How to analyze having a paid-off mortgage in retirement?

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Afty
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How to analyze having a paid-off mortgage in retirement?

Post by Afty »

It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
KlangFool
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Re: How to analyze having a paid-off mortgage in retirement?

Post by KlangFool »

OP,

In my case,

1) EF = 120K

2) Portfolio = 1.4 million

3) 300K mortgage @ 3.49% -> 15K loan payment per year.

4) Annual expense = 60K per year. PITI = 20K per year.

I choose not to pay off the mortgage until my portfolio is 1.8 million.

300K = 20 years of 15K loan payment. It does not make sense for me to pay off the mortgage.

KlangFool
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celia
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Re: How to analyze having a paid-off mortgage in retirement?

Post by celia »

Not only does a paid off mortgage lower your living expenses, but it gives you a sense of security. The house's value won't be volatile, but don't think of it as an investment, but rather a lifestyle need (you need to live somewhere).

You can also do some calcs to see what happens when you get a mortgage for half the value and invest the equity. Then you would have more assets throwing off distributions and capital gains. What does that due to your tax bracket to have that new income, unless you have enough to itemize your deductions?
conservativeinvestor
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Re: How to analyze having a paid-off mortgage in retirement?

Post by conservativeinvestor »

It depends on the interest rate of the mortgage and your expected portfolio return.

If you have, or refinance to one of the low interest rates currently available then any extra money you would use to payoff the mortgage early would be better invested in the market, assuming 7% annual returns.

On the other hand having a sense of security and lower monthly retirement expenses can help you sleep much better at night.
delamer
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Re: How to analyze having a paid-off mortgage in retirement?

Post by delamer »

If you’d need to withdraw from your portfolio to pay your monthly mortgage, then having no mortgage does reduce your sequence of returns risk.

The mortgage or no mortgage in retirement is one of the most frequently discussed topics on the forum. Ultimately, personal preference is a big part of the decision — as nice as it would be if it was simply numbers-driven.

Do remember that your property taxes and homeowner’s insurance premium, which are often included in the monthly mortgage payment, will not disappear even if you pay off the mortgage.
CoAndy
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Re: How to analyze having a paid-off mortgage in retirement?

Post by CoAndy »

Also, if one has to pull a lot more from their portfolio as they otherwise would because they still have a mortgage payment, that would increase their taxable income thus placing them in a higher tax bracket. That could also have implications in other areas (health insurance for example).
MathWizard
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Re: How to analyze having a paid-off mortgage in retirement?

Post by MathWizard »

It's cashflow that is important. Reducing expenses means lowering needed cash flow.

Also, if you carry a mortgage, consider it as negative bond, essentially adds to the equity portion of
your portfolio, meaning you have increased volatility risk as if the amount of the mortgage were in
equities.

Run some monte-carlo calculations to see which is better, both on average/median and worst case.

If you pay off the mortgage, you also have an asset free and clear. My plan B is to cut spending.
Plan C involves a reverse mortgage.
aristotelian
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Re: How to analyze having a paid-off mortgage in retirement?

Post by aristotelian »

The way I think of it:

1. I want bonds to reduce volatility, even if that reduces long term returns. I do not have the need or willingness to be 100% stocks. Certainly not more than 100% stocks. Leveraging debt to increase returns also increases risk. The logic of leverage is the exact opposite of my reasons for holding bonds. The only time using mortgage for leverage makes logical sense is if you are already 100% stock investor seeking even greater risk/return.

2. Mortgage interest drags against bond income. Regardless of how mortgage interest compares to potential stock returns, it loses compared to risk free return from bonds or cash.
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Watty
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Watty »

One great thing about having a paid off house is that I do not have to pay taxes on the "imputed rent"(Google this). If I had to raise the money to pay rent or a mortgage payment then selling investments in a taxable account or making IRA withdrawals could cause me to pay a lot of taxes. I should be able to structure my income so that we pay very little if any in income taxes once we both start Social Security.

It also helps that I live in a low to medium cost of living area but with a paid off house our Social Security checks will be just about enough to pay for our core living expenses if we really needed to.

Another thing is that we look at our home equity as being a safety net in case long term care is needed. If only one of us is surviving when LTC is needed then the house can be sold to pay for LTC, It would be more complicated if we are both surviving when LTC is needed but there are also options like a reverse mortgage.

One caveat though is that we have a house that is a reasonable size and cost. If you had one or two people living in an expensive McMansion then doing something like renting an apartment could make a lot more sense.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by quantAndHold »

A lot of this is a dupe of Watty's post, but I'll post it anyway...

While working, I don't see any real advantage for most people to have a paid off house. It really depends on interest rates, the terms of the mortgage, and the investment environment.

For a retiree who is living mostly off of investments, though, with no pension, or not enough of one to pay living expenses, having a home free and clear has some advantages. Our income is driven by our spending, since we have to sell investments to pay living expenses, so not having a mortgage reduces our living expenses, which reduces the amount of income tax we pay. If we had a mortgage, that would be another $20-30k that we'd need to liberate (and pay taxes on) from the investment accounts every year. The other benefit of reduced living expenses is we're less at the mercy of the markets, because we don't have to come up with as much money every month. Like Watty said, we could live on our Social Security if we had to, even in VHCOL Southern California.

The third thing is that the home equity is kind of the extreme old age version of an emergency fund. Our plan C or D or whatever for funding something like long term care is either a reverse mortgage or selling the house. An equivalent amount of TIPS would provide the same emergency fund, but until the emergency actually happens, we can live in the house. We can't live in a pile of TIPS.
Yes, I’m really that pedantic.
reln
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Re: How to analyze having a paid-off mortgage in retirement?

Post by reln »

Afty wrote: Wed Jul 01, 2020 11:39 am It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
Yes, having a paid off mortgage is less risky in the short term view of risk. But it can be more risky in the long term view of risk (opportunity cost). Similar to how bonds are less risky than stocks in the short term but more risky in the long term. It's a trade off in which you balance you're own priorities.
MrDrinkingWater
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Re: How to analyze having a paid-off mortgage in retirement?

Post by MrDrinkingWater »

Afty wrote: Wed Jul 01, 2020 11:39 am It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
If your portfolio has a risk-adjusted return that is greater than the risk-adjusted interest rate costs that you are paying on the money that you are "renting", then staying invested, and withdrawing funds from your portfolio to pay the mortgage slowly, is probably a better deal. You might be very able to feel secure and sleep well at night with that strategy, maybe better than you would sleep well at night by owning the home free-and-clear, and having a smaller investment portfolio.

Review your tax forms to confirm that you can or are itemizing or taking allowed deductions correctly, like a mortgage interest paid deduction, going forward. For some folks, the new larger standard deduction and having zero exemptions may not be as good of a deal as the previous standard deduction with exemptions.

If you don't have a State And Local Tax deduction limitation (deductions of state and local income, sales, and property taxes limited to $10,000), then having a mortgage in retirement might be an okay thing for you as well.
hudson
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Re: How to analyze having a paid-off mortgage in retirement?

Post by hudson »

Afty wrote: Wed Jul 01, 2020 11:39 am It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
I don't think you can find the best alternative unless you know what future returns are. In other words, nobody knows. It can't be done. One could only speculate.
You might be able to estimate it using past returns....to me, that's a shot in the dark.
If I were you, I would come up with a plan that makes sense to you and go with it. Keep following that plan as long as it makes sense to you.
My plan was to have no debt at age 65; that made my retirement calculations easier.
Klangfool has a plan that looks promising.
adamthesmythe
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Re: How to analyze having a paid-off mortgage in retirement?

Post by adamthesmythe »

hudson wrote: Wed Jul 01, 2020 3:50 pm
Afty wrote: Wed Jul 01, 2020 11:39 am It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
I don't think you can find the best alternative unless you know what future returns are. In other words, nobody knows. It can't be done. One could only speculate.
That's what I think. Quantitative analysis can't take you very far because one crucial input is unknown and unknowable.

That leaves the comfort issue. I feel better about having the mortgage paid off.
ohboy!
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Re: How to analyze having a paid-off mortgage in retirement?

Post by ohboy! »

KlangFool wrote: Wed Jul 01, 2020 11:45 am OP,

In my case,

1) EF = 120K

2) Portfolio = 1.4 million

3) 300K mortgage @ 3.49% -> 15K loan payment per year.

4) Annual expense = 60K per year. PITI = 20K per year.

I choose not to pay off the mortgage until my portfolio is 1.8 million.

300K = 20 years of 15K loan payment. It does not make sense for me to pay off the mortgage.

KlangFool
Isn’t your income and age an important part of this story?
KlangFool
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Re: How to analyze having a paid-off mortgage in retirement?

Post by KlangFool »

ohboy! wrote: Wed Jul 01, 2020 4:26 pm
KlangFool wrote: Wed Jul 01, 2020 11:45 am OP,

In my case,

1) EF = 120K

2) Portfolio = 1.4 million

3) 300K mortgage @ 3.49% -> 15K loan payment per year.

4) Annual expense = 60K per year. PITI = 20K per year.

I choose not to pay off the mortgage until my portfolio is 1.8 million.

300K = 20 years of 15K loan payment. It does not make sense for me to pay off the mortgage.

KlangFool
Isn’t your income and age an important part of this story?
ohboy!,

Please note that OP's question is in regards to "in retirement". Income and age do not come into play.

KlangFool
KlangFool
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Re: How to analyze having a paid-off mortgage in retirement?

Post by KlangFool »

adamthesmythe wrote: Wed Jul 01, 2020 4:24 pm
hudson wrote: Wed Jul 01, 2020 3:50 pm
Afty wrote: Wed Jul 01, 2020 11:39 am It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
I don't think you can find the best alternative unless you know what future returns are. In other words, nobody knows. It can't be done. One could only speculate.
That's what I think. Quantitative analysis can't take you very far because one crucial input is unknown and unknowable.

That leaves the comfort issue. I feel better about having the mortgage paid off.
To each its own. I feel very uncomfortable paying off my mortgage. Hence, I don't.

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Re: How to analyze having a paid-off mortgage in retirement?

Post by Toons »

We didn't do any number crunching years ago when we paid off the mortgage,
We just didn't want think about it any more as we approached retirement
:happy
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Re: How to analyze having a paid-off mortgage in retirement?

Post by 123 »

celia wrote: Wed Jul 01, 2020 12:53 pm Not only does a paid off mortgage lower your living expenses, but it gives you a sense of security. The house's value won't be volatile, but don't think of it as an investment, but rather a lifestyle need (you need to live somewhere)...
+1 While a paid off mortgage doesn't always make financial sense the sense of security it provides can be incalcuable. The mortgage is often the biggest monthly expense for many households. Once I were laid-off from a magacorp. It didn't particularly bother me because I had significant reserves and had a paid off mortgage (many of those reserves were the result of aggressively paying down the mortgage). When I casually mentioned the layoff to a friend he said he didn't understand how I could be so calm, that he would be "sweating bullets" if he was laid off due to his mortgage.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by cantabtim »

quantAndHold wrote: Wed Jul 01, 2020 2:48 pm A lot of this is a dupe of Watty's post, but I'll post it anyway...

While working, I don't see any real advantage for most people to have a paid off house. It really depends on interest rates, the terms of the mortgage, and the investment environment.

For a retiree who is living mostly off of investments, though, with no pension, or not enough of one to pay living expenses, having a home free and clear has some advantages. Our income is driven by our spending, since we have to sell investments to pay living expenses, so not having a mortgage reduces our living expenses, which reduces the amount of income tax we pay. If we had a mortgage, that would be another $20-30k that we'd need to liberate (and pay taxes on) from the investment accounts every year. The other benefit of reduced living expenses is we're less at the mercy of the markets, because we don't have to come up with as much money every month. Like Watty said, we could live on our Social Security if we had to, even in VHCOL Southern California.

The third thing is that the home equity is kind of the extreme old age version of an emergency fund. Our plan C or D or whatever for funding something like long term care is either a reverse mortgage or selling the house. An equivalent amount of TIPS would provide the same emergency fund, but until the emergency actually happens, we can live in the house. We can't live in a pile of TIPS.
I've spent 35 lucrative years in high-tech, lived and worked on three continents, been employed by start-ups and mega-corps, managed dullards and high-performing crazies, and invested in volatile stock markets through booms, recessions, wars, terrorist strikes and pandemics - using Boglehead principals of course.

At the end of October both my husband and I are retiring. A little early, 57 & 56, but we feel we've stressed out quite enough.

I want retirement to be fulfilling and exciting. I also want it to be low stress and relaxing. Yes, there's still property taxes and utilities, but knowing we own free and clear our modest, cheap to run, and perfectly (for us) located condo, and have minimized our required monthly spending, is going to make that discretionary spending all the more enjoyable and guilt-free.
Last edited by cantabtim on Wed Jul 01, 2020 4:50 pm, edited 1 time in total.
Jags4186
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Jags4186 »

It makes sense to have a paid off your mortgage in retirement if you plan to have a conventional 30 year or so retirement.

30 year retirement safe withdrawal rate is 4%. Some here think that is too high and believe is 3%. Let’s use 4%.

Say you have a $300,000 30 year mortgage at 3.25%. That gives you $1306/mo or $15,672 annually in expenses. $15,672/$300,000 is 5.22%. $15,672 / 4% is $391,800. You need $391,800 in assets at the start of retirement to support the mortgage payment on a 3.25% 30 year $300,000 mortgage.

If you are working off a 3% withdrawal rate you need $522,400 in assets at retirement to support the same loan.

Now, you may say “but that payment is reducing principal.” Yes it is. But it is not getting rid of your obligation to make that payment, and the principal is locked into the property until you sell the home or refinance resetting the cycle.

If your goal is to maximize the amount of money you have when you pass on, then yes holding a low interest rate mortgage makes sense because you are likely to get investing returns higher than the rate of the loan. However, if the goal is simply to make it through retirement with the least stress, paying off the loan makes a bunch of sense.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Nate79 »

Jags4186 wrote: Wed Jul 01, 2020 4:50 pm It makes sense to have a paid off your mortgage in retirement if you plan to have a conventional 30 year or so retirement.

30 year retirement safe withdrawal rate is 4%. Some here think that is too high and believe is 3%. Let’s use 4%.

Say you have a $300,000 30 year mortgage at 3.25%. That gives you $1306/mo or $15,672 annually in expenses. $15,672/$300,000 is 5.22%. $15,672 / 4% is $391,800. You need $391,800 in assets at the start of retirement to support the mortgage payment on a 3.25% 30 year $300,000 mortgage.

If you are working off a 3% withdrawal rate you need $522,400 in assets at retirement to support the same loan.

Now, you may say “but that payment is reducing principal.” Yes it is. But it is not getting rid of your obligation to make that payment, and the principal is locked into the property until you sell the home or refinance resetting the cycle.

If your goal is to maximize the amount of money you have when you pass on, then yes holding a low interest rate mortgage makes sense because you are likely to get investing returns higher than the rate of the loan. However, if the goal is simply to make it through retirement with the least stress, paying off the loan makes a bunch of sense.
+1 Great answer.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by KlangFool »

Jags4186 wrote: Wed Jul 01, 2020 4:50 pm It makes sense to have a paid off your mortgage in retirement if you plan to have a conventional 30 year or so retirement.

30 year retirement safe withdrawal rate is 4%. Some here think that is too high and believe is 3%. Let’s use 4%.

Say you have a $300,000 30 year mortgage at 3.25%. That gives you $1306/mo or $15,672 annually in expenses. $15,672/$300,000 is 5.22%. $15,672 / 4% is $391,800. You need $391,800 in assets at the start of retirement to support the mortgage payment on a 3.25% 30 year $300,000 mortgage.

If you are working off a 3% withdrawal rate you need $522,400 in assets at retirement to support the same loan.

Now, you may say “but that payment is reducing principal.” Yes it is. But it is not getting rid of your obligation to make that payment, and the principal is locked into the property until you sell the home or refinance resetting the cycle.

If your goal is to maximize the amount of money you have when you pass on, then yes holding a low interest rate mortgage makes sense because you are likely to get investing returns higher than the rate of the loan. However, if the goal is simply to make it through retirement with the least stress, paying off the loan makes a bunch of sense.
Jags4186,

Life is never as simple as that.

A) I am 55+ years old.

B) My annual expense is 60K per year with 20K PITI.

C) My portfolio is 1.4 million now.

D) My mortgage is 300K. If I pay it off, I save 15K per year.

E) My social security benefit at 67 years old is about 30K per year.

F) My AA is 60/40.

In summary, my danger zone is between now and 67 years old. Aka, the next 10 years. Paying off the 300K mortgage until I reach 67 years old is dangerous. It is a liquidity issue.

Everyone should do a cash flow analysis to verify what is safer for them.

KlangFool
Last edited by KlangFool on Wed Jul 01, 2020 5:38 pm, edited 1 time in total.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Mlm »

When the time comes for retirement decide what allows you to sleep well at night. Everyone's situation is different.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Watty »

Jags4186 wrote: Wed Jul 01, 2020 4:50 pm It makes sense to have a paid off your mortgage in retirement if you plan to have a conventional 30 year or so retirement.

30 year retirement safe withdrawal rate is 4%. Some here think that is too high and believe is 3%. Let’s use 4%.

Say you have a $300,000 30 year mortgage at 3.25%. That gives you $1306/mo or $15,672 annually in expenses. $15,672/$300,000 is 5.22%. $15,672 / 4% is $391,800. You need $391,800 in assets at the start of retirement to support the mortgage payment on a 3.25% 30 year $300,000 mortgage.

If you are working off a 3% withdrawal rate you need $522,400 in assets at retirement to support the same loan.

Now, you may say “but that payment is reducing principal.” Yes it is. But it is not getting rid of your obligation to make that payment, and the principal is locked into the property until you sell the home or refinance resetting the cycle.

If your goal is to maximize the amount of money you have when you pass on, then yes holding a low interest rate mortgage makes sense because you are likely to get investing returns higher than the rate of the loan. However, if the goal is simply to make it through retirement with the least stress, paying off the loan makes a bunch of sense.
There are a couple of things that you are missing.

You are missing taxes on the 3 or 4 percent spending.

The 4% SWR is also base on an inflation adjustment each year but with a fixed rate mortgage you would not need that.
Jags4186 wrote: Wed Jul 01, 2020 4:50 pm You need $391,800 in assets at the start of retirement to support the mortgage payment on a 3.25% 30 year $300,000 mortgage.


If you paid the house off instead then you would have a paid off house plus the extra $91,800 that would be left over that could be invested for 30 years.

I didn't try to crunch the numbers but how that would work out would be more complicated.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Jags4186 »

KlangFool wrote: Wed Jul 01, 2020 5:13 pm
Jags4186,

Life is never as simple as that.

A) I am 55+ years old.

B) My annual expense is 60K per year with 20K PITI.

C) My portfolio is 1.4 million now.

D) My mortgage is 300K. If I pay it off, I save 15K per year.

E) My social security benefit at 67 years old is about 30K per year.

F) My AA is 60/40.

In summary, my danger zone is between now and 67 years old. Aka, the next 10 years. Paying off the 300K mortgage until I reach 67 years old is dangerous. It is a liquidity issue.

Everyone should do a cash flow analysis to verify what is safer for them.

KlangFool
You say it is dangerous but have not defined the danger. The issue is pretty simple and there are two possibilities:

1) You pay off the mortgage. This protects you for market losses and prevents you from participating in market gains.

2) You hold a mortgage. This gives you market risk and allows you to participate in potential market gains.

Paying off the house removes an obligation. If you do not intend to leave the property, then the value of the property once paid off matters little. You have a free-ish place to live.

In your particular situation, I understand why you want to hold more cash as you are involuntarily early retired, kind of cutting it close with your assets, but have a new income stream coming which changes the equation 10 years down the line. For a typical person who retires at FRA and has no expected additional income streams coming in the future, reducing fixed expenses places less stress on the portfolio.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by firebirdparts »

Afty wrote: Wed Jul 01, 2020 11:39 am It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
Well it’s just the same old asset allocation question. You could hold 150% stocks and -50% house. That’s not really how old people invest. If you hold bonds and a mortgage, they cancel out.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by abuss368 »

Less demands on portfolio if no mortgage. This is important especially if in a bear market.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by abuss368 »

I plan to be debt free before retirement. Sure we will always have some type of car payment. But no mortgage!
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Rowan Oak »

Toons wrote: Wed Jul 01, 2020 4:43 pm We didn't do any number crunching years ago when we paid off the mortgage,
We just didn't want think about it any more as we approached retirement
:happy
+1
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Re: How to analyze having a paid-off mortgage in retirement?

Post by KlangFool »

Jags4186 wrote: Wed Jul 01, 2020 5:52 pm
KlangFool wrote: Wed Jul 01, 2020 5:13 pm
Jags4186,

Life is never as simple as that.

A) I am 55+ years old.

B) My annual expense is 60K per year with 20K PITI.

C) My portfolio is 1.4 million now.

D) My mortgage is 300K. If I pay it off, I save 15K per year.

E) My social security benefit at 67 years old is about 30K per year.

F) My AA is 60/40.

In summary, my danger zone is between now and 67 years old. Aka, the next 10 years. Paying off the 300K mortgage until I reach 67 years old is dangerous. It is a liquidity issue.

Everyone should do a cash flow analysis to verify what is safer for them.

KlangFool
You say it is dangerous but have not defined the danger. The issue is pretty simple and there are two possibilities:

1) You pay off the mortgage. This protects you for market losses and prevents you from participating in market gains.

2) You hold a mortgage. This gives you market risk and allows you to participate in potential market gains.

Paying off the house removes an obligation. If you do not intend to leave the property, then the value of the property once paid off matters little. You have a free-ish place to live.

In your particular situation, I understand why you want to hold more cash as you are involuntarily early retired, kind of cutting it close with your assets, but have a new income stream coming which changes the equation 10 years down the line. For a typical person who retires at FRA and has no expected additional income streams coming in the future, reducing fixed expenses places less stress on the portfolio.
Jags4186,

Within my cycles of friends and family members, I have not come across anyone that retires at FRA. So, it might be a typical person for you but it is highly abnormal for me.

KlangFool
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Re: How to analyze having a paid-off mortgage in retirement?

Post by smitcat »

KlangFool wrote: Wed Jul 01, 2020 6:36 pm
Jags4186 wrote: Wed Jul 01, 2020 5:52 pm
KlangFool wrote: Wed Jul 01, 2020 5:13 pm
Jags4186,

Life is never as simple as that.

A) I am 55+ years old.

B) My annual expense is 60K per year with 20K PITI.

C) My portfolio is 1.4 million now.

D) My mortgage is 300K. If I pay it off, I save 15K per year.

E) My social security benefit at 67 years old is about 30K per year.

F) My AA is 60/40.

In summary, my danger zone is between now and 67 years old. Aka, the next 10 years. Paying off the 300K mortgage until I reach 67 years old is dangerous. It is a liquidity issue.

Everyone should do a cash flow analysis to verify what is safer for them.

KlangFool
You say it is dangerous but have not defined the danger. The issue is pretty simple and there are two possibilities:

1) You pay off the mortgage. This protects you for market losses and prevents you from participating in market gains.

2) You hold a mortgage. This gives you market risk and allows you to participate in potential market gains.

Paying off the house removes an obligation. If you do not intend to leave the property, then the value of the property once paid off matters little. You have a free-ish place to live.

In your particular situation, I understand why you want to hold more cash as you are involuntarily early retired, kind of cutting it close with your assets, but have a new income stream coming which changes the equation 10 years down the line. For a typical person who retires at FRA and has no expected additional income streams coming in the future, reducing fixed expenses places less stress on the portfolio.
Jags4186,

Within my cycles of friends and family members, I have not come across anyone that retires at FRA. So, it might be a typical person for you but it is highly abnormal for me.

KlangFool
The average retirement age is 62 not FRA.
KlangFools spouse is still employed.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by inbox788 »

conservativeinvestor wrote: Wed Jul 01, 2020 1:12 pm It depends on the interest rate of the mortgage and your expected portfolio return.

If you have, or refinance to one of the low interest rates currently available then any extra money you would use to payoff the mortgage early would be better invested in the market, assuming 7% annual returns.

On the other hand having a sense of security and lower monthly retirement expenses can help you sleep much better at night.
All this and more. Depends on how you compensate for the change in cash flows. Mortgage rate costs more than return I get in bonds, so I pay off the mortgage and buy less bonds. This changes my perceived AA, but my mortgage adjusted AA is same.

The security from paid off mortgage makes it easier to be more aggressively invested in the market.

If you make all the adjustments and corrections, it wouldn't be all that different. Compare 3 middle aged teachers with identical net worth in LCOL area, say $250k home. Does it matter that one owns home outright, another just bought a home and a third still rents?
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Re: How to analyze having a paid-off mortgage in retirement?

Post by grabiner »

Having a home in retirement works similarly to having an annuity. The home is guaranteed to pay enough each month for you to live in it (except for maintenance and taxes). Therefore, you can afford to take more risk if you own a home than if you rent, as a 20% decline in your portfolio will not result in a 20% decline in your standard of living.

Once you own a home, the mortgage is a negative bond. If you still have 10 years on your mortgage, but you also have a 10-year bond ladder providing enough money each year to make the mortgage payments, you are in the same situation as if you had neither. An intermediate-term bond fund would serve the same purpose as a bond ladder, as it holds similar bonds.

If you have both bonds and a mortgage, it makes sense to sell the bonds to pay off the mortgage if the bond yield is significantly lower than the mortgage rate. (If it is close, you may want to keep the mortgage, as you retain the option of refinancing later, or of choosing to keep the mortgage if yields rise but pay it off if yields fall).

Whether you are in retirement or not is not particularly relevant to the comparison of bonds to a mortgage, since selling bonds to pay off a mortgage doesn't change your risk. If you aren't yet old enough to withdraw from your 401(k) or IRA penalty-free, paying down the mortgage might affect liquidity. But if you are 59-1/2, even if you are still working, selling bonds yielding 2% to pay down a 3% non-deductible mortgage is a risk-free benefit.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by wanderer »

A suggestion I read on this BH site was to consider the mortgage as a "negative" bond. This give you a higher effective stock/bond ratio. The duration of the negative bond is also probably longer than your TBM holdings too, again adding to effective volatility. Yes, the mortgage interest is tax deductible, but you are probably holding your bonds in a tax deferred IRA/401(k) with a future tax liability for their dividends/interest. You might becoming out ahead, but that's a heck of a tax calculation.

When you are young, this additional volatility risk is probably good as you have a longer time frame. But depending on your retirement situation, this "complication" might not be for you.

Only you can decide if your "effective" AA and net tax situation are appropriate for your situation.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by flaccidsteele »

Afty wrote: Wed Jul 01, 2020 11:39 am It's pretty common to have a goal of paying off your mortgage by retirement. But why? Obviously it reduces your expenses, but it also reduces the size of your nest egg. It's possible that it's better financially to have the larger nest egg.

How would you determine which alternative is better? How would you think about this in a quantitative way? For example, does not having a mortgage reduce sequence of returns risk?
Mortgage or not, I consider shelter an expense-generating saving account
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Re: How to analyze having a paid-off mortgage in retirement?

Post by sandramjet »

abuss368 wrote: Wed Jul 01, 2020 6:25 pm I plan to be debt free before retirement. Sure we will always have some type of car payment. But no mortgage!
Really? I'm just the opposite... I never want to have a car payment. Why owe $ on a depreciating asset, with no possible tax advantage vs a mortgage on a (usually) appreciating asset with some potential tax advantages?
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Re: How to analyze having a paid-off mortgage in retirement?

Post by 1789 »

KlangFool wrote: Wed Jul 01, 2020 5:13 pm
Jags4186 wrote: Wed Jul 01, 2020 4:50 pm It makes sense to have a paid off your mortgage in retirement if you plan to have a conventional 30 year or so retirement.

30 year retirement safe withdrawal rate is 4%. Some here think that is too high and believe is 3%. Let’s use 4%.

Say you have a $300,000 30 year mortgage at 3.25%. That gives you $1306/mo or $15,672 annually in expenses. $15,672/$300,000 is 5.22%. $15,672 / 4% is $391,800. You need $391,800 in assets at the start of retirement to support the mortgage payment on a 3.25% 30 year $300,000 mortgage.

If you are working off a 3% withdrawal rate you need $522,400 in assets at retirement to support the same loan.

Now, you may say “but that payment is reducing principal.” Yes it is. But it is not getting rid of your obligation to make that payment, and the principal is locked into the property until you sell the home or refinance resetting the cycle.

If your goal is to maximize the amount of money you have when you pass on, then yes holding a low interest rate mortgage makes sense because you are likely to get investing returns higher than the rate of the loan. However, if the goal is simply to make it through retirement with the least stress, paying off the loan makes a bunch of sense.
Jags4186,

Life is never as simple as that.

A) I am 55+ years old.

B) My annual expense is 60K per year with 20K PITI.

C) My portfolio is 1.4 million now.

D) My mortgage is 300K. If I pay it off, I save 15K per year.

E) My social security benefit at 67 years old is about 30K per year.

F) My AA is 60/40.

In summary, my danger zone is between now and 67 years old. Aka, the next 10 years. Paying off the 300K mortgage until I reach 67 years old is dangerous. It is a liquidity issue.

Everyone should do a cash flow analysis to verify what is safer for them.

KlangFool
Yes, if i were you i also WOULD NOT PAY it off. There could be a date where it makes more sense and easy decision in the future.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by abuss368 »

sandramjet wrote: Wed Jul 01, 2020 9:58 pm
abuss368 wrote: Wed Jul 01, 2020 6:25 pm I plan to be debt free before retirement. Sure we will always have some type of car payment. But no mortgage!
Really? I'm just the opposite... I never want to have a car payment. Why owe $ on a depreciating asset, with no possible tax advantage vs a mortgage on a (usually) appreciating asset with some potential tax advantages?
Just looking at cash flows. Nothing specific.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by 7eight9 »

We put down 50% and paid off the property within the year. This was in the mid 2000s. Fast forward a couple of years. Housing market crashed. At that juncture I wish we had put down 3% because we could have walked (non-recourse state) and bought for cash at a huge discount. It made sense at the time to pay it off because we wouldn't have been willing to gamble the money in the equity markets and fixed income was paying less than the mortgage. The positive thing about not having a mortgage is we live on app. $18K/year. Not hard to make ends meet even when unemployed.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by inbox788 »

wanderer wrote: Wed Jul 01, 2020 9:23 pm A suggestion I read on this BH site was to consider the mortgage as a "negative" bond. This give you a higher effective stock/bond ratio. The duration of the negative bond is also probably longer than your TBM holdings too, again adding to effective volatility. Yes, the mortgage interest is tax deductible, but you are probably holding your bonds in a tax deferred IRA/401(k) with a future tax liability for their dividends/interest. You might becoming out ahead, but that's a heck of a tax calculation.

When you are young, this additional volatility risk is probably good as you have a longer time frame. But depending on your retirement situation, this "complication" might not be for you.

Only you can decide if your "effective" AA and net tax situation are appropriate for your situation.
On top of all this, you can consider you investment in the home as a leveraged transaction. Rule of thumb is that residential real estate returns 3% annually with a wide variance, lots of costs and illiquidity. You can pay cash and own a property outright getting back 3% returns which is bond like. If you borrow 80% and only invest 20%, that's about 5:1 leverage, so you're getting back about 15% ROIC (return on invested capital), which is more stock like. When you've paid off your mortgage principal half way so 2:1 leverage, it's a little like a 50:50 portfolio, which occurs about 2/3 of the way thru a 30 year term. In a way, buying a home with a mortgage is on a self adjusting glidepath that is quite reasonable for many folks, even if they don't realize what's happening or why.

You may want to compare your investment portfolio to your home equity and see which one you want to be exposed to more, the market or real estate. Some folks want more of the latter and if the home isn't enough, they buy rentals and become landlords or add REITs. I'm satisfied with my home and market REIT weighing, so don't do any more than that.
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Retiring Before, at, or after FRA?

Post by hudson »

KlangFool wrote: Wed Jul 01, 2020 6:36 pm Within my cycles of friends and family members, I have not come across anyone that retires at FRA. So, it might be a typical person for you but it is highly abnormal for me.
KlangFool
When do they usually retire?
In my first career, education/state employee, many of my peers would retire around age 50...as soon as they reached the state's 30 year...full retirement. The took a "social security leveling option." The state covered their health insurance until age 65 and Medicare.
In my second career, I worked in a manufacturing plant. Because of health care, many workers retired just after age 65 with Medicare and probably Medicaid benefits. The numbers didn't work for me until I reached FRA (full retirement age) at 66.

Back to the OP.
Somebody probably already mentioned if you keep your mortgage, high inflation will help make payments....if there is high inflation.
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Re: Retiring Before, at, or after FRA?

Post by KlangFool »

hudson wrote: Thu Jul 02, 2020 7:22 am
KlangFool wrote: Wed Jul 01, 2020 6:36 pm Within my cycles of friends and family members, I have not come across anyone that retires at FRA. So, it might be a typical person for you but it is highly abnormal for me.
KlangFool
When do they usually retire?
Hudson,

2 at 62 years old. The rest earlier.

KlangFool
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Re: How to analyze having a paid-off mortgage in retirement?

Post by SmileyFace »

I simply looked at the decision as a guaranteed savings of interest. Yes - maybe I could have made more in the market or with certain aggressive bonds - but this is an unknown. Having my mortgage paid off (well before retirement) allows me to have a slightly more aggressive portfolio (more stocks) heading into retirement. I hold some iBonds for a similar reason - few investments provide such a risk-free guarantee.
Plan on remaining debt free heading into retirement (only debt I will take on are car-loans where the loans are 0% or so minimal my money makes more money sitting in the bank).
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Re: How to analyze having a paid-off mortgage in retirement?

Post by SmileyFace »

abuss368 wrote: Wed Jul 01, 2020 10:09 pm
sandramjet wrote: Wed Jul 01, 2020 9:58 pm
abuss368 wrote: Wed Jul 01, 2020 6:25 pm I plan to be debt free before retirement. Sure we will always have some type of car payment. But no mortgage!
Really? I'm just the opposite... I never want to have a car payment. Why owe $ on a depreciating asset, with no possible tax advantage vs a mortgage on a (usually) appreciating asset with some potential tax advantages?
Just looking at cash flows. Nothing specific.
I never got the depreciating/appreciating asset argument of holding a mortgage versus a car loan. Why not just evaluate post-tax interest rates. Since all my money is fungible - I see no reason why I would hold a 4% mortgage in favor of a 1% car loan.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by goodenyou »

Having a home value that was a small fraction of our net worth was our goal. We paid off our house when the rates were 5+%. It is a small fraction of our net worth and getting smaller every year. We want to relocate to our retirement destination in the next year, and we live in a market where our home will be very difficult to sell. We are willing to sell at a significant loss to move on because it is a small fraction of our net worth. We planned on paying cash for our next house, but if the rates stay very very low, it may be enticing to have a mortgage. The priority will be to keep the cost at a small fraction of net worth.
Last edited by goodenyou on Thu Jul 02, 2020 9:09 am, edited 1 time in total.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by cyclist »

grabiner wrote: Wed Jul 01, 2020 9:20 pm But if you are 59-1/2, even if you are still working, selling bonds yielding 2% to pay down a 3% non-deductible mortgage is a risk-free benefit.
I’m not sure that is true in our case. We’re retired with modest after-tax resources and currently living beneath the ACA cliff. Thereafter we plan to defer SS, and continue to limit income (to a lesser extent) for IRMA reasons.

Cash flow issues aside, any extra dollar we pull from bonds in our tax-advantaged portfolio to pay off our modest 3% mortgage is a dollar we might otherwise have instead used for Roth conversion.

I still consider paying our mortgage down (within our current cash flow constraints) but haven’t gone there yet.

Cyclist
Last edited by cyclist on Thu Jul 02, 2020 10:30 am, edited 1 time in total.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by delamer »

smitcat wrote: Wed Jul 01, 2020 7:56 pm
KlangFool wrote: Wed Jul 01, 2020 6:36 pm
Jags4186 wrote: Wed Jul 01, 2020 5:52 pm
KlangFool wrote: Wed Jul 01, 2020 5:13 pm
Jags4186,

Life is never as simple as that.

A) I am 55+ years old.

B) My annual expense is 60K per year with 20K PITI.

C) My portfolio is 1.4 million now.

D) My mortgage is 300K. If I pay it off, I save 15K per year.

E) My social security benefit at 67 years old is about 30K per year.

F) My AA is 60/40.

In summary, my danger zone is between now and 67 years old. Aka, the next 10 years. Paying off the 300K mortgage until I reach 67 years old is dangerous. It is a liquidity issue.

Everyone should do a cash flow analysis to verify what is safer for them.

KlangFool
You say it is dangerous but have not defined the danger. The issue is pretty simple and there are two possibilities:

1) You pay off the mortgage. This protects you for market losses and prevents you from participating in market gains.

2) You hold a mortgage. This gives you market risk and allows you to participate in potential market gains.

Paying off the house removes an obligation. If you do not intend to leave the property, then the value of the property once paid off matters little. You have a free-ish place to live.

In your particular situation, I understand why you want to hold more cash as you are involuntarily early retired, kind of cutting it close with your assets, but have a new income stream coming which changes the equation 10 years down the line. For a typical person who retires at FRA and has no expected additional income streams coming in the future, reducing fixed expenses places less stress on the portfolio.
Jags4186,

Within my cycles of friends and family members, I have not come across anyone that retires at FRA. So, it might be a typical person for you but it is highly abnormal for me.

KlangFool
The average retirement age is 62 not FRA.
KlangFools spouse is still employed.
If this average is based on when most people start taking Social Security, I am not sure that that is a good proxy for the average retirement age. People retire before they are eligible to claim, claim before they retire, retire and delay claiming, etc.

And since 62 is the most popular claiming age it is, by definition, one type of average (the mode) but it isn’t the mean age for claiming: https://www.usatoday.com/story/money/pe ... /35928543/
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Re: How to analyze having a paid-off mortgage in retirement?

Post by abuss368 »

DaftInvestor wrote: Thu Jul 02, 2020 8:22 am
abuss368 wrote: Wed Jul 01, 2020 10:09 pm
sandramjet wrote: Wed Jul 01, 2020 9:58 pm
abuss368 wrote: Wed Jul 01, 2020 6:25 pm I plan to be debt free before retirement. Sure we will always have some type of car payment. But no mortgage!
Really? I'm just the opposite... I never want to have a car payment. Why owe $ on a depreciating asset, with no possible tax advantage vs a mortgage on a (usually) appreciating asset with some potential tax advantages?
Just looking at cash flows. Nothing specific.
I never got the depreciating/appreciating asset argument of holding a mortgage versus a car loan. Why not just evaluate post-tax interest rates. Since all my money is fungible - I see no reason why I would hold a 4% mortgage in favor of a 1% car loan.
I agree. I look at cash flows. My car loans are 0% and I think maybe 0.9% (or maybe less). I don't worry about it. I no longer have itemized deductions so the mortgage interest is straight cash flows and no after tax.
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Re: How to analyze having a paid-off mortgage in retirement?

Post by Engaging in sloth »

I was self-employed. Paying off the mortgage early felt liberating and secure. Great decision. You don't make $ paying interest- EVER
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