Having mortgage during retirement. Max retirement saving now

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WhiteMaxima
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Having mortgage during retirement. Max retirement saving now

Post by WhiteMaxima » Thu Sep 14, 2017 9:57 am

Is there any pros and cons to max retirement saving now and have a mortgage during retirement? I understand paying off mortgage is most common among BH.

retiredjg
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Re: Having mortgage during retirement. Max retirement saving now

Post by retiredjg » Thu Sep 14, 2017 10:10 am

It's also somewhat common to have a mortgage in retirement. With interest rates as low as they were a few years ago, it could even make good sense to have a mortgage in retirement, especially while you are able to deduct your mortgage interest.

I had a choice a few years back and chose to have the mortgage - at 2.785% - which was actually lower for several years since I could deduct the interest. I figured in most years, my investments would make at least that much (2.785%). This made it financially beneficial to carry the mortgage and I didn't have a gut desire to not have one.

A lot of this is an emotional decision, not a financial decision. If you don't want a mortgage now or in retirement, it can make sense to pay it off early as long as you can save adequately for retirement.

bigred77
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Re: Having mortgage during retirement. Max retirement saving now

Post by bigred77 » Thu Sep 14, 2017 10:21 am

While still working, the decision to accelerate mortgage payoff or throw extra funds into your portfolio is probably best viewed through the lens of "do I expect my portfolio to have a reasonable chance of outperforming the interest rate on the loan over my expected holding period, knowing I am taking more risk by investing in my portfolio instead of taking the guaranteed return of paying down the mortgage principal balance".

Once in retirement, I think the biggest driver is cash flow concerns. Do I want to take higher withdrawals from a larger portfolio in order to service the debt or would it make more sense to pay off the mortgage and have lower monthly cash flow needs that I need to meet with a portfolio that has been reduced by the outstanding principal balance (ignoring tax concerns)?

I personally plan to hold a mortgage over most of my accumulating years but I think it makes sense to have it paid off once you retire if at all possible.

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grabiner
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Re: Having mortgage during retirement. Max retirement saving now

Post by grabiner » Thu Sep 14, 2017 10:35 am

If you contribute more to your retirement accounts now, you can invest the money in low-risk bonds which earn a higher after-tax return than your deductible mortgage. When you retire, you will have enough in your retirement account to pay off the mortgage, and you can then decide whether it is a good deal to pay off or keep.

There is no extra burden from having a mortgage in retirement if you have enough available to pay it off whenever you want; it is then an investment decision.
David Grabiner

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Toons
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Re: Having mortgage during retirement. Max retirement saving now

Post by Toons » Thu Sep 14, 2017 10:38 am

I can only speak to my situation.
Mortage and debt free upon entering retirement.
"Freedom"in so many ways other than financial. :happy
Last edited by Toons on Thu Sep 14, 2017 12:08 pm, edited 1 time in total.
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headingboogle
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Re: Having mortgage during retirement. Max retirement saving now

Post by headingboogle » Thu Sep 14, 2017 10:54 am

I'd say it depends on what your situation is. What the interest rate is for the mortgage, how much longer on the mortgage w/ no extra payments, how long until you retire, how much retirement funds you have, etc.

I have almost a 5% interest rate on my mortgage, with the mortgage scheduled to end (with no prepayments) a couple years into retirement. My personal plan is to pay extra principal at least until my mortgage end date is before retirement. No mortgage will greatly increase cash flow so it'd be nice not to have any during retirement.

runner3081
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Re: Having mortgage during retirement. Max retirement saving now

Post by runner3081 » Thu Sep 14, 2017 10:56 am

On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction?

At 3.5%, let's say, it is a true 3.5%. I guess the "gain" possibility by being in the market would be the margin between 3.5% and the roughly 7% yearly gains.

Seems like a bigger risk that way, but again, hard to know for sure.

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Pranav
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Re: Having mortgage during retirement. Max retirement saving now

Post by Pranav » Thu Sep 14, 2017 10:59 am

In the last few years, we maximized all tax-advantaged space and any leftover money went towards prepaying the mortgage.
Pranav

retiredjg
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Re: Having mortgage during retirement. Max retirement saving now

Post by retiredjg » Thu Sep 14, 2017 11:22 am

runner3081 wrote:
Thu Sep 14, 2017 10:56 am
On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction?

That did happen for me. I started off being able to take the deduction and then moved into the standard deduction. I've kept the mortgage anyway because the interest rate is still low enough (2.785%) to make it worth it in my opinion.

But with a higher interest mortgage, I'm not so sure - since I'm invested at 50/50 my portfolio is not going to make 9% or 10% a year. :happy

spammagnet
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Re: Having mortgage during retirement. Max retirement saving now

Post by spammagnet » Fri Sep 15, 2017 12:07 am

runner3081 wrote:
Thu Sep 14, 2017 10:56 am
On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction? ...
Even if it is, it's beneficial only to the extent your itemized deductions exceed the standard deduction. That''s not an argument against holding a mortgage; it's an argument against over-valuing the tax benefit of a mortgage interest deduction.

vested1
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Re: Having mortgage during retirement. Max retirement saving now

Post by vested1 » Fri Sep 15, 2017 10:18 am

Due to circumstances beyond our control, we still have a mortgage in retirement, and will have in the foreseeable future if we stay in this house. Our delayed plan is to sell the house and move to a lower cost area where we can purchase a nicer home than ours with cash at a fraction of the cost with the equity we've earned. We can't do that until my 94 year old MIL passes however, as we are the last remaining relatives in our area.

As others have stated, it's all about needed income. Since our spendable income in retirement matches that of when we were working, our lifestyle hasn't changed. Our mortgage is approximately 11% of our income. Would we like an 11% raise? You bet, but sometimes life intervenes.

We could pay it off now with a portion of invested savings, but the tax hit makes that a poor proposition.

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Earl Lemongrab
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Re: Having mortgage during retirement. Max retirement saving now

Post by Earl Lemongrab » Fri Sep 15, 2017 11:46 am

spammagnet wrote:
Fri Sep 15, 2017 12:07 am
runner3081 wrote:
Thu Sep 14, 2017 10:56 am
On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction? ...
Even if it is, it's beneficial only to the extent your itemized deductions exceed the standard deduction. That''s not an argument against holding a mortgage; it's an argument against over-valuing the tax benefit of a mortgage interest deduction.
Some are like me, single and state income tax + property tax fills the entire standard deduction. All of my home loan interest is deductible.
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runner3081
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Re: Having mortgage during retirement. Max retirement saving now

Post by runner3081 » Fri Sep 15, 2017 12:12 pm

Earl Lemongrab wrote:
Fri Sep 15, 2017 11:46 am
spammagnet wrote:
Fri Sep 15, 2017 12:07 am
runner3081 wrote:
Thu Sep 14, 2017 10:56 am
On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction? ...
Even if it is, it's beneficial only to the extent your itemized deductions exceed the standard deduction. That''s not an argument against holding a mortgage; it's an argument against over-valuing the tax benefit of a mortgage interest deduction.
Some are like me, single and state income tax + property tax fills the entire standard deduction. All of my home loan interest is deductible.
Right, plenty of people have the ability to benefit from a deduction. However, in nearly all of the forum posts, it seems to be implied for everyone. I just wanted to bring another viewpoint, which spammagnet further added to. When calculating your true mortgage rate, the entire thing may not be deductible, the only benefit is above the standard deduction.

To be honest, I am very happy that our interest is not deductible :)

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Watty
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Re: Having mortgage during retirement. Max retirement saving now

Post by Watty » Fri Sep 15, 2017 1:18 pm

WhiteMaxima wrote:
Thu Sep 14, 2017 9:57 am
Is there any pros and cons to max retirement saving now and have a mortgage during retirement? I understand paying off mortgage is most common among BH.
One problem is that having more taxable retirement income in order to pay the mortgage may mean that more of your Social Security is taxed, and with the complex way Social Security is taxed even middle income people can end up in a surprisingly high effective tax bracket.

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

https://www.bogleheads.org/wiki/Social_ ... calculator

When I was running my numbers it looked like for a couple with $30K in taxable income and $30K in Social Security will pay very little federal income taxes. I live in a moderate cost of living area so with a paid off house that is enough to live an above average lifestyle. If one of you survives the other and then files tax returns in the higher single tax brackets then that could put you in an even higher tax bracket.

With a mortgage you will also have a lot more sequence of returns risk. Here is the 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 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.
Last edited by Watty on Fri Sep 15, 2017 4:01 pm, edited 1 time in total.

barnaclebob
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Re: Having mortgage during retirement. Max retirement saving now

Post by barnaclebob » Fri Sep 15, 2017 1:24 pm

retiredjg wrote:
Thu Sep 14, 2017 11:22 am
runner3081 wrote:
Thu Sep 14, 2017 10:56 am
On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction?

That did happen for me. I started off being able to take the deduction and then moved into the standard deduction. I've kept the mortgage anyway because the interest rate is still low enough (2.785%) to make it worth it in my opinion.

But with a higher interest mortgage, I'm not so sure - since I'm invested at 50/50 my portfolio is not going to make 9% or 10% a year. :happy
See if you can take control of paying your property taxes yourself and lump them together every other year to get yourself bumped into itemizing in the years where you pay two years of taxes in the same calendar year. For example" Pay in Jan 2018 and Dec 2018 (for 2019), then Jan 2020 and Dec 2020 (for 2021)

runner3081
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Re: Having mortgage during retirement. Max retirement saving now

Post by runner3081 » Fri Sep 15, 2017 1:28 pm

Fortunately, that still wouldn't do much for us. They are pretty low in AZ.

...also, I already tried and the bank won't have any of it.

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Artful Dodger
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Re: Having mortgage during retirement. Max retirement saving now

Post by Artful Dodger » Fri Sep 15, 2017 2:02 pm

The main driver for me is the tax consequence in retirement. Almost all my money is in IRAs or 401Ks, with a much smaller amount in my ROTH. My plan now is to have about a 10% effective federal tax rate. If I leave the mortgage til retirement, I'll be paying at least a portion of it with money taxable at the 25% level. Plus it would be really nice to be done with it.

Iliketoridemybike
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Re: Having mortgage during retirement. Max retirement saving now

Post by Iliketoridemybike » Fri Sep 15, 2017 3:50 pm

barnaclebob wrote:
Fri Sep 15, 2017 1:24 pm
retiredjg wrote:
Thu Sep 14, 2017 11:22 am
runner3081 wrote:
Thu Sep 14, 2017 10:56 am
On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction?

That did happen for me. I started off being able to take the deduction and then moved into the standard deduction. I've kept the mortgage anyway because the interest rate is still low enough (2.785%) to make it worth it in my opinion.

But with a higher interest mortgage, I'm not so sure - since I'm invested at 50/50 my portfolio is not going to make 9% or 10% a year. :happy
See if you can take control of paying your property taxes yourself and lump them together every other year to get yourself bumped into itemizing in the years where you pay two years of taxes in the same calendar year. For example" Pay in Jan 2018 and Dec 2018 (for 2019), then Jan 2020 and Dec 2020 (for 2021)
I don't think you can pay property taxes in advance. One year at a time. Otherwise, I would prepay the next 10 years for the deduction. :D

noco-hawkeye
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Re: Having mortgage during retirement. Max retirement saving now

Post by noco-hawkeye » Fri Sep 15, 2017 3:59 pm

In similar light as the sequence of returns issues - I see this as something that "depends" based upon where you are in your savings path.

If you are 25 yrs old, I would max out your savings. You are mostly in stocks at this point, and have a long time to recover, and that money almost certainly would be better off in the market vs paying down a mortgage.

When you are 55, you might be 60% in stocks, and a big market correction could be something where 10 years later you are back where you started in the market. At this point, I think getting that mortgage knocked out makes a lot more sense. Plus, you could be earning more than what your tax advantage space would allow you to save.

This isn't a concrete / simple answer, but "it depends" would be my answer. Certainly younger investors should almost always max the savings imo.

barnaclebob
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Re: Having mortgage during retirement. Max retirement saving now

Post by barnaclebob » Fri Sep 15, 2017 4:04 pm

Iliketoridemybike wrote:
Fri Sep 15, 2017 3:50 pm
barnaclebob wrote:
Fri Sep 15, 2017 1:24 pm
retiredjg wrote:
Thu Sep 14, 2017 11:22 am
runner3081 wrote:
Thu Sep 14, 2017 10:56 am
On the flip side, what if the mortgage interest isn't enough (combined with everything else) to move you out of the standard deduction?

That did happen for me. I started off being able to take the deduction and then moved into the standard deduction. I've kept the mortgage anyway because the interest rate is still low enough (2.785%) to make it worth it in my opinion.

But with a higher interest mortgage, I'm not so sure - since I'm invested at 50/50 my portfolio is not going to make 9% or 10% a year. :happy
See if you can take control of paying your property taxes yourself and lump them together every other year to get yourself bumped into itemizing in the years where you pay two years of taxes in the same calendar year. For example" Pay in Jan 2018 and Dec 2018 (for 2019), then Jan 2020 and Dec 2020 (for 2021)
I don't think you can pay property taxes in advance. One year at a time. Otherwise, I would prepay the next 10 years for the deduction. :D
In my county you can pay them as soon as the county tells you what they are. So the most you can prepay is the for the next year.

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