DON'T pay off your mortgage; instead reduce Sequence of Return Risk

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livesoft
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DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by livesoft » Sun May 28, 2017 12:46 pm

Another reason to not pay off one's mortgage is mentioned in the Safe Withdrawal Rate series at https://earlyretirementnow.com/2017/05/ ... isk-part2/
EarlyRetirementNow wrote:Are there ways to alleviate Sequence of Return Risk?

Last week after posting the first part of the SRR blog post, two commenters had suggestions on how to overcome or at least alleviate the SRR problem. Both of them are brilliant ideas. But only one of them works.
[...]
2: “Mortgage” your retirement.

For retirement savers there is one sure-fire way to avoid missing out on strong equity returns early during the accumulation phase: Borrow against your future retirement account contributions and invest the whole loot as one big lump-sum payment without further contributions in the future (i.e., use your future retirement contributions to pay down the margin loan).

[...]
But there are ways to at least alleviate the SRR problem:
  • Hold a 100% equity portfolio early on. Don’t bother about holding any bonds.
  • Don’t bother about paying down low-interest debt when young (mortgage, low-interest student loans). Put every last dollar you can scrape together into the stock market early on. (of course, high-interest debt, especially debt with interest higher than your expected equity return should be paid down as early as possible)
  • Once you have a critical mass of equity investments, then tackle your low-interest debt.
Sorry, I cannot quote the entire article, so you may wish to read the articles before responding to my quoted bits above.
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qwertyjazz
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by qwertyjazz » Sun May 28, 2017 12:53 pm

Yeah I read this and it completely defeated my logic of paying down debt first and feeling good about it. Unfortunately, I need a time machine for it to be mostly actionable for me. :oops:
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The Wizard
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by The Wizard » Sun May 28, 2017 1:07 pm

SRR is largely a matter of how much of your retirement income derives from portfolio withdrawal vs SS, pensions, and annuities.
About 2/3 of mine is from the latter grouping, so I'm in the lesser impacted group...
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Chip
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by Chip » Sun May 28, 2017 1:27 pm

Mortgage Your Retirement. Hmmm, has a familiar ring to it. Maybe this thread?

livesoft
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by livesoft » Sun May 28, 2017 1:29 pm

I'd say this article confirms my thoughts on having a low-interest mortgage: One has the OPTION to pay off the mortgage AFTER equities have gone way up and also the OPTION to not pay off the mortgage while one's equity investments are not doing well. That is, one can always wait for equities to outperform the interest rate of the loan, so it's practically a guaranteed return to not pay off the mortgage.
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livesoft
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by livesoft » Sun May 28, 2017 1:30 pm

Chip wrote:Mortgage Your Retirement. Hmmm, has a familiar ring to it. Maybe this thread?
I like it. :sharebeer
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triceratop
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by triceratop » Sun May 28, 2017 1:35 pm

Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
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jmndu99
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by jmndu99 » Sun May 28, 2017 4:01 pm

Hello thank you for this link. I do not understand most of the mechanics of the math.

I do listen to a radio program where the "guy" also stresses to not pay off the mortgage.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by badbreath » Sun May 28, 2017 5:27 pm

I had a 15 year mortgage but I payed it off in 15 years funny how that works. Now I just invest the +-$1000 a month in my taxable.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by unclescrooge » Sun May 28, 2017 5:44 pm

livesoft wrote:Another reason to not pay off one's mortgage is mentioned in the Safe Withdrawal Rate series at https://earlyretirementnow.com/2017/05/ ... isk-part2/
EarlyRetirementNow wrote:Are there ways to alleviate Sequence of Return Risk?

Last week after posting the first part of the SRR blog post, two commenters had suggestions on how to overcome or at least alleviate the SRR problem. Both of them are brilliant ideas. But only one of them works.
[...]
2: “Mortgage” your retirement.

For retirement savers there is one sure-fire way to avoid missing out on strong equity returns early during the accumulation phase: Borrow against your future retirement account contributions and invest the whole loot as one big lump-sum payment without further contributions in the future (i.e., use your future retirement contributions to pay down the margin loan).

[...]
But there are ways to at least alleviate the SRR problem:
  • Hold a 100% equity portfolio early on. Don’t bother about holding any bonds.
  • Don’t bother about paying down low-interest debt when young (mortgage, low-interest student loans). Put every last dollar you can scrape together into the stock market early on. (of course, high-interest debt, especially debt with interest higher than your expected equity return should be paid down as early as possible)
  • Once you have a critical mass of equity investments, then tackle your low-interest debt.
Sorry, I cannot quote the entire article, so you may wish to read the articles before responding to my quoted bits above.
I read the article. And the "borrow against your retirement" thread... well about 3 pages out of 29.

I'm more confused than when I started!

On a personal level, I'm comfortable taking on a larger mortgage and putting the excess into the stock market. If I wasn't as confident in the stability of my family income, I would take on a less risk.

Stability of one's income - I think that's the crux of the issue.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by avalpert » Sun May 28, 2017 6:03 pm

unclescrooge wrote:
livesoft wrote:Another reason to not pay off one's mortgage is mentioned in the Safe Withdrawal Rate series at https://earlyretirementnow.com/2017/05/ ... isk-part2/
EarlyRetirementNow wrote:Are there ways to alleviate Sequence of Return Risk?

Last week after posting the first part of the SRR blog post, two commenters had suggestions on how to overcome or at least alleviate the SRR problem. Both of them are brilliant ideas. But only one of them works.
[...]
2: “Mortgage” your retirement.

For retirement savers there is one sure-fire way to avoid missing out on strong equity returns early during the accumulation phase: Borrow against your future retirement account contributions and invest the whole loot as one big lump-sum payment without further contributions in the future (i.e., use your future retirement contributions to pay down the margin loan).

[...]
But there are ways to at least alleviate the SRR problem:
  • Hold a 100% equity portfolio early on. Don’t bother about holding any bonds.
  • Don’t bother about paying down low-interest debt when young (mortgage, low-interest student loans). Put every last dollar you can scrape together into the stock market early on. (of course, high-interest debt, especially debt with interest higher than your expected equity return should be paid down as early as possible)
  • Once you have a critical mass of equity investments, then tackle your low-interest debt.
Sorry, I cannot quote the entire article, so you may wish to read the articles before responding to my quoted bits above.
I read the article. And the "borrow against your retirement" thread... well about 3 pages out of 29.

I'm more confused than when I started!

On a personal level, I'm comfortable taking on a larger mortgage and putting the excess into the stock market. If I wasn't as confident in the stability of my family income, I would take on a less risk.

Stability of one's income - I think that's the crux of the issue.
To some degree stability of income solves many problems. But let me suggest that, when you have unstable income, you have more flexibility with a mortgage payment and the cash in a liquid account then with no payment and the cash in your illiquid house.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by Toons » Sun May 28, 2017 6:05 pm

Pay off your mortgage,,,,,
Long before you retire.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by grabiner » Sun May 28, 2017 6:31 pm

The two parts of advice go together: hold a 100%-equity portfolio, and don't pay down your debt.

It is a better investment to pay down debt at X% than to buy a bond with the same duration paying less than X% (assuming you don't need the liquidity). However, if you don't have the option of buying a bond, because you are 100% equity, then you might decide to keep the mortgage even if mortgage rates are higher than bond yields (after any tax considerations).

The other reason not to pay down debt has nothing to do with sequence of returns risk, but with the tax benefit. If you can invest in your 401(k) or IRA, even in bonds, you get tax-deferred growth on that return, and the tax-deferred growth lasts even after the mortgage is gone. It is common for taxable bond yields to be higher than after-tax mortgage rates.

In a high tax bracket, even tax-exempt bond yields may be higher than after-tax mortgage rates, which means that investing in tax-exempt bonds is better than paying down a mortgage.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by grok87 » Sun May 28, 2017 6:49 pm

triceratop wrote:Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
Agree

I think its important to have realistic market downside scenarios and test your plan against them. My current one is: what if global equities crashed by 50% and stayed down for 20 years.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by grok87 » Sun May 28, 2017 6:51 pm

avalpert wrote:
unclescrooge wrote:
livesoft wrote:Another reason to not pay off one's mortgage is mentioned in the Safe Withdrawal Rate series at https://earlyretirementnow.com/2017/05/ ... isk-part2/
EarlyRetirementNow wrote:Are there ways to alleviate Sequence of Return Risk?

Last week after posting the first part of the SRR blog post, two commenters had suggestions on how to overcome or at least alleviate the SRR problem. Both of them are brilliant ideas. But only one of them works.
[...]
2: “Mortgage” your retirement.

For retirement savers there is one sure-fire way to avoid missing out on strong equity returns early during the accumulation phase: Borrow against your future retirement account contributions and invest the whole loot as one big lump-sum payment without further contributions in the future (i.e., use your future retirement contributions to pay down the margin loan).

[...]
But there are ways to at least alleviate the SRR problem:
  • Hold a 100% equity portfolio early on. Don’t bother about holding any bonds.
  • Don’t bother about paying down low-interest debt when young (mortgage, low-interest student loans). Put every last dollar you can scrape together into the stock market early on. (of course, high-interest debt, especially debt with interest higher than your expected equity return should be paid down as early as possible)
  • Once you have a critical mass of equity investments, then tackle your low-interest debt.
Sorry, I cannot quote the entire article, so you may wish to read the articles before responding to my quoted bits above.
I read the article. And the "borrow against your retirement" thread... well about 3 pages out of 29.

I'm more confused than when I started!

On a personal level, I'm comfortable taking on a larger mortgage and putting the excess into the stock market. If I wasn't as confident in the stability of my family income, I would take on a less risk.

Stability of one's income - I think that's the crux of the issue.
To some degree stability of income solves many problems. But let me suggest that, when you have unstable income, you have more flexibility with a mortgage payment and the cash in a liquid account then with no payment and the cash in your illiquid house.
+1
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by willthrill81 » Sun May 28, 2017 6:56 pm

grabiner wrote:The two parts of advice go together: hold a 100%-equity portfolio, and don't pay down your debt.

It is a better investment to pay down debt at X% than to buy a bond with the same duration paying less than X% (assuming you don't need the liquidity). However, if you don't have the option of buying a bond, because you are 100% equity, then you might decide to keep the mortgage even if mortgage rates are higher than bond yields (after any tax considerations).

The other reason not to pay down debt has nothing to do with sequence of returns risk, but with the tax benefit. If you can invest in your 401(k) or IRA, even in bonds, you get tax-deferred growth on that return, and the tax-deferred growth lasts even after the mortgage is gone. It is common for taxable bond yields to be higher than after-tax mortgage rates.

In a high tax bracket, even tax-exempt bond yields may be higher than after-tax mortgage rates, which means that investing in tax-exempt bonds is better than paying down a mortgage.
I find this thread very interesting. When I started a thread a few months ago questioning whether an 80/20 portfolio provided a sufficient reduction in volatility compared to a 100% equity portfolio to eliminate panic-selling, many practically dragged me over the coals for seemingly suggesting, which I never did, that people go all-in with equities.

Now people are fine with suggesting not only a 100% equity portfolio, but essentially going beyond 100% by maxing out mortgage debt for as long as possible, despite the potentially big risks involved. :oops:

I suppose I'm an odd-ball, but even though my retirement portfolio is 100% equities, I'm working to pay off my mortgage in about three years. There are several reasons for it (i.e. long-term employment concerns, DW really wants to), but reducing my monthly obligations is not the least of them. I've considered the tax deduction, but we just barely can itemize our taxes anyway, so that's a minimal benefit for us. And considering that my mortgage rate is 3.375%, it makes no sense to invest a penny in bonds apart from a desire for additional liquidity, which I do not have.

Frankly, unless one is in a high tax rate AND is gaining a significant benefit from itemizing their taxes and/or has a mortgage rate well under 3%, I think that retaining a mortgage in favor of buying bonds makes little sense for most people. Of course there are exceptions, and generalities help no one, but I think the point should still be made for those not savvy in the topic.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by qwertyjazz » Sun May 28, 2017 6:59 pm

grok87 wrote:
triceratop wrote:Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
Agree

I think its important to have realistic market downside scenarios and test your plan against them. My current one is: what if global equities crashed by 50% and stayed down for 20 years.
That is why ERN is so good. The answer depends on where you are on the savings vs spending timeline for a such a SRR question. If the vast majority of saving is in the future, then a one time drop of 50 percent and then a similar rate of increase would not matter as much. If you were already retired, then ...
I really like ERN
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by grok87 » Sun May 28, 2017 7:11 pm

qwertyjazz wrote:
grok87 wrote:
triceratop wrote:Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
Agree

I think its important to have realistic market downside scenarios and test your plan against them. My current one is: what if global equities crashed by 50% and stayed down for 20 years.
That is why ERN is so good. The answer depends on where you are on the savings vs spending timeline for a such a SRR question. If the vast majority of saving is in the future, then a one time drop of 50 percent and then a similar rate of increase would not matter as much. If you were already retired, then ...
I really like ERN
What is ERN?
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by deikel » Sun May 28, 2017 7:17 pm

avalpert wrote:
unclescrooge wrote:
livesoft wrote:Another reason to not pay off one's mortgage is mentioned in the Safe Withdrawal Rate series at https://earlyretirementnow.com/2017/05/ ... isk-part2/
EarlyRetirementNow wrote:Are there ways to alleviate Sequence of Return Risk?

Last week after posting the first part of the SRR blog post, two commenters had suggestions on how to overcome or at least alleviate the SRR problem. Both of them are brilliant ideas. But only one of them works.
[...]
2: “Mortgage” your retirement.

For retirement savers there is one sure-fire way to avoid missing out on strong equity returns early during the accumulation phase: Borrow against your future retirement account contributions and invest the whole loot as one big lump-sum payment without further contributions in the future (i.e., use your future retirement contributions to pay down the margin loan).

[...]
But there are ways to at least alleviate the SRR problem:
  • Hold a 100% equity portfolio early on. Don’t bother about holding any bonds.
  • Don’t bother about paying down low-interest debt when young (mortgage, low-interest student loans). Put every last dollar you can scrape together into the stock market early on. (of course, high-interest debt, especially debt with interest higher than your expected equity return should be paid down as early as possible)
  • Once you have a critical mass of equity investments, then tackle your low-interest debt.
Sorry, I cannot quote the entire article, so you may wish to read the articles before responding to my quoted bits above.
I read the article. And the "borrow against your retirement" thread... well about 3 pages out of 29.

I'm more confused than when I started!

On a personal level, I'm comfortable taking on a larger mortgage and putting the excess into the stock market. If I wasn't as confident in the stability of my family income, I would take on a less risk.

Stability of one's income - I think that's the crux of the issue.
To some degree stability of income solves many problems. But let me suggest that, when you have unstable income, you have more flexibility with a mortgage payment and the cash in a liquid account then with no payment and the cash in your illiquid house.
Yes, this is entirely a cash flow issue. Of course leveraging your mortgage against the market is a great idea over 30 years at a current rate of say 4%(your mortgage looses value by inflation AND you gain in the market) - just falls flat when your cash flow becomes negative for whatever reason (job loss, health issue ect). I prefer to have my house paid off and one less cash drain in such times.

And although the house is illiquid, I can borrow against it (HELOC ect) or sell it - maybe not immediately or maybe at some loss.

There is some psychology to be said about the chance to hole up in your own four walls when the times get tough....vs loosing a place to sleep.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by AlohaJoe » Sun May 28, 2017 7:17 pm

Chip wrote:Mortgage Your Retirement. Hmmm, has a familiar ring to it. Maybe this thread?
triceratop wrote:Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
I'm not totally sure what you or Chip have succeeded at other than demonstrating you didn't follow livesoft's suggestion of "you may wish to read the articles before responding to my quoted bits above." 8-)

Immediately after livesoft's except ERN also wrote
If this sounds too extreme to you, I’d have to agree. There are multiple reasons why this is not workable. For example, since I work in a very volatile industry I’d not be comfortable borrowing against future earnings.
And...the comments on the post already contained a link markettimer's thread that was posted five days ago :)

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by staythecourse » Sun May 28, 2017 7:30 pm

I have an easier and WAY more logical approach. It is the common sense approach of 1. Have enough in principle stable investments to match one's monthly liabilities and 2. ADAPT to the situation. It is no different then one needing to adapt to their investment plan during the accumulation period when they unexpectedly lose their jobs. It isn't like those folks keep on spending without adapting to the decreased monthly income coming in.

I am not sure why NO ONE seems to take into account the ultimate answer of just adapt to the situation. That is what one does in every aspect of their non investment life. But now when you throw something like "sequence of return risk" out there folks have to come up with some complicated plan to out think the problem. JUST ADAPT. It is that simple.

Good luck.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by qwertyjazz » Sun May 28, 2017 7:31 pm

grok87 wrote:
qwertyjazz wrote:
grok87 wrote:
triceratop wrote:Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
Agree

I think its important to have realistic market downside scenarios and test your plan against them. My current one is: what if global equities crashed by 50% and stayed down for 20 years.
That is why ERN is so good. The answer depends on where you are on the savings vs spending timeline for a such a SRR question. If the vast majority of saving is in the future, then a one time drop of 50 percent and then a similar rate of increase would not matter as much. If you were already retired, then ...
I really like ERN
What is ERN?
The writer of the linked article in the OP. I have been reading his stuff past few months and he makes a lot of original arguments including about SRR linked to here
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by triceratop » Sun May 28, 2017 7:32 pm

AlohaJoe wrote:
Chip wrote:Mortgage Your Retirement. Hmmm, has a familiar ring to it. Maybe this thread?
triceratop wrote:Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
I'm not totally sure what you or Chip have succeeded at other than demonstrating you didn't follow livesoft's suggestion of "you may wish to read the articles before responding to my quoted bits above." 8-)

Immediately after livesoft's except ERN also wrote
If this sounds too extreme to you, I’d have to agree. There are multiple reasons why this is not workable. For example, since I work in a very volatile industry I’d not be comfortable borrowing against future earnings.
And...the comments on the post already contained a link markettimer's thread that was posted five days ago :)
Oh, but I did read the post before commenting! Nor did my post come into contradiction with anything ERN stated. My point is there are ways to apply the ideas of Mortgage Your Retirement without exposing yourself to some of the risks of using leverage. Why do you think that ERN excerpt you posted is not consistent with what I suggested? Nowhere did I suggest borrowing to invest...

Not sure why I should want to wade through the comment section either, nor did livesoft suggest that. :wink:
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by knpstr » Sun May 28, 2017 7:45 pm

livesoft wrote:Another reason to not pay off one's mortgage is mentioned in the Safe Withdrawal Rate series at https://earlyretirementnow.com/2017/05/ ... isk-part2/
EarlyRetirementNow wrote:Are there ways to alleviate Sequence of Return Risk?

But there are ways to at least alleviate the SRR problem:
  • Hold a 100% equity portfolio early on. Don’t bother about holding any bonds.
Bingo!
+1

It's been implied in other threads that I'm reckless for suggesting one to go 100% stocks in effort to "outrun" SRR by building up a large enough some to allow using an ultra low WD of 3% or less in retirement.
Last edited by knpstr on Sun May 28, 2017 7:46 pm, edited 2 times in total.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by qwertyjazz » Sun May 28, 2017 7:46 pm

triceratop wrote:
AlohaJoe wrote:
Chip wrote:Mortgage Your Retirement. Hmmm, has a familiar ring to it. Maybe this thread?
triceratop wrote:Chip beat me to it. In a sense MT's timing (ironically) could not have been worse, though he could not have known that; but from an instructional point of view, it could not have been better. Yes, there are risks in leverage.

But the idea to invest in higher-risk investments early is a good one (e.g. I have not even begun saving for a downpayment because doing so would concentrate so much of my risk in later years). Yes, MT got wiped out but that does not mean one cannot use some of the ideas, if not the highly-leveraged execution. The fact is that there is an enormous amount of risk in life no matter what one does; beginning investing later in life only hides the risk.
I'm not totally sure what you or Chip have succeeded at other than demonstrating you didn't follow livesoft's suggestion of "you may wish to read the articles before responding to my quoted bits above." 8-)

Immediately after livesoft's except ERN also wrote
If this sounds too extreme to you, I’d have to agree. There are multiple reasons why this is not workable. For example, since I work in a very volatile industry I’d not be comfortable borrowing against future earnings.
And...the comments on the post already contained a link markettimer's thread that was posted five days ago :)
Oh, but I did read the post before commenting! Nor did my post come into contradiction with anything ERN stated. My point is there are ways to apply the ideas of Mortgage Your Retirement without exposing yourself to some of the risks of using leverage. Why do you think that ERN excerpt you posted is not consistent with what I suggested? Nowhere did I suggest borrowing to invest...

Not sure why I should want to wade through the comment section either, nor did livesoft suggest that. :wink:
I am not as clever or well read as livesoft or AlohaJoe. But I would recommend wading through the comments of ERN's posts. He highlights some good points and Siamond has also made some excellent corrections on the arguments
(Although you will also read some marketing self congrats stuff if a relatively new blog)
FWIW
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by SGM » Sun May 28, 2017 7:48 pm

I started out 100% in stocks early on and did not waiver from that AA until a few years prior to retirement. After age 40 I began to pay down my mortgage quickly. The mortgage then was at a higher interest rate. I have always felt it was a mistake to not be 100% in stocks early in the accumulation period. I considered paying off my mortgage to be a bond like investment in retrospect. I tended to think of it at the time as just getting that relatively high interest rate off my back.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by willthrill81 » Sun May 28, 2017 7:49 pm

staythecourse wrote:I have an easier and WAY more logical approach. It is the common sense approach of 1. Have enough in principle stable investments to match one's monthly liabilities and 2. ADAPT to the situation. It is no different then one needing to adapt to their investment plan during the accumulation period when they unexpectedly lose their jobs. It isn't like those folks keep on spending without adapting to the decreased monthly income coming in.

I am not sure why NO ONE seems to take into account the ultimate answer of just adapt to the situation. That is what one does in every aspect of their non investment life. But now when you throw something like "sequence of return risk" out there folks have to come up with some complicated plan to out think the problem. JUST ADAPT. It is that simple.
:sharebeer

Far too often, people ignore the value of adaptation, but it's one of human's greatest strengths. Planning for the future is great and something that is often woefully lacking in society, but being willing and able to adapt to whatever situation one finds oneself in in the future is at least as important IMHO.

Personally, that's part of the reason why I want to pay off my mortgage ASAP. Once it's paid off, I'll have tremendous flexibility with future income and could live on a shoe-string budget if need be. And considering that my employment contract was just renewed for the time left to pay off the mortgage, I feel very secure about it and am not concerned over a liquidity issue with money 'tied up' in the home while still being required to make payments.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by triceratop » Sun May 28, 2017 7:52 pm

qwertyjazz wrote: I am not as clever or well read as livesoft or AlohaJoe. But I would recommend wading through the comments of ERN's posts. He highlights some good points and Siamond has also made some excellent corrections on the arguments
(Although you will also read some marketing self congrats stuff if a relatively new blog)
FWIW
Fair enough; I was mostly commenting on the idea that I commented before reading the article, and the absurd idea one must now read the comments as well before commenting intelligently and responsibly.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by tanstaafl » Sun May 28, 2017 8:10 pm

willthrill81 wrote:
I suppose I'm an odd-ball, but even though my retirement portfolio is 100% equities, I'm working to pay off my mortgage in about three years. There are several reasons for it (i.e. long-term employment concerns, DW really wants to), but reducing my monthly obligations is not the least of them. I've considered the tax deduction, but we just barely can itemize our taxes anyway, so that's a minimal benefit for us. And considering that my mortgage rate is 3.375%, it makes no sense to invest a penny in bonds apart from a desire for additional liquidity, which I do not have.

Frankly, unless one is in a high tax rate AND is gaining a significant benefit from itemizing their taxes and/or has a mortgage rate well under 3%, I think that retaining a mortgage in favor of buying bonds makes little sense for most people. Of course there are exceptions, and generalities help no one, but I think the point should still be made for those not savvy in the topic.
I agree completely, and seem to be in the same boat regarding our mortgage (though we are about 20% bonds and aim to stay there, we still prioritize debt payments over additional fixed income in our portfolio). We plan to tackle our mortgage early, largely due to debt aversion. Since we bought a modest house, we have never benefitted from an itemized deduction.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by grabiner » Sun May 28, 2017 9:03 pm

willthrill81 wrote:
grabiner wrote:The two parts of advice go together: hold a 100%-equity portfolio, and don't pay down your debt.
I find this thread very interesting. When I started a thread a few months ago questioning whether an 80/20 portfolio provided a sufficient reduction in volatility compared to a 100% equity portfolio to eliminate panic-selling, many practically dragged me over the coals for seemingly suggesting, which I never did, that people go all-in with equities.

Now people are fine with suggesting not only a 100% equity portfolio, but essentially going beyond 100% by maxing out mortgage debt for as long as possible, despite the potentially big risks involved. :oops:
Mathematically, a 100%-equity portfolio is optimal early in your career. If you have a 50%-equity portfolio just before you retire, then a 50% market decline will cost you 25% of your retirement income. If you have a 100%-equity portfolio early in your career, more than half your retirement income will come from money you haven't invested yet, and thus a 50% market decline will cost you less than 25% of your retirement income. More than 100% could be mathematically optimal if you don't have to deal with margin calls (because your debt is student loans, or a mortgage, rather than being secured by your portfolio) and you have a secure job so that you will be able to pay off that debt.

But the mathematically optimal portfolio is only optimal if you know your risk tolerance and will stick with it. I never recommend more than 80% stock unless you have already been through a bear market with a stock-heavy portfolio.
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by randomguy » Sun May 28, 2017 9:45 pm

livesoft wrote:
Chip wrote:Mortgage Your Retirement. Hmmm, has a familiar ring to it. Maybe this thread?
I like it. :sharebeer
They aren't remotely the same. This is talking about holding ~2x leverage. MT was borrowing money to invest and then leveraging it up 10x+ towards the end. The first one gets wiped out every 50-75 years or so. The second one gets wiped out every 2 years or so. That is a drastically different risk profile. And if the first gets wiped out, you have lost 2 years of savings.

Taking risk early is the prudent way of going. The question is strictly how much and how to do it smartly. Not paying off noncallable/low interest debt always seems like an obvious way of going. Borrowing at variable rate/callable debt has always been a bit sketchier. At it should be pointed out that in a world where you can borrow to invest at <3% isn't the same as borrowing at 12% (i.e. reality for most of the 80s-90s).

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by J295 » Sun May 28, 2017 10:03 pm

Not our cup of tea. Eliminating mortgage early and having no debt worked out fine for our retirement at 53.

Would be curious how the group might see this in a more stressful environment (anyone recall steep housing price and equity market declines in 2007-2009? ..... Throw in a job loss or major medical or family issue and high leverage can turn ugly regardless of lower interest rate).

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by KlangFool » Sun May 28, 2017 10:13 pm

J295 wrote:Not our cup of tea. Eliminating mortgage early and having no debt worked out fine for our retirement at 53.

Would be curious how the group might see this in a more stressful environment (anyone recall steep housing price and equity market declines in 2007-2009? ..... Throw in a job loss or major medical or family issue and high leverage can turn ugly regardless of lower interest rate).
J295,

1) A person without sufficient liquidity would suffer the same disastrous outcome with or without a paid off house.

2) Does not overspend on housing and the person would be fine under most circumstances.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by Dirghatamas » Sun May 28, 2017 10:14 pm

grabiner wrote: But the mathematically optimal portfolio is only optimal if you know your risk tolerance and will stick with it.
I agree with grabiner. It is not just about risk tolerance but how one feels psychologically about debt (quite different from general risk). This stuff isn't rational and usually has something to do with early childhood/upbringing/culture etc.

I can't stand debt. The only debt I ever took was my mortgage for my house, but I paid it off in my late twenties and have never taken on debt since. I used to have sleepless nights and used to have actual panic attacks when I had a mortgage. Even though I could do the math that it is better to have a debt if the expected return on stocks is higher than the mortgage rate..I just couldn't do it.

Paradoxically, I always own 100% stocks and sleep just fine but debt made me seriously stressed. I think it is the psychological comfort, knowing you have a secure roof over your head that you own outright. No one can take that away from you even if things go bad! Optimal allocation theories are fine but sometimes better to be a bit irrational, listen to one's emotions and lose out a bit of returns.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by jalbert » Sun May 28, 2017 10:15 pm

I must be missing something because it seems like increasing expenses and thus income needs while simultaneously increasing portfolio volatility through borrowing to increase equity exposure is likely to increase sequence of return risk.
Risk is not a guarantor of return.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by J295 » Sun May 28, 2017 10:39 pm

KlangFool » Sun May 28, 2017 9:13 pm

J295 wrote:
Not our cup of tea. Eliminating mortgage early and having no debt worked out fine for our retirement at 53.

Would be curious how the group might see this in a more stressful environment (anyone recall steep housing price and equity market declines in 2007-2009? ..... Throw in a job loss or major medical or family issue and high leverage can turn ugly regardless of lower interest rate).


J295,

1) A person without sufficient liquidity would suffer the same disastrous outcome with or without a paid off house.

2) Does not overspend on housing and the person would be fine under most circumstances.

KlangFool

KF

#1. I don't see it that way. With a paid off house one could simply tap the equity or downsize (say your $1 million home in San Francisco quickly declines in value to $600k and you have no debt but need cash .... you could sell or take out a loan and your have the cash. Can't do that if you are 100% home leveraged (and now $400k underwater on your home).

#2 Regardless of whether you "overspend" or not on your home, when you are 100% home leveraged and 100% equities and you lose 40% value in each and lose a job (or medical, or family emergency, etc.), the fact that you didn't "overspend" on your housing may not leave you "fine."

Now, I'm not saying it won't "work" (it would have worked fine for us had we choose to go that route), it would have been unnecessarily aggressive and would have taken on unnecessary risk. To each their own, as this isn't one size fits all. Anyone choosing this path though should understand the risks.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by KlangFool » Sun May 28, 2017 11:10 pm

Folks,

I might be overstating the obvious. But, here it goes.

1) If a person's retirement expenses are substantially supported by a pension and/or social security, the person is less reliant on the investment for support. Then, the person is less exposed to the SRR.

2) If the house/mortgage is substantially small in size as compared to the overall investment, then, it may not matter whether the person does or does not pay off the mortgage. For example, if a person has 1 million investment and 50K house, it won't matter much whether the person pays off the mortgage.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by KlangFool » Sun May 28, 2017 11:17 pm

J295 wrote:
KlangFool » Sun May 28, 2017 9:13 pm

J295 wrote:
Not our cup of tea. Eliminating mortgage early and having no debt worked out fine for our retirement at 53.

Would be curious how the group might see this in a more stressful environment (anyone recall steep housing price and equity market declines in 2007-2009? ..... Throw in a job loss or major medical or family issue and high leverage can turn ugly regardless of lower interest rate).


J295,

1) A person without sufficient liquidity would suffer the same disastrous outcome with or without a paid off house.

2) Does not overspend on housing and the person would be fine under most circumstances.

KlangFool

KF

#1. I don't see it that way. With a paid off house one could simply tap the equity or downsize (say your $1 million home in San Francisco quickly declines in value to $600k and you have no debt but need cash .... you could sell or take out a loan and your have the cash. Can't do that if you are 100% home leveraged (and now $400k underwater on your home).

#2 Regardless of whether you "overspend" or not on your home, when you are 100% home leveraged and 100% equities and you lose 40% value in each and lose a job (or medical, or family emergency, etc.), the fact that you didn't "overspend" on your housing may not leave you "fine."

Now, I'm not saying it won't "work" (it would have worked fine for us had we choose to go that route), it would have been unnecessarily aggressive and would have taken on unnecessary risk. To each their own, as this isn't one size fits all. Anyone choosing this path though should understand the risks.
J295,

#1) In summary, you do not account for the situation where the house could not be sold or a loan could not be taken against the house.

<<when you are 100% home leveraged and 100% equities >>
<<the fact that you didn't "overspend" on your housing may not leave you "fine.">>

#2) Most of my "House Poor" peers had little to no investment outside the house. They could not afford to save and invest. In general, they are in worst financial shape than the renters. People tend to spend more on housing when they buy.

KlangFool

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by livesoft » Sun May 28, 2017 11:25 pm

What about renters? We didn't buy a home until we were in our late thirties. We had invested for almost 15 years without any worries of paying a mortgage or falling home prices or falling stock prices or losing our jobs. We were debt free, too. Go figure. Was that ultimate "peace of mind"?
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by letsgobobby » Sun May 28, 2017 11:26 pm

willthrill81 wrote:
And considering that my mortgage rate is 3.375%, it makes no sense to invest a penny in bonds apart from a desire for additional liquidity, which I do not have.
Of course it does. You should be buying EE bonds. You would earn more than your mortgage, risk free, and you say you have no desire for liquidity.

Sorry, I just could not resist.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by michaelsieg » Sun May 28, 2017 11:27 pm

In a high tax bracket, even tax-exempt bond yields may be higher than after-tax mortgage rates, which means that investing in tax-exempt bonds is better than paying down a mortgage.
I am in this situation and I am not sure if I completely agree. It comes down to the 100s of threads if people should invest their money or pay off a mortgage.
For me the problem seems to be, that I mentally discount future earnings of a bond differently than an immediate benefit.
Let me give you an example, lets say you have $1000 that you can either invest in a tax exempt bond or use it to pay off additional principal of your mortgage. Let's say you have 10 years on a 15 year mortgage left to pay it off. (I used the calculator at bankrate.com to calculate the numbers (http://www.bankrate.com/calculators/mor ... lator.aspx)
Sure, mathematically, if you hold a tax exempt bond for 10 years, in 10 years you will have more money than if you pay it towards the principal of your mortgage today - but that assumes, that you hold the bond for 10 years and a lot of things can happen in 10 years.
On the other hand, if you pay $1000 towards the principal today - if I plug in the numbers on the above calculator, a one time $1000 payment will save you $365 of interest, and for me (mentally) that savings is immediate - as you will not have to pay that interest ever. I know it may sound illogical, but I discount an immediate benefit that can't be taken away differently than a bond that I have to hold over 10 years.
In summary, Grabiner, you are probably right, but somehow (to me) future earnings are worth less than immediately getting rid of a liability I would have for 10 years, to me it feels like immediate savings.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by randomguy » Sun May 28, 2017 11:34 pm

livesoft wrote:What about renters? We didn't buy a home until we were in our late thirties. We had invested for almost 15 years without any worries of paying a mortgage or falling home prices or falling stock prices or losing our jobs. We were debt free, too. Go figure. Was that ultimate "peace of mind"?
And you paid every increasing rent and missed out on 15 years of house appreciation. You gain the ability to move but it wasn't a free lunch. We all play mental games to try and make our choices seem like the way to go. In the end you are making educated guesses and hoping things work out. I know a bunch of people that stopped contributing/saving for a 401(k) and sunk everything into a house. It worked out fine for them has the house values more than doubled since they bought. But they had to deal with the risk of making that choice. If you couldn't handle the case when house prices were flat/declined, loss of jobs and so on, you shouldn't take on that risk. You need to figure out what risks you are comfortable with and which ones scare you. I worry a heck of a lot more about not having enough money at 90 than I do about market volatility before retirement so I take risk now so I don't have to take it later. A lot of people seem to like avoiding risk now and will deal with having less money later. Either approach works. You just need to figure out what you are comfortable with.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by livesoft » Sun May 28, 2017 11:50 pm

randomguy wrote:
livesoft wrote:What about renters? We didn't buy a home until we were in our late thirties. We had invested for almost 15 years without any worries of paying a mortgage or falling home prices or falling stock prices or losing our jobs. We were debt free, too. Go figure. Was that ultimate "peace of mind"?
And you paid every increasing rent and missed out on 15 years of house appreciation.
Well, that may have been true for some people, but not everyone. For instance, we moved to cheaper places. Also home prices don't always appreciate … remember this thread ? -> viewtopic.php?f=2&t=143735

And 2007-2009 was not the first or second housing bust I have lived through.

But yes, there are financial risks in life.

Would living like a cheap student and investing every dime earned in one's first "real job" help avoid SRR and count as "mortgage" your retirement? Or would it be a pathetic moustachian cry for help?
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by VaR » Mon May 29, 2017 12:08 am

I see at least a few opinions in this thread that are psychological rather than econometric - mostly about the comfort of paying off one's mortgage early.

I'd like to pose a middle-of-the-road hypothetical. Let's say I've followed at least some of KlangFool's advice and have purchased a reasonable sized home that is no more than 3x my annual income and have put 20-25% down on a 15-year mortgage at 3%. I am also employed at a company offering good low-cost 401k investment choices but with no matching. I have a 6 month emergency fund in cash at the credit union at 1.25% interest. I have calculated my budget and have the ability to save $2,000 a month after all expenses.

My choices are:
1. Pay off mortgage more quickly at $2,000 extra a month.
2. Max out my 401k ($18,000) and save $6,000 per annum after tax or in a backdoor ROTH.

Please ignore my pre-tax math error. :)

Option 1 will enable me to pay off my mortgage in 10 years but I lose 10 years worth of savings. This seems a high price to pay.

I *think* that option 2 is the clear econometric winner due to reduction in SRR and the expected return due to the long-term expected return from equities being greater than the mortgage rate. And this holds even if I don't count the benefit of the expansion in tax-favored space.

Oh, and Livesoft, the quote in your original post is a bit misleading. It implies that the author is recommending borrowing for the lump-sum investment of their entire retirement savings at the start of their career. The author does *not* recommend this in the full article. I think this thread went sideways due to that misunderstanding.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by The Wizard » Mon May 29, 2017 1:04 am

KlangFool wrote:Folks,

I might be overstating the obvious. But, here it goes.

1) If a person's retirement expenses are substantially supported by a pension and/or social security, the person is less reliant on the investment for support. Then, the person is less exposed to the SRR...
Yes, I pointed this out a while ago upthread.

I was in no rush to pay off my mortgage in my latter working years. Now in retirement, I only have a modest HELOC balance. It has a monthly payment of $400, though I usually pay $1000. And when I pay that completely off before long, I'll have a nice uptick in discretionary income...
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by JamesSFO » Mon May 29, 2017 2:10 am

VaR wrote:I see at least a few opinions in this thread that are psychological rather than econometric - mostly about the comfort of paying off one's mortgage early.

I'd like to pose a middle-of-the-road hypothetical. Let's say I've followed at least some of KlangFool's advice and have purchased a reasonable sized home that is no more than 3x my annual income and have put 20-25% down on a 15-year mortgage at 3%. I am also employed at a company offering good low-cost 401k investment choices but with no matching. I have a 6 month emergency fund in cash at the credit union at 1.25% interest. I have calculated my budget and have the ability to save $2,000 a month after all expenses.

My choices are:
1. Pay off mortgage more quickly at $2,000 extra a month.
2. Max out my 401k ($18,000) and save $6,000 per annum after tax or in a backdoor ROTH.

Please ignore my pre-tax math error. :)

Option 1 will enable me to pay off my mortgage in 10 years but I lose 10 years worth of savings. This seems a high price to pay.

I *think* that option 2 is the clear econometric winner due to reduction in SRR and the expected return due to the long-term expected return from equities being greater than the mortgage rate. And this holds even if I don't count the benefit of the expansion in tax-favored space.

Oh, and Livesoft, the quote in your original post is a bit misleading. It implies that the author is recommending borrowing for the lump-sum investment of their entire retirement savings at the start of their career. The author does *not* recommend this in the full article. I think this thread went sideways due to that misunderstanding.
Thanks for anchoring to a specific scenario and I think in most cases people here would vote for #2. However, I think if you modify the scenario to having say $2,500 available each month to invest is where the split arises.

1') Do 401K/Roth IRA and put $500/month towards house
2') Do 401K/Roth IRA and put $500/month into investments (mortgaging your retirement)

Economically which of those two do you think is better? FWIW, I picked 1' for me and have no regrets. But I did it more for peace of mind/flexibility. I can now say F-U to my job if I wanted, etc.

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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by IlliniDave » Mon May 29, 2017 6:13 am

Well, I'm 30 years into it so no point in rehashing what I maybe coulda done decades ago. Certainly the leveraged high equity approach is one where the numbers can appear to work for someone with decades left to work, regardless of the source of the leverage. Since I was investing for a good 20 years while carrying a mortgage, and other debt, technically I was leveraging my investments, but that never occurred to me at the time. Everyone I knew personally who talked about deliberately using a leveraged approach stopped either in 2000-2002 or 2007-2009. So I can't say I know anyone who consciously employed such a strategy to brilliant success. Even though we don't like to admit it, the large majority of humans are driven by emotion rather than reason when push comes to shove . Mr. Spock was a great fiction character. So ultimately I agree with what grabiner said above, it's most important to come up with a plan one can stick with.

I retired my mortgage early. The reason I did so was because I went through a layoff scare in 2011 at a time and in a career field that being on the cusp of 50 and freshly laid off made sliding into an equivalent job nearly impossible. At the time NPR news was following a number of "underemployed" individuals whose demographics paralleled mine quite well. At a certain age excess stress can become deadly in a hurry, so when the threat of layoff abated, I opted to lower my risk profile by eliminating all my debt (while being careful to maintain significant liquidity).

To manage SRR I took a different approach. I made a game of dialing back my lifestyle spending even though my income did not require it. That allowed me to save more aggressively (it took less than two years to "replace" the amount it took to pay off the mortgage) and I learned a lot about myself in the sense that I have an equal or greater degree of contentedness with a more humble lifestyle (really, a more thoughtful lifestyle). If you are looking at, say, a 3% withdrawal rate, for every $1,000/mo you eliminate from your lifestyle spending means there is $400K you don't have to accumulate. So my tactic was to identify a lower threshold lifestyle that I am content with, target that as ~2% WR, then enjoy a 3-4% WR as long as conditions warrant it, knowing that I can drop down to 2% without consigning myself to misery. That whole epiphany put me on a path to early retirement. A moderate lifestyle is not an approach that everyone would find desirable, which is completely understandable, but it's worthy of at least a thought experiment if you're wondering how you'll get by on moderate assets.

It's really all about ratios, so one can count on a machine-like temperament to maximize volatility risk in an attempt to outsize a higher-cost lifestyle, or one can moderate lifestyle to minimize the required accumulation and need for risk. Most of us operate in the middle. In my case I was sort of unwittingly invested 100% in equities early on (I just bought funds in my 401k without any real thought about the implications or having an AA) and even now am 70-75% equities. I have a lot of risk tolerance for investment volatility, not so much for disruptions to day-to-day lifestyle which to me are exacerbated by carrying debt.
Don't do something. Just stand there!

grok87
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by grok87 » Mon May 29, 2017 6:28 am

IlliniDave wrote:Well, I'm 30 years into it so no point in rehashing what I maybe coulda done decades ago. Certainly the leveraged high equity approach is one where the numbers can appear to work for someone with decades left to work, regardless of the source of the leverage. Since I was investing for a good 20 years while carrying a mortgage, and other debt, technically I was leveraging my investments, but that never occurred to me at the time. Everyone I knew personally who talked about deliberately using a leveraged approach stopped either in 2000-2002 or 2007-2009. So I can't say I know anyone who consciously employed such a strategy to brilliant success. Even though we don't like to admit it, the large majority of humans are driven by emotion rather than reason when push comes to shove . Mr. Spock was a great fiction character. So ultimately I agree with what grabiner said above, it's most important to come up with a plan one can stick with.
...
It's really all about ratios, so one can count on a machine-like temperament to maximize volatility risk in an attempt to outsize a higher-cost lifestyle, or one can moderate lifestyle to minimize the required accumulation and need for risk. Most of us operate in the middle. In my case I was sort of unwittingly invested 100% in equities early on (I just bought funds in my 401k without any real thought about the implications or having an AA) and even now am 70-75% equities. I have a lot of risk tolerance for investment volatility, not so much for disruptions to day-to-day lifestyle which to me are exacerbated by carrying debt.
Thanks, very helpful.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

Grt2bOutdoors
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by Grt2bOutdoors » Mon May 29, 2017 7:01 am

I read most of the posts, my question is simple:
How Many who posted would be so confident with those responses they posted had this been 2008/2009? Your 100% equity portfolio would have been cut in half - and don't bank on being rescued If there is ever a next time. You play with fire when you use leverage, you can be burned, severely sometimes.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

NiceUnparticularMan
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Re: DON'T pay off your mortgage; instead reduce Sequence of Return Risk

Post by NiceUnparticularMan » Mon May 29, 2017 7:24 am

I don't think you have to be 100% in equities to make this work for you.

I do think you likely have to be 0% in nominal long bonds, because at least if you are talking about the same rate environment, usually a mortgage will be roughly equivalent to a negative long bond. But even then, if these instruments are from different rate environments, then you could potentially hold both. I strongly suspect if rates go up a lot, not a lot of people will still be tempted to pay off sub-4% mortgages.

But the same logic doesn't apply to short-term fixed instruments, or for that matter inflation-adjusted instruments. Both of those are different from nominal long bonds, such that a strategy could reasonably have those even while going "negative" in the nominal long bond space.

And I have personally done all of this. We are holding onto a 30-year mortgage (and actually recently refinanced it yet again). And we hold no long bonds, because that would indeed be largely pointless. We are also holding onto my student loans, which I consolidated and fixed at well below current market rates. Technically we could hold both that and long bonds, but I am not bothering.

But we are not 100% equities. We also hold non-equities in the form of short-term instruments (mostly a stable-value fund and a cash-balance pension, and eventually we will use the G Fund too). All this is providing us with emergency spending reserves, emergency contribution reserves, rebalancing reserves, and so on. It just doesn't include nominal long bonds.

We'll see how it works out. But I do think the basic logic of being not only 0% but negative in the nominal long bond space when in accumulation is pretty solid. However, understanding it is really specific to that space may help folks understand how it is even less extreme of a position than you might think.

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