Asset Allocation Question.

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Topic Author
SteadyEddie
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Joined: Thu Jun 20, 2019 1:22 pm

Asset Allocation Question.

Post by SteadyEddie » Thu Jun 20, 2019 1:39 pm

This is not my exact scenario but will suffice for this purpose. Retired now and age 70. Have no debt other than a $200,000 mortgage. Have $1 million in an IRA. Social Security plus pension plus RMDs pay all bills and support desired lifestyle. Asset allocation for the $1 million is now at my targeted 50-50 goal. The return on the income portion of my portfolio is 2.5 to 3%. It is non-taxable when earned in the IRA, but 100% taxable when withdrawn from the IRA. My mortgage rate is 4% and the interest is not tax deductible for me. I'm wondering why I shouldn't take $200,000 of my income portfolio and payoff the mortgage. That would give me a guaranteed return of 4% which is higher than I am earning on that investment. Thoughts? The more important part of the question is whether I should leave the remaining $800,000 invested exactly as it is now, which would result in my allocation changing from 50-50 to 62.5-37.5. I have convinced myself that at this point in my life 50-50 is the right target allocation for me. But under these circumstances I can't stop thinking that the $200,000 I would take out of a 3% fixed income portfolio to pay off a 4% interest mortgage should still be counted as part of my allocation leaving it at 50-50. Thoughts on whether this way of thinking about it is reasonable, or whether I should reallocate the remaining $800,000 back to 50-50 if I took out $200,000 to payoff the mortgage?

Please don't give me the pat answer that you are not supposed to count your home as part of your asset allocation. I know that. But that is general rule and I'm trying to decide whether it still holds under this particular scenario. I either have $200,000 invested in bonds earning probably less than 3% and a $200,000 mortgage at 4%, or I have no mortgage and only 37.5% of my portfolio invested in bonds. What do you all think?

Silk McCue
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Re: Asset Allocation Question.

Post by Silk McCue » Thu Jun 20, 2019 6:21 pm

Welcome to Bogleheads!

Taking $200k out the IRA will push you into a much higher tax bracket, at least 24%, so there is no way that paying the mortgage off that way could ever make financial sense from the return perspective that you described.

Cheers

jbranx
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Re: Asset Allocation Question.

Post by jbranx » Thu Jun 20, 2019 6:49 pm

{Topic is now in Personal Investments Forum}

dbr
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Re: Asset Allocation Question.

Post by dbr » Thu Jun 20, 2019 7:47 pm

I think it can make sense to count a mortgage as a negative bond. That does not in any way try to count the asset value of the house as an investment.

Topic Author
SteadyEddie
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Re: Asset Allocation Question.

Post by SteadyEddie » Fri Jun 21, 2019 12:13 am

Silk McCue wrote:
Thu Jun 20, 2019 6:21 pm
Welcome to Bogleheads!

Taking $200k out the IRA will push you into a much higher tax bracket, at least 24%, so there is no way that paying the mortgage off that way could ever make financial sense from the return perspective that you described.

Cheers
I knew I over-simplified the exact circumstances. I should not have said the money was coming from an IRA. If it comes from a taxable account then there are no taxable consequences. The real question is whether I should reallocate the remaining money after using a portion of the current income portfolio to payoff the mortgage.

sf_tech_saver
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Re: Asset Allocation Question.

Post by sf_tech_saver » Fri Jun 21, 2019 12:43 am

Just a thought -- but why not take out a 7 year ARM. I'm refinancing mine now at only 3.3% and I bet you could do better than that soon.

In my case, I can pay off the mortgage anytime from my portfolio but it helps me on my tax rate and I can afford the risk of an ARM because of my ability to pay it off if rates are higher 7 years from now.

Historically speaking a 50/50 AA has a decent shot of beating 3%.
VTI is a modern marvel

MotoTrojan
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Re: Asset Allocation Question.

Post by MotoTrojan » Fri Jun 21, 2019 10:08 am

My way of looking at this; AA is based on your ability, willingness, and need to take risk. Your ability goes up after this as your debt/required cash flow is now drastically reduced. Thus maintaining the same equity exposure is reasonable.

Quaestner
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Re: Asset Allocation Question.

Post by Quaestner » Fri Jun 21, 2019 12:48 pm

I'm tempted to advise you stay with a plan that matches your "SteadyEddie" moniker - and just "stay the course" you've set! But, there's some (non-financial) value in the feeling of a paid-off mortgage in addition to the guaranteed return you mention. But I do wonder - does your decision need to be all or nothing on the mortgage payoff? What if you paid down $40K (ish) over each of the next 5 years? You could gradually shift from your 50/50 to a 60/40 (or 62.5/37.5)? (Then you could brag you're following the "rising equity glide path" advice that some recommend in retirement.) The home equity should be there if you ever need it later. Outcomes of a 50/50 vs a 60/40 aren't hugely different, so don't agonize over this too much!

pkcrafter
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Re: Asset Allocation Question.

Post by pkcrafter » Fri Jun 21, 2019 1:08 pm

Please don't give me the pat answer that you are not supposed to count your home as part of your asset allocation.
You seem to be the one doing that. :happy

Pay off the loan and return to your target asset allocation.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Dandy
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Re: Asset Allocation Question.

Post by Dandy » Sat Jun 22, 2019 7:32 am

Interesting issue. I pretty much am a pay off the debt guy.

One thought would be how long do you plan to live in your house. I know at 71 I'm thinking of moving to a rental after 45 years as a home owner. Getting tired of the house/landscaping upkeep ,etc. The longer you plan to stay might make it lean toward pay down the mortgage.

Another thought would be if you are meeting your lifestyle expenses now what is the need or use planned for the extra monthly cash flow - taxable investing? expanded lifestyle? And what taxable asset level will you have left and is that ok.

Another thought would will I have too much of my assets in real estate which can be hard to sell at certain times.

I don't think there is a horrible move either way - it is more to you feeling comfortable with the decision and what investment allocation you have/end up with. I wouldn't put a lot of weight on I'm paying 4% and earning less on my taxable fixed income --unless you have a lot of taxable fixed income.

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Wiggums
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Re: Asset Allocation Question.

Post by Wiggums » Sat Jun 22, 2019 7:47 am

I agree that there really is not much difference between 50/50 and 60/40. I am a pay off the mortgage person too. I’d pay it off over several years. You cannot go wrong with any decision that you make.

I personally paid off my mortgage. My rate was similar to yours and I could have made a little more in the market too. I had fun being debt free and rebuilding my cash. :-)

Cpadave
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Re: Asset Allocation Question.

Post by Cpadave » Sat Jun 22, 2019 7:58 am

I just paid off my mortgage too. I did not see a point in paying more than what my bond portfolio was earning. If your SS, pension and RMD is more than what you need after the mortgage payments are gone, than leave the allocation unchanged.

retiredjg
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Re: Asset Allocation Question.

Post by retiredjg » Sat Jun 22, 2019 8:47 am

I have decided NOT to pay off my mortgage because that would push me into a higher IRMAA tier and it is not worth that to me because my mortgage rate is incredibly low (lower than expected return on investments).

If you can somehow gather $200k without raising your taxable income and triggering IRMAA, it might be worth it to you.

I'd keep the portfolio at 50/50.

Topic Author
SteadyEddie
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Re: Asset Allocation Question.

Post by SteadyEddie » Sat Jun 22, 2019 11:08 pm

MotoTrojan wrote:
Fri Jun 21, 2019 10:08 am
My way of looking at this; AA is based on your ability, willingness, and need to take risk. Your ability goes up after this as your debt/required cash flow is now drastically reduced. Thus maintaining the same equity exposure is reasonable.


I had not checked responses for a couple days and came back and found several. I think this answer resonates best with me. It occurred to me over the past couple days that perhaps if I pay off my mortgage then a 62.5 -37.5 asset allocation would be more appropriate than 50-50. With no mortgage and virtually no other debt I am probably willing to back to something close to 60-40. When younger it was 100% stock. In my 50's it was 80-20 and in my 60's more like 65-35. I had only moved to 50-50 a couple years ago. But if I payoff the mortgage I think going back to 60-40 would be perfectly fine. And that's what will happen if I don't reallocate the rest of my investments after using part of the bond portfolio to payoff the mortgage.

MotoTrojan
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Re: Asset Allocation Question.

Post by MotoTrojan » Sun Jun 23, 2019 12:06 am

SteadyEddie wrote:
Sat Jun 22, 2019 11:08 pm
MotoTrojan wrote:
Fri Jun 21, 2019 10:08 am
My way of looking at this; AA is based on your ability, willingness, and need to take risk. Your ability goes up after this as your debt/required cash flow is now drastically reduced. Thus maintaining the same equity exposure is reasonable.


I had not checked responses for a couple days and came back and found several. I think this answer resonates best with me. It occurred to me over the past couple days that perhaps if I pay off my mortgage then a 62.5 -37.5 asset allocation would be more appropriate than 50-50. With no mortgage and virtually no other debt I am probably willing to back to something close to 60-40. When younger it was 100% stock. In my 50's it was 80-20 and in my 60's more like 65-35. I had only moved to 50-50 a couple years ago. But if I payoff the mortgage I think going back to 60-40 would be perfectly fine. And that's what will happen if I don't reallocate the rest of my investments after using part of the bond portfolio to payoff the mortgage.
Glad it helped. I think 60/40 is a very reasonable forever AA, unless something new comes along to change your situation again.

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