Yet Another When to Take Social Security Thread

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Yet Another When to Take Social Security Thread

Post by MarkerFM »

I've searched some threads but didn't find any that apply to my situation, so I'm asking for advice.

My wife will turn 62 later this year, and therefore eligible to file early for social security. I am three years younger than she, and neither of us work for money. We are both in good health. Her parents lived into their 90s and mine unfortunately died in their 70s of smoking related illnesses, but my grandparents lived long lives.

Her estimated PIA is about $1,100 and mine is about $2,600. Using Open Social Security and the 2017 NSO nonsmoker preferred mortality table for both of us, and assuming benefits are not cut, the answer about whether she starts now or waits depends of course on the real discount rate. At 2.9% and above, the recommendation is to start now.

I read the article on why the default is the yield on 20-year TIPS, and am stuck on this question, "Alternatively, you can think of the analysis as, “what part of my portfolio would I spend down in order to delay Social Security? And what would be the rate of return that I’d be giving up by no longer having those assets in my portfolio?”".

We don't spend as much as we make and really don't have plans to. If we assume we would take whatever social security we get and invest it, then the real discount rate would be higher than 2.9% over time. As a practical matter, this change in our cash flow isn't significant enough to actually do anything with, and it would just sit in cash or be absorbed into regular spending. For what it's worth, we would pay tax on 85% of the benefit now and in the future.

So I'm stuck on how to think about the real discount rate. If anyone who was in a similar situation would like to let me know how you thought about this issue, I would appreciate it.
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Re: Yet Another When to Take Social Security Thread

Post by ObliviousInvestor »

Whether you would or wouldn't be spending the benefits doesn't really matter in terms of applicable discount rate. "Take the money and invest it" is no different from "spend the benefits and thereby have more remaining in the portfolio." In either case, a dollar of benefits is a substitute for a dollar in the portfolio, so the appropriate discount rate is the expected rate of return for the asset class in the portfolio that has the most similar risk.

So that generally means bond returns, unless a) you have a 100%-stock portfolio and b) if you took the money and invested it you would continue to use a 100%-stock portfolio.
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Re: Yet Another When to Take Social Security Thread

Post by petulant »

ObliviousInvestor wrote: Fri Jul 10, 2020 11:06 am Whether you would or wouldn't be spending the benefits doesn't really matter in terms of applicable discount rate. "Take the money and invest it" is no different from "spend the benefits and thereby have more remaining in the portfolio." In either case, a dollar of benefits is a substitute for a dollar in the portfolio, so the appropriate discount rate is the expected rate of return for the asset class in the portfolio that has the most similar risk.

So that generally means bond returns, unless a) you have a 100%-stock portfolio and b) if you took the money and invested it you would continue to use a 100%-stock portfolio.
+1 Agreed.
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Re: Yet Another When to Take Social Security Thread

Post by willthrill81 »

ObliviousInvestor wrote: Fri Jul 10, 2020 11:06 am Whether you would or wouldn't be spending the benefits doesn't really matter in terms of applicable discount rate. "Take the money and invest it" is no different from "spend the benefits and thereby have more remaining in the portfolio." In either case, a dollar of benefits is a substitute for a dollar in the portfolio, so the appropriate discount rate is the expected rate of return for the asset class in the portfolio that has the most similar risk.

So that generally means bond returns, unless a) you have a 100%-stock portfolio and b) if you took the money and invested it you would continue to use a 100%-stock portfolio.
And with bond yields being what they are, deferring SS benefits for as long as possible is almost certainly going to provide a better effective 'return'.
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Re: Yet Another When to Take Social Security Thread

Post by Vanguard Fan 1367 »

willthrill81 wrote: Fri Jul 10, 2020 11:44 am And with bond yields being what they are, deferring SS benefits for as long as possible is almost certainly going to provide a better effective 'return'.
I agree with that. If you can wait till 70 or as long as possible to take your social security that is what I am doing and would recommend that you consider doing also.
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Re: Yet Another When to Take Social Security Thread

Post by MarkerFM »

ObliviousInvestor wrote: Fri Jul 10, 2020 11:06 am Whether you would or wouldn't be spending the benefits doesn't really matter in terms of applicable discount rate. "Take the money and invest it" is no different from "spend the benefits and thereby have more remaining in the portfolio." In either case, a dollar of benefits is a substitute for a dollar in the portfolio, so the appropriate discount rate is the expected rate of return for the asset class in the portfolio that has the most similar risk.

So that generally means bond returns, unless a) you have a 100%-stock portfolio and b) if you took the money and invested it you would continue to use a 100%-stock portfolio.
Thanks, after reading your reply I realize I forgot that money is fungible! I'm curious why the discount rate needs to be set at the bond return. If I'm 70/30 and will continue with that over the long term, shouldn't the expected return be the 70/30 long term return?
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Re: Yet Another When to Take Social Security Thread

Post by ObliviousInvestor »

MarkerFM wrote: Fri Jul 10, 2020 1:39 pm Thanks, after reading your reply I realize I forgot that money is fungible! I'm curious why the discount rate needs to be set at the bond return.
Because money is fungible! :)

Sorry, couldn't resist...
MarkerFM wrote: Fri Jul 10, 2020 1:39 pm If I'm 70/30 and will continue with that over the long term, shouldn't the expected return be the 70/30 long term return?
By way of analogy, imagine that Vanguard releases a new bond fund tomorrow. When evaluating the new fund to determine whether you want to add it to your portfolio or not, would you want to know whether the fund's expected return is:
1) At least as good as the return of bond funds in your portfolio with similar risk, or
2) At least as good as the weighted average return of your 70/30 portfolio?

Question #1 is the relevant question. If the new fund had, for example, a 0.5% higher yield than a given bond fund in your portfolio with a similar level of risk, it would probably merit inclusion -- even if the new fund's expected return is considerably lower than the weighted average expected return of your 70/30 portfolio.

Same thing with Social Security.

If your portfolio is currently 30% bonds and you are currently considering filing before 70, you can instead choose to swap some of those bonds for more Social Security. In practice, that usually looks like spending more quickly from bonds than you otherwise would have done -- "selling" bonds in order to "buy" Social Security.

For somebody who isn't spending from their portfolio because they have income from other sources, it means shifting the allocation of the portfolio toward stocks. Counter-intuitive, but because money is fungible it's the same concept.

That is, if you have, for example, decided that filing at 62 and using a 70/30 portfolio is an appropriate level of risk, what about instead filing at 70 and using an 80/20 portfolio? (Just making up the 80/20 here. The actual percentage would depend on the size of your Social Security benefit relative to the size of your portfolio. The idea is to keep the same level of risk, but have more Social Security and less bonds.)
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Re: Yet Another When to Take Social Security Thread

Post by Watty »

MarkerFM wrote: Fri Jul 10, 2020 9:46 am If anyone who was in a similar situation would like to let me know how you thought about this issue, I would appreciate it.
My situation is vaguely similar.

It took me a while to realize that once I reach my full retirement age that my wife's spousal benefit would not increase if I delayed starting Social Security beyond my FRA. Her survivor benefit would increase if she outlives me though. This means that for me delaying starting SS until my FRA has a larger payback than after my FRA since both of our social Security checks would increase. After my FRA only my SS check would increase if I delay longer than that.

One thing to look at on the Open Social Security web site is how much difference it would make if you start SS at different ages. For us if I delay from my FRA to 70 the website says that would only be worth an extra $23K. That is not a huge amount so I may start it at my FRA.

MarkerFM wrote: Fri Jul 10, 2020 1:39 pm ....I realize I forgot that money is fungible!
It is actually more complicated than that since SS income will be taxed differently than other types of income like withdraws form an IRA. Many states do not tax SS and at most the feds will tax SS at 85%, but it can also trigger higher effective tax rates because of they complex way that SS is taxed.

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

After taxes a dollar in SS income can literally be worth more than a dollar in taxable income.

I have played with the numbers and for an over 65 couple they can have $40K in Social Security and $20K in taxable income and owe no federal income taxes.

In contrast if they had $30K in Social Security and $30K in taxable income they would owe $1,028 in federal income taxes.

https://www.olt.com/main/home/taxestimator.asp

This can be even more important if one of you survives the other then is filing taxes in the higher single tax brackets.

The first scenario is sort of my target and my state does not tax Social Security and there is a retirement income exemption so with that income we would owe no federal or state income taxes. Where I live, along with a paid of house, that is enough for a comfortable middle class retirement.
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Re: Yet Another When to Take Social Security Thread

Post by petulant »

ObliviousInvestor wrote: Fri Jul 10, 2020 1:56 pm
MarkerFM wrote: Fri Jul 10, 2020 1:39 pm Thanks, after reading your reply I realize I forgot that money is fungible! I'm curious why the discount rate needs to be set at the bond return.
Because money is fungible! :)

Sorry, couldn't resist...
MarkerFM wrote: Fri Jul 10, 2020 1:39 pm If I'm 70/30 and will continue with that over the long term, shouldn't the expected return be the 70/30 long term return?
By way of analogy, imagine that Vanguard releases a new bond fund tomorrow. When evaluating the new fund to determine whether you want to add it to your portfolio or not, would you want to know whether the fund's expected return is:
1) At least as good as the return of bond funds in your portfolio with similar risk, or
2) At least as good as the weighted average return of your 70/30 portfolio?

Question #1 is the relevant question. If the new fund had, for example, a 0.5% higher yield than a given bond fund in your portfolio with a similar level of risk, it would probably merit inclusion -- even if the new fund's expected return is considerably lower than the weighted average expected return of your 70/30 portfolio.

Same thing with Social Security.

If your portfolio is currently 30% bonds and you are currently considering filing before 70, you can instead choose to swap some of those bonds for more Social Security. In practice, that usually looks like spending more quickly from bonds than you otherwise would have done -- "selling" bonds in order to "buy" Social Security.

For somebody who isn't spending from their portfolio because they have income from other sources, it means shifting the allocation of the portfolio toward stocks. Counter-intuitive, but because money is fungible it's the same concept.

That is, if you have, for example, decided that filing at 62 and using a 70/30 portfolio is an appropriate level of risk, what about instead filing at 70 and using an 80/20 portfolio? (Just making up the 80/20 here. The actual percentage would depend on the size of your Social Security benefit relative to the size of your portfolio. The idea is to keep the same level of risk, but have more Social Security and less bonds.)
Agree with all of that. To supplement the point on replacing bonds with social security and increasing stock allocation, see the following articles on the bond tent or rising equity glidepath:

https://thephysicianphilosopher.com/bes ... etirement/
https://www.kitces.com/blog/should-equi ... ly-better/
https://www.kitces.com/blog/managing-po ... -red-zone/

Between sequence of returns risk and the value of delaying SS, the optimum strategy for many retirees is to delay SS, spend down from from portfolio with reduction coming from bond side, use extra 12% tax bracket space for Roth conversions, then take SS at 70 with supplements from remaining portfolio. The following provides more information:

http://longevity.stanford.edu/wp-conten ... %20SCL.pdf
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Re: Yet Another When to Take Social Security Thread

Post by willthrill81 »

petulant wrote: Fri Jul 10, 2020 2:31 pm Between sequence of returns risk and the value of delaying SS, the optimum strategy for many retirees is to delay SS, spend down from from portfolio with reduction coming from bond side, use extra 12% tax bracket space for Roth conversions, then take SS at 70 with supplements from remaining portfolio.
That's precisely what we plan to do.
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Re: Yet Another When to Take Social Security Thread

Post by markcoop »

willthrill81 wrote: Fri Jul 10, 2020 3:01 pm
petulant wrote: Fri Jul 10, 2020 2:31 pm Between sequence of returns risk and the value of delaying SS, the optimum strategy for many retirees is to delay SS, spend down from from portfolio with reduction coming from bond side, use extra 12% tax bracket space for Roth conversions, then take SS at 70 with supplements from remaining portfolio.
That's precisely what we plan to do.
Get the feeling that is becoming the strategy of many with the only difference of how much to convert (up to 12%, 22%, to the limit of IRMMA).
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Re: Yet Another When to Take Social Security Thread

Post by #Cruncher »

ObliviousInvestor wrote: Fri Jul 10, 2020 1:56 pm
MarkerFM wrote: Fri Jul 10, 2020 1:39 pm If I'm 70/30 and will continue with that over the long term, shouldn't the expected return be the 70/30 long term return?
By way of analogy, imagine that Vanguard releases a new bond fund tomorrow. When evaluating the new fund to determine whether you want to add it to your portfolio or not, would you want to know whether the fund's expected return is:
1) At least as good as the return of bond funds in your portfolio with similar risk, or
2) At least as good as the weighted average return of your 70/30 portfolio?

Question #1 is the relevant question. If the new fund had, for example, a 0.5% higher yield than a given bond fund in your portfolio with a similar level of risk, it would probably merit inclusion -- even if the new fund's expected return is considerably lower than the weighted average expected return of your 70/30 portfolio.

Same thing with Social Security.
Beautiful analogy, Mike. The best I've seen. :thumbsup
ObliviousInvestor in same post wrote:... if you have, for example, decided that filing at 62 and using a 70/30 portfolio is an appropriate level of risk, what about instead filing at 70 and using an 80/20 portfolio? (Just making up the 80/20 here. ... The idea is to keep the same level of risk, but have more Social Security and less bonds.)
Another way to accomplish the same thing is to keep the same equity:fixed income allocation but to include the capitalized value of expected future SS benefits in fixed income. I show an example in this post. The example shows that even with an assumed 7% annual growth in equities, by age 82 one's portfolio value (equity + bonds) would be higher if one delayed starting SS until age 70 instead of taking it at age 62.
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Re: Yet Another When to Take Social Security Thread

Post by ObliviousInvestor »

Thank you for the kind words, #Cruncher.
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Re: Yet Another When to Take Social Security Thread

Post by MarkerFM »

ObliviousInvestor wrote: Fri Jul 10, 2020 1:56 pm
MarkerFM wrote: Fri Jul 10, 2020 1:39 pm Thanks, after reading your reply I realize I forgot that money is fungible! I'm curious why the discount rate needs to be set at the bond return.
Because money is fungible! :)

Sorry, couldn't resist...
MarkerFM wrote: Fri Jul 10, 2020 1:39 pm If I'm 70/30 and will continue with that over the long term, shouldn't the expected return be the 70/30 long term return?
By way of analogy, imagine that Vanguard releases a new bond fund tomorrow. When evaluating the new fund to determine whether you want to add it to your portfolio or not, would you want to know whether the fund's expected return is:
1) At least as good as the return of bond funds in your portfolio with similar risk, or
2) At least as good as the weighted average return of your 70/30 portfolio?

Question #1 is the relevant question. If the new fund had, for example, a 0.5% higher yield than a given bond fund in your portfolio with a similar level of risk, it would probably merit inclusion -- even if the new fund's expected return is considerably lower than the weighted average expected return of your 70/30 portfolio.

Same thing with Social Security.

If your portfolio is currently 30% bonds and you are currently considering filing before 70, you can instead choose to swap some of those bonds for more Social Security. In practice, that usually looks like spending more quickly from bonds than you otherwise would have done -- "selling" bonds in order to "buy" Social Security.

For somebody who isn't spending from their portfolio because they have income from other sources, it means shifting the allocation of the portfolio toward stocks. Counter-intuitive, but because money is fungible it's the same concept.

That is, if you have, for example, decided that filing at 62 and using a 70/30 portfolio is an appropriate level of risk, what about instead filing at 70 and using an 80/20 portfolio? (Just making up the 80/20 here. The actual percentage would depend on the size of your Social Security benefit relative to the size of your portfolio. The idea is to keep the same level of risk, but have more Social Security and less bonds.)
Thanks, this is helpful. In my case, the amount of the benefit is minuscule relative to the portfolio.

Let me ask another question that is a bit of a twist on the bond yield discussion. What if I took the early social security payment to apply to a mortgage that costs 3.2%? Would that be my discount rate?
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Re: Yet Another When to Take Social Security Thread

Post by ObliviousInvestor »

MarkerFM wrote: Sat Jul 11, 2020 8:38 am Let me ask another question that is a bit of a twist on the bond yield discussion. What if I took the early social security payment to apply to a mortgage that costs 3.2%? Would that be my discount rate?
It might be. Two points to consider, in order to determine the answer.

First: if you're doing the analysis in real terms (as would be the case if you're using the Open Social Security calculator), the 3.2% would have to be inflation-adjusted, which of course requires a guess as to inflation rate.

Second: in general, the question is, what is the least efficient thing I am currently doing with my money? And is there a way to improve upon that? So if you have bond funds with an expected return lower than the expected return from prepaying the mortgage, the applicable discount rate is still the expected return from the bond funds.

In other words, we generally want to use the lowest discount rate that makes sense. (And to be clear this is not unique to Social Security analysis. It applies just the same in terms of selecting funds -- just like in the bond hypothetical above. Whenever considering an asset that is not in the portfolio, we want to see what is easiest way to get it into the portfolio -- what is the worst thing we're currently doing with our money, such that we could do this new thing instead?)
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Re: Yet Another When to Take Social Security Thread

Post by MarkerFM »

ObliviousInvestor wrote: Sat Jul 11, 2020 9:01 am
MarkerFM wrote: Sat Jul 11, 2020 8:38 am Let me ask another question that is a bit of a twist on the bond yield discussion. What if I took the early social security payment to apply to a mortgage that costs 3.2%? Would that be my discount rate?
It might be. Two points to consider, in order to determine the answer.

First: if you're doing the analysis in real terms (as would be the case if you're using the Open Social Security calculator), the 3.2% would have to be inflation-adjusted, which of course requires a guess as to inflation rate.

Second: in general, the question is, what is the least efficient thing I am currently doing with my money? And is there a way to improve upon that? So if you have bond funds with an expected return lower than the expected return from prepaying the mortgage, the applicable discount rate is still the expected return from the bond funds.

In other words, we generally want to use the lowest discount rate that makes sense. (And to be clear this is not unique to Social Security analysis. It applies just the same in terms of selecting funds -- just like in the bond hypothetical above. Whenever considering an asset that is not in the portfolio, we want to see what is easiest way to get it into the portfolio -- what is the worst thing we're currently doing with our money, such that we could do this new thing instead?)
Thank you so much for helping me through this. I'm not sure what inflation rate I would use, but it would be low. The only bonds I own are in the form of VWAHX, which has had a 15-year return rate of 4.57%.

Another thing that enters my mind is that while I do not expect overall benefit levels to be cut, I wouldn't be surprised to see some kind of change in the taxation of benefits and/or means testing. If that were to happen (and I'm fine with that), then our cash flow from social security would drop. I'm not speculating on what will happen to legislation, I'm just identifying this as a risk factor. If I choose the option on Open Social Security to assume benefit cuts as a rough proxy for the risks I see, the break-even real discount rate drops to 1.95%.

If I look at the difference in the annual benefit (not NPV) in the years we would both be getting 12 payments, it is only $4,100 in favor of waiting. If I look at the total benefits (not NPV) over the next 32 years assuming we are both alive, the difference is only $57,000 or about 5%.

I'm thinking that for us it makes sense to file early for my wife at this point. I will probably not claim early. In this way, we have sort of a hedge on what is essentially a bet.
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Re: Yet Another When to Take Social Security Thread

Post by grabiner »

MarkerFM wrote: Sat Jul 11, 2020 10:12 am
ObliviousInvestor wrote: Sat Jul 11, 2020 9:01 am
MarkerFM wrote: Sat Jul 11, 2020 8:38 am Let me ask another question that is a bit of a twist on the bond yield discussion. What if I took the early social security payment to apply to a mortgage that costs 3.2%? Would that be my discount rate?
It might be. Two points to consider, in order to determine the answer.

First: if you're doing the analysis in real terms (as would be the case if you're using the Open Social Security calculator), the 3.2% would have to be inflation-adjusted, which of course requires a guess as to inflation rate.

Second: in general, the question is, what is the least efficient thing I am currently doing with my money? And is there a way to improve upon that? So if you have bond funds with an expected return lower than the expected return from prepaying the mortgage, the applicable discount rate is still the expected return from the bond funds.

In other words, we generally want to use the lowest discount rate that makes sense. (And to be clear this is not unique to Social Security analysis. It applies just the same in terms of selecting funds -- just like in the bond hypothetical above. Whenever considering an asset that is not in the portfolio, we want to see what is easiest way to get it into the portfolio -- what is the worst thing we're currently doing with our money, such that we could do this new thing instead?)
Thank you so much for helping me through this. I'm not sure what inflation rate I would use, but it would be low. The only bonds I own are in the form of VWAHX, which has had a 15-year return rate of 4.57%.
For a bond fund, you would use the SEC yield, which is the best estimate of future returns. That yield is currently 2.49% (2.57% on the Admiral class), tax-free.

And that isn't quite a fair comparison. VWAHX (Vanguard High-Yield Tax-Exempt) is not a junk-bond fund despite its name, but it still has a fair amount of risk. Paying down the mortgage has none. Therefore, if you don't need the liquidity, and you aren't deducting the mortgage in a high tax bracket, it makes sense to sell the muni fund in order to pay down the mortgage.
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Re: Yet Another When to Take Social Security Thread

Post by MarkerFM »

grabiner wrote: Sat Jul 11, 2020 11:56 pm
MarkerFM wrote: Sat Jul 11, 2020 10:12 am
ObliviousInvestor wrote: Sat Jul 11, 2020 9:01 am
MarkerFM wrote: Sat Jul 11, 2020 8:38 am Let me ask another question that is a bit of a twist on the bond yield discussion. What if I took the early social security payment to apply to a mortgage that costs 3.2%? Would that be my discount rate?
It might be. Two points to consider, in order to determine the answer.

First: if you're doing the analysis in real terms (as would be the case if you're using the Open Social Security calculator), the 3.2% would have to be inflation-adjusted, which of course requires a guess as to inflation rate.

Second: in general, the question is, what is the least efficient thing I am currently doing with my money? And is there a way to improve upon that? So if you have bond funds with an expected return lower than the expected return from prepaying the mortgage, the applicable discount rate is still the expected return from the bond funds.

In other words, we generally want to use the lowest discount rate that makes sense. (And to be clear this is not unique to Social Security analysis. It applies just the same in terms of selecting funds -- just like in the bond hypothetical above. Whenever considering an asset that is not in the portfolio, we want to see what is easiest way to get it into the portfolio -- what is the worst thing we're currently doing with our money, such that we could do this new thing instead?)
Thank you so much for helping me through this. I'm not sure what inflation rate I would use, but it would be low. The only bonds I own are in the form of VWAHX, which has had a 15-year return rate of 4.57%.
For a bond fund, you would use the SEC yield, which is the best estimate of future returns. That yield is currently 2.49% (2.57% on the Admiral class), tax-free.

And that isn't quite a fair comparison. VWAHX (Vanguard High-Yield Tax-Exempt) is not a junk-bond fund despite its name, but it still has a fair amount of risk. Paying down the mortgage has none. Therefore, if you don't need the liquidity, and you aren't deducting the mortgage in a high tax bracket, it makes sense to sell the muni fund in order to pay down the mortgage.
I prefer to use the distribution yield for something like this. For VWAHX, the last three months yield is 3.21%, twelve months is 3.26%. Some of the mortgage interest is deductible, and I would owe capital gains taxes on the VWAHX. So, selling this to pay off a 3.20% mortgage would not make sense for me.
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