New home, new mortgage?

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tmthyp
Posts: 3
Joined: Wed Aug 05, 2020 11:10 pm

New home, new mortgage?

Post by tmthyp »

This is a slightly different take on the argument over whether to pay off mortgages that always seem to get plenty of opinions, which is what I'm looking for.
I'm 67, wife is 65. I still work in what may be the world's best job (so it's hard to quit), with income about $200,000 a year.
We just bought a home in a 55-plus community with lots of golf and other activities. Because of the hyper hot market we had to pay cash to get the house ($780,000), which was a bit of a stretch but the only way to make it happen. The good news is we should get more for the house we're selling, so it all comes out in the wash.
We're intending this to be our home into retirement, which inevitably will come (I'm guessing 1-2 years). Since we paid cash my immediate reflex was to look for a mortgage of $400-500,000 when we move.
But I'm having thoughts about the advantages of a paid off house, too. Looking for advice on whether to take out a mortgage and, if we do, how much.
Here are our basic financials:

Income 200k, for now.
When retired will take SS at 70 and have a pension. Together they total about 100k a year.
If I don't take out a mortgage we will have about $1.4 million in retirement funds. If I do, that will be near the $2 million mark.
We have no other debt, other than a car lease. We pay our credit cards off each month and our kids are grown and on their own.
Our expenses right now are probably about 80k a year.

So, do I take out a mortgage and, if so, for how much?
Or do I go with the theory that a paid off house is the best retirement gift I can give myself?
Thanks in advance for your help.
squirm
Posts: 3235
Joined: Sat Mar 19, 2011 11:53 am

Re: New home, new mortgage?

Post by squirm »

Everyone capable of paying off their mortgage early frets over this, there is no right or wrong answer it's really a personal preference. Perhaps the easiest is to pay half and see how you feel over time. Some people would rather have the cash but a mortgage and others vice versa. Personally I would hate debt in retirement.
LittleMaggieMae
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Re: New home, new mortgage?

Post by LittleMaggieMae »

When retired will take SS at 70 and have a pension. Together they total about 100k a year.
Not being morbid - but you should probably consider what income will be available with "survivor" benefits. I'm guessing you will want to insure that there's enough income to cover all the monthly bills when there is only one of you still living in the house. Don't forget income taxes might be dramatically different when filing single versus Married Filing Joint.

That might influence weather you want the mortgage or not.
59Gibson
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Re: New home, new mortgage?

Post by 59Gibson »

In a few years you'll be retired w/ $100k/yr coming in(pension, SS) with 80k expenses. That's not including 1.4 mil. portfolio.. Add another 40-60k. Are there legacy plans to max out the next 40-50 yrs? otherwise why bother w/ a mortgage.
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JoeRetire
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Re: New home, new mortgage?

Post by JoeRetire »

tmthyp wrote: Tue Apr 06, 2021 11:46 am When retired will take SS at 70 and have a pension. Together they total about 100k a year.
Our expenses right now are probably about 80k a year.
What happens if one of you dies? How well is the other covered?

Do you expect your expenses to change in retirement? If not, then I don't see that it matters much if you have a mortgage or not. You have some retirement savings that you won't need to touch since all your expenses are covered by your income.

Do whatever pleases you more.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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Watty
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Re: New home, new mortgage?

Post by Watty »

tmthyp wrote: Tue Apr 06, 2021 11:46 am So, do I take out a mortgage and, if so, for how much?
I would pay cash for two reasons;

1) If your asset allocation is 50/50 and you get a $500K mortgage then you would be buying $250K in bonds that are paying a bit over 1%. Paying a 3%(ish) mortgage to invest a lot of the money at a lower interest rate makes it harder to come out ahead.

2) Even though interest rates are low investing the money and earning a higher return is harder than it sounds because you have sequence of returns risk. Here is a simplistic example that I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: New home, new mortgage?

Post by delamer »

I’m a little confused by your numbers.

What do you have in liquid savings now? How much will you net on the sale of your current home?

How much of a mortgage will you qualify for based on your pension plus withdrawals from your savings?

Will your expenses change in retirement?
psychoslowmatic
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Re: New home, new mortgage?

Post by psychoslowmatic »

I could be wrong, but if you’ve already bought the house with cash, wouldn’t any loan you get now be considered cash out? So it’d have both a higher rate and the interest isn’t deductible? Please correct if I’m wrong
Topic Author
tmthyp
Posts: 3
Joined: Wed Aug 05, 2020 11:10 pm

Re: New home, new mortgage?

Post by tmthyp »

Thanks for the replies, good to get feedback.
A new mortgage is technically a refi so the rate is a bit higher, 3.37 was my last quote.
The savings numbers are based on what I'll have after selling my house, depending on mortgage.
I don't expect much higher expenses in retirement, one of the reasons we bought the house was to lock in our future home. Even with a mortgage in the $450,000 range it doesn't come out much more than our current home.
The good news is in this crazy market my current home should sell fast and at a top price.

Basically, I was looking at a mortgage so I could pay back retirement IRA funds within 60 days to avoid having to pay taxes on the withdrawals. But my house should sell for enough so I don't need to do that.
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