Author Topic: Should I get a Mortgage and how am I looking to retire in FEB 2024  (Read 675 times)

GHG7F0

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Life Situation:

Married - filing jointly
1 dependent: 9 months old
Sacramento Area, CA USA

Gross Salary/Wages: 83K per year


Expenses:

401k contributions: $22K

IRA's: $10,000

Health Insurance: $363 per month

HSA: $810 per month

Mortgage Payments: Home was paid in cash DEC 2016

My budget is break even right now as max all my tax accounts as shown above.


Assets:
FERS Pension at retirement in 2024
House: ~$420K
2016 Hyundai Sinata Hybrid: paid off worth maybe 17K
TSP/401k: $180K (Pre-tax)
IRA:  $73,000 (Pre-tax)


Liabilities:

TSP/401K loan $39K


Specific Questions:

I'm wondering if I should take a mortgage at all time low rates and invest in VTSAX.
I plan on retiring on FEB/2024 and I will sell or rent the home at this time (probably sell). I will move to a low cost of living area.
If it's best to mortgage the house how many years would be best??
Let me know how I'm overall doing?  Thanks!



« Last Edit: June 24, 2017, 11:53:27 AM by GHG7F0 »

Blissful Biker

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Re: Should I get a Mortgage and how am I looking to retire in FEB 2024
« Reply #1 on: June 24, 2017, 10:09:21 AM »
Leveraging home equity to invest is a hot topic of debate on the forum.  Historic data shows that you generally come out ahead investing the money as opposed to leaving it in the house.  However, in my opinion, we have a had such a good long run in the stock market that now is not the time to leverage. 

I am also in the 2024 cohort so your post caught my eye.  My house is paid for and that makes me happy, relaxed and better able to enjoy the sunshine.

Guide2003

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Re: Should I get a Mortgage and how am I looking to retire in FEB 2024
« Reply #2 on: June 25, 2017, 12:19:52 PM »
Are you going to be in that house until 2024? If you can get a 4% loan now there's a pretty good chance the market will be up a good bit by 2024. If I knew I was selling the house that soon, my guess would be to go for the lowest rate (15, maybe even 10 year), but the advice I've seen from proponents of the "biggest mortgage you can get" crew are usually in favor of 30 year loans continually refinanced at opportune times.

It looks to me like you can plan on 4% in seven years being $18k which looks like half of your current living expenses. Would your pension be $41.5k or some number less than that? If you buy a cheaper place that would further help the margin, and if the market drops and recovers before you retire that would be ideal. Obviously the lower COL will help, but do you think that expenses will increase as the 9mo grows?
“We think sometimes that poverty is only being hungry, naked and homeless. The poverty of being unwanted, unloved and uncared for is the greatest poverty. We must start in our own homes to remedy this kind of poverty.” Mother Teresa

GHG7F0

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Re: Should I get a Mortgage and how am I looking to retire in FEB 2024
« Reply #3 on: June 25, 2017, 01:23:31 PM »
Yes I will be in the house until 2024. I will sell and rent in a low cost of living area. My expenses will be low as most of my expenses are savings. My FERS retirement will be at least 2k a month. I expect I will have about a million at retirement.

I guess my fear is getting a mortgage and cashing out 420K and putting it in VTI only to have the market crash. I have learned you can't time the market but it's been awhile since we have has a correction.
« Last Edit: June 25, 2017, 01:25:03 PM by GHG7F0 »

Guide2003

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Re: Should I get a Mortgage and how am I looking to retire in FEB 2024
« Reply #4 on: June 25, 2017, 01:43:11 PM »
I guess my fear is getting a mortgage and cashing out 420K and putting it in VTI only to have the market crash. I have learned you can't time the market but it's been awhile since we have has a correction.
A million including the money that's in the house now? I'm seeing just under half a million in investments based on what you currently have plus retirement contributions extrapolated to 2024. I didn't do the math for investment returns over the next seven years, but that's almost a doubling period with the rule of 72.

I agree that it's been a while, and this is purely speculative, but I'd think there's a better chance of the market correcting and recovering within the next seven years (because it's due, as well as socio-political factors) rather than staying strong for six and then dropping right as you're trying to retire.
“We think sometimes that poverty is only being hungry, naked and homeless. The poverty of being unwanted, unloved and uncared for is the greatest poverty. We must start in our own homes to remedy this kind of poverty.” Mother Teresa

PapaBear

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Re: Should I get a Mortgage and how am I looking to retire in FEB 2024
« Reply #5 on: June 25, 2017, 04:03:26 PM »
I would like to represent a bit more conservative point-of-view in this discussion:
If you really want to leverage your stock investment by taking a mortgage on your house, you should be very, very clear about the associated risks.
Yes, the stock market has, on average, quite high returns. However, average returns are not your reality, the sequence of returns in your individual investment period are your reality. Unfortunately, no one can predict the sequence of return for you.

In this case, your reality depends on two factors - housing prices as well as the stock market. At the end of the 7-year period, a lot of potential scenarios are possible that fall somewhere in between the best and worst case:
- Best case: THe stock market and the housing market continue to rise - Your investments increase substantially and you can pay back your mortgage easily with your house sale
- Worst case: The stock market and housing prices plummet - Your investments are down by 50%, your house sale does not even net the remaining principal on your mortgage and you have to delay your FIRE plans

You should also note that 7 years is quite a short time frame for any investment in the stock market. Usually, the longer you are invested, the higher is your chance to reach average returns. For me personally, the heat map on portfoliocharts.com helped me a lot to understand the factor the duration of the investment period has on my expected returns. See the graph on https://portfoliocharts.com/portfolio/total-stock-market/
Blue boxes show investment periods with positive real returns, while red boxes show negative real returns. With an investment period of 7 years, 12 of 39 analyzed 7-year-periods had negative or zero real returns! Only with an investment period of 13 years or more, there were no periods with negative real returns.
(Please note, the graph shows real returns and includes inflation, which is a more conservative view, as your mortgage is in nominal dollars. However, you still need to factor in the interest of your mortgage, and in most of the post-1970s time periods, average inflation should have been lower or equal than a mortgage rate of ~3.5-4% - thus the real returns could still be a rough indicator for your excess returns after mortgage interest)

In the end, it is a simple question of whether you are able to sleep well at night with the associated risks of leveraging, or not.
For me personally, the associated risks would definitely outweigh the potential rewards of leveraged investments in this case.

By the way: An alternative to a mortgage could be also a leveraged ETFs or funds on a broad stock index (some examples can be found here: http://www.investopedia.com/articles/etfs/top-leveraged-sp-500-etfs/). At least these ETF do not require your house as collateral and buying them regularly with a part of your monthly surplus could reduce the risk associated to the sequence of returns.
EDIT: That was a bit too quick. It is is quite debatable if leveraged ETFs suitable for long-term investments, due the effect of volatility on the leverage. Since these products usually reset the leverage daily, the long term result is unfortunately not 2x or 4x the Index, but often way lower. This article explains the underlying mechanics quite well: http://www.investopedia.com/articles/mutualfund/07/leveraged_etfs.asp and this one has the full dose of math http://ddnum.com/articles/leveragedETFs.php
Leveraging your investment in the medium or long term is still possible, but might require different products (e.g., derivatives) and should be done by experienced investors only.
« Last Edit: June 26, 2017, 10:02:24 AM by PapaBear »

GHG7F0

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Re: Should I get a Mortgage and how am I looking to retire in FEB 2024
« Reply #6 on: June 25, 2017, 10:07:33 PM »
Thanks!

A lot to think about.