Mortgage Pay Off Question

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Topic Author
Colleen
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Mortgage Pay Off Question

Post by Colleen »

I have always been of the opinion that for most people, including myself, it is better to carry a mortgage than not. Should one fall on hard times, all things being equal it is better to have $300,000 in cash and $300,000 in mortgage debt, than it is to have 0 cash and 0 mortgage. This is for the obvious reason that you can feed and house yourself for many years with $300,000 and a mortgage, but cannot do so with $0 and $0 mortgage. Of course you could raise cash with a loan or home sale, but who knows what that'll cost you when its needed.

That said, we've lost our main income source, no longer get a tax deduction for the interest, and getting rid of the monthly payment would be nice. However, I'm not sure it makes economic sense to pay it off. Here is the situation:

We have $900,000 outside of retirement accounts.
We have $2,200,000 inside retirement accounts.
We owe $275,000 on the mortgage, paying $1560 a month of which $890 a month is interest and it'll be paid off in 2042.
We have no idea if we will be living in the house long term. No plans to move but maybe a job comes up that allows us to.

In order pay off the house right now and have living expenses for the year, we'd need to realize $144,000 in long term capital gains which would cause us to pay taxes of approximately $10,000. That would save us $18,708 in mortgage payments every year (of which close to $10,000 is interest in the near term years), but would cost us $19,250 assuming we earn 7% on the $275,000 balance.

Of course we might lose money if it stays invested in the stock market, but but historically that has not been the case over long periods of time.

If we pay off the mortgage now that would leave us with $625,000 outside of retirement accounts, which isn't ideal given we need about 7 years 9 months until DH turns 59.5 years old and can readily tap the retirement money. Given our spending that would be cutting it very close, assuming the markets cooperated between now and then.

Thoughts?
bloom2708
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Re: Mortgage Pay Off Question

Post by bloom2708 »

You explained many of the pros and cons.

You put the "personal" in your personal finance. If you don't think about what other people say or do, what do you want to do?

I would pay it off. Wait 1 year. See if you miss it. If you miss it get a new mortgage for the amount you want. Or wait another year and re-check.

You have enough cash to do it. $10k tax on the gain is less than the interest. Nobody knows if stocks will go up or down or sideways, so that is just guessing.

We paid our mortgage off in early fall 2007. Right before the "big dip". Haven't regretted it once or thought about getting a new mortgage.

Good luck with your decision.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
Pops1860
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Re: Mortgage Pay Off Question

Post by Pops1860 »

I sense you have a good grasp on the financial details of paying off / not paying off your mortgage early, so you seem to be looking for some other aspects to consider.

Here's a perspective to consider.

This does not have to be an 'all or none' decision. You can add some extra $$ to your scheduled monthly payment (how much is your choice), and direct the mortgage holder to apply the excess to principal. The advantage here is you can stop at any time, or change the excess amount (up or down) as well. You can gauge your comfort with paying the mortgage off early without a irrevocable, up front decision.

Paying a mortgage off early is a 'feel good' consideration, as well as a financial consideration, IMO. Doing it this way allows you to see if the 'feel good' aspect actually makes a difference to you. For us, we did this with both our house mortgage and next-door-lot mortgage, paying them off in about 1/2 the scheduled time. For us, the 'feel good' factor was an important consideration, and we have never had second thoughts. After the 'no more mortgage' milestone, we just accelerated our retirement savings, still had plenty of time to accrue market growth with remaining employment years.

Good luck.
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw
Unladen_Swallow
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Re: Mortgage Pay Off Question

Post by Unladen_Swallow »

I have never been one to find a mortgage useful if one has the ability to pay it off.

You have to decide for yourself.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
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Meg77
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Re: Mortgage Pay Off Question

Post by Meg77 »

A 30 year old who is investing a chunk of their income into stocks each year can reasonably keep a mortgage in hopes of earning higher market returns than the cost of the loan. If stocks tank, they may lose the bet in certain periods, but life goes on and they can just keep plowing more and more into investments. And they can afford the payment regardless.

However it sounds like you are living off of your investments for the most part. So you are having to sell investments NOW to make the mortgage payments if you keep it. It's an entirely different discussion. You are much more susceptible to sequence of returns risk. Your portfolio could tank AND you have to continue selling shares (or at minimum not reinvesting dividends and not making new contributions) which severely curtails your portfolio's ability to bounce back even once the market recovers.

Put in emotional terms: How would you feel if you decided not to pay off the mortgage and the stock market dropped 30% next week? Sure, eventually it will likely rebound, but you aren't dealing with a long time horizon here. You're living off the portfolio TODAY. Besides, you absolutely cannot assume you'll earn 7% on your portfolio for the next 10 years. 7% might be the AVERAGE OVER TIME you can expect, but if you factor in the last decade of phenomenal growth, then to get to that average stocks could return negative or nothing for much of the next decade and still average 7% over that 20 year stretch.

Stocks are at all time highs. Take some money off the table, pay your gains while you have them, slash your monthly expenses, and then sleep easy knowing you have to sell less to live on each year to live on and are therefore much less exposed to the whims of the market.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

Stocks have been at an all time high for years and years and years. Sure, I accept that there will be bumps along the way. Last year we “lost” $200,000 in the dip and regretted not selling some at the time. Since then we “made” $300,000 in 90 days. I suppose my gut tells me I’d I lose $300,000 in 90 days I’ll really kick myself If we still have the mortgage. OTOH, ifthe markets tank I think I’ll regret it more if I pay off the mortgage because in that case I will have “lost” $275,000 on top of the market losses and will thus be less able to finance expenses these next 7.5 years. Taking out another mortgage would be expensive and could be at higher rates, so that isn’t a risk I want to take.

As for what happens in a 30% correction, that’s what the BND portfolio is for. So I can buy that dip.

Prepaying a portion of the mortgage didn’t make any sense to me because it has a negative impact on my cashflow. I get there I am reducing exposure to the markets but I don’t feel like I am getting anything for it other than shortening my payoff date.

Maybe raise the cash and park it so that I can pay the mortgage off without taking any market risk in the interim? Probably should maximize cash from selling appreciated assets at least until the next tax bracket. That way if markets tank we I’ll have cash in hand.
boomer_techie
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Re: Mortgage Pay Off Question

Post by boomer_techie »

Colleen wrote: Wed Jan 22, 2020 2:15 pm IThat said, we've lost our main income source, ...

In order pay off the house right now and have living expenses for the year, we'd need to realize $144,000 in long term capital gains which would cause us to pay taxes of approximately $10,000.
With the loss of you main income source, you should have a large 0% bracket for LTCG: As much as $80,000 + $24,800.

Have you considered tax gain harvesting to the limit of the 0% rate and using available proceeds to pay down the mortgage? In two or three years you should be able to pay off the mortgage.
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

For sure we will maximize the 0% capital gains. I think we'll take a middle road and stockpile any extra cash after filling up the 0% bucket. However, due to unemployment, dividends and my own job, that will only give us $48,000 or so of gains to play with.
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Watty
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Re: Mortgage Pay Off Question

Post by Watty »

Colleen wrote: Wed Jan 22, 2020 2:15 pm ....which isn't ideal given we need about 7 years 9 months until DH turns 59.5 years old and can readily tap the retirement money.
Just in case you have not seen it, there are ways to get the money without paying the penalty.

https://www.bogleheads.org/wiki/Substan ... c_payments
Colleen wrote: Wed Jan 22, 2020 2:15 pm In order pay off the house right now and have living expenses for the year, we'd need to realize $144,000 in long term capital gains which would cause us to pay taxes of approximately $10,000.
Paying taxes is never fun but sometimes it is only a question of when you pay then not "if" you will have to pay them someday.
Colleen wrote: Wed Jan 22, 2020 2:15 pm ...assuming we earn 7% on the $275,000 balance.
That does not sound very realistic to me. The problem is that since you are in your 50s now have "lost our main income source" you should likely have at least a somewhat conservative asset allocation. I don't know what asset allocation you are using but the Vanguard 2020 fund is at 50% bonds.

https://investor.vanguard.com/mutual-fu ... olio/vtwnx

This means that of the $275K you would use to pay off the mortage half of it, $137K, is invested in bonds that might be earning 2% or so. That makes it really hard to get a 7% return.

You will also have a sequence of returns risk. I have posted this simplistic example of sequence of returns risk before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

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

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

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

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

Post by Colleen »

We are 65% in equities.
19% bonds
4% fixed return fund earning 7%

The rest in cash and a bit in crypto.

I don’t see 7% returns as far fetched though I realize there can be down years during which time I’ll sell bonds for stocks and hopefully ride the market back up.

Would I eliminate the risk by raising enough cash to pay the mortgage and just sitting on it? Then I make the monthly payments. Have the cash on hand to pay off the mortgage OR spend or invest it in a down market.
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grabiner
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Re: Mortgage Pay Off Question

Post by grabiner »

Colleen wrote: Wed Jan 22, 2020 2:15 pm I have always been of the opinion that for most people, including myself, it is better to carry a mortgage than not. Should one fall on hard times, all things being equal it is better to have $300,000 in cash and $300,000 in mortgage debt, than it is to have 0 cash and 0 mortgage. This is for the obvious reason that you can feed and house yourself for many years with $300,000 and a mortgage, but cannot do so with $0 and $0 mortgage. Of course you could raise cash with a loan or home sale, but who knows what that'll cost you when its needed.

That said, we've lost our main income source, no longer get a tax deduction for the interest, and getting rid of the monthly payment would be nice. However, I'm not sure it makes economic sense to pay it off. Here is the situation:

We have $900,000 outside of retirement accounts.
We have $2,200,000 inside retirement accounts.
We owe $275,000 on the mortgage, paying $1560 a month of which $890 a month is interest and it'll be paid off in 2042.
We have no idea if we will be living in the house long term. No plans to move but maybe a job comes up that allows us to.
Your numbers suggest a 3.875% rate. That is the rate to use for comparison, as it is a risk-free but long-term return. If you sell low-risk long-term bonds to pay down the mortgage, you come out ahead if the bond yield is less than 3.875%. (This may or may not be a benefit, but since you have a huge taxable account and will soon be eligible to withdraw from your retirement accounts, you don't have a liquidity need.) If you sell something else, you change both your risk and return, but you can adjust for this by buying or selling in your retirement account. For example, if you sell stock to pay down the mortgage, and move an equal amount from bonds to stock in your employer plan, you have not changed your stock-market risk. (This is exactly what I will do if I pay mine off; it isn't worth paying off now because I have a very low, still-deductible rate.)
In order pay off the house right now and have living expenses for the year, we'd need to realize $144,000 in long term capital gains which would cause us to pay taxes of approximately $10,000.
But that is an additional cost. If you make an extra mortgage payment but lose 10% of the payment to capital gains, that is equivalent to losing 10% of the return. For example, if you have already paid down your mortgage to ten years, then paying it down to nine years is equivalent to a risk-free bond yielding 3.875%, but if you lose 10% of the principal before buying that "bond", the return is equivalent to only 2.78%, which is much less attractive.

Therefore, I would suggest paying down only as much as you can with low-taxed capital gains. In future years, you will be able to pay down the mortgage further. And if you have paid down the principal, see whether your lender allows you to "recast" the mortgage to improve your cash flow.
Wiki David Grabiner
KlangFool
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Re: Mortgage Pay Off Question

Post by KlangFool »

Colleen wrote: Wed Jan 22, 2020 2:15 pm
If we pay off the mortgage now that would leave us with $625,000 outside of retirement accounts, which isn't ideal given we need about 7 years 9 months until DH turns 59.5 years old and can readily tap the retirement money. Given our spending that would be cutting it very close, assuming the markets cooperated between now and then.

Thoughts?
Colleen,

1) Just thinking out loud. What if you use your cash to create the opportunity for Roth conversion and Capital Gain Harvesting over the next 7 years?

2) What is your annual expense with the mortgage?

3) What is your annual expense without the mortgage?

4) Do you have any Roth IRAs? How much Roth IRA's contribution can you tap to bridge the gap?

It looks like a sequence of return risk and cash flow management problems. Paying off the mortgage may or may not help.

KlangFool
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

KlangFool wrote: Wed Jan 22, 2020 11:27 pm
Colleen wrote: Wed Jan 22, 2020 2:15 pm
If we pay off the mortgage now that would leave us with $625,000 outside of retirement accounts, which isn't ideal given we need about 7 years 9 months until DH turns 59.5 years old and can readily tap the retirement money. Given our spending that would be cutting it very close, assuming the markets cooperated between now and then.

Thoughts?
Colleen,

1) Just thinking out loud. What if you use your cash to create the opportunity for Roth conversion and Capital Gain Harvesting over the next 7 years?

2) What is your annual expense with the mortgage?

3) What is your annual expense without the mortgage?

4) Do you have any Roth IRAs? How much Roth IRA's contribution can you tap to bridge the gap?

It looks like a sequence of return risk and cash flow management problems. Paying off the mortgage may or may not help.

KlangFool
At the moment we do not really have much cash to speak of. Today I will sell an amount that almost fills our 0% bucket and see what that gets us.

Expenses with the mortgage run about $120,000 and without, about $100,000. I’ll probably want to budget an extra $10,000 in there for a cash cushion.

We have between us $352,000 in Roth IRAs. And $16,000 in a medical savings account. The plan was not to spend from those for a long time so as to allow them to grow.

Maybe we just have to sacrifice the Roth or take 72t distributions if the taxable account depletes.

One thing we can do is tax loss harvest using our well thought out crypto investments. Luckily we forgot to tax loss harvest those last year and wound up with $3000 in realized gains but have like $10,000 of losses we can harvest. Will do that today.
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JoeRetire
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Re: Mortgage Pay Off Question

Post by JoeRetire »

Colleen wrote: Wed Jan 22, 2020 2:15 pm I have always been of the opinion that for most people, including myself, it is better to carry a mortgage than not. Should one fall on hard times, all things being equal it is better to have $300,000 in cash and $300,000 in mortgage debt, than it is to have 0 cash and 0 mortgage.

That said, we've lost our main income source, no longer get a tax deduction for the interest, and getting rid of the monthly payment would be nice. However, I'm not sure it makes economic sense to pay it off.

If we pay off the mortgage now that would leave us with $625,000 outside of retirement accounts, which isn't ideal given we need about 7 years 9 months until DH turns 59.5 years old and can readily tap the retirement money. Given our spending that would be cutting it very close, assuming the markets cooperated between now and then.

Thoughts?
Seems like you already know the right answer.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
KlangFool
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Re: Mortgage Pay Off Question

Post by KlangFool »

Colleen wrote: Thu Jan 23, 2020 3:58 am
KlangFool wrote: Wed Jan 22, 2020 11:27 pm
Colleen wrote: Wed Jan 22, 2020 2:15 pm
If we pay off the mortgage now that would leave us with $625,000 outside of retirement accounts, which isn't ideal given we need about 7 years 9 months until DH turns 59.5 years old and can readily tap the retirement money. Given our spending that would be cutting it very close, assuming the markets cooperated between now and then.

Thoughts?
Colleen,

1) Just thinking out loud. What if you use your cash to create the opportunity for Roth conversion and Capital Gain Harvesting over the next 7 years?

2) What is your annual expense with the mortgage?

3) What is your annual expense without the mortgage?

4) Do you have any Roth IRAs? How much Roth IRA's contribution can you tap to bridge the gap?

It looks like a sequence of return risk and cash flow management problems. Paying off the mortgage may or may not help.

KlangFool
At the moment we do not really have much cash to speak of. Today I will sell an amount that almost fills our 0% bucket and see what that gets us.

Expenses with the mortgage run about $120,000 and without, about $100,000. I’ll probably want to budget an extra $10,000 in there for a cash cushion.

We have between us $352,000 in Roth IRAs. And $16,000 in a medical savings account. The plan was not to spend from those for a long time so as to allow them to grow.

Maybe we just have to sacrifice the Roth or take 72t distributions if the taxable account depletes.

One thing we can do is tax loss harvest using our well thought out crypto investments. Luckily we forgot to tax loss harvest those last year and wound up with $3000 in realized gains but have like $10,000 of losses we can harvest. Will do that today.
Colleen,

1) I would not be comfortable to retire without 1 to 2 years of expense in cash.

<<We have between us $352,000 in Roth IRAs. And $16,000 in a medical savings account. The plan was not to spend from those for a long time so as to allow them to grow.

Maybe we just have to sacrifice the Roth or take 72t distributions if the taxable account depletes.>>

2) How much of that 352K is Roth IRA's contribution? You could spend that before 59 1/2.

<<The plan was not to spend from those for a long time so as to allow them to grow. >>

3) Come on. Money is fungible. You could spend Roth IRA's contribution while refilling the Roth IRA with Roth conversion. In the end, the Roth IRA is still there.

4) You should look at your AA too. I do not think you can afford a 50% loss of your portfolio.

5) I don't think you can afford to pay off the mortgage due to cash flow concerns.

KlangFool
EnjoyIt
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Re: Mortgage Pay Off Question

Post by EnjoyIt »

You have 3.1 million, a $275k home and expenses of $120k/yr with the mortgage or $100k/yr expenses without the mortgage. Since the mortgage has 22 more years to go it pretty much is a constant expense.

3.1 million with 120k/yr is a withdrawal rate of 3.87%
If you pay off the mortgage you will have 2.85 million and a withdrawal rate of 3.5%.
I like the idea of paying off your mortgage ASAP. It does not have to happen tomorrow but I think over the next 2-3 years you should pay it off. A 3.5% withdrawal rate plus collecting Social security in about 18 years I believe will have a 100% success rate in firecalc.

Also, you are in the perfect scenario where your mortgage can be considered as a negative bond. If you have bonds paying out less than 3.875% then it mathematically incorrect to keep those bonds and the mortgage. Sell the bonds to pay off the mortgage and then over the next few years rebalance back to your desired asset allocation. I say this despite for most people do not believe that a mortgage is a negative bond. But for people like you whose mortgage is a tiny portion of their portfolio it hold very true.

Lastly, don't be afraid to pull money from your retirement accounts to live. You do not have to wait till 59.5 as described by another poster above. You have plenty of options.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

KlangFool wrote: Thu Jan 23, 2020 9:13 am Colleen,

1) I would not be comfortable to retire without 1 to 2 years of expense in cash.

<<We have between us $352,000 in Roth IRAs. And $16,000 in a medical savings account. The plan was not to spend from those for a long time so as to allow them to grow.

Maybe we just have to sacrifice the Roth or take 72t distributions if the taxable account depletes.>>

2) How much of that 352K is Roth IRA's contribution? You could spend that before 59 1/2.

<<The plan was not to spend from those for a long time so as to allow them to grow. >>

3) Come on. Money is fungible. You could spend Roth IRA's contribution while refilling the Roth IRA with Roth conversion. In the end, the Roth IRA is still there.

4) You should look at your AA too. I do not think you can afford a 50% loss of your portfolio.

5) I don't think you can afford to pay off the mortgage due to cash flow concerns.

KlangFool
1. We do have $213,000 in cash that is in the traditional IRA. It isn't worth $213,000 of course, but its there (for now) in an emergency.
We also have $73,000 in I-Bonds, which we can tap, but which may also be used for college expenses a decade down the road.
And, I just sold about $119,000 in my taxable accounts to fill up my 0% capital gains bucket.
Come August, I *Could* harvest another $100,000 in long term gains after realizing some crypto losses. Do you think I should do that? I'd be raising a lot more cash than I need this year, but it would essentially give me most of what I need for the following year (i.e., I'll have two years of expenses in accessible cash. I could harvest less today selling something else, instead of waiting for the 1 year holding period to expire in august).

2. We've not kept track of the Roth contributions versus earnings. I don't even know if we have tax returns going back to when we first converted the Traditional IRA to a Roth... that is something I'll need to research but I am pretty sure that information is lost at this point.

3. I am not sure about this. If I convert money from my traditional IRA to a Roth, I have to pay taxes on that money. So, if I spend $100,000 of Roth money and convert $100,000 to a Roth to "refill" it, that will cost me more than $100,000 to do so; spending and replacing seems like something to be avoided. Am I missing something there? That's the same problem, I suppose, with just laddering Roth IRAs. Now I will be careful to keep my IRS forms to track the basis in those ladders, but there will be upfront tax costs to create the ladders. It is generally accepted that it is worth the up front tax hit to have more money in the Roth growing for later? It seems that this would have to be a better strategy than spend and replace assuming we can swing it and assuming it makes sense to convert and pay up front.

4. I wouldn't be comfortable with a 50% loss in my porfolio. I know its theoretically possible but we never lost that much even when we were 100% invested in equities. At least, i don't recall getting hit that hard. And now that we have some bond money to rebalance, I feel like we are already much more able to weather the stock storm by rebalancing.

5. I am coming to the same conclusion. Instead I am going to raise the maximum cash filling up my 0% capital gains bucket. If that exceeds our annual expenses over the next few years maybe we'll use it as ballast to buy into dips and/or pay off the mortgage if it grows too big.
Last edited by Colleen on Thu Jan 23, 2020 10:48 am, edited 1 time in total.
EnjoyIt
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Re: Mortgage Pay Off Question

Post by EnjoyIt »

I wanted to add some math. If you are holding a ~70/30 allocation with $3.1 million that means you have $930k in bonds/CDs/cash/money market accounts and cryptos. If you pay off your mortgage by selling those you will have ($930k - $275k = $655k) on a portfolio of $2.85 million. That amounts to a 77/23 AA and not that far off from 70/30. Hopefully you are not re-investing dividends plus over the next few years you can sell equities for living expenses which will eventually get you back to 70/30.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

EnjoyIt wrote: Thu Jan 23, 2020 10:10 am I wanted to add some math. If you are holding a ~70/30 allocation with $3.1 million that means you have $930k in bonds/CDs/cash/money market accounts and cryptos. If you pay off your mortgage by selling those you will have ($930k - $275k = $655k) on a portfolio of $2.85 million. That amounts to a 77/23 AA and not that far off from 70/30. Hopefully you are not re-investing dividends plus over the next few years you can sell equities for living expenses which will eventually get you back to 70/30.
I stopped reinvesting dividends in the taxable accounts this past summer. Still reinvesting in the sheltered accounts.

The taxable accounts, excluding the savings bonds, are now 72% stocks, 14% cash, 8.5% bonds and 5% alternatives
So I can't pay off the mortgage by selling bonds. Most of those bonds are munibonds paying more than the mortgage rate so I'm not intending to sell those.
Lalamimi
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Re: Mortgage Pay Off Question

Post by Lalamimi »

You might ask if they can re amortize if you make a large one time payment. We paid $90K on our $250K mortgage on our "retirement/weekend home" when we sold our house (my husband had just lost his job). They did for a small fee. Made the payments much more manageable.
5 yrs later we refinanced the R/W home and cashed out about $30K for down payment to purchase a small house to live in when I had to come back to Houston to work. Sold it 5 yrs later for double the price. Took longer to sell the R/W home, but it had tripled in price and best feeling was paying off the large mtg we had taken out on our new retirement house. Good luck.
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Re: Mortgage Pay Off Question

Post by Jack FFR1846 »

Colleen wrote: Thu Jan 23, 2020 10:05 am
We also have $73,000 in I-Bonds, which we can tap, but which may also be used for college expenses a decade down the road.
For tax year '19, if your MAGI was over $151,600 (MFJ), you get no interest tax exclusion for using savings bonds for education. If you think you'll be below this when your kids are in college, then holding the bonds to eliminate interest is a good thing. If not, use the equity now, if you like.
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Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

Jack FFR1846 wrote: Thu Jan 23, 2020 11:29 am
Colleen wrote: Thu Jan 23, 2020 10:05 am
We also have $73,000 in I-Bonds, which we can tap, but which may also be used for college expenses a decade down the road.
For tax year '19, if your MAGI was over $151,600 (MFJ), you get no interest tax exclusion for using savings bonds for education. If you think you'll be below this when your kids are in college, then holding the bonds to eliminate interest is a good thing. If not, use the equity now, if you like.
Since we only need enough to live off of, I expect that we will get the benefit of the interest tax exclusion if our kids go to college.
apex84
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Re: Mortgage Pay Off Question

Post by apex84 »

Another option is to refinance to a 15 year at a lower rate then pay it off early as your desired based on how much you want to pay in capital gains & income taxes.
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

apex84 wrote: Thu Jan 23, 2020 11:56 am Another option is to refinance to a 15 year at a lower rate then pay it off early as your desired based on how much you want to pay in capital gains & income taxes.
Refinancing is very expensive where I live, as there is a recording tax of 1.8% of the mortgage value. I will ask them if we qualify for a loan modification, which is what I believe we call the loan recasting that others have talked about.
KlangFool
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Re: Mortgage Pay Off Question

Post by KlangFool »

Colleen wrote: Thu Jan 23, 2020 10:05 am
1. We do have $213,000 in cash that is in the traditional IRA. It isn't worth $213,000 of course, but its there (for now) in an emergency.
Colleen,

1) This does not make any sense. You want your cash in your taxable account. So, I would sell the bond and stock in your taxable account and buy the stock and bond with your cash in this trad. IRA.

2) You need a full-scale portfolio review and something like i-ORP to work out your withdrawal strategy. I am not smart enough to help you fully.

KlangFool
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

KlangFool wrote: Thu Jan 23, 2020 12:20 pm
Colleen wrote: Thu Jan 23, 2020 10:05 am
1. We do have $213,000 in cash that is in the traditional IRA. It isn't worth $213,000 of course, but its there (for now) in an emergency.
Colleen,

1) This does not make any sense. You want your cash in your taxable account. So, I would sell the bond and stock in your taxable account and buy the stock and bond with your cash in this trad. IRA.

2) You need a full-scale portfolio review and something like i-ORP to work out your withdrawal strategy. I am not smart enough to help you fully.

KlangFool
All things being equal, I agree that it is better to have the cash in the taxable account. However, to do that we'd have to realize taxable gains.
The cash is there because he hasn't invested all of the rollover money yet and because that money serves as ballast for buying when the markets drop. I know that seems crazy to the boglehead community, but he likes to have "dry powder" to buy when buying opportunities arise. And between you and me, I prefer that the cash is less touchable and visible, so I'm happy its in the IRA.

I am off to I-orp.com, something I didn't know about till i ran the acronym. Thank you.
JBTX
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Re: Mortgage Pay Off Question

Post by JBTX »

Maybe I missed it, but I have seen no discussion of what the mortgage interest rate is.
TheDDC
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Re: Mortgage Pay Off Question

Post by TheDDC »

I would pay off the mortgage fast (as in tomorrow). There is more risk to holding a mortgage long term than you acknowledge. BTW I don't like either of your hypothetical options. I pick option 3: $600,000 in cash and 0 mortgage.

-TheDDC
Rules to wealth building: 90-100% VTSAX piled high and deep, 0-10% VIGAX tilt, 0% given away to banks, minimize amount given to medical-industrial complex
janezoey
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Re: Mortgage Pay Off Question

Post by janezoey »

Can someone tell me if this is the correct way to think of mortgage interest?

For example, if I wanted to pay an extra $2400 into my mortgage (30-year; 3.875%), I would only save $93 x number of years left. If say, I have 25 years left, then I would save $2325. But if I only had 10 years left, I would only save $930 ($93x10).

So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage. Otherwise, with inflation and growing needs (e.g. kids' college tuition, health, ageism) as you get older, being liquid may be much more valuable.
Thorsbane
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Re: Mortgage Pay Off Question

Post by Thorsbane »

Meg77 wrote: Wed Jan 22, 2020 4:28 pm A 30 year old who is investing a chunk of their income into stocks each year can reasonably keep a mortgage in hopes of earning higher market returns than the cost of the loan. If stocks tank, they may lose the bet in certain periods, but life goes on and they can just keep plowing more and more into investments. And they can afford the payment regardless.

However it sounds like you are living off of your investments for the most part. So you are having to sell investments NOW to make the mortgage payments if you keep it. It's an entirely different discussion. You are much more susceptible to sequence of returns risk. Your portfolio could tank AND you have to continue selling shares (or at minimum not reinvesting dividends and not making new contributions) which severely curtails your portfolio's ability to bounce back even once the market recovers.

Put in emotional terms: How would you feel if you decided not to pay off the mortgage and the stock market dropped 30% next week? Sure, eventually it will likely rebound, but you aren't dealing with a long time horizon here. You're living off the portfolio TODAY. Besides, you absolutely cannot assume you'll earn 7% on your portfolio for the next 10 years. 7% might be the AVERAGE OVER TIME you can expect, but if you factor in the last decade of phenomenal growth, then to get to that average stocks could return negative or nothing for much of the next decade and still average 7% over that 20 year stretch.

Stocks are at all time highs. Take some money off the table, pay your gains while you have them, slash your monthly expenses, and then sleep easy knowing you have to sell less to live on each year to live on and are therefore much less exposed to the whims of the market.
I like your spin on this and it reconciles very closely to my feelings to paying off your mortgage early (which I aspire to do). My experience in 2008-2009 when the stock market dovetailed was that staffing realignments took place resulting in layoffs and individuals taking jobs that were far below their qualifications (re: less income). I'm very risk averse to this and like the idea of protecting for those uncertain market times which are relatively guaranteed to arrive again at some point in my career. Whether it will be me that is fired is not guaranteed, but I can guarantee that if I don't pay down my mortgage I will still have expenses associated with it.
KlangFool
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Re: Mortgage Pay Off Question

Post by KlangFool »

janezoey wrote: Thu Jan 23, 2020 12:54 pm Can someone tell me if this is the correct way to think of mortgage interest?

For example, if I wanted to pay an extra $2400 into my mortgage (30-year; 3.875%), I would only save $93 x number of years left. If say, I have 25 years left, then I would save $2325. But if I only had 10 years left, I would only save $930 ($93x10).

So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage. Otherwise, with inflation and growing needs (e.g. kids' college tuition, health, ageism) as you get older, being liquid may be much more valuable.
janezoey,

No, that is the wrong way to think of mortgage interest. Most people do not max up their tax-advantaged accounts. So, they are paying 20+% to 30+% taxes in order to save a 3.875% mortgage interest.

<<So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage.>>

No, it does not make sense to pre-pay a 3.875% mortgage until the person had maxed up all tax-advantaged accounts. The person is only saving 3.875% mortgage interest regardless of any time of the mortgage. The math is still the same.

KlangFool
KlangFool
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Re: Mortgage Pay Off Question

Post by KlangFool »

Colleen wrote: Thu Jan 23, 2020 12:40 pm
KlangFool wrote: Thu Jan 23, 2020 12:20 pm
Colleen wrote: Thu Jan 23, 2020 10:05 am
1. We do have $213,000 in cash that is in the traditional IRA. It isn't worth $213,000 of course, but its there (for now) in an emergency.
Colleen,

1) This does not make any sense. You want your cash in your taxable account. So, I would sell the bond and stock in your taxable account and buy the stock and bond with your cash in this trad. IRA.

2) You need a full-scale portfolio review and something like i-ORP to work out your withdrawal strategy. I am not smart enough to help you fully.

KlangFool
All things being equal, I agree that it is better to have the cash in the taxable account. However, to do that we'd have to realize taxable gains.
The cash is there because he hasn't invested all of the rollover money yet and because that money serves as ballast for buying when the markets drop. I know that seems crazy to the boglehead community, but he likes to have "dry powder" to buy when buying opportunities arise. And between you and me, I prefer that the cash is less touchable and visible, so I'm happy its in the IRA.

I am off to I-orp.com, something I didn't know about till i ran the acronym. Thank you.
Colleen,

You have to get rid of the bond in your taxable account first. They are interest income and it limits your Roth conversion. As for the stock, they are long-term capital gain. They are not as bad. And, you should not have a lot of capital gain for the bond.

In summary, you have a withdrawal problem that you need to think in term of

A) The sequence of Return Risk

B) Tax Management.

I would be a lot more comfortable if your annual expense is 80K to 100K instead of 100K to 120K. The margin for error is a lot lower with your current annual expense.

Sorry that I could not be more helpful. Someone that is retired and well-versed in those tools like I-Orp would be more useful to you after you provided the details.

KlangFool
janezoey
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Re: Mortgage Pay Off Question

Post by janezoey »

KlangFool wrote: Thu Jan 23, 2020 1:02 pm
janezoey wrote: Thu Jan 23, 2020 12:54 pm Can someone tell me if this is the correct way to think of mortgage interest?

For example, if I wanted to pay an extra $2400 into my mortgage (30-year; 3.875%), I would only save $93 x number of years left. If say, I have 25 years left, then I would save $2325. But if I only had 10 years left, I would only save $930 ($93x10).

So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage. Otherwise, with inflation and growing needs (e.g. kids' college tuition, health, ageism) as you get older, being liquid may be much more valuable.
janezoey,

No, that is the wrong way to think of mortgage interest. Most people do not max up their tax-advantaged accounts. So, they are paying 20+% to 30+% taxes in order to save a 3.875% mortgage interest.

<<So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage.>>

No, it does not make sense to pre-pay a 3.875% mortgage until the person had maxed up all tax-advantaged accounts. The person is only saving 3.875% mortgage interest regardless of any time of the mortgage. The math is still the same.

KlangFool
Ok. Assume all retirement tax vehicles are maxed out as well as 529 plans being full-funded. Then does it matter whether the extra mortgage payments are paid near the beginning?
chevca
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Re: Mortgage Pay Off Question

Post by chevca »

Colleen wrote: Thu Jan 23, 2020 10:05 am
KlangFool wrote: Thu Jan 23, 2020 9:13 am Colleen,

1) I would not be comfortable to retire without 1 to 2 years of expense in cash.

<<We have between us $352,000 in Roth IRAs. And $16,000 in a medical savings account. The plan was not to spend from those for a long time so as to allow them to grow.

Maybe we just have to sacrifice the Roth or take 72t distributions if the taxable account depletes.>>

2) How much of that 352K is Roth IRA's contribution? You could spend that before 59 1/2.

<<The plan was not to spend from those for a long time so as to allow them to grow. >>

3) Come on. Money is fungible. You could spend Roth IRA's contribution while refilling the Roth IRA with Roth conversion. In the end, the Roth IRA is still there.

4) You should look at your AA too. I do not think you can afford a 50% loss of your portfolio.

5) I don't think you can afford to pay off the mortgage due to cash flow concerns.

KlangFool
1. We do have $213,000 in cash that is in the traditional IRA. It isn't worth $213,000 of course, but its there (for now) in an emergency.
In the first post you said you guys lost your main source of income. Is that not an emergency?

Bottom line is, you guys have over $3M in your portfolio... it matters little if you pay off the mortgage all at once or keep it. To everyone that says to pay it off, you make arguments to keep the mortgage. Even though you said it would be nice to get rid if the monthly payment in the first post? Just keep the mortgage, if that's what you want to do.
chevca
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Re: Mortgage Pay Off Question

Post by chevca »

janezoey wrote: Thu Jan 23, 2020 1:18 pm
KlangFool wrote: Thu Jan 23, 2020 1:02 pm
janezoey wrote: Thu Jan 23, 2020 12:54 pm Can someone tell me if this is the correct way to think of mortgage interest?

For example, if I wanted to pay an extra $2400 into my mortgage (30-year; 3.875%), I would only save $93 x number of years left. If say, I have 25 years left, then I would save $2325. But if I only had 10 years left, I would only save $930 ($93x10).

So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage. Otherwise, with inflation and growing needs (e.g. kids' college tuition, health, ageism) as you get older, being liquid may be much more valuable.
janezoey,

No, that is the wrong way to think of mortgage interest. Most people do not max up their tax-advantaged accounts. So, they are paying 20+% to 30+% taxes in order to save a 3.875% mortgage interest.

<<So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage.>>

No, it does not make sense to pre-pay a 3.875% mortgage until the person had maxed up all tax-advantaged accounts. The person is only saving 3.875% mortgage interest regardless of any time of the mortgage. The math is still the same.

KlangFool
Ok. Assume all retirement tax vehicles are maxed out as well as 529 plans being full-funded. Then does it matter whether the extra mortgage payments are paid near the beginning?
The more you can throw at the mortgage towards the beginning the better, if you're trying to save on total interest paid. However much extra you throw at it early on, you never pay interest on that again.

Which of course, is still true later on. But, as the balance gets smaller and time left on the loan gets shorter, it's not as big a benefit.
KlangFool
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Re: Mortgage Pay Off Question

Post by KlangFool »

janezoey wrote: Thu Jan 23, 2020 1:18 pm
KlangFool wrote: Thu Jan 23, 2020 1:02 pm
janezoey wrote: Thu Jan 23, 2020 12:54 pm Can someone tell me if this is the correct way to think of mortgage interest?

For example, if I wanted to pay an extra $2400 into my mortgage (30-year; 3.875%), I would only save $93 x number of years left. If say, I have 25 years left, then I would save $2325. But if I only had 10 years left, I would only save $930 ($93x10).

So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage. Otherwise, with inflation and growing needs (e.g. kids' college tuition, health, ageism) as you get older, being liquid may be much more valuable.
janezoey,

No, that is the wrong way to think of mortgage interest. Most people do not max up their tax-advantaged accounts. So, they are paying 20+% to 30+% taxes in order to save a 3.875% mortgage interest.

<<So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage.>>

No, it does not make sense to pre-pay a 3.875% mortgage until the person had maxed up all tax-advantaged accounts. The person is only saving 3.875% mortgage interest regardless of any time of the mortgage. The math is still the same.

KlangFool
Ok. Assume all retirement tax vehicles are maxed out as well as 529 plans being full-funded. Then does it matter whether the extra mortgage payments are paid near the beginning?
janezoey,

1) No. You either pay or save a 3.875% interest per year.

2) Even in that case, you need to think about the opportunity cost. My 60/40 portfolio returns about 7% per year. Why would I save 3.875% when I can earn 7% with the same amount of money?

KlangFool
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

I'm not sure I need to get rid of the municipal bonds in my taxable account. I am not even sure I want to do roth conversions yet. But even if I did, I don't believe the bonds impact this decision much, if at all.
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

Turns out that I may be able to kill two birds with one stone.
I have two municipal bonds, one Build America Bond with a coupon of 7.4%, principal $20,640 ($40 loss) and one general obligations bond paying 4.5% with a principal value of $10,391 ($500 gain). Both are likely to be called in the next year or so.

If I give up the tax free interest on my I-Bonds $30,000 principal $2,854 interest and $40,965.02 (37,500 principal, $3,465 interest), I may be able to recast my mortgage and save $617 a month. Thoughts?

To me it seems a little nutty to get rid of bonds that pay me more than my mortgage rate (3.785%). I feel like I shouldn’t sell those until called.
KlangFool
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Re: Mortgage Pay Off Question

Post by KlangFool »

OP,

There are multiple dimensions to your question and it is all related.

1) Your Asset Allocation now versus what you should have

2) Your Withdrawal plan/cash flow

3) Your tax management strategy before and after 59 1/2.

4) The sequence of return risk during your withdrawal (SRR)

For example, you may need more bonds in order to protect against your SRR. And, the best place to put it is in your Trad. IRA account. You may need more cash in your taxable account in order to protect against SRR and provide better tax management since cash generates minimal gain and taxable income. On top of all that, you may generate gains and taxable income while moving your investment around.

You need a full portfolio review and cash flow analysis. And, none of this is possible unless and until you provide a full portfolio breakdown. Until and unless you do this, it is not safe to pay down or pay off your mortgage.

I am not that smart. This is just my opinion.

KlangFool
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grabiner
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Re: Mortgage Pay Off Question

Post by grabiner »

janezoey wrote: Thu Jan 23, 2020 12:54 pm Can someone tell me if this is the correct way to think of mortgage interest?

For example, if I wanted to pay an extra $2400 into my mortgage (30-year; 3.875%), I would only save $93 x number of years left. If say, I have 25 years left, then I would save $2325. But if I only had 10 years left, I would only save $930 ($93x10).

So to me, adding more money to a mortgage mostly makes sense if you are near the beginning of the mortgage.
The math is not quite correct because the prepayment compounds. If you pay $2400 ten years before the mortgage is paid off, you will save $3510 in payments at the end of the mortgage, a gain of $1110. If you pay it 25 years before the mortgage is paid off, you will save $6209, a gain of $3809.

But the more important issue is that the math is the wrong question, because it matters when you get the money. If you pay $2400 ten years before the mortgage is paid off, you will have $3510 more money in ten years, which you can invest. If you invest that amount at 3.875% for another fifteen years, it will grow to $6209, which is the same as the 25-year benefit.
Wiki David Grabiner
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grabiner
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Re: Mortgage Pay Off Question

Post by grabiner »

Colleen wrote: Thu Jan 23, 2020 3:40 pm Turns out that I may be able to kill two birds with one stone.
I have two municipal bonds, one Build America Bond with a coupon of 7.4%, principal $20,640 ($40 loss) and one general obligations bond paying 4.5% with a principal value of $10,391 ($500 gain). Both are likely to be called in the next year or so.

If I give up the tax free interest on my I-Bonds $30,000 principal $2,854 interest and $40,965.02 (37,500 principal, $3,465 interest), I may be able to recast my mortgage and save $617 a month. Thoughts?

To me it seems a little nutty to get rid of bonds that pay me more than my mortgage rate (3.785%). I feel like I shouldn’t sell those until called.
If these bonds are likely to be called soon, their current yield is not the yield to maturity, but the yield to call. For example, if the GO bond has a par of $10,000 and will be called at $10,200 exactly one year from now, keeping it for one year will give you $10,650 (including the $450 coupon), a gain of only 2.49%.

However, selling soon-to-be-called bonds may not be worthwhile anyway because of transaction costs. If that $10,391 bond gives you only $10,288 if you sell it (a 1% trading loss), the gain on keeping it rises to 3.52%.

Whether to cash in your I-Bonds depends on their rates. If you have old I-Bonds, with a rate of 1% or higher (well above current rates), you should keep them to maturity. I-Bonds, unlike marketable bonds, do not have their prices rise when rates fall; they can only be redeemed at par. The value to you of keeping such a bond is much more than the par value.
Wiki David Grabiner
aqan
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Re: Mortgage Pay Off Question

Post by aqan »

another thing to consider is that the stock market is all time high.. it wouldn't be a bad idea to take a little off the table reduce your risk exposure and feel debt free at the same time. you can also chose to pay off x% instead of 100% of your mortgage if you're not fully sold yet.
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Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

grabiner wrote: Thu Jan 23, 2020 8:02 pm Whether to cash in your I-Bonds depends on their rates. If you have old I-Bonds, with a rate of 1% or higher (well above current rates), you should keep them to maturity. I-Bonds, unlike marketable bonds, do not have their prices rise when rates fall; they can only be redeemed at par. The value to you of keeping such a bond is much more than the par value.
Thank you for that. The I-Bonds show rates of 1.4 - 2.32%. As for the municipals, I am not really sure if they are being called or not.

One of them is described thus: https://www.bonddesk.com/etrade/owa/pkg ... =63165TFX8https://www.bonddesk.com/etrade/owa/pkg ... =63165TFX8

the other is described https://www.bonddesk.com/etrade/owa/pkg ... =649791DT4https://www.bonddesk.com/etrade/owa/pkg ... =649791DT4

Note the red language which is somewhat of a mystery to me.
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

aqan wrote: Thu Jan 23, 2020 8:42 pm another thing to consider is that the stock market is all time high.. it wouldn't be a bad idea to take a little off the table reduce your risk exposure and feel debt free at the same time. you can also chose to pay off x% instead of 100% of your mortgage if you're not fully sold yet.
I have already taken a ton off the table by moving from 100% equities to 61% equities. It feels like the right allocation for me.
Topic Author
Colleen
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Re: Mortgage Pay Off Question

Post by Colleen »

KlangFool wrote: Thu Jan 23, 2020 6:09 pm OP,

There are multiple dimensions to your question and it is all related.

1) Your Asset Allocation now versus what you should have

2) Your Withdrawal plan/cash flow

3) Your tax management strategy before and after 59 1/2.

4) The sequence of return risk during your withdrawal (SRR)

For example, you may need more bonds in order to protect against your SRR. And, the best place to put it is in your Trad. IRA account. You may need more cash in your taxable account in order to protect against SRR and provide better tax management since cash generates minimal gain and taxable income. On top of all that, you may generate gains and taxable income while moving your investment around.

You need a full portfolio review and cash flow analysis. And, none of this is possible unless and until you provide a full portfolio breakdown. Until and unless you do this, it is not safe to pay down or pay off your mortgage.

I am not that smart. This is just my opinion.

KlangFool
I don't know if this helps anybody, but it lays out my asset allocation by account type, etc. Everybody's risk tolerance is different, of course. But I feel this is appropriate for me. Having moved from 100% equities to 60% equities, I feel as though I am barely participating in the market, and it hurts me to see the gains I am losing. But it doesn't hurt quite enough to make me increase exposure.

Hopefully this image shows up.

Image
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