retiring with a mortgage

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EnjoyIt
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retiring with a mortgage

Post by EnjoyIt » Sun Sep 11, 2016 4:56 pm

Has anyone here retired while still having a mortgage payment?
How was our sleep when the real estate bubble burst in 2009?
Would you do it again?

My parents are looking to retire soon. The plan is to sell their house in a HCOL area of which they have about 70% principal and then move to a LCOL area where they can purchase the house outright with the proceeds of the HCOL sale.
They are thinking of taking out a mortgage on 50% of the purchase price. Looking at current interest rates I assume they will get a 30 year loan at 3.25%-3.5% and they are unlikely to have enough itemized deductions to really have any interest rate deduction benefit to speak of. The goal is to take the extra cash and be able to invest it over long term. We expect the purchase price to be about $250k-350k.

Personally I think it is a horrible idea. Although dad would not worry too much about fixed expenses and recessions, mom would stress immensely. She is a worrier by nature and although I have projected a very comfortable retirement for them with their current SS and nest egg she is still concerned about not having enough. The math doesn't matter I guess.

Does anyone have any advice, thoughts, opinions. At the end of the day it is their money and they can obviously do whatever they want with it. I just want to make sure they make their decision with the most amount of information possible. My plan is to share this thread and everyones thoughts on the subject.


*****EDIT*****

Net worth about $1 million excluding house. Most of it is in a handful of individual stocks. I have recently convinced him to invest in bonds and about 10% are in bonds. He states that upon retirement he is looking to sell all stocks and invest in index funds. To be honest I do no fully believe that will happen. He has some very "hopeful" stocks in his portfolio. Some of these stocks are great candidates for tax loss harvesting :|

The plan is to retire within 1 year.
over the next 1.5 years they will just live on his SS a little over $25k a year and any cashflow from investments
then my mom will collect half his SS for the next 4 years, and then collect her own SS which will be higher than his.
That should give them almost $60k/yr

Based on this, I fear that they have way too much risk also having a mortgage. A recession right after they retire would devastate their portfolio and they will have to sell stocks at a severe loss to pay the bills. Especially considering they are so heavily invested in individual stocks.
Last edited by EnjoyIt on Mon Sep 12, 2016 1:32 am, edited 1 time in total.

littlebird
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Re: retiring with a mortgage

Post by littlebird » Sun Sep 11, 2016 5:05 pm

My thought is why do they need to spend $250-350K for a retirement home in a LCOL area? If it were me, I'd keep it under $200K and dispense with the mortgage.

cadreamer2015
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Re: retiring with a mortgage

Post by cadreamer2015 » Sun Sep 11, 2016 5:09 pm

I don't necessarily see a problem with retiring with a mortgage if you have built in the mortgage payments to your retirement budget. I'm semi-retired, and will be fully retired within a year I'd guess, and we are planning on retiring with a mortgage.

That said, it is not as easy to get a mortgage when you are retired as when you are working. If you don't have W-2 income or at least a two year track record of self-employment income showing on your tax returns you will probably not qualify for a mortgage under the standard income ratio underwriting standards. Some lenders will make what are called asset-depletion qualification mortgages, where they essentially take all you retirement assets, apply a factor (70%), divide by 30 years and say this is the annual income you can use to qualify for a mortgage.
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cheese_breath
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Re: retiring with a mortgage

Post by cheese_breath » Sun Sep 11, 2016 5:13 pm

cadreamer2015 wrote:I don't necessarily see a problem with retiring with a mortgage if you have built in the mortgage payments to your retirement budget. I'm semi-retired, and will be fully retired within a year I'd guess, and we are planning on retiring with a mortgage....
Exactly what I did, and I'd do the same thing again.
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retiredjg
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Re: retiring with a mortgage

Post by retiredjg » Sun Sep 11, 2016 5:14 pm

I had a mortgage when I retired. When I sold that house and moved, I got another mortgage by choice. I figured if the mortgage was 2.75% and deductible, I could do better investing the money. Having the mortgage was no big deal.

However, as I was getting the mortgage, I did note that some of the money going out would not have been necessary had I paid cash. It was probably only $2k or something, but it did get my attention during settlement of the papers. Second, I will likely fall into the zone of using standard deduction rather than individual deductions. So some of my comparison has changed from what I expected. I will have to compare investing the money to 2.75% interest instead of 2.06% interest.

However, I think the best answer is right in your message. "Although dad would not worry too much about fixed expenses and recessions, mom would stress immensely." It is hardly fair, when you have a choice, to ask one part of a couple to be uncomfortable just because the other part does not have concerns.

This seems to be a case where having a mortgage is a choice, not a necessity. Both people should be on board with the choice. Nobody needs to be uncomfortable in this situation so there is no need to choose that route.

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Re: retiring with a mortgage

Post by Stonebr » Sun Sep 11, 2016 5:17 pm

I'm like your mom, I just don't like debt. My wife is the same. We retired a few years ago without debt.

On the other hand, if your parents have plenty of assets (and I mean PLENTY) and could pay off the mortgage with a snap of the fingers even in a bear market like 2008, then there's a case to be made to take on risk and hold assets that might do better than the fixed, guaranteed rate that you pay the crooks at the bank. The tax deduction on mortgage interest was irrelevant for us -- low tax bracket -- so there was no compelling reason to bet the house (literally) on the stock market.
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O2sats
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Re: retiring with a mortgage

Post by O2sats » Sun Sep 11, 2016 5:20 pm

Everyone looks at debt differently.
Reading this forum has helped me see what debt really means to me-
"a noose around my neck"

I would pass on the 30 year mortgage to start retirement. Especially if your parents have plenty of assets to live comfortable.

furwut
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Re: retiring with a mortgage

Post by furwut » Sun Sep 11, 2016 5:21 pm

We just had a big long thread on the subject (with a lot of Ric Edelman discussion thrown in).

Ric Edelman's The Truth about Retirement on PBS

SGM
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Re: retiring with a mortgage

Post by SGM » Sun Sep 11, 2016 5:47 pm

The time to take added risk is when you are young and have a lot of human capital. When you are retired it is time to cut back on risk. Getting a mortgage in retirement is the last thing I would want to do. My tolerance for risk is much different now that I am retired. I haven't had a mortgage for 20 years. I was 100% in stocks for many years and now have dialed back.

furwut
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Re: retiring with a mortgage

Post by furwut » Sun Sep 11, 2016 5:59 pm

One of the big investment risks in early retirement is the sequence of returns risk. That is the risk that your investments suffer poor returns and you're forced to withdraw at a higher rate from your portfolio than prudent to meet expenses. To mitigate against this risk we try to determine what is the maximum SWR (Sustainable Withdrawal Rate) and keep our actual withdrawal rate below that. Of course no one can predict the future so we don't know what the SWR will be for our own retirements. The best we can do is look to the past and see what would has worked.

The research shows that the safest (never failed for a 30 year retirement) SWR is about 4%. Now there is a lot of controversy about what that really means and how much to rely on it given its a historical number and to quote the Doors - "The future's uncertain, and the end is always near".

Maybe a good exercise would be to draw up a really complete retirement budget. One with the mortgage and one without. Then determine what the WR would be in each scenario. First scenario would be no mortgage but reduced portfolio. Second would be with the mortgage payment but larger portfolio. If one of them requires a higher WR (by several tenths of a percent) then maybe that choice is too risky.

furwut
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Re: retiring with a mortgage

Post by furwut » Sun Sep 11, 2016 6:25 pm

It just occurred to me that we can isolate the mortgage and look at the WR to service it.

Assuming a 300K purchase price and we finance 50% @ 3.5% then monthly P&I is $674 or $8,088/yr. To service that we have the $150k we held back to invest. The first year withdraw rate on that is (8088/150,000) * 100 = 5.4%!

I think most on this board would find an initial retirement WR in the 3 - 4% perfectly acceptable with the more pessimistic among us (which includes me) adding the provision that we need to plan to reduce lifestyle if conditions warrant.

I think most of this board would be concerned starting retirement at 5.4%.

DetroitRick
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Re: retiring with a mortgage

Post by DetroitRick » Sun Sep 11, 2016 6:37 pm

Yep, retired in 2006 with a small (emphasis!) mortgage and still have one. Next house, I will either have a small one or an equity line of credit. We have no other debt, and it simply never bothered me. Not now, not ever. But you should do whatever allows you to sleep.

For me, keeping the mortgage loan at a modest level relative to assets and income works fine. Interest tax deduction increases my willingness just a little bit too. Plus, I just like the leverage that a mortgage provides.

In 2009 when homes in my area were down about 50% from 2005 high - no issue. Had I been underwater, yes, that would have bothered me a lot. But I was not even close. Several of my neighbors in a similar age bracket had to sell and really took baths, several were foreclosed. They would paint a different picture.

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Re: retiring with a mortgage

Post by drawpoker » Sun Sep 11, 2016 6:38 pm

EnjoyIt wrote:Has anyone here retired while still having a mortgage payment?
I did.
But I was not part of a married couple, a single, so the decision was 100% mine to make ( or screw up) with no worries of blowback from a spouse.

In this case, maybe the OP can sit down with his mother and find out just what her reasons are for opposing the idea. Find out if her fears are justified or not.

Does she fear a bear market is just around the corner......... :( :(

delamer
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Re: retiring with a mortgage

Post by delamer » Sun Sep 11, 2016 6:59 pm

To get the best answer regarding the mortgage requires more information. What will your parents income be? What are their other assets? Do they have Social Security and pensions that will cover their basic living expenses, including the mortgage? What happens to that income if one of them dies before the mortgage is paid off?

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Re: retiring with a mortgage

Post by KlangFool » Sun Sep 11, 2016 7:07 pm

OP,

How will the mortgage affect the amount of taxes that they pay?

They will have to generate about 12K worth of income / "cash flow" to pay the mortgage. How much tax will that costs?

Versus paying for a house with cash. No mortgage payment. More Roth conversion space and so on.

KlangFool

randomguy
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Re: retiring with a mortgage

Post by randomguy » Sun Sep 11, 2016 7:18 pm

EnjoyIt wrote: Personally I think it is a horrible idea. Although dad would not worry too much about fixed expenses and recessions, mom would stress immensely. She is a worrier by nature and although I have projected a very comfortable retirement for them with their current SS and nest egg she is still concerned about not having enough. The math doesn't matter I guess.
Has the mom really express this or are you projecting/assuming? It is your Dad's job/responsibility to decide if a mortgage is for him and then convince the wife (assuming again she is against getting one). Tell him why you are in favor of paying off the mortgage and move on. In reality this probably doesn't matter either way. Unless you catch an outlier result (i.e. you stick it all in stocks and panic sell when they drop 50% or the markets go up 15%/year for 15 years) it is unlikely that you are going to be looking at more than say a -25k to +150k range. You can decide the downside isn't worth the upside.

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Re: retiring with a mortgage

Post by gkaplan » Sun Sep 11, 2016 8:17 pm

I didn't retire with a mortgage, because I was a lifelong renter; however, when I retired in January 2014 and moved up to Portland, my brother and his wife, who had been living in Portland for about twenty-five years, urged me to buy because of the skyrocketing rents in Portland, which I did. I made a 62.5% down payment, though.
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grabiner
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Re: retiring with a mortgage

Post by grabiner » Sun Sep 11, 2016 9:09 pm

There is nothing wrong with retiring with a mortgage, as long as you also have the income stream to pay that mortgage, or the assets to pay it off, and you subtract that from your retirement resources.

For example, if you have $300K in your Roth IRA and a $300K mortgage, you could pay off the mortgage, but you might decide that it isn't worth paying off because you would prefer the tax-deferred growth in the Roth IRA. You are no worse off than if you had neither account (since you could pay off the mortgage if you wanted to), and you might be better off if the Roth IRA is invested in bonds which have a higher yield than the after-tax interest rate on the mortgage. Similarly, if you have mortgage payments of $20K per year, and you also have a pension or annuity paying $20K per year, you can use that income to pay off the mortgage.
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Watty
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Re: retiring with a mortgage

Post by Watty » Sun Sep 11, 2016 9:21 pm

There is a wiki on this if you have not seen it.

https://www.bogleheads.org/wiki/Paying_ ... _investing

Personally I think that it is a very bad idea for these reasons.

1) If they invest with anywhere near the old sayings of "your age in bonds" then they may be investing 65% or more of the money in bonds that are paying lower interest rates. For example with a $100K mortgage at 3.5% they would have an extra $100k to invest so they would be buying $65k worth of bonds that might be paying in the ballpark of 2% before paying taxes on the bond interest. That would make it hard to come out ahead by investing the remaining $35K in stocks.

2) 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 paid 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 break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.

3) The extra investment income that would be needed to pay the mortgage could cause then to pay more taxes on their Social Security and possibly have medicare surcharges.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

22twain
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Re: retiring with a mortgage

Post by 22twain » Mon Sep 12, 2016 12:02 am

EnjoyIt wrote:We expect the purchase price to be about $250k-350k.
delamer wrote:What are their other assets?
More specifically, what percentage of their net worth would the value of the house be?
My investing princiPLEs do not include absolutely preserving princiPAL.

EnjoyIt
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Re: retiring with a mortgage

Post by EnjoyIt » Mon Sep 12, 2016 1:26 am

OP here,

Thank you all for taking the time to respond. I honestly thought there would be more people against carrying debt during retirement.
I will try and answer some questions that were asked.

Net worth about $1 million excluding house. Most of it is in a handful of individual stocks. I have recently convinced him to invest in bonds and about 10% are in bonds. He states that upon retirement he is looking to sell all stocks and invest in index funds. To be honest I do no fully believe that will happen. He has some very "hopeful" stocks in his portfolio.

The plan is to retire within 1 year.
over the next 1.5 years they will just live on his SS and any cashflow from investments
then my mom will collect half his SS for the next 4 years, and then collect her own SS which will be higher than his.
That should give them almost $60k/yr

Based on this, I fear that they have way too much risk also having a mortgage. A recession right after they retire would devastate their portfolio and they will have to sell stocks at a severe loss to pay the bills. Especially considering they are so heavily invested in individual stocks.

I also updated OP above with this info. and am now curious if anyone's opinion will change.
furwut wrote:It just occurred to me that we can isolate the mortgage and look at the WR to service it.

Assuming a 300K purchase price and we finance 50% @ 3.5% then monthly P&I is $674 or $8,088/yr. To service that we have the $150k we held back to invest. The first year withdraw rate on that is (8088/150,000) * 100 = 5.4%!

I think most on this board would find an initial retirement WR in the 3 - 4% perfectly acceptable with the more pessimistic among us (which includes me) adding the provision that we need to plan to reduce lifestyle if conditions warrant.

I think most of this board would be concerned starting retirement at 5.4%.
I thought this was a very interesting analysis. Definitely convinces me to be debt free in retirement. I wonder what it will do when I present it to my dad.
KlangFool wrote:OP,

How will the mortgage affect the amount of taxes that they pay?

They will have to generate about 12K worth of income / "cash flow" to pay the mortgage. How much tax will that costs?

Versus paying for a house with cash. No mortgage payment. More Roth conversion space and so on.

KlangFool
KlangFool,
That is a very good point. To my understanding maybe 20% of their portfolio is in tax deferred accounts. The rest is in taxable and they have a decent amount of . . . lets call it "tax loss harvesting" available.
randomguy wrote: Has the mom really express this or are you projecting/assuming? It is your Dad's job/responsibility to decide if a mortgage is for him and then convince the wife (assuming again she is against getting one). Tell him why you are in favor of paying off the mortgage and move on. In reality this probably doesn't matter either way. Unless you catch an outlier result (i.e. you stick it all in stocks and panic sell when they drop 50% or the markets go up 15%/year for 15 years) it is unlikely that you are going to be looking at more than say a -25k to +150k range. You can decide the downside isn't worth the upside.
My mom is just nervous and stresses a lot. Although she specifically never said "no mortgage," based on my discussion with her she would prefer a less stressful portfolio. Although you are correct that the difference with or without a mortgage may be small, a bad sequence of events in the first 2 years of retirement could be very severe. Once they are both collecting SS everything will be gravy.

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Re: retiring with a mortgage

Post by cadreamer2015 » Mon Sep 12, 2016 7:25 am

I think a bigger issue than a mortgage or not is entering retirement with a 90% allocation to equities.
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furwut
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Re: retiring with a mortgage

Post by furwut » Mon Sep 12, 2016 8:11 am

cadreamer2015 wrote:I think a bigger issue than a mortgage or not is entering retirement with a 90% allocation to equities.
To which I'll add in just a few stocks.
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Re: retiring with a mortgage

Post by midareff » Mon Sep 12, 2016 8:18 am

cheese_breath wrote:
cadreamer2015 wrote:I don't necessarily see a problem with retiring with a mortgage if you have built in the mortgage payments to your retirement budget. I'm semi-retired, and will be fully retired within a year I'd guess, and we are planning on retiring with a mortgage....
Exactly what I did, and I'd do the same thing again.
I too see no issues with retiring with a mortgage that fits into your monthly budget. The last five or six years have been very kind to those who kept their capital invested. I agree that 90% stocks faces far too large a sequence of return risk.

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Re: retiring with a mortgage

Post by KlangFool » Mon Sep 12, 2016 8:22 am

OP,

What is the annual expense of your parent? How much of that is covered by the social security? How much of that need to be covered by investment income?

Those are the key questions that determine whether this is a workable plan.

KlangFool

retiredjg
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Re: retiring with a mortgage

Post by retiredjg » Mon Sep 12, 2016 8:46 am

EnjoyIt wrote: The rest is in taxable and they have a decent amount of . . . lets call it "tax loss harvesting" available.
To me this would argue for paying more (if not all) of the house. If there are a lot of losses, they can sell a lot of stocks without paying taxes. They may not have such a good opportunity in the future.

My mom is just nervous and stresses a lot. Although she specifically never said "no mortgage," based on my discussion with her she would prefer a less stressful portfolio.
Well, heck yeah. If the portfolio has been all stocks up to this point, she should prefer a less stressful portfolio! It seems to me that an all stock portfolio and a mortgage at their ages is very aggressive, maybe even a little reckless unless they have more money than they can ever spend. No wonder she is nervous.

Larry Swedroe talks about "ability to take risk" and their ability is considerably less than when they were younger. They need to adjust to that. Ten or twenty years ago, they could afford an aggressive portfolio because there was time for portfolio recovery before withdrawal begins. That is no longer true.

My personal experience is that a market crash after withdrawal begins is very hard on a portfolio. It took mine years to recover. In the meantime, all the people who were still accumulating kept saying how their recovery was so fast and people still comment on how short the crash was. Well, it wasn't all that short for some of us.

I don't think having a mortgage in retirement is inherently good or bad. It can work fine if there is adequate cash flow. I'm not sure that is the issue here. I think the more important issue may be the portfolio.

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Re: retiring with a mortgage

Post by Watty » Mon Sep 12, 2016 9:28 am

EnjoyIt wrote:The plan is to retire within 1 year.
over the next 1.5 years they will just live on his SS a little over $25k a year and any cashflow from investments
then my mom will collect half his SS for the next 4 years, and then collect her own SS which will be higher than his.
That should give them almost $60k/yr
The rules about doing a restricted application to just get her spousal benefit changed last year. If they were not 62 by the beginning of this year then they may not be able to do that. (Look up the details to double check that)

They also need to look at their numbers three ways, as a couple and as if either of them survives the other.

The problem is that if one of them dies then the survivor would only be getting one Social Security check and if your Mom does not live to be 70 then that could be less than $30K a year. The survivor would also be filing in the single tax brackets which are a lot higher.

It depends on a lot of factors but a safe withdrawal rate is normally considered to be about 4%.

https://www.bogleheads.org/wiki/Safe_withdrawal_rates

If one of them dies when the stocks are down then they could be in a bind between having a high mortgage payment, only one Social Security check, and higher taxes.
EnjoyIt wrote:Net worth about $1 million excluding house....

I have recently convinced him to invest in bonds and about 10% are in bonds.
So they would start out with $900K in stocks and $100K in bonds.

Stocks= $900K = 90%
Bonds= $100K = 10%

If they buy a house with a $200K mortgage then they would have another $200K from their home equity to invest then they would buy $180K in stocks and $20K in bonds.

It is not exact but in a lot of ways a mortgage is like a negative bond, you can search for old threads about this. Looking at it this way they would then have;

Stock= $900K + $180K = $1,080K = 108%
Bonds= $100K - $200k(mortage) + $20K = - $80k = -8%

So using the leverage that way would give them over 108% in stocks. :shock:

One of the early signs of dementia can be making poor financial decisions. It might be good to see if your mom can get your dad to talk to his doctor about that possibility.

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Re: retiring with a mortgage

Post by delamer » Mon Sep 12, 2016 10:30 am

If your parents had a million dollar portfolio that was invested in the Vanguard Balanced fund or a target-date retirement fund, plus their $60K in Social Security, there would be no concern about them carrying the mortgage.

It is the combination of the mortgage with an inappropriate portfolio that is putting them at risk.

I'd show your parents some information on the wiki about the lazy portfolios and try to steer them in the right direction. And your mother does not have to agree to anything she isn't comfortable with, including signing a mortgage.

One possibility, though, would be to get a smaller mortgage, like 25%. Married couples frequently "meet in the middle" on issues like this. Neither party is completely happy, but each gets some of what they want.

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Re: retiring with a mortgage

Post by The Wizard » Mon Sep 12, 2016 11:37 am

grabiner wrote: Similarly, if you have mortgage payments of $20K per year, and you also have a pension or annuity paying $20K per year, you can use that income to pay off the mortgage.
There's more to consider than that.
Assuming you already have the mortgage as you approach retirement, you should look at your net take-home pay after all long term savings are subtracted.
Then look at your anticipated retirement income. If it's comparable to your net working income then you should be OK with the mortgage in retirement, no lifestyle crunch...
Attempted new signature...

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Re: retiring with a mortgage

Post by ResearchMed » Mon Sep 12, 2016 11:52 am

EnjoyIt wrote:OP here,

Thank you all for taking the time to respond. I honestly thought there would be more people against carrying debt during retirement.
I will try and answer some questions that were asked.

Net worth about $1 million excluding house. Most of it is in a handful of individual stocks. I have recently convinced him to invest in bonds and about 10% are in bonds. He states that upon retirement he is looking to sell all stocks and invest in index funds. To be honest I do no fully believe that will happen. He has some very "hopeful" stocks in his portfolio.

The plan is to retire within 1 year.
over the next 1.5 years they will just live on his SS and any cashflow from investments
then my mom will collect half his SS for the next 4 years, and then collect her own SS which will be higher than his.

That should give them almost $60k/yr

Based on this, I fear that they have way too much risk also having a mortgage. A recession right after they retire would devastate their portfolio and they will have to sell stocks at a severe loss to pay the bills. Especially considering they are so heavily invested in individual stocks.

I also updated OP above with this info. and am now curious if anyone's opinion will change.
furwut wrote:It just occurred to me that we can isolate the mortgage and look at the WR to service it.

Assuming a 300K purchase price and we finance 50% @ 3.5% then monthly P&I is $674 or $8,088/yr. To service that we have the $150k we held back to invest. The first year withdraw rate on that is (8088/150,000) * 100 = 5.4%!

I think most on this board would find an initial retirement WR in the 3 - 4% perfectly acceptable with the more pessimistic among us (which includes me) adding the provision that we need to plan to reduce lifestyle if conditions warrant.

I think most of this board would be concerned starting retirement at 5.4%.
I thought this was a very interesting analysis. Definitely convinces me to be debt free in retirement. I wonder what it will do when I present it to my dad.
KlangFool wrote:OP,

How will the mortgage affect the amount of taxes that they pay?

They will have to generate about 12K worth of income / "cash flow" to pay the mortgage. How much tax will that costs?

Versus paying for a house with cash. No mortgage payment. More Roth conversion space and so on.

KlangFool
KlangFool,
That is a very good point. To my understanding maybe 20% of their portfolio is in tax deferred accounts. The rest is in taxable and they have a decent amount of . . . lets call it "tax loss harvesting" available.
randomguy wrote: Has the mom really express this or are you projecting/assuming? It is your Dad's job/responsibility to decide if a mortgage is for him and then convince the wife (assuming again she is against getting one). Tell him why you are in favor of paying off the mortgage and move on. In reality this probably doesn't matter either way. Unless you catch an outlier result (i.e. you stick it all in stocks and panic sell when they drop 50% or the markets go up 15%/year for 15 years) it is unlikely that you are going to be looking at more than say a -25k to +150k range. You can decide the downside isn't worth the upside.
My mom is just nervous and stresses a lot. Although she specifically never said "no mortgage," based on my discussion with her she would prefer a less stressful portfolio. Although you are correct that the difference with or without a mortgage may be small, a bad sequence of events in the first 2 years of retirement could be very severe. Once they are both collecting SS everything will be gravy.
Please see above in red.

How old are your parents?

Is it too late for them to change their SS strategy?

If not, they should at least consider (especially considering health of each/expected longevity) that the HIGHER earner wait until 70 to begin taking SS. That way, the *survivor* will get the maximum possible benefit for life.

RM
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AlwaysAStudent
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Re: retiring with a mortgage

Post by AlwaysAStudent » Mon Sep 12, 2016 12:49 pm

EnjoyIt wrote:... move to a LCOL area where they can purchase the house outright with the proceeds of the HCOL sale.
... We expect the purchase price to be about $250k-350k.

....That should give them almost $60k/yr
That seems like a lot of house for a retired couple in a LCOL area. My mortgage (with a 20% down payment) is about what you are expecting your parent's will be , our income is higher than what your parent's is projected to be and I am in a LCOL area. I would not be comfortable in retirement with that mortgage (plus utility costs) and income but I might have different expectations from my retirement, my current budget includes a toddler and not nearly as much travel/hobbies as I would like in retirement. I still have 20-30 years until retirement so maybe my expectations for my own retirement might change by then.

EnjoyIt
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Re: retiring with a mortgage

Post by EnjoyIt » Mon Sep 12, 2016 7:17 pm

OP here,
Thank you all again for your time and comments. You can all see my concern for the mortgage. I completely agree that I would not care about the mortgage so much if they had a more diverse portfolio than 7 stocks and 10% in Vanguard Total Bond. Believe me, convincing them to even buy those bonds was a lot of effort on my part. I would love to have them invest in Total stock or some balanced fund, but I can not recommend anything other than bonds based on such a risky portfolio. There is also no changing his mind. He is in his 70s, has traded in the stock market for years and believes he is doing OK. I tried showing how that is not true, but there is no listening to me at this time. He almost made the switch to a 3 fund portfolio about a year ago but since he had stocks still in the red he felt it is better to just buy more of those stocks since he has faith that those companies will succeed. Today he says he will sell everything and go into a 3 fund portfolio upon retirement. I honestly do not believe he will.

For those asking about optimal social security, I believe their plan is as good as it will get He started ccollecting SS at 70. She will be waiting till 70 to collect and will start collect half his at her FRA. They just made it before the law change.

Their expected expenses are unknown since they will be moving to a new area. But based on current expenses and my prediction of what cost of living will be I believe both of their SS combined in 6 years will be plenty for a relatively comfortable retirement but it does not leave as much room for extensive travel. It is also 6 years away. Adding in a mortgage makes those numbers even worse especially if the cash will be invested in another single stock. I would prefer they still have a decent surplus of cash to provide more entertainment for them. I prefer that they use up all their money as I do not want and do not need an inheritance. And no they are not interested in an annuity.

The person who brought up the possibility of dementia. That's just crazy talk. Seriously though. The man still runs a business and does a great job at it. He has all his faculties.

And for those wondering, they are both very healthy and longevity is in their DNA.

As you can see, I see a ton of risk in their portfolio and am trying to minimize the risk as much as possible. I personally do not believe a mortgage will add any benefit but only adds unnecessary risk.

retiredjg
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Re: retiring with a mortgage

Post by retiredjg » Mon Sep 12, 2016 7:35 pm

EnjoyIt wrote:The person who brought up the possibility of dementia. That's just crazy talk. Seriously though. The man still runs a business and does a great job at it. He has all his faculties.
He may have all his faculties, but that does not make him a good stock picker. Anyone with a lot of losses right now has not picked even average producers.

That is not meant as a criticism. Very few people can reliably pick winning stocks, especially when you hold only 7 of them. Like most folks, he is not one of the few who manage to win this game.

With this further information, I can't see that holding a mortgage is a good idea at all. If things go south, they at least need to own where they live. This situation is not ideal by any means. Good luck with it.

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teen persuasion
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Re: retiring with a mortgage

Post by teen persuasion » Tue Sep 13, 2016 7:36 am

EnjoyIt wrote: Today he says he will sell everything and go into a 3 fund portfolio upon retirement. I honestly do not believe he will.


Their expected expenses are unknown since they will be moving to a new area. But based on current expenses and my prediction of what cost of living will be I believe both of their SS combined in 6 years will be plenty for a relatively comfortable retirement but it does not leave as much room for extensive travel. It is also 6 years away. Adding in a mortgage makes those numbers even worse especially if the cash will be invested in another single stock. I would prefer they still have a decent surplus of cash to provide more entertainment for them. I prefer that they use up all their money as I do not want and do not need an inheritance. And no they are not interested in an annuity.




As you can see, I see a ton of risk in their portfolio and am trying to minimize the risk as much as possible. I personally do not believe a mortgage will add any benefit but only adds unnecessary risk.

Could you promote a more stepwise refinement of their portfolio? Put new money (as from the home sale proceeds) into index funds, rather than another single stock.

Has your father looked at the tax cost of "selling everything"? You mentioned they had maybe 20% in tax deferred accounts. Those could be reallocated to index funds w/o tax consequences. Gradually shift his allocation to more index funds, but leave some stocks if the tax cost of selling/rebuying is too high AND he wants to dabble.

The situation really hinges on their expenses vs income. My parents have most of their investments in individual stocks in a taxable account, too. However, SS, RMDs (small), annuities (also small), and dividends nicely cover their spending. So they have no need or plan to sell stocks at all at this point. My retirement portfolio looks very different (index funds in tax deferred almost entirely), but dad (age 86) was investing in a different era and had different tools available to him.

Jack FFR1846
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Re: retiring with a mortgage

Post by Jack FFR1846 » Tue Sep 13, 2016 7:48 am

Perhaps explain the process of selling some of his loser stocks, taking the loss on his taxes and then buying into a broader fund where he still has exposure to those stocks. He could buy ETFs which trade like stocks do, but if chosen well, have zero cost to buy and zero cost to sell.

He may run a business but that doesn't mean that his mental state is as clear as it always has been. I can recall someone with a very diminished state of mind running a country.
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michaeljc70
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Re: retiring with a mortgage

Post by michaeljc70 » Tue Sep 13, 2016 8:55 am

I don't necessarily think retiring with a mortgage is a big deal. I think taking out a mortgage to invest the proceeds is a bad idea at retirement age. It seems like they already have too high an allocation in stocks for their age. And who is going to take a 3.5% mortgage to buy a bond that pays 1.5%? The current market valuation makes this idea even scarier to me.

It sounds like they need a better look at AA and risk for their age.

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