Another IRA/Mortgage Payoff Question

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Joe3zz
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Another IRA/Mortgage Payoff Question

Post by Joe3zz » Fri May 29, 2020 1:24 pm

My wife and I are retired, age 64 and 63 respectively. About 3.5M in assets 50/50 stocks and bonds. I read this article from Laurence Kotlikoff about using a 401K to pay off a morgage: https://www.forbes.com/sites/kotlikoff/ ... bb3dbab09b

So, having access to Maxifi planner, I ran a scenario comparing what would happen if we immediately withdrew $300K from our bond funds IRA (a regular IRA, not a Roth) to pay off our mortgage. The mortgage has about 23 years left @ 4.375%.

Of course, we would take a tax hit this year, but even with that, according to Maxifi we would be about $270,000 ahead over the course of our retirement.

Any thoughts from the Bogleheads?

Golf maniac
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Re: Another IRA/Mortgage Payoff Question

Post by Golf maniac » Fri May 29, 2020 1:27 pm

Do you plan to take Medicare Part B at 65? If you do having this large increase in income this year will have a significant impact on your premium. It would be better to pay it off gradually over several years and stay below the income level where the premiums increase.

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CAsage
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Re: Another IRA/Mortgage Payoff Question

Post by CAsage » Fri May 29, 2020 1:32 pm

The real problem might be your mortgage rate! Consider looking into a 10 year refi or a fixed for a few years, then variable loan? Then draw the money out and pay it off over a couple years, but definitely watch the taxes. The real "arbitrage" looks like it presumes the mortgage rate is much higher than the bond interest, which you could tighten up.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

EnjoyIt
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Re: Another IRA/Mortgage Payoff Question

Post by EnjoyIt » Fri May 29, 2020 1:38 pm

There are so many details missing to your question.
Much has to do with if you have a pension? How much of your assets are tax deferred and how large your RMDs will be? What will be your SS disbursements? What are your expenses and how much are you paying in taxes?

Basically it may be worth it to pay taxes now compared to making mortgage payments and paying higher taxes later when collecting RMDs, SS and pension.

This is a math problem with lots of loving parts.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

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corn18
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Re: Another IRA/Mortgage Payoff Question

Post by corn18 » Fri May 29, 2020 1:45 pm

Does Maxfli take into account inflation? A mortgage payment is a real expense vs. almost every other non loan expense which is nominal. What that means is @ 3% inflation, a $2,000 PI payment today is only $1107 in 20 years in real dollars. If I were you, I would run the analysis @ 3% mortgage rate and include 3% inflation.

I did this in my model and it resulted in a huge difference in keeping a mortgage vs. paying cash. I used a 3% mortgage rate, 2% real return on investments and 2% inflation.

All that being said, there isn't a day that goes by that I don't want to just pay off the mortgage.
Don't do something, just stand there!

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Joe3zz
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Re: Another IRA/Mortgage Payoff Question

Post by Joe3zz » Fri May 29, 2020 2:17 pm

Corn18,

I re-ran the scenario using 3% inflation and 2% real rate of return. Now the 270K gain becomes a 36k loss. Which illustrates that the outcome depends on what happens going forward. Based on the current market, Kotlikoff is recommending a 1.25% inflation and a 1.25% real rate of return (so essentially flat). So I guess it depends on how things shake out. Very tempted to do it though, because it would be nice to be debt free.

I appreciate other’s thoughts on refinancing, but I really want to consider just getting rid of the mortgage first - may to play with refinance options.

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corn18
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Re: Another IRA/Mortgage Payoff Question

Post by corn18 » Fri May 29, 2020 2:20 pm

Joe3zz wrote:
Fri May 29, 2020 2:17 pm
Corn18,

I re-ran the scenario using 3% inflation and 2% real rate of return. Now the 270K gain becomes a 36k loss. Which illustrates that the outcome depends on what happens going forward. Based on the current market, Kotlikoff is recommending a 1.25% inflation and a 1.25% real rate of return (so essentially flat). So I guess it depends on how things shake out. Very tempted to do it though, because it would be nice to be debt free.

I appreciate other’s thoughts on refinancing, but I really want to consider just getting rid of the mortgage first - may to play with refinance options.
If the payoff amount was sitting in cash, this is a no brainer: payoff that high interest rate. It's not, so it's more complicated.
Don't do something, just stand there!

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BrandonBogle
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Re: Another IRA/Mortgage Payoff Question

Post by BrandonBogle » Fri May 29, 2020 2:22 pm

Joe3zz wrote:
Fri May 29, 2020 2:17 pm
Corn18,

I re-ran the scenario using 3% inflation and 2% real rate of return. Now the 270K gain becomes a 36k loss. Which illustrates that the outcome depends on what happens going forward. Based on the current market, Kotlikoff is recommending a 1.25% inflation and a 1.25% real rate of return (so essentially flat). So I guess it depends on how things shake out. Very tempted to do it though, because it would be nice to be debt free.

I appreciate other’s thoughts on refinancing, but I really want to consider just getting rid of the mortgage first - may to play with refinance options.
Given the emotional aspect, getting the loan paid down and off is worth a cost. However, given the taxes on the withdrawal and Medicare considerations, I would pursue a no-cost refi. Without a W2 or self-employment income source, you may find fewer lenders to work on a refi and thus have less completion leading to higher rates, but surely you can find something better than 4.5%. Then pay it off over 10 years or whatever makes the most tax-sense.

EnjoyIt
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Re: Another IRA/Mortgage Payoff Question

Post by EnjoyIt » Fri May 29, 2020 9:40 pm

My parents paid off their mortgage this year while in retirement. They are so glad they did it because now SS covers all their essentials plus plenty of discretionary. Their portfolio is for the more extravagant fun. I estimated their taxes for 2020 and it looks like they will be paying $0 in taxes so we will convert a few thousand into their Roth account.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

Nate7out
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Re: Another IRA/Mortgage Payoff Question

Post by Nate7out » Sat May 30, 2020 7:45 am

Pay it down over the next several years being more strategic with the tIRA withdrawals. Stay in or below a certain tax bracket; also note the other poster's comment about medicare - I know nothing about that issue.

This will also help when it comes time to take RMDs.

mortfree
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Re: Another IRA/Mortgage Payoff Question

Post by mortfree » Sat May 30, 2020 8:06 am

With 3.5M in assets do you have to pull from your IRA?

Nothing in a taxable account with small gains that could pay it off?

Your best bet really is to look into a refinance IF you can’t pay it off in a year or so (just a guess on timing)

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Joe3zz
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Re: Another IRA/Mortgage Payoff Question

Post by Joe3zz » Sat May 30, 2020 11:41 am

Thanks for the suggestions....

I see some are suggesting a refinance, but it seems the best I could do is less than a 1% decrease, which by the time I pay closing costs etc., is not worth it. I will take a look at doing it non-ira funds, with the current decline, I may be able to do it without a capital gain.

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BrandonBogle
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Re: Another IRA/Mortgage Payoff Question

Post by BrandonBogle » Sat May 30, 2020 12:56 pm

Joe3zz wrote:
Sat May 30, 2020 11:41 am
Thanks for the suggestions....

I see some are suggesting a refinance, but it seems the best I could do is less than a 1% decrease, which by the time I pay closing costs etc., is not worth it. I will take a look at doing it non-ira funds, with the current decline, I may be able to do it without a capital gain.
Everyone’s circumstances will vary, but I closed two weeks ago in a 2.625% 15-year loan with no closing costs. Others are now getting around 3% 30-year with either no lender costs or no closing costs. Now, using retirement income may not be as easy as a W2, so the rate may be higher, but I have to feel you can get a no-cost refi with a rate lower than 4.375%.

EnjoyIt
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Re: Another IRA/Mortgage Payoff Question

Post by EnjoyIt » Sat May 30, 2020 1:01 pm

Joe3zz wrote:
Sat May 30, 2020 11:41 am
Thanks for the suggestions....

I see some are suggesting a refinance, but it seems the best I could do is less than a 1% decrease, which by the time I pay closing costs etc., is not worth it. I will take a look at doing it non-ira funds, with the current decline, I may be able to do it without a capital gain.
Plenty of people closing at below 3% with no closing costs. Even if you can drop it by 1% that is worth $3k in the first year (unless you pay it off tomorrow.) I figure $3k is worth a few hours of my time.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

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