from anything I actually wrote, arguing against that is a straw man. It's all good. :)

The difference between the rate of return of the cash and the mortgage rate is a cost. With conservative investments, like a CD ladder, that difference can be only a few basis points. I don't think it has been demonstrated that this small cost justifies giving up the flexibility that having an extra $260k in cash affords. I'd happily pay that tax for the option of keeping my money in the bank. There are a variety of scenarios under which having more cash is beneficial. I choose the path with more options.

As I said, YMMV. This is just what I would do.
This is kind od where I am.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 3:17 pm

MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
The difference between the rate of return of the cash and the mortgage rate is a cost.
On that point we can both wholeheartedly agree.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
With conservative investments, like a CD ladder, that difference can be only a few basis points.
It can be, but the difference may be much more than a few basis points as well.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
I don't think it has been demonstrated that this small cost justifies giving up the flexibility that having an extra $260k in cash affords.
That's because it's hard to put a precise price tag on something as ethereal as "flexibility" and "liquidity." Carrying a fixed expense of any type into retirement increases sequence of returns risk by the very definition of the concept (i.e. being forced to make a withdrawal at a potentially importune time). Whether that increased SRR is worth the options resulting from holding cash/fixed income in lieu of paying off the mortgage is a matter of opinion. Personally, this recurring idea of "flexibility" and "taking advantage of opportunities" smacks of trying to time the markets over the long-term, but I'm a trend follower myself, so I don't have a real problem with that. But if we're trying to time the market, let's be upfront and honest that that's what we're doing.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
I'd happily pay that tax for the option of keeping my money in the bank. There are a variety of scenarios under which having more cash is beneficial. I choose the path with more options.
And history has shown that maintaining a cash allocation and keeping one's options open in this regard can carry a significant opportunity cost as well. We've left the math now and are down to personal preferences, feelings, emotions, etc., which is why it's called "personal finance." One person favors risk reduction, another favors optionality, etc. and no one is definitively right or wrong because the end goal being sought after is not universal.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by LadyGeek » Wed Mar 27, 2019 3:47 pm

I removed several off-topic comments. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters.
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Wed Mar 27, 2019 4:09 pm

JBTX wrote:
Wed Mar 27, 2019 3:07 pm
EnjoyIt wrote:
Wed Mar 27, 2019 1:15 pm
JBTX wrote:
Wed Mar 27, 2019 11:32 am
EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
You can debate paying off a 3.875 mortgage at retirement, but paying off a 2.75% mortgage seems like giving away free money. You could hold the amount of mortgage in short term securities and currently come close to 2.75%, and it is almost certain sometime in the next 20 years rates will go materially higher than 2.75%, then you can go long bonds and "lock in" the profits.
Please re-read what I wrote. My plan is to invest the money right now and then, reevaluate my options. If I retire my goal is to retire with as low a fixed expenses as possible to allow for maximum Roth conversions with minimum tax paid. $28,000 a year on a mortgage are Roth conversions that I will not be able to do.

Remember these decisions are not in a vacuum.
So under what scenario would you pay off a 2.75% mortgage? Frankly I can't think of any. I doubt we will pay off our 3.25% mortgage with a modest balance.
Good question this is an example with round numbers.
Mortgage $250k @2.75% @2500/month
Living expenses $100k/yr
Strong believer in 4% withdrawal rate
Assets 2.75 million with 1/2 in 401k
Retiring yearly at this position.

By paying off the $250k prior to retirement this person in retirement has $30k less in expenses they need to pull from. This person benefits from doing Roth conversions and the extra $30k they need to withdraw for the mortgage will eat into that every year.

Paying off the mortgage prior to retirement will have less taxes paid over the course of the entire retirement. I would not do this if it involved selling anything and paying taxes.

JBTX
Posts: 5537
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 4:13 pm

willthrill81 wrote:
Wed Mar 27, 2019 3:17 pm
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
The difference between the rate of return of the cash and the mortgage rate is a cost.
On that point we can both wholeheartedly agree.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
With conservative investments, like a CD ladder, that difference can be only a few basis points.
It can be, but the difference may be much more than a few basis points as well.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
I don't think it has been demonstrated that this small cost justifies giving up the flexibility that having an extra $260k in cash affords.
That's because it's hard to put a precise price tag on something as ethereal as "flexibility" and "liquidity." Carrying a fixed expense of any type into retirement increases sequence of returns risk by the very definition of the concept (i.e. being forced to make a withdrawal at a potentially importune time). Whether that increased SRR is worth the options resulting from holding cash/fixed income in lieu of paying off the mortgage is a matter of opinion. Personally, this recurring idea of "flexibility" and "taking advantage of opportunities" smacks of trying to time the markets over the long-term, but I'm a trend follower myself, so I don't have a real problem with that. But if we're trying to time the market, let's be upfront and honest that that's what we're doing.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
I'd happily pay that tax for the option of keeping my money in the bank. There are a variety of scenarios under which having more cash is beneficial. I choose the path with more options.
And history has shown that maintaining a cash allocation and keeping one's options open in this regard can carry a significant opportunity cost as well. We've left the math now and are down to personal preferences, feelings, emotions, etc., which is why it's called "personal finance." One person favors risk reduction, another favors optionality, etc. and no one is definitively right or wrong because the end goal being sought after is not universal.
In a sense you can put a price tag on flexibility and liquidity. It is the spread between high quality govt backed mortgage rates and comparable duration long term govt bonds. This spread is largely to cover pre payment risk to the lender.

Vanguard GNMA fund has 3.1% SEC yield. Duration around 5.0 years.

https://www.morningstar.com/funds/XNAS/ ... quote.html

Vanguard intermediate govt bond sec yield is 2.25%. Similar duration.

https://www.morningstar.com/funds/xnas/ ... quote.html

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 4:24 pm

JBTX wrote:
Wed Mar 27, 2019 4:13 pm
willthrill81 wrote:
Wed Mar 27, 2019 3:17 pm
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
The difference between the rate of return of the cash and the mortgage rate is a cost.
On that point we can both wholeheartedly agree.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
With conservative investments, like a CD ladder, that difference can be only a few basis points.
It can be, but the difference may be much more than a few basis points as well.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
I don't think it has been demonstrated that this small cost justifies giving up the flexibility that having an extra $260k in cash affords.
That's because it's hard to put a precise price tag on something as ethereal as "flexibility" and "liquidity." Carrying a fixed expense of any type into retirement increases sequence of returns risk by the very definition of the concept (i.e. being forced to make a withdrawal at a potentially importune time). Whether that increased SRR is worth the options resulting from holding cash/fixed income in lieu of paying off the mortgage is a matter of opinion. Personally, this recurring idea of "flexibility" and "taking advantage of opportunities" smacks of trying to time the markets over the long-term, but I'm a trend follower myself, so I don't have a real problem with that. But if we're trying to time the market, let's be upfront and honest that that's what we're doing.
MindBogler wrote:
Wed Mar 27, 2019 1:56 pm
I'd happily pay that tax for the option of keeping my money in the bank. There are a variety of scenarios under which having more cash is beneficial. I choose the path with more options.
And history has shown that maintaining a cash allocation and keeping one's options open in this regard can carry a significant opportunity cost as well. We've left the math now and are down to personal preferences, feelings, emotions, etc., which is why it's called "personal finance." One person favors risk reduction, another favors optionality, etc. and no one is definitively right or wrong because the end goal being sought after is not universal.
In a sense you can put a price tag on flexibility and liquidity. It is the spread between high quality govt backed mortgage rates and comparable duration long term govt bonds. This spread is largely to cover pre payment risk to the lender.

Vanguard GNMA fund has 3.1% SEC yield. Duration around 5.0 years.

https://www.morningstar.com/funds/XNAS/ ... quote.html

Vanguard intermediate govt bond sec yield is 2.25%. Similar duration.

https://www.morningstar.com/funds/xnas/ ... quote.html
True, but the value of flexibility and liquidity to you may be very different.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 4:25 pm

EnjoyIt wrote:
Wed Mar 27, 2019 4:09 pm
JBTX wrote:
Wed Mar 27, 2019 3:07 pm
EnjoyIt wrote:
Wed Mar 27, 2019 1:15 pm
JBTX wrote:
Wed Mar 27, 2019 11:32 am
EnjoyIt wrote:
Wed Mar 27, 2019 10:51 am
Donebyforty,
I like the option where you build your wealth up to 1.26 million 1st and then pay off debt for two reasons.

1) I do not like your idea of being at 5% bonds for even 1 year. I don’t think that is safe.

2) If for some reason you lose your job during these two years you have more options.

Bonus reason: It offers you more options after the 2 year span. In 2 years you may find interest rates benign more favorable or your own circumstances might change a little.

BTW, I am in the exact same position as you but with different numbers. My mortgage is 2.75% and depending on Parker returns I should have enough to pay it off soon. I am investing that money for now and the re-evaluate my situation then.
You can debate paying off a 3.875 mortgage at retirement, but paying off a 2.75% mortgage seems like giving away free money. You could hold the amount of mortgage in short term securities and currently come close to 2.75%, and it is almost certain sometime in the next 20 years rates will go materially higher than 2.75%, then you can go long bonds and "lock in" the profits.
Please re-read what I wrote. My plan is to invest the money right now and then, reevaluate my options. If I retire my goal is to retire with as low a fixed expenses as possible to allow for maximum Roth conversions with minimum tax paid. $28,000 a year on a mortgage are Roth conversions that I will not be able to do.

Remember these decisions are not in a vacuum.
So under what scenario would you pay off a 2.75% mortgage? Frankly I can't think of any. I doubt we will pay off our 3.25% mortgage with a modest balance.
Good question this is an example with round numbers.
Mortgage $250k @2.75% @2500/month
Living expenses $100k/yr
Strong believer in 4% withdrawal rate
Assets 2.75 million with 1/2 in 401k
Retiring yearly at this position.

By paying off the $250k prior to retirement this person in retirement has $30k less in expenses they need to pull from. This person benefits from doing Roth conversions and the extra $30k they need to withdraw for the mortgage will eat into that every year.

Paying off the mortgage prior to retirement will have less taxes paid over the course of the entire retirement. I would not do this if it involved selling anything and paying taxes.
While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.

Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.

2.75 is almost inflation.

It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 5:03 pm

JBTX wrote:
Wed Mar 27, 2019 4:25 pm
It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
It's certainly true that prepaying expenses does not eliminate them, but prepaying them reduces sequence of returns risk because you would be eliminating the possibility of needing to withdraw from your portfolio when it's suffering. The same is true of a mortgage. The historic odds favor not prepaying such expenses, so you have to pick your poison: reduce sequence of returns risk or seek after higher returns and retain more liquidity.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Wed Mar 27, 2019 5:15 pm

JBTX wrote:
Wed Mar 27, 2019 4:25 pm
EnjoyIt wrote:
Wed Mar 27, 2019 4:09 pm
JBTX wrote:
Wed Mar 27, 2019 3:07 pm
EnjoyIt wrote:
Wed Mar 27, 2019 1:15 pm
JBTX wrote:
Wed Mar 27, 2019 11:32 am


You can debate paying off a 3.875 mortgage at retirement, but paying off a 2.75% mortgage seems like giving away free money. You could hold the amount of mortgage in short term securities and currently come close to 2.75%, and it is almost certain sometime in the next 20 years rates will go materially higher than 2.75%, then you can go long bonds and "lock in" the profits.
Please re-read what I wrote. My plan is to invest the money right now and then, reevaluate my options. If I retire my goal is to retire with as low a fixed expenses as possible to allow for maximum Roth conversions with minimum tax paid. $28,000 a year on a mortgage are Roth conversions that I will not be able to do.

Remember these decisions are not in a vacuum.
So under what scenario would you pay off a 2.75% mortgage? Frankly I can't think of any. I doubt we will pay off our 3.25% mortgage with a modest balance.
Good question this is an example with round numbers.
Mortgage $250k @2.75% @2500/month
Living expenses $100k/yr
Strong believer in 4% withdrawal rate
Assets 2.75 million with 1/2 in 401k
Retiring yearly at this position.

By paying off the $250k prior to retirement this person in retirement has $30k less in expenses they need to pull from. This person benefits from doing Roth conversions and the extra $30k they need to withdraw for the mortgage will eat into that every year.

Paying off the mortgage prior to retirement will have less taxes paid over the course of the entire retirement. I would not do this if it involved selling anything and paying taxes.
While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.

Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.

2.75 is almost inflation.

It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by dknightd » Wed Mar 27, 2019 5:17 pm

JoeRetire wrote:
Wed Mar 27, 2019 12:03 pm
dknightd wrote:
Wed Mar 27, 2019 9:15 am
another thought. Going into retirement with a fixed expense, with a known ending date, might be a good idea.
It gives you some certainty of your expenses. You can't predict what your gains might be. But if at least part of your expenses are known, that could be an advantage
To be fair, going into retirement with a fixed $0 expense in this category doesn't change your argument at all. If it's an advantage to know that you have a fixed expense of $X/month in this category, it's also an advantage to know that you have a fixed expense of $0/month in this category.

It's a difference without a distinction.
True. Want to pay off my mortgage for me ;)

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by SovereignInvestor » Wed Mar 27, 2019 5:27 pm

So much debate between paying off mortgage or not. Why not pay off half of it?

Best of both worlds.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 5:27 pm

willthrill81 wrote:
Wed Mar 27, 2019 5:03 pm
JBTX wrote:
Wed Mar 27, 2019 4:25 pm
It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
It's certainly true that prepaying expenses does not eliminate them, but prepaying them reduces sequence of returns risk because you would be eliminating the possibility of needing to withdraw from your portfolio when it's suffering. The same is true of a mortgage. The historic odds favor not prepaying such expenses, so you have to pick your poison: reduce sequence of returns risk or seek after higher returns and retain more liquidity.
I thought we had settled this. Sequence of returns is only affected if you invest the mortgage proceeds in stocks, and even then, there are strategies one could engage in to reduce that risk. If you have a pot of cash sitting there earning inflation returns, depleting the pot of cash now to pay expenses in advance doesn't do anything to reduce sequence of returns vs retaining your pot of cash and paying your mortgage over time at a comparable rate of interest.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 5:31 pm

EnjoyIt wrote:
Wed Mar 27, 2019 5:15 pm
JBTX wrote:
Wed Mar 27, 2019 4:25 pm
EnjoyIt wrote:
Wed Mar 27, 2019 4:09 pm
JBTX wrote:
Wed Mar 27, 2019 3:07 pm
EnjoyIt wrote:
Wed Mar 27, 2019 1:15 pm


Please re-read what I wrote. My plan is to invest the money right now and then, reevaluate my options. If I retire my goal is to retire with as low a fixed expenses as possible to allow for maximum Roth conversions with minimum tax paid. $28,000 a year on a mortgage are Roth conversions that I will not be able to do.

Remember these decisions are not in a vacuum.
So under what scenario would you pay off a 2.75% mortgage? Frankly I can't think of any. I doubt we will pay off our 3.25% mortgage with a modest balance.
Good question this is an example with round numbers.
Mortgage $250k @2.75% @2500/month
Living expenses $100k/yr
Strong believer in 4% withdrawal rate
Assets 2.75 million with 1/2 in 401k
Retiring yearly at this position.

By paying off the $250k prior to retirement this person in retirement has $30k less in expenses they need to pull from. This person benefits from doing Roth conversions and the extra $30k they need to withdraw for the mortgage will eat into that every year.

Paying off the mortgage prior to retirement will have less taxes paid over the course of the entire retirement. I would not do this if it involved selling anything and paying taxes.
While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.

Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.

2.75 is almost inflation.

It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.
You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.

Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Wed Mar 27, 2019 7:30 pm

JBTX wrote:
Wed Mar 27, 2019 5:31 pm
EnjoyIt wrote:
Wed Mar 27, 2019 5:15 pm
JBTX wrote:
Wed Mar 27, 2019 4:25 pm
EnjoyIt wrote:
Wed Mar 27, 2019 4:09 pm
JBTX wrote:
Wed Mar 27, 2019 3:07 pm


So under what scenario would you pay off a 2.75% mortgage? Frankly I can't think of any. I doubt we will pay off our 3.25% mortgage with a modest balance.
Good question this is an example with round numbers.
Mortgage $250k @2.75% @2500/month
Living expenses $100k/yr
Strong believer in 4% withdrawal rate
Assets 2.75 million with 1/2 in 401k
Retiring yearly at this position.

By paying off the $250k prior to retirement this person in retirement has $30k less in expenses they need to pull from. This person benefits from doing Roth conversions and the extra $30k they need to withdraw for the mortgage will eat into that every year.

Paying off the mortgage prior to retirement will have less taxes paid over the course of the entire retirement. I would not do this if it involved selling anything and paying taxes.
While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.

Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.

2.75 is almost inflation.

It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.
You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.

Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.
By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 8:17 pm

EnjoyIt wrote:
Wed Mar 27, 2019 7:30 pm
JBTX wrote:
Wed Mar 27, 2019 5:31 pm
EnjoyIt wrote:
Wed Mar 27, 2019 5:15 pm
JBTX wrote:
Wed Mar 27, 2019 4:25 pm
EnjoyIt wrote:
Wed Mar 27, 2019 4:09 pm


Good question this is an example with round numbers.
Mortgage $250k @2.75% @2500/month
Living expenses $100k/yr
Strong believer in 4% withdrawal rate
Assets 2.75 million with 1/2 in 401k
Retiring yearly at this position.

By paying off the $250k prior to retirement this person in retirement has $30k less in expenses they need to pull from. This person benefits from doing Roth conversions and the extra $30k they need to withdraw for the mortgage will eat into that every year.

Paying off the mortgage prior to retirement will have less taxes paid over the course of the entire retirement. I would not do this if it involved selling anything and paying taxes.
While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.

Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.

2.75 is almost inflation.

It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.
You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.

Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.
By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
Based on my understanding of what you've provided, it does appear to be advantageous to pay off the mortgage early in order to save on taxes.

I find it interesting to see how many of our decisions are impacted significantly by taxes. For instance, I know a retired couple who was going to have to make a significant withdrawal from a tax-deferred account in order to pay for a new home outright. First, I helped them do the math to see whether it would be preferable to take out a short-term mortgage in order to spread the withdrawals out; it was close to a wash, but paying outright was slightly better. Second, due to the large withdrawal to pay for their home, their tax bracket this year will be significantly higher than in future years, so I advised them to take out a 0% interest credit card that they will put their living expenses on this year and then pay off with another withdrawal in 2020, when they're in a lower bracket. They will also get about $200 for a new card bonus and 1% on top of that. All of that for the sake of managing taxes!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

pasadena
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by pasadena » Wed Mar 27, 2019 8:35 pm

So if I get this right (I''m probably not :)), you seem to think that a 96/4 portfolio without mortgage, is less risky than a 75/25 portfolio with a mortgage?

I personally also strongly dislike the idea of having a mortgage in retirement, but I wouldn't change my AA because of that. I'd make sure the mortgage is paid off upon retirement, yes, but either by using "new" money, or selling investments when I retire, while maintaining my target AA.

That said, if I were to retire at 40, I might not do that, because at 40, you still have the opportunity to go back to work, or somehow increase your income, if you need to.

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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 8:54 pm

pasadena wrote:
Wed Mar 27, 2019 8:35 pm
So if I get this right (I''m probably not :)), you seem to think that a 96/4 portfolio without mortgage, is less risky than a 75/25 portfolio with a mortgage?
That's not the whole story. The OP isn't going to retire until he at least gets his AA back to 75/25 via new contributions. For now, he's basically considering 'swapping' his bonds for his mortgage, which he definitely wants to have paid off by the time he actually does retire. And he is planning on retiring very early (i.e. 40).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

pasadena
Posts: 333
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Location: Washington State

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by pasadena » Wed Mar 27, 2019 9:04 pm

willthrill81 wrote:
Wed Mar 27, 2019 8:54 pm
pasadena wrote:
Wed Mar 27, 2019 8:35 pm
So if I get this right (I''m probably not :)), you seem to think that a 96/4 portfolio without mortgage, is less risky than a 75/25 portfolio with a mortgage?
That's not the whole story. The OP isn't going to retire until he at least gets his AA back to 75/25 via new contributions. For now, he's basically considering 'swapping' his bonds for his mortgage, which he definitely wants to have paid off by the time he actually does retire. And he is planning on retiring very early (i.e. 40).
Yes, I got that. My question wasn't about retirement years specifically. But it does seem over-complicated to me, vs the plan of paying it off monthly, or in a lump-sum upon retirement. I also never really understood this theory that a house can be considered as bonds - except that having a paid off house might increase your ability / willingness to take risks, hence reducing your bond allocation. But obliterating it only to rebuild it? meh.

EnjoyIt
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Wed Mar 27, 2019 9:07 pm

It just goes to show that we should not jump to conclusions or use emotions to give knee jerk responses. Situations may vary. For OP sake it makes sense to build the cash up and re-evaluate his/her situation in 2 years to see if paying off the debt right away is worth it.

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willthrill81
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 9:15 pm

pasadena wrote:
Wed Mar 27, 2019 9:04 pm
willthrill81 wrote:
Wed Mar 27, 2019 8:54 pm
pasadena wrote:
Wed Mar 27, 2019 8:35 pm
So if I get this right (I''m probably not :)), you seem to think that a 96/4 portfolio without mortgage, is less risky than a 75/25 portfolio with a mortgage?
That's not the whole story. The OP isn't going to retire until he at least gets his AA back to 75/25 via new contributions. For now, he's basically considering 'swapping' his bonds for his mortgage, which he definitely wants to have paid off by the time he actually does retire. And he is planning on retiring very early (i.e. 40).
Yes, I got that. My question wasn't about retirement years specifically. But it does seem over-complicated to me, vs the plan of paying it off monthly, or in a lump-sum upon retirement. I also never really understood this theory that a house can be considered as bonds - except that having a paid off house might increase your ability / willingness to take risks, hence reducing your bond allocation. But obliterating it only to rebuild it? meh.
A 30 year mortgage is basically a negative bond with a duration of about 11.3 years as compared to 14.7 years for Vanguard's Long-term Bond Index fund (VBLLX; currently yielding 3.84% but obviously very volatile by bond standards). So it's a bit like a moderately-long-term bond but in reverse (i.e. a negative bond) except that paying off the mortgage provides a guaranteed 3.75% for the OP. An investor's return yield of VBLLX could be significantly higher or lower than the yield of 3.84% due to the complications of fluctuating interest rates. And the OP, like many on this forum, probably isn't interested in owning long-term bonds at any time.

It is definitely more complicated to do what the OP is suggesting versus paying it down, but over the time frame that he would do that, he can take advantage of a little interest rate arbitrage compared to other guaranteed investments (e.g. best 5 year CD rate I can find today is 3.5%). In the end, it's just personal preference.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by willthrill81 » Wed Mar 27, 2019 9:22 pm

EnjoyIt wrote:
Wed Mar 27, 2019 9:07 pm
It just goes to show that we should not jump to conclusions or use emotions to give knee jerk responses. Situations may vary. For OP sake it makes sense to build the cash up and re-evaluate his/her situation in 2 years to see if paying off the debt right away is worth it.
That would certainly maximize his options but at the expense of the post-tax return on the cash vs. the post-tax mortgage rate over the two years. Assuming that high-yield savings account yields don't change, that would seemingly come out to a little over $10k over the course of two years ((3.75% mortgage rate - (2.2% - 20% taxes)) x $260k x 2). I certainly don't blame the OP for taking the bird in the hand (i.e. the $10k).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JBTX
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 9:47 pm

EnjoyIt wrote:
Wed Mar 27, 2019 7:30 pm
JBTX wrote:
Wed Mar 27, 2019 5:31 pm
EnjoyIt wrote:
Wed Mar 27, 2019 5:15 pm
JBTX wrote:
Wed Mar 27, 2019 4:25 pm
EnjoyIt wrote:
Wed Mar 27, 2019 4:09 pm


Good question this is an example with round numbers.
Mortgage $250k @2.75% @2500/month
Living expenses $100k/yr
Strong believer in 4% withdrawal rate
Assets 2.75 million with 1/2 in 401k
Retiring yearly at this position.

By paying off the $250k prior to retirement this person in retirement has $30k less in expenses they need to pull from. This person benefits from doing Roth conversions and the extra $30k they need to withdraw for the mortgage will eat into that every year.

Paying off the mortgage prior to retirement will have less taxes paid over the course of the entire retirement. I would not do this if it involved selling anything and paying taxes.
While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.

Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.

2.75 is almost inflation.

It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.
You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.

Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.
By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.

On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.

Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.

Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.

EnjoyIt
Posts: 2877
Joined: Sun Dec 29, 2013 8:06 pm

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Wed Mar 27, 2019 10:29 pm

JBTX wrote:
Wed Mar 27, 2019 9:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 7:30 pm
JBTX wrote:
Wed Mar 27, 2019 5:31 pm
EnjoyIt wrote:
Wed Mar 27, 2019 5:15 pm
JBTX wrote:
Wed Mar 27, 2019 4:25 pm


While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.

Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.

2.75 is almost inflation.

It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.
You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.

Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.
By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.

On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.

Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.

Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.
Sure, I will explain. First I want to make sure you understand that the process of converting money from a 401k to a Roth IRA is a taxable event. Every dollar converted is taxes at your top tax rate.

Let's look at 2 scenarios and how they may look.

Scenario 1: living expenses are $100k/yr since this person retired early, they will need to withdraw money from their taxable account. For arguments sake and to make math easy we will have $30k in dividends and another $70k in the sale of equities with 50% capital gains. This means this person has $65k in taxable income. After the standard deduction of $24k this family has $41k in taxable income which puts them in the 12% tax bracket which peaks at $78,950 for a family in 2019. This person will be paying $0 taxes on their qualified dividends and long term capital gains. In fact, this person can now convert ($78,950 - $41,000 = $37,950) from a 401k to a Roth and pay 12% taxes on that conversion but still pay 0% on the capital gains. If this person converts $1 more, that dollar will put them in the 22% tax bracket where now qualified dividends and long term capital gains are also taxed at 15%. This is not where I want to be.

Scenario #2 is exactly the same but now I also have a $2,500 per month mortgage which comes out to $30k/yr. If we agreed we are selling equities at 50% capital gains to meet our expenses needs, we will incur an extra $15k in capital gains. Therefore instead of having $41k in taxable income I will have ($41k + $15k = $56k.) This means I can now only convert ($78,950 - $56,000 = $22,950) from a 401k to a Roth. Sure I can convert more, but any extra will be at 22% tax bracket which would not make financial sense.

In this example, the extra $15k Roth conversions add up over the years which surpass the arbitrage of holding a 2.75% mortgage.

I hope I explained it so it makes sense.

Other good reason some may not want a mortgage in retirement:
1) The mortgage payment may put a family outside of ACA subsidies
2) An early retire might still have kids going to college. They may have all their wealth in a 401k doing SEP withdrawals for living expenses. Keeping their withdrawals low may qualify them for need based financial aid.
I'm sure there are other tax cliff reasons why lowering your yearly spending is helpful.

JBTX
Posts: 5537
Joined: Wed Jul 26, 2017 12:46 pm

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Wed Mar 27, 2019 10:47 pm

EnjoyIt wrote:
Wed Mar 27, 2019 10:29 pm
JBTX wrote:
Wed Mar 27, 2019 9:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 7:30 pm
JBTX wrote:
Wed Mar 27, 2019 5:31 pm
EnjoyIt wrote:
Wed Mar 27, 2019 5:15 pm


Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.
You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.

Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.
By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.

On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.

Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.

Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.
Sure, I will explain. First I want to make sure you understand that the process of converting money from a 401k to a Roth IRA is a taxable event. Every dollar converted is taxes at your top tax rate.

Let's look at 2 scenarios and how they may look.

Scenario 1: living expenses are $100k/yr since this person retired early, they will need to withdraw money from their taxable account. For arguments sake and to make math easy we will have $30k in dividends and another $70k in the sale of equities with 50% capital gains. This means this person has $65k in taxable income. After the standard deduction of $24k this family has $41k in taxable income which puts them in the 12% tax bracket which peaks at $78,950 for a family in 2019. This person will be paying $0 taxes on their qualified dividends and long term capital gains. In fact, this person can now convert ($78,950 - $41,000 = $37,950) from a 401k to a Roth and pay 12% taxes on that conversion but still pay 0% on the capital gains. If this person converts $1 more, that dollar will put them in the 22% tax bracket where now qualified dividends and long term capital gains are also taxed at 15%. This is not where I want to be.

Scenario #2 is exactly the same but now I also have a $2,500 per month mortgage which comes out to $30k/yr. If we agreed we are selling equities at 50% capital gains to meet our expenses needs, we will incur an extra $15k in capital gains. Therefore instead of having $41k in taxable income I will have ($41k + $15k = $56k.) This means I can now only convert ($78,950 - $56,000 = $22,950) from a 401k to a Roth. Sure I can convert more, but any extra will be at 22% tax bracket which would not make financial sense.

In this example, the extra $15k Roth conversions add up over the years which surpass the arbitrage of holding a 2.75% mortgage.

I hope I explained it so it makes sense.

Other good reason some may not want a mortgage in retirement:
1) The mortgage payment may put a family outside of ACA subsidies
2) An early retire might still have kids going to college. They may have all their wealth in a 401k doing SEP withdrawals for living expenses. Keeping their withdrawals low may qualify them for need based financial aid.
I'm sure there are other tax cliff reasons why lowering your yearly spending is helpful.
I've done Roth conversions so I am familiar with them and their tax impact.

I'm still not getting why you need to pull $30k per year out of investment the same year you are doing conversions. Presumably you already plan to pull money out up front to pay off the mortgage, and incur a rather large capital gains bill up front. If having capital gains during Roth conversion years is suboptimal, then sell and take your mortgage proceeds and capital gains up front, just like you would have if you chose to pay it off up front. Then take the $250k and put it in liquid fixed income, and use it to pay off the mortgage over the 8 remaining years. That will generate only about $6000 of interest a year.

I can see from your examples that even a small amount of incremental income could have a higher than expected marginal rate due to phase outs, double ups in the tax code, and/or ACA, and could make it not worth it. But I think you are greatly exaggerating the impact.

Perhaps it's not worth the trouble. I get that.

EnjoyIt
Posts: 2877
Joined: Sun Dec 29, 2013 8:06 pm

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Thu Mar 28, 2019 12:20 am

JBTX wrote:
Wed Mar 27, 2019 10:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 10:29 pm
JBTX wrote:
Wed Mar 27, 2019 9:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 7:30 pm
JBTX wrote:
Wed Mar 27, 2019 5:31 pm


You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.

Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.
By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.

On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.

Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.

Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.
Sure, I will explain. First I want to make sure you understand that the process of converting money from a 401k to a Roth IRA is a taxable event. Every dollar converted is taxes at your top tax rate.

Let's look at 2 scenarios and how they may look.

Scenario 1: living expenses are $100k/yr since this person retired early, they will need to withdraw money from their taxable account. For arguments sake and to make math easy we will have $30k in dividends and another $70k in the sale of equities with 50% capital gains. This means this person has $65k in taxable income. After the standard deduction of $24k this family has $41k in taxable income which puts them in the 12% tax bracket which peaks at $78,950 for a family in 2019. This person will be paying $0 taxes on their qualified dividends and long term capital gains. In fact, this person can now convert ($78,950 - $41,000 = $37,950) from a 401k to a Roth and pay 12% taxes on that conversion but still pay 0% on the capital gains. If this person converts $1 more, that dollar will put them in the 22% tax bracket where now qualified dividends and long term capital gains are also taxed at 15%. This is not where I want to be.

Scenario #2 is exactly the same but now I also have a $2,500 per month mortgage which comes out to $30k/yr. If we agreed we are selling equities at 50% capital gains to meet our expenses needs, we will incur an extra $15k in capital gains. Therefore instead of having $41k in taxable income I will have ($41k + $15k = $56k.) This means I can now only convert ($78,950 - $56,000 = $22,950) from a 401k to a Roth. Sure I can convert more, but any extra will be at 22% tax bracket which would not make financial sense.

In this example, the extra $15k Roth conversions add up over the years which surpass the arbitrage of holding a 2.75% mortgage.

I hope I explained it so it makes sense.

Other good reason some may not want a mortgage in retirement:
1) The mortgage payment may put a family outside of ACA subsidies.
2) An early retire might still have kids going to college. They may have all their wealth in a 401k doing SEP withdrawals for living expenses. Keeping their withdrawals low may qualify them for need based financial aid.
I'm sure there are other tax cliff reasons why lowering your yearly spending is helpful.
I've done Roth conversions so I am familiar with them and their tax impact.

I'm still not getting why you need to pull $30k per year out of investment the same year you are doing conversions. Presumably you already plan to pull money out up front to pay off the mortgage, and incur a rather large capital gains bill up front. If having capital gains during Roth conversion years is suboptimal, then sell and take your mortgage proceeds and capital gains up front, just like you would have if you chose to pay it off up front. Then take the $250k and put it in liquid fixed income, and use it to pay off the mortgage over the 8 remaining years. That will generate only about $6000 of interest a year.

I can see from your examples that even a small amount of incremental income could have a higher than expected marginal rate due to phase outs, double ups in the tax code, and/or ACA, and could make it not worth it. But I think you are greatly exaggerating the impact.

Perhaps it's not worth the trouble. I get that.
Where did the $250k come from that I put in a liquid fixed income as you recommend? Also, what fixed income is paying better than 2.75%? I can understand keeping it invested at my AA, but fixed income is just a waste of time.

The mortgage is $30k I have to pull it from somewhere. If I am retired and with the mortgage I decrease my Roth conversions. I don’t understand why it is not getting through to you.

Actually the plan is to tax gain harvest every other year to the 0% tax bracket and then Roth conversions the following year. I believe this minimizes my taxes further.

Keep in mind decreasing the pretax accounts will have a significant tax impact at 70 when RMDs start to kick in on top of SS payments.

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corn18
Posts: 1532
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by corn18 » Thu Mar 28, 2019 8:42 am

OP, please read the title of your thread: Should We Sell Short Term Bonds to Pay Off Mortgage?

What are you using to pay the $30k/year mortgage if you keep it? Just answer the question.

(BTW< if anyone wants to know all the details, a quick visit to his website [link in first post] answers a lot of the repeated questions we are asking him/her). It’s actually a pretty good read.
Don't do something, just stand there!

JBTX
Posts: 5537
Joined: Wed Jul 26, 2017 12:46 pm

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Thu Mar 28, 2019 9:13 am

EnjoyIt wrote:
Thu Mar 28, 2019 12:20 am
JBTX wrote:
Wed Mar 27, 2019 10:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 10:29 pm
JBTX wrote:
Wed Mar 27, 2019 9:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 7:30 pm


By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.

On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.

Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.

Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.
Sure, I will explain. First I want to make sure you understand that the process of converting money from a 401k to a Roth IRA is a taxable event. Every dollar converted is taxes at your top tax rate.

Let's look at 2 scenarios and how they may look.

Scenario 1: living expenses are $100k/yr since this person retired early, they will need to withdraw money from their taxable account. For arguments sake and to make math easy we will have $30k in dividends and another $70k in the sale of equities with 50% capital gains. This means this person has $65k in taxable income. After the standard deduction of $24k this family has $41k in taxable income which puts them in the 12% tax bracket which peaks at $78,950 for a family in 2019. This person will be paying $0 taxes on their qualified dividends and long term capital gains. In fact, this person can now convert ($78,950 - $41,000 = $37,950) from a 401k to a Roth and pay 12% taxes on that conversion but still pay 0% on the capital gains. If this person converts $1 more, that dollar will put them in the 22% tax bracket where now qualified dividends and long term capital gains are also taxed at 15%. This is not where I want to be.

Scenario #2 is exactly the same but now I also have a $2,500 per month mortgage which comes out to $30k/yr. If we agreed we are selling equities at 50% capital gains to meet our expenses needs, we will incur an extra $15k in capital gains. Therefore instead of having $41k in taxable income I will have ($41k + $15k = $56k.) This means I can now only convert ($78,950 - $56,000 = $22,950) from a 401k to a Roth. Sure I can convert more, but any extra will be at 22% tax bracket which would not make financial sense.

In this example, the extra $15k Roth conversions add up over the years which surpass the arbitrage of holding a 2.75% mortgage.

I hope I explained it so it makes sense.

Other good reason some may not want a mortgage in retirement:
1) The mortgage payment may put a family outside of ACA subsidies.
2) An early retire might still have kids going to college. They may have all their wealth in a 401k doing SEP withdrawals for living expenses. Keeping their withdrawals low may qualify them for need based financial aid.
I'm sure there are other tax cliff reasons why lowering your yearly spending is helpful.
I've done Roth conversions so I am familiar with them and their tax impact.

I'm still not getting why you need to pull $30k per year out of investment the same year you are doing conversions. Presumably you already plan to pull money out up front to pay off the mortgage, and incur a rather large capital gains bill up front. If having capital gains during Roth conversion years is suboptimal, then sell and take your mortgage proceeds and capital gains up front, just like you would have if you chose to pay it off up front. Then take the $250k and put it in liquid fixed income, and use it to pay off the mortgage over the 8 remaining years. That will generate only about $6000 of interest a year.

I can see from your examples that even a small amount of incremental income could have a higher than expected marginal rate due to phase outs, double ups in the tax code, and/or ACA, and could make it not worth it. But I think you are greatly exaggerating the impact.

Perhaps it's not worth the trouble. I get that.
Where did the $250k come from that I put in a liquid fixed income as you recommend? Also, what fixed income is paying better than 2.75%? I can understand keeping it invested at my AA, but fixed income is just a waste of time.

The mortgage is $30k I have to pull it from somewhere. If I am retired and with the mortgage I decrease my Roth conversions. I don’t understand why it is not getting through to you.

Actually the plan is to tax gain harvest every other year to the 0% tax bracket and then Roth conversions the following year. I believe this minimizes my taxes further.

Keep in mind decreasing the pretax accounts will have a significant tax impact at 70 when RMDs start to kick in on top of SS payments.
Your plan is to use $250k to pay off mortgage. That money has to come from somewhere, and probably has capital gains taxes associated with it.

Lets say hypothetically your plan is to liquidate investments in 2020 to pay off the mortgage in full. Presumably You realize a a large cap gain in 2020. Then you plan to do conversions 2021-2028.

All I'm saying is liquidate the $250k investments in 2020 as planned. But don't pay it off. Use the $250k plus any interest income to pay off your $30k mortgage from 2021-2028. You will have approx $6000k per year of interest in which may or may not be a problem but it isn't $30k per year of taxable income.

Perhaps that is more trouble than its worth. Perhaps the $6000 interest causes it's own tax problems. If so, so be it. But you don't have to realize $30k of income every year.

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JoeRetire
Posts: 3881
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JoeRetire » Thu Mar 28, 2019 9:13 am

dknightd wrote:
Wed Mar 27, 2019 5:17 pm
JoeRetire wrote:
Wed Mar 27, 2019 12:03 pm
dknightd wrote:
Wed Mar 27, 2019 9:15 am
another thought. Going into retirement with a fixed expense, with a known ending date, might be a good idea.
It gives you some certainty of your expenses. You can't predict what your gains might be. But if at least part of your expenses are known, that could be an advantage
To be fair, going into retirement with a fixed $0 expense in this category doesn't change your argument at all. If it's an advantage to know that you have a fixed expense of $X/month in this category, it's also an advantage to know that you have a fixed expense of $0/month in this category.

It's a difference without a distinction.
True. Want to pay off my mortgage for me ;)
No, but you can go ahead and pay yours off if you think that will give you a fixed expenses predictability advantage.
Do you want to fund my retirement?
Don't be a lemming.

User avatar
JoeRetire
Posts: 3881
Joined: Tue Jan 16, 2018 2:44 pm

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JoeRetire » Thu Mar 28, 2019 9:14 am

SovereignInvestor wrote:
Wed Mar 27, 2019 5:27 pm
So much debate between paying off mortgage or not. Why not pay off half of it?

Best of both worlds.
A meet-in-the-middle compromise is almost always a worst of both worlds.
Don't be a lemming.

JBTX
Posts: 5537
Joined: Wed Jul 26, 2017 12:46 pm

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by JBTX » Thu Mar 28, 2019 9:19 am

EnjoyIt wrote:
Thu Mar 28, 2019 12:20 am
JBTX wrote:
Wed Mar 27, 2019 10:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 10:29 pm
JBTX wrote:
Wed Mar 27, 2019 9:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 7:30 pm


By not doing the math you are talking out of your ear.

In this particular scenario at what tax bracket should I do Roth conversions?
0
10%
12%
22%
24%

You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.

In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?

Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.

On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.

Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.

Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.
Sure, I will explain. First I want to make sure you understand that the process of converting money from a 401k to a Roth IRA is a taxable event. Every dollar converted is taxes at your top tax rate.

Let's look at 2 scenarios and how they may look.

Scenario 1: living expenses are $100k/yr since this person retired early, they will need to withdraw money from their taxable account. For arguments sake and to make math easy we will have $30k in dividends and another $70k in the sale of equities with 50% capital gains. This means this person has $65k in taxable income. After the standard deduction of $24k this family has $41k in taxable income which puts them in the 12% tax bracket which peaks at $78,950 for a family in 2019. This person will be paying $0 taxes on their qualified dividends and long term capital gains. In fact, this person can now convert ($78,950 - $41,000 = $37,950) from a 401k to a Roth and pay 12% taxes on that conversion but still pay 0% on the capital gains. If this person converts $1 more, that dollar will put them in the 22% tax bracket where now qualified dividends and long term capital gains are also taxed at 15%. This is not where I want to be.

Scenario #2 is exactly the same but now I also have a $2,500 per month mortgage which comes out to $30k/yr. If we agreed we are selling equities at 50% capital gains to meet our expenses needs, we will incur an extra $15k in capital gains. Therefore instead of having $41k in taxable income I will have ($41k + $15k = $56k.) This means I can now only convert ($78,950 - $56,000 = $22,950) from a 401k to a Roth. Sure I can convert more, but any extra will be at 22% tax bracket which would not make financial sense.

In this example, the extra $15k Roth conversions add up over the years which surpass the arbitrage of holding a 2.75% mortgage.

I hope I explained it so it makes sense.

Other good reason some may not want a mortgage in retirement:
1) The mortgage payment may put a family outside of ACA subsidies.
2) An early retire might still have kids going to college. They may have all their wealth in a 401k doing SEP withdrawals for living expenses. Keeping their withdrawals low may qualify them for need based financial aid.
I'm sure there are other tax cliff reasons why lowering your yearly spending is helpful.
I've done Roth conversions so I am familiar with them and their tax impact.

I'm still not getting why you need to pull $30k per year out of investment the same year you are doing conversions. Presumably you already plan to pull money out up front to pay off the mortgage, and incur a rather large capital gains bill up front. If having capital gains during Roth conversion years is suboptimal, then sell and take your mortgage proceeds and capital gains up front, just like you would have if you chose to pay it off up front. Then take the $250k and put it in liquid fixed income, and use it to pay off the mortgage over the 8 remaining years. That will generate only about $6000 of interest a year.

I can see from your examples that even a small amount of incremental income could have a higher than expected marginal rate due to phase outs, double ups in the tax code, and/or ACA, and could make it not worth it. But I think you are greatly exaggerating the impact.

Perhaps it's not worth the trouble. I get that.
Where did the $250k come from that I put in a liquid fixed income as you recommend? Also, what fixed income is paying better than 2.75%? I can understand keeping it invested at my AA, but fixed income is just a waste of time.

The mortgage is $30k I have to pull it from somewhere. If I am retired and with the mortgage I decrease my Roth conversions. I don’t understand why it is not getting through to you.

Actually the plan is to tax gain harvest every other year to the 0% tax bracket and then Roth conversions the following year. I believe this minimizes my taxes further.

Keep in mind decreasing the pretax accounts will have a significant tax impact at 70 when RMDs start to kick in on top of SS payments.
Your plan is to use $250k to pay off mortgage. That money has to come from somewhere, and probably has capital gains taxes associated with it.

Lets say hypothetically your plan is to liquidate investments in 2020 to pay off the mortgage in full. Presumably You realize a a large cap gain in 2020. Then you plan to do conversions 2021-2028.

All I'm saying is liquidate the $250k investments in 2020 as planned. But don't pay it off. Use the $250k plus any interest income to pay off your $30k mortgage from 2021-2028. You will have approx $6000k per year of interest in which may or may not be a problem but it isn't $30k per year of taxable income.

Perhaps that is more trouble than its worth. Perhaps the $6000 interest per year causes it's own tax problems. If so, so be it. But you don't have to realize $30k of income every year from 2021-2028. Instead take it in 2020, just like you are planning to do anyway.

EnjoyIt
Posts: 2877
Joined: Sun Dec 29, 2013 8:06 pm

Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by EnjoyIt » Thu Mar 28, 2019 9:25 am

JBTX wrote:
Thu Mar 28, 2019 9:13 am
EnjoyIt wrote:
Thu Mar 28, 2019 12:20 am
JBTX wrote:
Wed Mar 27, 2019 10:47 pm
EnjoyIt wrote:
Wed Mar 27, 2019 10:29 pm
JBTX wrote:
Wed Mar 27, 2019 9:47 pm


I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.

On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.

Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.

Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.
Sure, I will explain. First I want to make sure you understand that the process of converting money from a 401k to a Roth IRA is a taxable event. Every dollar converted is taxes at your top tax rate.

Let's look at 2 scenarios and how they may look.

Scenario 1: living expenses are $100k/yr since this person retired early, they will need to withdraw money from their taxable account. For arguments sake and to make math easy we will have $30k in dividends and another $70k in the sale of equities with 50% capital gains. This means this person has $65k in taxable income. After the standard deduction of $24k this family has $41k in taxable income which puts them in the 12% tax bracket which peaks at $78,950 for a family in 2019. This person will be paying $0 taxes on their qualified dividends and long term capital gains. In fact, this person can now convert ($78,950 - $41,000 = $37,950) from a 401k to a Roth and pay 12% taxes on that conversion but still pay 0% on the capital gains. If this person converts $1 more, that dollar will put them in the 22% tax bracket where now qualified dividends and long term capital gains are also taxed at 15%. This is not where I want to be.

Scenario #2 is exactly the same but now I also have a $2,500 per month mortgage which comes out to $30k/yr. If we agreed we are selling equities at 50% capital gains to meet our expenses needs, we will incur an extra $15k in capital gains. Therefore instead of having $41k in taxable income I will have ($41k + $15k = $56k.) This means I can now only convert ($78,950 - $56,000 = $22,950) from a 401k to a Roth. Sure I can convert more, but any extra will be at 22% tax bracket which would not make financial sense.

In this example, the extra $15k Roth conversions add up over the years which surpass the arbitrage of holding a 2.75% mortgage.

I hope I explained it so it makes sense.

Other good reason some may not want a mortgage in retirement:
1) The mortgage payment may put a family outside of ACA subsidies.
2) An early retire might still have kids going to college. They may have all their wealth in a 401k doing SEP withdrawals for living expenses. Keeping their withdrawals low may qualify them for need based financial aid.
I'm sure there are other tax cliff reasons why lowering your yearly spending is helpful.
I've done Roth conversions so I am familiar with them and their tax impact.

I'm still not getting why you need to pull $30k per year out of investment the same year you are doing conversions. Presumably you already plan to pull money out up front to pay off the mortgage, and incur a rather large capital gains bill up front. If having capital gains during Roth conversion years is suboptimal, then sell and take your mortgage proceeds and capital gains up front, just like you would have if you chose to pay it off up front. Then take the $250k and put it in liquid fixed income, and use it to pay off the mortgage over the 8 remaining years. That will generate only about $6000 of interest a year.

I can see from your examples that even a small amount of incremental income could have a higher than expected marginal rate due to phase outs, double ups in the tax code, and/or ACA, and could make it not worth it. But I think you are greatly exaggerating the impact.

Perhaps it's not worth the trouble. I get that.
Where did the $250k come from that I put in a liquid fixed income as you recommend? Also, what fixed income is paying better than 2.75%? I can understand keeping it invested at my AA, but fixed income is just a waste of time.

The mortgage is $30k I have to pull it from somewhere. If I am retired and with the mortgage I decrease my Roth conversions. I don’t understand why it is not getting through to you.

Actually the plan is to tax gain harvest every other year to the 0% tax bracket and then Roth conversions the following year. I believe this minimizes my taxes further.

Keep in mind decreasing the pretax accounts will have a significant tax impact at 70 when RMDs start to kick in on top of SS payments.
Your plan is to use $250k to pay off mortgage. That money has to come from somewhere, and probably has capital gains taxes associated with it.

Lets say hypothetically your plan is to liquidate investments in 2020 to pay off the mortgage in full. Presumably You realize a a large cap gain in 2020. Then you plan to do conversions 2021-2028.

All I'm saying is liquidate the $250k investments in 2020 as planned. But don't pay it off. Use the $250k plus any interest income to pay off your $30k mortgage from 2021-2028. You will have approx $6000k per year of interest in which may or may not be a problem but it isn't $30k per year of taxable income.

Perhaps that is more trouble than its worth. Perhaps the $6000 interest causes it's own tax problems. If so, so be it. But you don't have to realize $30k of income every year.
I see what you are getting at though I don’t understand the benefit. If I liquidate the $250k in 2020 and don’t pay off the mortgage then it is not invisited and I waste money on the mortgage interest. The benefit of keeping a mortgage comes from investing the money, not just letting it sit in cash or other low interest investments like CDs or money market accounts. I don’t see the benefit of this plan.

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donebyforty
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Re: Should We Sell Short Term Bonds to Pay Off Mortgage?

Post by donebyforty » Thu Mar 28, 2019 9:51 am

corn18 wrote:
Thu Mar 28, 2019 8:42 am
OP, please read the title of your thread: Should We Sell Short Term Bonds to Pay Off Mortgage?

What are you using to pay the $30k/year mortgage if you keep it? Just answer the question.

(BTW< if anyone wants to know all the details, a quick visit to his website [link in first post] answers a lot of the repeated questions we are asking him/her). It’s actually a pretty good read.
Your current discussion on the $30k mortgage is not with the OP.

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