Mortgage in Retirement

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Cipro
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Mortgage in Retirement

Post by Cipro » Wed May 15, 2019 4:25 pm

I’m planning on buying a new house in the next 2 years. In that timeframe, I also plan to retire. Is there any advantage to obtaining a mortgage in such a situation if one is capable of buying the house outright? I don’t have any immediate need for money but would rather have insurance of additional money in ‘savings’ now, understanding that my obligations will continue in the future (till sale?).

Thanks

Dottie57
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Re: Mortgage in Retirement

Post by Dottie57 » Wed May 15, 2019 4:36 pm

A mortgage is secured by property. Don’t think you can get one without property to secure it.

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bengal22
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Re: Mortgage in Retirement

Post by bengal22 » Wed May 15, 2019 4:37 pm

I don't know if there is an advantage either way. I chose to have a mortgage even though I could have paid for the house because I feel my assets will earn more than my interest rate. But it really does not matter.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

Nowizard
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Re: Mortgage in Retirement

Post by Nowizard » Wed May 15, 2019 6:07 pm

Personal decision, but standard advice is to be debt free at retirement. We have always thought that debt was something you could not pay at a particular time rather than an outstanding loan or other financial obligation you could erase at any time. We have a mortgage and are in our retirement years, though we have reduced it with a recent purchase to spend some extra cash. We have always carried higher mortgages than necessary in order to invest the extra funds and continue to do so even though we are probably investing for our heirs which gives us pleasure psychologically even though they do not need it. In other words, there are people doing well financially who do not totally follow the most pragmatic advice but have generally had positive experiences financially.

Tim

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celia
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Re: Mortgage in Retirement

Post by celia » Wed May 15, 2019 6:49 pm

It feels great to be retired and without a mortgage! Our expenses are much lower, thus we don’t need as much income.

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willthrill81
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Re: Mortgage in Retirement

Post by willthrill81 » Wed May 15, 2019 6:52 pm

Cipro wrote:
Wed May 15, 2019 4:25 pm
I’m planning on buying a new house in the next 2 years. In that timeframe, I also plan to retire. Is there any advantage to obtaining a mortgage in such a situation if one is capable of buying the house outright? I don’t have any immediate need for money but would rather have insurance of additional money in ‘savings’ now, understanding that my obligations will continue in the future (till sale?).

Thanks
Having a fixed expense like a mortgage in retirement, by definition, increases your sequence of returns risk because you must pay that mortgage payment every month, regardless of how your investment portfolio is performing. Historically, you would usually benefit from leveraging your home to own more equities, but remember that leverage swings in both directions. It amplifies the good and the bad.

Personally, there's no way that I would want to use my home as leverage to own more stock in retirement. Heck, I don't even want to do that now, and I'm a good ~17 years from retirement.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JoeRetire
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Re: Mortgage in Retirement

Post by JoeRetire » Wed May 15, 2019 7:09 pm

Cipro wrote:
Wed May 15, 2019 4:25 pm
I don’t have any immediate need for money but would rather have insurance of additional money in ‘savings’ now, understanding that my obligations will continue in the future (till sale?).
When would you expect to sell this house?

What mortgage rate can you get? What are you earning on the money that would be used to pay for the house if you choose not to get a mortgage?

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Watty
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Re: Mortgage in Retirement

Post by Watty » Wed May 15, 2019 7:39 pm

Cipro wrote:
Wed May 15, 2019 4:25 pm
Is there any advantage to obtaining a mortgage in such a situation if one is capable of buying the house outright?
A couple advantages of having a paid off house that I can think of.

1) You would need to have some income to pay the mortage and you will be taxed on that. With a paid off house you are not taxed on the "imputed rent"(Google this). The extra income might also mean that you would not qualify for things like an ACA healthcare subsidy.

2) In some states you home equity has some protections if you are sued.

3) You would have less sequence of returns risk if the stock market does badly. There are two ways that this would impact you, you would have less invested in the stock market and you would not need to sell stocks when the market is low to pay your mortage.

4) It is far from exact but in some ways a mortage is like a negative bond so it can result in you having a more aggressive asset allocation that you may realize.

5) Having a paid off house can also adjust your risk profile. For example I have a paid off house in a moderate to low cost of living area so once I start Social Security that will be enough to cover my core living expenses. That means that I can then take more risks in my investing.

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Cipro
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Re: Mortgage in Retirement

Post by Cipro » Wed May 15, 2019 8:10 pm

Thanks for the replies. I appreciate the comments regarding sequence of returns risk. This is one of my main concerns as I enter retirement. I’m currently in process of changing asset allocation from 60/40 to 40/60 to partially address. I guess any reduced ability to accommodate a negative series of returns in a portfolio by reducing spending (like a mortgage) could lead to bad outcome. Makes sense. Just a psychological component to reducing nest egg at beginning of retirement,

livelovelaugh00
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Re: Mortgage in Retirement

Post by livelovelaugh00 » Wed May 15, 2019 8:31 pm

Downsize is very important.
I realized I only have one favorite sitting area in my home. So I really do not need a big house. It's easy to maintain too.
I do not need a two guest bedrooms. One is enough. The money saved I could pay for nearby hotel room for my guests.
In winter and summer, I can keep unused rooms closed to save on energy.
We plan to stay in our little cozy house after retirement. It will save us the realtor's fee also.
A small house is easy to pay off. It was paid off.
Now there is only $1200 annual property tax. What a relief.

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willthrill81
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Re: Mortgage in Retirement

Post by willthrill81 » Wed May 15, 2019 8:58 pm

Cipro wrote:
Wed May 15, 2019 8:10 pm
Thanks for the replies. I appreciate the comments regarding sequence of returns risk. This is one of my main concerns as I enter retirement. I’m currently in process of changing asset allocation from 60/40 to 40/60 to partially address. I guess any reduced ability to accommodate a negative series of returns in a portfolio by reducing spending (like a mortgage) could lead to bad outcome. Makes sense. Just a psychological component to reducing nest egg at beginning of retirement,
Many believe incorrectly that if you could earn a higher return on your portfolio that you should keep your mortgage by default, but this is false. You might be able to achieve an average return greater than your mortgage interest rate, but remember that average returns are not as important as many believe them to be when you're in the withdrawal phase (aka retirement). This is easily seen by the average real return for U.S. stocks being about 7%, while the 30 year safe withdrawal rate has been about 4%. The difference between the two is due to sequence of returns risk. By definition, this risk will be higher if you carry a mortgage into retirement than not, regardless of the interest rate. Now you might believe that it's worthwhile to take on that risk in order to potentially arbitrage the return, but given that most metrics seem to suggest that we're looking at below average returns over the next decade or so, that may not be a good bet.

Of course, if you pay off your mortgage, then you could potentially have a higher stock allocation than you would otherwise (i.e. swapping bonds in your portfolio for no mortgage).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Bronko
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Re: Mortgage in Retirement

Post by Bronko » Thu May 16, 2019 2:04 pm

willthrill81 wrote:
Wed May 15, 2019 8:58 pm
Cipro wrote:
Wed May 15, 2019 8:10 pm
Thanks for the replies. I appreciate the comments regarding sequence of returns risk. This is one of my main concerns as I enter retirement. I’m currently in process of changing asset allocation from 60/40 to 40/60 to partially address. I guess any reduced ability to accommodate a negative series of returns in a portfolio by reducing spending (like a mortgage) could lead to bad outcome. Makes sense. Just a psychological component to reducing nest egg at beginning of retirement,
Many believe incorrectly that if you could earn a higher return on your portfolio that you should keep your mortgage by default, but this is false. You might be able to achieve an average return greater than your mortgage interest rate, but remember that average returns are not as important as many believe them to be when you're in the withdrawal phase (aka retirement). This is easily seen by the average real return for U.S. stocks being about 7%, while the 30 year safe withdrawal rate has been about 4%. The difference between the two is due to sequence of returns risk. By definition, this risk will be higher if you carry a mortgage into retirement than not, regardless of the interest rate. Now you might believe that it's worthwhile to take on that risk in order to potentially arbitrage the return, but given that most metrics seem to suggest that we're looking at below average returns over the next decade or so, that may not be a good bet.

Of course, if you pay off your mortgage, then you could potentially have a higher stock allocation than you would otherwise (i.e. swapping bonds in your portfolio for no mortgage).
Would you still feel that way if you had to take about 35% of saved assets out of the retirement portfolio to pay off a significant mortgage that was at 4.35%. Would having a secured pension of 4K a month change the answer?
Never let a little bit of money get in the way of a real good time.

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willthrill81
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Re: Mortgage in Retirement

Post by willthrill81 » Thu May 16, 2019 2:35 pm

Bronko wrote:
Thu May 16, 2019 2:04 pm
willthrill81 wrote:
Wed May 15, 2019 8:58 pm
Cipro wrote:
Wed May 15, 2019 8:10 pm
Thanks for the replies. I appreciate the comments regarding sequence of returns risk. This is one of my main concerns as I enter retirement. I’m currently in process of changing asset allocation from 60/40 to 40/60 to partially address. I guess any reduced ability to accommodate a negative series of returns in a portfolio by reducing spending (like a mortgage) could lead to bad outcome. Makes sense. Just a psychological component to reducing nest egg at beginning of retirement,
Many believe incorrectly that if you could earn a higher return on your portfolio that you should keep your mortgage by default, but this is false. You might be able to achieve an average return greater than your mortgage interest rate, but remember that average returns are not as important as many believe them to be when you're in the withdrawal phase (aka retirement). This is easily seen by the average real return for U.S. stocks being about 7%, while the 30 year safe withdrawal rate has been about 4%. The difference between the two is due to sequence of returns risk. By definition, this risk will be higher if you carry a mortgage into retirement than not, regardless of the interest rate. Now you might believe that it's worthwhile to take on that risk in order to potentially arbitrage the return, but given that most metrics seem to suggest that we're looking at below average returns over the next decade or so, that may not be a good bet.

Of course, if you pay off your mortgage, then you could potentially have a higher stock allocation than you would otherwise (i.e. swapping bonds in your portfolio for no mortgage).
Would you still feel that way if you had to take about 35% of saved assets out of the retirement portfolio to pay off a significant mortgage that was at 4.35%. Would having a secured pension of 4K a month change the answer?
Let me reiterate that fixed withdrawals increase a retiree's sequence of returns risk by definition. It's not a matter of "feelings."

A big question if the example you provide is whether you would encounter a big tax hit by withdrawing 35% of your saved assets in order to pay off the mortgage. If so, then the benefit of reducing SRR could be more than offset by the high tax bill.

If a retiree needs a third of their investment portfolio to pay off their mortgage, it sounds like the mortgage is too big, the portfolio is too small, or both.

Since money is fungible, it doesn't really matter whether the retiree has a pension or not; income is income, and fixed expenses are fixed expenses. That being said, many would probably say that the increase in SRR is alright if their mortgage and other fixed expenses can be at least mostly covered by the pension.
Last edited by willthrill81 on Thu May 16, 2019 2:36 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

surfstar
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Re: Mortgage in Retirement

Post by surfstar » Thu May 16, 2019 2:36 pm

If not worried about passing on the house to heirs and money is needed later on... reverse mortgage! A nice backup to have.

Topic Author
Cipro
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Re: Mortgage in Retirement

Post by Cipro » Thu May 16, 2019 2:58 pm

I was convinced before but now I’m even more convinced.
If there’s one thing I’ve learned is that I’m capable of learning!

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Re: Mortgage in Retirement

Post by Bronko » Thu May 16, 2019 3:09 pm

willthrill81 wrote:
Thu May 16, 2019 2:35 pm
Bronko wrote:
Thu May 16, 2019 2:04 pm
willthrill81 wrote:
Wed May 15, 2019 8:58 pm
Cipro wrote:
Wed May 15, 2019 8:10 pm
Thanks for the replies. I appreciate the comments regarding sequence of returns risk. This is one of my main concerns as I enter retirement. I’m currently in process of changing asset allocation from 60/40 to 40/60 to partially address. I guess any reduced ability to accommodate a negative series of returns in a portfolio by reducing spending (like a mortgage) could lead to bad outcome. Makes sense. Just a psychological component to reducing nest egg at beginning of retirement,
Many believe incorrectly that if you could earn a higher return on your portfolio that you should keep your mortgage by default, but this is false. You might be able to achieve an average return greater than your mortgage interest rate, but remember that average returns are not as important as many believe them to be when you're in the withdrawal phase (aka retirement). This is easily seen by the average real return for U.S. stocks being about 7%, while the 30 year safe withdrawal rate has been about 4%. The difference between the two is due to sequence of returns risk. By definition, this risk will be higher if you carry a mortgage into retirement than not, regardless of the interest rate. Now you might believe that it's worthwhile to take on that risk in order to potentially arbitrage the return, but given that most metrics seem to suggest that we're looking at below average returns over the next decade or so, that may not be a good bet.

Of course, if you pay off your mortgage, then you could potentially have a higher stock allocation than you would otherwise (i.e. swapping bonds in your portfolio for no mortgage).
Would you still feel that way if you had to take about 35% of saved assets out of the retirement portfolio to pay off a significant mortgage that was at 4.35%. Would having a secured pension of 4K a month change the answer?
Let me reiterate that fixed withdrawals increase a retiree's sequence of returns risk by definition. It's not a matter of "feelings."

A big question if the example you provide is whether you would encounter a big tax hit by withdrawing 35% of your saved assets in order to pay off the mortgage. If so, then the benefit of reducing SRR could be more than offset by the high tax bill.

If a retiree needs a third of their investment portfolio to pay off their mortgage, it sounds like the mortgage is too big, the portfolio is too small, or both.

Since money is fungible, it doesn't really matter whether the retiree has a pension or not; income is income, and fixed expenses are fixed expenses. That being said, many would probably say that the increase in SRR is alright if their mortgage and other fixed expenses can be at least mostly covered by the pension.
I appreciate the thought Will. I wasn't being snarky, I always consider your thoughtful insight when I read posts.
Never let a little bit of money get in the way of a real good time.

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willthrill81
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Re: Mortgage in Retirement

Post by willthrill81 » Thu May 16, 2019 3:19 pm

Bronko wrote:
Thu May 16, 2019 3:09 pm
willthrill81 wrote:
Thu May 16, 2019 2:35 pm
Bronko wrote:
Thu May 16, 2019 2:04 pm
willthrill81 wrote:
Wed May 15, 2019 8:58 pm
Cipro wrote:
Wed May 15, 2019 8:10 pm
Thanks for the replies. I appreciate the comments regarding sequence of returns risk. This is one of my main concerns as I enter retirement. I’m currently in process of changing asset allocation from 60/40 to 40/60 to partially address. I guess any reduced ability to accommodate a negative series of returns in a portfolio by reducing spending (like a mortgage) could lead to bad outcome. Makes sense. Just a psychological component to reducing nest egg at beginning of retirement,
Many believe incorrectly that if you could earn a higher return on your portfolio that you should keep your mortgage by default, but this is false. You might be able to achieve an average return greater than your mortgage interest rate, but remember that average returns are not as important as many believe them to be when you're in the withdrawal phase (aka retirement). This is easily seen by the average real return for U.S. stocks being about 7%, while the 30 year safe withdrawal rate has been about 4%. The difference between the two is due to sequence of returns risk. By definition, this risk will be higher if you carry a mortgage into retirement than not, regardless of the interest rate. Now you might believe that it's worthwhile to take on that risk in order to potentially arbitrage the return, but given that most metrics seem to suggest that we're looking at below average returns over the next decade or so, that may not be a good bet.

Of course, if you pay off your mortgage, then you could potentially have a higher stock allocation than you would otherwise (i.e. swapping bonds in your portfolio for no mortgage).
Would you still feel that way if you had to take about 35% of saved assets out of the retirement portfolio to pay off a significant mortgage that was at 4.35%. Would having a secured pension of 4K a month change the answer?
Let me reiterate that fixed withdrawals increase a retiree's sequence of returns risk by definition. It's not a matter of "feelings."

A big question if the example you provide is whether you would encounter a big tax hit by withdrawing 35% of your saved assets in order to pay off the mortgage. If so, then the benefit of reducing SRR could be more than offset by the high tax bill.

If a retiree needs a third of their investment portfolio to pay off their mortgage, it sounds like the mortgage is too big, the portfolio is too small, or both.

Since money is fungible, it doesn't really matter whether the retiree has a pension or not; income is income, and fixed expenses are fixed expenses. That being said, many would probably say that the increase in SRR is alright if their mortgage and other fixed expenses can be at least mostly covered by the pension.
I appreciate the thought Will. I wasn't being snarky, I always consider your thoughtful insight when I read posts.
I didn't think that you were, but I always believe it is appropriate to distinguish between the objective and subjective elements of personal finance to the fullest extent possible. :beer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

adamthesmythe
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Re: Mortgage in Retirement

Post by adamthesmythe » Thu May 16, 2019 3:28 pm

Bronko wrote:
Thu May 16, 2019 2:04 pm
willthrill81 wrote:
Wed May 15, 2019 8:58 pm
Cipro wrote:
Wed May 15, 2019 8:10 pm
Thanks for the replies. I appreciate the comments regarding sequence of returns risk. This is one of my main concerns as I enter retirement. I’m currently in process of changing asset allocation from 60/40 to 40/60 to partially address. I guess any reduced ability to accommodate a negative series of returns in a portfolio by reducing spending (like a mortgage) could lead to bad outcome. Makes sense. Just a psychological component to reducing nest egg at beginning of retirement,
Many believe incorrectly that if you could earn a higher return on your portfolio that you should keep your mortgage by default, but this is false. You might be able to achieve an average return greater than your mortgage interest rate, but remember that average returns are not as important as many believe them to be when you're in the withdrawal phase (aka retirement). This is easily seen by the average real return for U.S. stocks being about 7%, while the 30 year safe withdrawal rate has been about 4%. The difference between the two is due to sequence of returns risk. By definition, this risk will be higher if you carry a mortgage into retirement than not, regardless of the interest rate. Now you might believe that it's worthwhile to take on that risk in order to potentially arbitrage the return, but given that most metrics seem to suggest that we're looking at below average returns over the next decade or so, that may not be a good bet.

Of course, if you pay off your mortgage, then you could potentially have a higher stock allocation than you would otherwise (i.e. swapping bonds in your portfolio for no mortgage).
Would you still feel that way if you had to take about 35% of saved assets out of the retirement portfolio to pay off a significant mortgage that was at 4.35%. Would having a secured pension of 4K a month change the answer?
Since almost everyone would have at least some of the mortgage paid off at retirement...that 35% would correspond to a very expensive house in relation to retirement assets. There are big risks to that...taxes could go up, you might need expensive repairs...and these risks increase with the value of the house.

Whether you have a mortgage in retirement or not, it's a good idea to downsize, or rightsize, or whatever.

megabad
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Re: Mortgage in Retirement

Post by megabad » Thu May 16, 2019 3:35 pm

Cipro wrote:
Wed May 15, 2019 4:25 pm
I’m planning on buying a new house in the next 2 years. In that timeframe, I also plan to retire. Is there any advantage to obtaining a mortgage in such a situation if one is capable of buying the house outright? I don’t have any immediate need for money but would rather have insurance of additional money in ‘savings’ now, understanding that my obligations will continue in the future (till sale?).
There is potentially an advantage of a return on the money (that you presumably invested vs spent on the house). However, most approaching retirement have very conservative portfolios. The 30 year mortgage is at about 4% right now. I am not convinced that a conservative portfolio will return much more than 4% after tax over the next 30 years and even a "conservative" portfolio has volatility and uncertainty associated with it. Also, I don't really factor it in, but I suppose by getting a mortgage you also face increased exposure to losses in the home and some lack of control of that asset (since the bank owns it). If you hold the house for a very long time (as anyone getting a mortgage should), I think this risks of this are relatively small. On the whole, I don't see a significant advantage to a mortgage in retirement unless you have a temporary cash/liquidity issue.

DetroitRick
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Re: Mortgage in Retirement

Post by DetroitRick » Thu May 16, 2019 4:33 pm

Doesn't bother me in the least to have a mortgage in retirement. Never did. Although, holding a large mortgage balance would. But our mortgage balance is small and I could pay it off at any time. Next house, we will likely choose either a small mortgage again or a line of credit, depending on rates, the exact price of the house we opt for, and a few more factors.

It's just a personal decision, and a generation ago, this was pretty rare. Not so much anymore. Everybody has different circumstances - I would not feel pressure either way. Personally, I like the flexibility it gives me in deploying funds, coupled with the ability to leverage very cheap money. Should inflation rear its head, there can be some advantages for debtors too, DEPENDING on the nature of your retirement income streams. In my particular case, paying off today's mortgage would be very costly to me - far more than my current interest payments - because the sources I would have to go to for funds would push me out of ACA subsidies.

Some people might use this type of leverage to buy more house than they would otherwise find suitable. That could, of course, present a special danger in retirement. But fortunately I'm immune to that temptation, as is my wife. And we also foresee carrying no other debt in retirement, except possibly a car loan at times.

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calmaniac
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Re: Mortgage in Retirement

Post by calmaniac » Thu May 16, 2019 8:58 pm

willthrill81 wrote:
Wed May 15, 2019 6:52 pm
Having a fixed expense like a mortgage in retirement, by definition, increases your sequence of returns risk because you must pay that mortgage payment every month, regardless of how your investment portfolio is performing.
+1

Fewer moving parts when you don't have a mortgage. The Δ between income stream/cash flow and expenses is a lot less. Easier and less stressful to figure out how to cover the Δ. The "4% rule" or whatever rule you are using does not have to maintain as much of your lifestyle.

Dick D
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Re: Mortgage in Retirement

Post by Dick D » Thu May 16, 2019 9:09 pm

I would just pay cash for the house and be done with it. If you find out that you miss having a mortgage, you could always finance it later.

Topic Author
Cipro
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Re: Mortgage in Retirement

Post by Cipro » Fri May 17, 2019 10:43 am

Thanks for all the feedback. I will pay for house outright. Now regarding the money for the house - I recently sold out shares of an IPO in company where I worked and so have $$ to buy house. This money is a long-tertm gain -I owe 2019 taxes on it already. This money is sitting in Fidelity Government Money Market (SPAXX). It's a sizable amount of money. he timeframe for buying house uncertain but somewhere between next 6-months and 2 years. The amount planned for the house is about 20% of total portfolio value (HCOL area) - using various retirement calculators - I should be able to comfortably maintain my current standard of living.

Where should I hold $$?

Thanks
Rob

Bronko
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Re: Mortgage in Retirement

Post by Bronko » Fri May 17, 2019 11:36 am

I'd do a 6 month CD then if you're not ready to purchase do another for same time period. Protected money and they usually carry penalties if you withdraw before maturity. You could always do several of different value.
Never let a little bit of money get in the way of a real good time.

MindBogler
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Re: Mortgage in Retirement

Post by MindBogler » Fri May 17, 2019 12:02 pm

willthrill81 wrote:
Thu May 16, 2019 2:35 pm
Let me reiterate that fixed withdrawals increase a retiree's sequence of returns risk by definition. It's not a matter of "feelings."
You keep saying this while seemingly ignoring the fact that there will always be some fixed expenses in retirement: utilities, gas/transportation, groceries, health care premiums, and the list goes on. The mortgage is just another fixed expense. If you don't account for this expense, it could increase sequence of returns risk. If you do account for it, then it is no more risky than paying your water bill every month. There is nothing special about the fixed expense of a mortgage vs any other type. I find the statement that "a mortgage increases sequence of returns risk" rather than "fixed expenses increase sequence of returns risk" to be a misleading statement. Carrying a mortgage into retirement simply requires more assets than the alternative because the "E" in "25x Expenses" has increased.

Topic Author
Cipro
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Re: Mortgage in Retirement

Post by Cipro » Fri May 17, 2019 12:20 pm

From my perspective, what I really care about is minimizing sequence of returns risk through reasonable means at my disposal. Question really is whether using loan on house undermines that goal.

Broken Man 1999
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Re: Mortgage in Retirement

Post by Broken Man 1999 » Fri May 17, 2019 12:49 pm

MindBogler wrote:
Fri May 17, 2019 12:02 pm
willthrill81 wrote:
Thu May 16, 2019 2:35 pm
Let me reiterate that fixed withdrawals increase a retiree's sequence of returns risk by definition. It's not a matter of "feelings."
You keep saying this while seemingly ignoring the fact that there will always be some fixed expenses in retirement: utilities, gas/transportation, groceries, health care premiums, and the list goes on. The mortgage is just another fixed expense. If you don't account for this expense, it could increase sequence of returns risk. If you do account for it, then it is no more risky than paying your water bill every month. There is nothing special about the fixed expense of a mortgage vs any other type. I find the statement that "a mortgage increases sequence of returns risk" rather than "fixed expenses increase sequence of returns risk" to be a misleading statement. Carrying a mortgage into retirement simply requires more assets than the alternative because the "E" in "25x Expenses" has increased.
I think a mortgage is different in the sense that it can be the largest expense encountered in retirement. Our mortgage payment (when we had one) was always the largest item of our monthly expenses.

As well, unlike some expenses that can be eliminated or reduced quickly if need be, a mortgage takes time and effort to reduce, or eliminate.

I agree there are many fixed expenses, but some are expenses, and others are expenses.

And, to your point, the solution is to really be careful you account for that major expenses in your expenses projections, 'cause a mistake of the magnitude of a mortgage expense could turn out to be a real disaster of a retirement.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

gpburdell
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Re: Mortgage in Retirement

Post by gpburdell » Fri May 17, 2019 1:57 pm

If you retire before buying the house, you might have a problem getting a mortgage as you won't have regular income. My parents faced this problem when they bought a new house couple years ago. They had the money to buy outright, but initially they wanted a mortgage to give them some flexibility and not tie up all that money. The lenders wanted to see several years of consistent RMD withdrawals large enough in order to treat it like income. My parents were only taking out the minimum RMD amount which wasn't enough. In the end, they just decided to buy in cash.

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Re: Mortgage in Retirement

Post by G12 » Fri May 17, 2019 2:30 pm

Broken Man 1999 wrote:
Fri May 17, 2019 12:49 pm
MindBogler wrote:
Fri May 17, 2019 12:02 pm
willthrill81 wrote:
Thu May 16, 2019 2:35 pm
Let me reiterate that fixed withdrawals increase a retiree's sequence of returns risk by definition. It's not a matter of "feelings."
You keep saying this while seemingly ignoring the fact that there will always be some fixed expenses in retirement: utilities, gas/transportation, groceries, health care premiums, and the list goes on. The mortgage is just another fixed expense. If you don't account for this expense, it could increase sequence of returns risk. If you do account for it, then it is no more risky than paying your water bill every month. There is nothing special about the fixed expense of a mortgage vs any other type. I find the statement that "a mortgage increases sequence of returns risk" rather than "fixed expenses increase sequence of returns risk" to be a misleading statement. Carrying a mortgage into retirement simply requires more assets than the alternative because the "E" in "25x Expenses" has increased.
I think a mortgage is different in the sense that it can be the largest expense encountered in retirement. Our mortgage payment (when we had one) was always the largest item of our monthly expenses.

As well, unlike some expenses that can be eliminated or reduced quickly if need be, a mortgage takes time and effort to reduce, or eliminate.

I agree there are many fixed expenses, but some are expenses, and others are expenses.

And, to your point, the solution is to really be careful you account for that major expenses in your expenses projections, 'cause a mistake of the magnitude of a mortgage expense could turn out to be a real disaster of a retirement.

Broken Man 1999
I have had a mortgage while working, I have had a non-encumbered home when working, didn't feel any different whatsoever, can't imagine it feeling much different in retirement. I believe health care expenses will be our highest line item cost over time in retirement, not potential mortgage payments. I could envision having a small mortgage in retirement, ie likely less than 35% of home value, if it helped to keep after tax funds for paying tax on IRA conversions or other worthwhile uses. Then again one could get a home equity LOC to serve similar purposes. If someone retires with ample retirement resources, ie 30x expenses including the mortgage, etc I don't see a mortgage being an issue. I wouldn't sell something like investment RE which has a much higher ROC than a 4% mortgage. Some of this stuff is very specific to one's investments and/or financial wherewithal.

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Re: Mortgage in Retirement

Post by Cipro » Fri May 17, 2019 3:11 pm

Have looked at total expenses in last 3 years - varied between 130-155k/year with a mortgage.Using various retirement calculators, I should be good withdrawing up to 170k/year. By 25x rule, about 160k/year if I carry a mortgage similar to what I carry now.

Rob

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Re: Mortgage in Retirement

Post by MindBogler » Fri May 17, 2019 3:20 pm

Broken Man 1999 wrote:
Fri May 17, 2019 12:49 pm
And, to your point, the solution is to really be careful you account for that major expenses in your expenses projections, 'cause a mistake of the magnitude of a mortgage expense could turn out to be a real disaster of a retirement.
Yes, I agree.

In my opinion, if you have accounted for this expense, heading into retirement with several years of mortgage payments left might actually be seen as semi-positive. You planned for X expenses including your mortgage and then your expenses transition to (X - mortgage) once the note is paid. This obviously works best if you don't open up a 30 year mortgage and then retire the next day. :D

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Re: Mortgage in Retirement

Post by Meg77 » Fri May 17, 2019 4:02 pm

A mortgage is a bond - literally. If you get a mortgage it will likely be bundled up and sold and end up owned by investors like yourself who hold bond funds that are made up of treasuries and mortgage backed securities, etc. It doesn't make any sense to hold a mortgage and buy a bond or bond fund unless the expected rate of return on the bond(s) exceeds the interest rate you're paying on your mortgage - after accounting for fees, taxes and the risks associated with the investment (default risk and the like).

Another way to look at a mortgage is as a negative bond allocation. If you are 40/60 stocks/bonds but hold a mortgage, then you are really more like 50/50 or whatever the numbers work out to.

Long story short - pay for your home in cash. Your bonds are not going to return anything close to the rate you'll borrow at today after fees and taxes.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Mortgage in Retirement

Post by JoeRetire » Fri May 17, 2019 4:17 pm

Cipro wrote:
Wed May 15, 2019 4:25 pm
Is there any advantage to obtaining a mortgage in such a situation if one is capable of buying the house outright?
The clear advantage is liquidity.

All other potential advantages depend on lots of details you haven't mentioned.

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Re: Mortgage in Retirement

Post by Cipro » Fri May 17, 2019 4:20 pm

Will do. Again, thanks for all the good advice.

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Re: Mortgage in Retirement

Post by Cipro » Fri May 17, 2019 4:22 pm

I.e. will buy out right.

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Re: Mortgage in Retirement

Post by willthrill81 » Fri May 17, 2019 5:14 pm

MindBogler wrote:
Fri May 17, 2019 12:02 pm
willthrill81 wrote:
Thu May 16, 2019 2:35 pm
Let me reiterate that fixed withdrawals increase a retiree's sequence of returns risk by definition. It's not a matter of "feelings."
You keep saying this while seemingly ignoring the fact that there will always be some fixed expenses in retirement: utilities, gas/transportation, groceries, health care premiums, and the list goes on. The mortgage is just another fixed expense. If you don't account for this expense, it could increase sequence of returns risk. If you do account for it, then it is no more risky than paying your water bill every month. There is nothing special about the fixed expense of a mortgage vs any other type. I find the statement that "a mortgage increases sequence of returns risk" rather than "fixed expenses increase sequence of returns risk" to be a misleading statement. Carrying a mortgage into retirement simply requires more assets than the alternative because the "E" in "25x Expenses" has increased.
As noted by others, the difference with a mortgage compared to all other categories you provided is that it can be paid off forevermore. You have a choice as to whether you want to carry the fixed expense that is a mortgage into retirement.

I'm not saying that it's never a reasonable idea to have a mortgage in retirement, especially if you would encounter a big tax hit by doing so. But we must be aware that this strategy will increase the sequence of returns risk that the retiree encounters compared to not having it.

Karsten at Early Retirement Now has an excellent post about this, two excerpts from which are quoted below.
The case for having a mortgage is pretty simple: You can get a 30-year mortgage for about 4% right now. Probably even slightly below 4% when you shop around. Equities will certainly beat that nominal rate of return over the next 30 years. Open and shut case! End of the discussion, right? Well, not so fast! As we have seen in our posts on Sequence of Return Risk (Part 14 and Part 15), the average return is less relevant than the sequence of returns. Having a mortgage in retirement will exacerbate your sequence of return risk because you are frontloading your withdrawals early on during retirement to pay for the mortgage; not just interest but also principal payments. In other words, if we are unlucky and experience low returns early during our retirement (the definition of sequence risk) we’d withdraw more shares when equity prices are down. The definition of sequence risk!
The lesson from this exercise: If you are risk-averse and like to hedge out the tail risk it’s best to have no mortgage and a moderate bond allocation. If you are a risk-taker (degenerate gambler?) then you might as well go all-in: Have a mortgage and 100% equities in the portfolio as well. Having both a mortgage and a bond portfolio doesn’t make any sense. And there is a reason for it: the bond return is likely inferior to the mortgage yield. This is beautifully consistent with an old vintage post from last year. If you want to use the mortgage as leverage to juice up your equity returns, that’s fine. It’s a matter of risk tolerance. But make sure you don’t use the mortgage to buy low-yielding bonds; leverage only works when your asset returns more than what you pay for your liabilities!!!
https://earlyretirementnow.com/2017/10/ ... etirement/
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage in Retirement

Post by Cipro » Fri May 17, 2019 5:42 pm

Bronko wrote:
Fri May 17, 2019 11:36 am
I'd do a 6 month CD then if you're not ready to purchase do another for same time period. Protected money and they usually carry penalties if you withdraw before maturity. You could always do several of different value.
I called up Fidelity to inquire about CDs. They offered a different ‘class’ of SPAXX, that has average return of 2.31%. Any reason not to stick with the MM?

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Re: Mortgage in Retirement

Post by corn18 » Fri May 17, 2019 8:16 pm

Cipro wrote:
Fri May 17, 2019 5:42 pm
Bronko wrote:
Fri May 17, 2019 11:36 am
I'd do a 6 month CD then if you're not ready to purchase do another for same time period. Protected money and they usually carry penalties if you withdraw before maturity. You could always do several of different value.
I called up Fidelity to inquire about CDs. They offered a different ‘class’ of SPAXX, that has average return of 2.31%. Any reason not to stick with the MM?
I use FZDXX. $100k min, but it sounds like you have that. 2.31% SEC yield right now. I am parking my house payoff (or not) money there right now.
Don't do something, just stand there!

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Re: Mortgage in Retirement

Post by Cipro » Fri May 17, 2019 8:28 pm

That’s it! Same MM fund.

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Re: Mortgage in Retirement

Post by MindBogler » Sat May 18, 2019 10:09 am

willthrill81 wrote:
Fri May 17, 2019 5:14 pm
Karsten at Early Retirement Now has an excellent post about this, two excerpts from which are quoted below.
I find much of what has been done on ERN interesting but I don't agree with his analysis on this point. Examine it critically: There are 8 sample portfolios in his "model" and yet not a single one accounts for the mortgage as an expense. Every scenario includes a 15Y or 30Y mortgage that starts on day 0 of retirement. He doesn't bother to examine how the result changes with a say .25, .5 or .75 of the mortgage period remaining. He doesn't include a scenario where the mortgage payment is backed by sufficient assests (Mtg Payment * 12 * 25). The analysis is so flawed that I wonder if it was setup that way to achieve a desired result.

Funding retirement is entirely a matter of matching expenses with assets which can generate cash flow. The rate of the mortgage, whether the leverage "beats" paying down, these are all irrelevant talking points in a discussion about meeting one's fixed expenses. It doesn't matter whether expenses are $500 or $5000 a month, the derivation of the amount of money you need for a safe withdrawal rate remains the same (25X). Setting up the mortgage to fail by not accounting for it as a fixed expense and then declaring "mortgages increase sequence of return risk" is a horribly flawed result.

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Re: Mortgage in Retirement

Post by willthrill81 » Sat May 18, 2019 10:26 am

MindBogler wrote:
Sat May 18, 2019 10:09 am
willthrill81 wrote:
Fri May 17, 2019 5:14 pm
Karsten at Early Retirement Now has an excellent post about this, two excerpts from which are quoted below.
I find much of what has been done on ERN interesting but I don't agree with his analysis on this point. Examine it critically: There are 8 sample portfolios in his "model" and yet not a single one accounts for the mortgage as an expense. Every scenario includes a 15Y or 30Y mortgage that starts on day 0 of retirement. He doesn't bother to examine how the result changes with a say .25, .5 or .75 of the mortgage period remaining. He doesn't include a scenario where the mortgage payment is backed by sufficient assests (Mtg Payment * 12 * 25). The analysis is so flawed that I wonder if it was setup that way to achieve a desired result.

Funding retirement is entirely a matter of matching expenses with assets which can generate cash flow. The rate of the mortgage, whether the leverage "beats" paying down, these are all irrelevant talking points in a discussion about meeting one's fixed expenses. It doesn't matter whether expenses are $500 or $5000 a month, the derivation of the amount of money you need for a safe withdrawal rate remains the same (25X). Setting up the mortgage to fail by not accounting for it as a fixed expense and then declaring "mortgages increase sequence of return risk" is a horribly flawed result.
Even if you disagree with the specifics of the simulation that Karsten conducted, it doesn't change the fact that any fixed expense in retirement increases sequence of returns risk compared to the absence of a fixed expense. It's a mathematical fact. Holding a mortgage in retirement increases one's 'tail risk', both negative and positive, because it's a form of leverage. Obviously, leverage can work out in your favor if your portfolio assets (i.e. stocks) significantly outperform the cost of the leverage, but the inverse can happen as well. The first quote I made of Karsten's blog illustrates this very well.
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Re: Mortgage in Retirement

Post by MindBogler » Sat May 18, 2019 11:04 am

willthrill81 wrote:
Sat May 18, 2019 10:26 am
Even if you disagree with the specifics of the simulation that Karsten conducted, it doesn't change the fact that any fixed expense in retirement increases sequence of returns risk compared to the absence of a fixed expense. It's a mathematical fact.
If one needs $60k a year to live does it matter whether $15k of it is from a mortgage or heath insurance? Ignore what the expenses are labeled because it doesn't matter at all to this analysis. If my yearly expense is X then I will plan for a 25X portfolio to support a 30 year draw down. You seem to be implying that reducing expenses or, stated differently, having in excess of 25X reduces sequence of returns risk. There is nothing surprising about that result!
willthrill81 wrote:
Sat May 18, 2019 10:26 am
Holding a mortgage in retirement increases one's 'tail risk', both negative and positive, because it's a form of leverage. Obviously, leverage can work out in your favor if your portfolio assets (i.e. stocks) significantly outperform the cost of the leverage, but the inverse can happen as well.
The way I analyzed the problem was based on matching assets to liabilities not about "winning" an invest vs mortgage payoff battle. Stocks don't need to outperform the mortgage note given my analysis. The portfolio needs to be sufficiently large that a safe withdrawal rate is able to match my total yearly expense including the mortgage payment (25X).

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Re: Mortgage in Retirement

Post by willthrill81 » Sat May 18, 2019 12:25 pm

MindBogler wrote:
Sat May 18, 2019 11:04 am
willthrill81 wrote:
Sat May 18, 2019 10:26 am
Even if you disagree with the specifics of the simulation that Karsten conducted, it doesn't change the fact that any fixed expense in retirement increases sequence of returns risk compared to the absence of a fixed expense. It's a mathematical fact.
If one needs $60k a year to live does it matter whether $15k of it is from a mortgage or heath insurance? Ignore what the expenses are labeled because it doesn't matter at all to this analysis. If my yearly expense is X then I will plan for a 25X portfolio to support a 30 year draw down. You seem to be implying that reducing expenses or, stated differently, having in excess of 25X reduces sequence of returns risk. There is nothing surprising about that result!
willthrill81 wrote:
Sat May 18, 2019 10:26 am
Holding a mortgage in retirement increases one's 'tail risk', both negative and positive, because it's a form of leverage. Obviously, leverage can work out in your favor if your portfolio assets (i.e. stocks) significantly outperform the cost of the leverage, but the inverse can happen as well.
The way I analyzed the problem was based on matching assets to liabilities not about "winning" an invest vs mortgage payoff battle. Stocks don't need to outperform the mortgage note given my analysis. The portfolio needs to be sufficiently large that a safe withdrawal rate is able to match my total yearly expense including the mortgage payment (25X).
You seem to be presuming that a 4% withdrawal rate (i.e. 25x expenses) eliminates sequence of returns risk. It does not. Any fixed withdrawal strategy will encounter sequence of returns risk (i.e. the final portfolio balance is dependent on the order of the returns you experience).

Let's look a very simple example of this. We'll ignore mortgage interest rates as they are irrelevant here. At the point of retirement, we'll assume that a retiree has the choice as to whether to pay off off their mortgage or leave the funds invested in their portfolio. They will need to pay the mortgage using withdrawals from their portfolio. If their portfolio drops in value, they will still need to make their mortgage payment every month. This is what happens when sequence of returns risk appears.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage in Retirement

Post by MindBogler » Sat May 18, 2019 1:30 pm

willthrill81 wrote:
Sat May 18, 2019 12:25 pm
Let's look a very simple example of this. We'll ignore mortgage interest rates as they are irrelevant here. At the point of retirement, we'll assume that a retiree has the choice as to whether to pay off off their mortgage or leave the funds invested in their portfolio. They will need to pay the mortgage using withdrawals from their portfolio. If their portfolio drops in value, they will still need to make their mortgage payment every month. This is what happens when sequence of returns risk appears.
They also need to cover their other fixed expenses, like eating food, paying property taxes and keeping the lights and water on. These will require withdrawals from a portfolio in either case. Sequence of returns risk is real but independent of the nature of the underlying expenses. Don't you see that the only difference here is magnitude? You're thinking of the mortgage as a special case when it isn't special at all. If you carry a mortgage into retirement you need more assets to survive.

Let's take two simple cases where expenses cannot be reduced. The nature of the expense is irrelevant.

Case A: $50000/yr expense, $1.25m portfolio.
Case B: $60000/yr expense, $1.50m portfolio.

Does the sequence of returns risk differ between these cases?

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Re: Mortgage in Retirement

Post by willthrill81 » Sat May 18, 2019 1:35 pm

MindBogler wrote:
Sat May 18, 2019 1:30 pm
willthrill81 wrote:
Sat May 18, 2019 12:25 pm
Let's look a very simple example of this. We'll ignore mortgage interest rates as they are irrelevant here. At the point of retirement, we'll assume that a retiree has the choice as to whether to pay off off their mortgage or leave the funds invested in their portfolio. They will need to pay the mortgage using withdrawals from their portfolio. If their portfolio drops in value, they will still need to make their mortgage payment every month. This is what happens when sequence of returns risk appears.
They also need to cover their other fixed expenses, like eating food, paying property taxes and keeping the lights and water on. These will require withdrawals from a portfolio in either case. Sequence of returns risk is real but independent of the nature of the underlying expenses. Don't you see that the only difference here is magnitude? You're thinking of the mortgage as a special case when it isn't special at all. If you carry a mortgage into retirement you need more assets to survive.

Let's take two simple cases where expenses cannot be reduced. The nature of the expense is irrelevant.

Case A: $50000/yr expense, $1.25m portfolio.
Case B: $60000/yr expense, $1.50m portfolio.

Does the sequence of returns risk differ between these cases?
Of course the SRR is the same in both instances because the withdrawal rate is identical in both. In the real world, there will always be a difference in the withdrawal rate if you compare paying off the mortgage at the beginning of retirement vs. not.

And yes, you will always have some SRR, but all else being equal, we'd choose for it be as small as possible.

I don't know why you seem to be insinuating that all of a retiree's expenses are fixed. That's hypothetically possible, but it's quite uncommon, especially for Bogleheads. Expenses that can be reduced or eliminated if your portfolio performance is poor represent less of a problem with SRR than truly fixed expenses which must be satisfied regardless of portfolio performance. Most BH retirees could easily cut their spending by 20% or more if the need was there. We plan for 50% of our spending in retirement to be discretionary, and we could completely eliminate that if we needed to. That's not an option with a mortgage.

It really does matter whether an expense is fixed or not.
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Re: Mortgage in Retirement

Post by MindBogler » Sat May 18, 2019 2:38 pm

willthrill81 wrote:
Sat May 18, 2019 1:35 pm
Of course the SRR is the same in both instances because the withdrawal rate is identical in both.
Exactly my point!
willthrill81 wrote:
Sat May 18, 2019 1:35 pm
I don't know why you seem to be insinuating that all of a retiree's expenses are fixed.
I'm not making that assertion. I simplified, controlling the variables in the equation because It helps illustrate my point.

If I understand correctly, you're assuming that a retiree has basically two spending buckets: discretionary (D) and non-discretionary spending (N) and N+D is the yearly expense (T). In times of distress, the retiree will reduce non-discretionary spending. They plan retirement with a total expense of D + N = T * 25. I agree that reasonable people would reduce D as necessary in poor market conditions. I suppose that as the proportion of N in relation to T increases, the retiree has less room adjust their withdrawal downward by cutting out D.

What I'm trying to explain is that if N = T, the composition of N is irrelevant because spending cannot be reduced further. This means the statement "mortgage increases sequence of returns risk" is not true. It has conditions for truth and that is why I'm making an issue at all.

I think, in a more generic sense, you could say that sequence of returns risk is affected by the percentage of non-discretionary spending with respect to total monthly expenses. As N approaches T, risk increases because flexibility to reduce expenses is reduced. To counter this risk, one might need a larger multiple of expenses. I think that there might be some way to model this by comparing SRR at varying ratios of D:N vs varying expense multiples. I think there is a more general truth hidden here than "mortgage bad."

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Re: Mortgage in Retirement

Post by willthrill81 » Sat May 18, 2019 2:46 pm

MindBogler wrote:
Sat May 18, 2019 2:38 pm
What I'm trying to explain is that if N = T, the composition of N is irrelevant because spending cannot be reduced further. This means the statement "mortgage increases sequence of returns risk" is not true. It has conditions for truth and that is why I'm making an issue at all.
No, it has no conditions. Remember that the retiree still has the choice of keeping the mortgage or eliminating it.

Here's a real world example of why the SRR risk is higher with a mortgage in retirement. According to BankRate.com, 30 year mortgage rates are currently 4.25%. Accordinly, the principal and interest payments for a year would be 5.9% of the mortgage balance. Alternatively, you could take the funds out of your portfolio and not have a mortgage. This means that at the very beginning of the mortgage, your corresponding withdrawal rate just for the mortgaged funds is 5.9%. By definition, paying off the mortgage now means that there is literally no sequence of returns risk for the funds used to do so; the subsequent sequence of returns will have no impact at all on the funds used to buy the home. But by taking out the mortgage, you must withdraw 5.9% of the starting corresponding funds from your account every year. If your portfolio goes down in value, then your effective withdrawal rate will go up even more because the mortgage payment is fixed. As Karsten pointed out, that is the very definition of SRR.
MindBogler wrote:
Sat May 18, 2019 2:38 pm
I think, in a more generic sense, you could say that sequence of returns risk is affected by the percentage of non-discretionary spending with respect to total monthly expenses. As N approaches T, risk increases because flexibility to reduce expenses is reduced. To counter this risk, one might need a larger multiple of expenses. I think that there might be some way to model this by comparing SRR at varying ratios of D:N vs varying expense multiples.
Yes, that is certainly true. The more fixed your expenses are, the less flexibility you have to reduce withdrawals if needed, and you would need a larger multiple of expenses in order to keep your SRR steady. That's why carrying a mortgage into retirement always increases SRR compared to not having it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mortgage in Retirement

Post by MindBogler » Sat May 18, 2019 3:32 pm

willthrill81 wrote:
Sat May 18, 2019 2:46 pm
MindBogler wrote:
Sat May 18, 2019 2:38 pm
What I'm trying to explain is that if N = T, the composition of N is irrelevant because spending cannot be reduced further. This means the statement "mortgage increases sequence of returns risk" is not true. It has conditions for truth and that is why I'm making an issue at all.
No, it has no conditions. Remember that the retiree still has the choice of keeping the mortgage or eliminating it.
Does the retiree always have a choice? Where does the money come from (or where did you assume it came from)? What if its in taxable and they will owe 15% capital gains? What if taking that withdrawal pushes them into a higher overall bracket? What if the mortgage has only 5 years remaining on a 30? Are you really convinced that your premise is always true, without conditions?

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Re: Mortgage in Retirement

Post by bltn » Sat May 18, 2019 4:03 pm

willthrill81 wrote:
Sat May 18, 2019 12:25 pm
MindBogler wrote:
Sat May 18, 2019 11:04 am
willthrill81 wrote:
Sat May 18, 2019 10:26 am
Even if you disagree with the specifics of the simulation that Karsten conducted, it doesn't change the fact that any fixed expense in retirement increases sequence of returns risk compared to the absence of a fixed expense. It's a mathematical fact.
If one needs $60k a year to live does it matter whether $15k of it is from a mortgage or heath insurance? Ignore what the expenses are labeled because it doesn't matter at all to this analysis. If my yearly expense is X then I will plan for a 25X portfolio to support a 30 year draw down. You seem to be implying that reducing expenses or, stated differently, having in excess of 25X reduces sequence of returns risk. There is nothing surprising about that result!
willthrill81 wrote:
Sat May 18, 2019 10:26 am
Holding a mortgage in retirement increases one's 'tail risk', both negative and positive, because it's a form of leverage. Obviously, leverage can work out in your favor if your portfolio assets (i.e. stocks) significantly outperform the cost of the leverage, but the inverse can happen as well.
The way I analyzed the problem was based on matching assets to liabilities not about "winning" an invest vs mortgage payoff battle. Stocks don't need to outperform the mortgage note given my analysis. The portfolio needs to be sufficiently large that a safe withdrawal rate is able to match my total yearly expense including the mortgage payment (25X).
You seem to be presuming that a 4% withdrawal rate (i.e. 25x expenses) eliminates sequence of returns risk. It does not. Any fixed withdrawal strategy will encounter sequence of returns risk (i.e. the final portfolio balance is dependent on the order of the returns you experience).

Let's look a very simple example of this. We'll ignore mortgage interest rates as they are irrelevant here. At the point of retirement, we'll assume that a retiree has the choice as to whether to pay off off their mortgage or leave the funds invested in their portfolio. They will need to pay the mortgage using withdrawals from their portfolio. If their portfolio drops in value, they will still need to make their mortgage payment every month. This is what happens when sequence of returns risk appears.
This sequence of returns analysis of the desirability of having a mortgage is something I ve never thought about. It is a good explanation for the advantage of paying off a mortgage before retirement. I ve recommended relatives and friends to do this based more on an intuitive feeling more than anything else.
Good explanation. Thanks.

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Re: Mortgage in Retirement

Post by willthrill81 » Sat May 18, 2019 4:47 pm

MindBogler wrote:
Sat May 18, 2019 3:32 pm
willthrill81 wrote:
Sat May 18, 2019 2:46 pm
MindBogler wrote:
Sat May 18, 2019 2:38 pm
What I'm trying to explain is that if N = T, the composition of N is irrelevant because spending cannot be reduced further. This means the statement "mortgage increases sequence of returns risk" is not true. It has conditions for truth and that is why I'm making an issue at all.
No, it has no conditions. Remember that the retiree still has the choice of keeping the mortgage or eliminating it.
Does the retiree always have a choice? Where does the money come from (or where did you assume it came from)? What if its in taxable and they will owe 15% capital gains? What if taking that withdrawal pushes them into a higher overall bracket? What if the mortgage has only 5 years remaining on a 30? Are you really convinced that your premise is always true, without conditions?
If the retiree does not have adequate savings to pay off the mortgage, then there is obviously no choice, but that's irrelevant to whether the presence of a mortgage increases SRR compared to not having it. Whether the price that retirees must pay in the form of taxes or something else is worth the reduction in SRR is another matter. But the SRR is still there, which has been my point all along, and which you seem completely unwilling to acknowledge exists.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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