Coming out of being debt free - ??

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fuddbogle
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Coming out of being debt free - ??

Post by fuddbogle »

It’s talked a lot about here going into retirement debt-free. Currently, my wife and I are debt-free – age 52/53 - will likely retire in 6 to 7 years. We planned to be debt-free at this point to focus on college payments (2 kids in, 1 now out) and to fully fund our retirement accounts.

The plan in retirement is to own a home near family and another in a warm climate (exact locations and timing TBD). We currently live in a somewhat LCOL area. When we sell our current home, it will not bring enough for either of the likely homes we would (or may) purchase. We do each have a Roth and one shared taxable account but most of the money will be tied up in tIRA’s.

Major expenses in retirement, like many, will be taxes and health care, at least to age 65. Income from pensions and real estate will be 100k per year with COLA pensions bringing it to roughly 118k per year at age 70. Social security will be roughly 42k combined at age 70 so income will be 160k annually. My wife is a teacher and does not pay into SS, BTW. We should also have (give or take) $2M ($1.4 in tIRA) in investment assets assuming a 5% increase per year (nominal) at the time of retirement.

Laying out what is above, my feeling seems to be that once we retire, the anxiety of funding “things” will be gone. It’s time to enjoy. Since quite a bit of our money will be tied up in pensions/RE/tIRA that don’t reasonably provide a lump sum but payout over time, I have no anxiety about taking out a mortgage(s). But that seems counterintuitive to the boglehead approach. Am I wrong? Do others take on a mortgage or two in retirement after being debt-free?

Note: If our health or pension payouts have issues or the stock market tanks, we would adapt and compromise based on the conditions.
mnsportsgeek
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Re: Coming out of being debt free - ??

Post by mnsportsgeek »

I wouldn't be too concerned about taking on a mortgage in your situation. 100k+ in income per year before even touching your nest egg is plenty of money that you will probably never need to spend from your retirement accounts for the rest of your life.

I would buy the house that will make you happy in your retirement years and not worry about a mortgage.
Last edited by mnsportsgeek on Mon Apr 12, 2021 12:25 pm, edited 2 times in total.
Vanguard Fan 1367
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Re: Coming out of being debt free - ??

Post by Vanguard Fan 1367 »

Everybody has to do their own thing. I don’t like the second home or the mortgage but you have to live with the situation, not me.
John Bogle: "It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
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hand
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Re: Coming out of being debt free - ??

Post by hand »

Being debt free becomes a religion unto itself for many who have been overwhelmed by debt in the past much like newly sober alcoholics sometimes proselytize against the dangers of drink.

While staying debt free is guaranteed to keep you from debt related issues, it is also likely to limit your ability to prioritize consumption in early retirement, presumably reducing your enjoyment of life.

Definitely do the math for your specific circumstance, but I wouldn't be inordinately worried about taking a mortgage with 100k in COLA'd retirement income before investments. In fact, there is some case to be made for a 30 year fixed mortgage as a reasonable hedge against inflation.
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quantAndHold
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Re: Coming out of being debt free - ??

Post by quantAndHold »

I don’t see a problem with a mortgage in your situation. But what struck me was your statement that one of your main expenses will be taxes, and then you mentioned income from real estate. If you have a $100k+ pension and social security, maybe you want to consider spending the next few years reallocating that real estate investment into something that’s more tax efficient, especially since you have significant RMD’s coming down the pipe as well.
delamer
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Re: Coming out of being debt free - ??

Post by delamer »

We have been fully retired for about 1 year. Our situation is similar to yours with large pensions and substantial savings.

We’ve recently started making purchases that we’ve deferred until we reached our current level of financial security. One of those purchases will probably be a beach condo, with a mortgage. So will we go from debt-free to in-debt.

Life is short. At age 60, you will have a lot more life behind you than in front of you. If you can afford the mortgages on the homes that you want, then don’t let being debt-free as a goal in-and-of-itself drive your decisions.

The only caution is that the finances need to be comfortable if one of you dies prematurely — as in, before the mortgages are paid off. The payments need to be comfortable for the survivor on what will likely be a reduced income. Consider purchasing one property outright, and having a mortgage only on the other one.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
hudson
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Re: Coming out of being debt free - ??

Post by hudson »

fuddbogle,

In your situation, you will be fine.
A good friend bought a big house with a VA loan when he was in his 70s. It worked out. That would have given me heartburn.
My plan was always to have the house and student loans cleared before I retired.
If I were in your shoes, I would have a plan to clear all debts before retirement.

Bottom line:
Again, you'll be fine with a mortgage. I could do the same, but I don't like loan payments.
Broken Man 1999
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Re: Coming out of being debt free - ??

Post by Broken Man 1999 »

hudson wrote: Mon Apr 12, 2021 1:11 pm fuddbogle,

In your situation, you will be fine.
A good friend bought a big house with a VA loan when he was in his 70s. It worked out. That would have given me heartburn.
My plan was always to have the house and student loans cleared before I retired.
If I were in your shoes, I would have a plan to clear all debts before retirement.

Bottom line:
Again, you'll be fine with a mortgage. I could do the same, but I don't like loan payments.
There certainly is an aversion to debt here at BHs. Our home was paid off years ago, but considering the current interest rates, IF I had such a mortgage today, I don't think I would be in any great hurry to pay it off. We never had a mortgage for less than 6%-7%; one was 11.5%

When we did have debt, I never worried at all about it. I figured the folks who gave us the mortgage should be the worried party, not us. :D

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
Mike Scott
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Re: Coming out of being debt free - ??

Post by Mike Scott »

If you have enough ongoing fixed and taxed income to cover the mortgage and other living expenses, a mortgage is fine. One of the arguments is that a mortgage costs more if you have to take money out of tax deferred accounts to pay it and pay taxes on the withdrawal. Another perspective just does not want any debt.

We will have a fixed and taxed retirement income and plan to let the new mortgage refi run it's 30 year term and invest the difference in payment. I'm pretty confident the investment will beat inflation and the mortgage rate over 30 years. If we change our minds, we can pay off the mortgage and be done with it.
HomeStretch
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Re: Coming out of being debt free - ??

Post by HomeStretch »

If you and spouse are comfortable with mortgages in retirement, I don’t see a problem in borrowing to have 2 homes in desired locations as long as you can afford it. On that note:
1. What is the amount of the projected mortgage loans?
2) Do your pension benefits receive cost-of-living increases?
3) Will your retirement income cover all retirement expenses including healthcare, income taxes, lumpy expenses like a new car, the new mortgage and the higher utilities/property taxes/insurance/maintenance costs for two homes? Or will you need to withdraw from your portfolio and, if yes, at what annual % rate?
4) Do you have long-term care insurance coverage?
Topic Author
fuddbogle
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Re: Coming out of being debt free - ??

Post by fuddbogle »

Thanks to all. Getting out of the mindset (eventually) about save, save, save, just seems different.

mnsportsgeek/Vanguard Fan - Unless something goes off the rails, we will be buying! While we like our current home it is in a boring location.

hand - that debt-free religion was me. When we paid off our mortgage years ago, I vowed never to owe a penny to anyone. I guess circumstances change :D

quantAndHold - a good suggestion on the real estate, however, it's a family farm in a trust so there is 0% chance of it going anywhere. I'm ok with that, as all things considered, the positive outway the negative.

delamer - I agree life is short. That's partially driving this. If not when I'm 60 or so, when? Do I wait until I'm 6' under or hogtied to a hospital bed? They actually had to do that to my FIL because he was pulling out his vent. No thanks.

hudson/BrokenMan/Mike Scott - Thanks - I know it's not for everyone but being debt-free now is nice but the retirement accounts just keep growing. That could change but we will adapt our plans if that happens.
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fuddbogle
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Re: Coming out of being debt free - ??

Post by fuddbogle »

HomeStretch wrote: Mon Apr 12, 2021 1:35 pm If you and spouse are comfortable with mortgages in retirement, I don’t see a problem in borrowing to have 2 homes in desired locations as long as you can afford it. On that note:
1. What is the amount of the projected mortgage loans?
2) Do your pension benefits receive cost-of-living increases?
3) Will your retirement income cover all retirement expenses including healthcare, income taxes, lumpy expenses like a new car, the new mortgage and the higher utilities/property taxes/insurance/maintenance costs for two homes? Or will you need to withdraw from your portfolio and, if yes, at what annual % rate?
4) Do you have long-term care insurance coverage?
HomeStretch,

All of the specifics are a wait-and-see both for mortgage(s) and overall expenses. I have a general idea of expenses but until our kids are fully on their own I'm not going to drill down too deep. So ultimately, we won't overextend our mortgage(s) with a lack of planning regarding other expenses. We will also probably do any mortgage one at a time and let the dust settle before moving on to the next.

I do plan on withdrawing from our portfolio but the plan is not to go above 2.5%. I also will try and squeeze in some Roth conversions if/when possible.

My pensions do NOT have a COLA and in fact, I'm going to take an accelerated payout on one from 55-62 and be done with it. All COLA listed is from my wife's pensions.

No long-term care insurance. We actually "family" manage long-term care along with in-home health care. Part of the reason for a home near family. Over 10-years worth of managing this with 3 different families. Sad to say we have an extensive network of in-home care providers.
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Watty
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Re: Coming out of being debt free - ??

Post by Watty »

There are lots of threads about considering a mortgage as a negative bond that you can look up.

Something to consider is if you do get a mortgage is how you will count that in your asset allocation.

Some people will want around a 50/50 asset allocation when they retire so if you get a $500K mortgage you would have an extra $500K in your investing account. With that asset allocation you would be using a 3%(ish) mortgage to buy another $250K in bonds that might be earning less than 2%.

There are lots of ways to crunch the numbers but it gets harder to justify having a mortgage when you will also own a lot of bonds that have a lower interest rate.
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JoeRetire
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Re: Coming out of being debt free - ??

Post by JoeRetire »

fuddbogle wrote: Mon Apr 12, 2021 12:15 pmSince quite a bit of our money will be tied up in pensions/RE/tIRA that don’t reasonably provide a lump sum but payout over time, I have no anxiety about taking out a mortgage(s). But that seems counterintuitive to the boglehead approach. Am I wrong?
Worry only about the approach that works best for you, never "the boglehead approach". Use debt to your advantage. There no magic in being "debt-free" if you can afford the payments.

Nobody will kick you out of the forum.
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delamer
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Re: Coming out of being debt free - ??

Post by delamer »

JoeRetire wrote: Mon Apr 12, 2021 3:10 pm
fuddbogle wrote: Mon Apr 12, 2021 12:15 pmSince quite a bit of our money will be tied up in pensions/RE/tIRA that don’t reasonably provide a lump sum but payout over time, I have no anxiety about taking out a mortgage(s). But that seems counterintuitive to the boglehead approach. Am I wrong?
Worry only about the approach that works best for you, never "the boglehead approach". Use debt to your advantage. There no magic in being "debt-free" if you can afford the payments.

Nobody will kick you out of the forum.
And I am not aware that John Bogle ever talked about the pros and cons of having a mortgage.

There are some perceptions of the posters on this forum — no debt, drive 10-year old Subarus, go camping for vacations, retire wth 50X expenses, don’t subscribe to cable TV, etc. — that I suspect wouldn’t be borne out by a well-designed survey of said posters.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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