Author Topic: Investment VS Mortgage Pay Off Summary Article?  (Read 1748 times)

MTBmustachian

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Investment VS Mortgage Pay Off Summary Article?
« on: October 08, 2018, 08:15:00 PM »
Hi there, MMM reader but first-time forum poster.

Is there a summary article (aside from the one MMM article) anywhere that you'd recommend reading when considering paying off a mortgage early VS investing? I've gotten down in the weeds reading a number of different forum threads, but the answer still seems unclear to me. Basically, I'm unclear on how people are paying their mortgage when in retirement, and how saving the amount of money in your portfolio needed to cover your mortgage payment could be advantageous.

Based on my calculations, if I pay off my mortgage early I should be able to FIRE with $163,000 FEWER dollars saved or invested, or I could move up my FIRE timeline accordingly. (Note this is not a portfolio amount at retirement, but rather the amount of money initially put away from paychecks and invested.)

It seems that the biggest factor is covering the mortgage payment in retirement. With ~27 years left on a 30-year mortgage and a timeline of 10 (or less) years to retirement, that leaves 17 or more years of having to cover a mortgage payment. Whereas if you pay off the mortgage, not only are you saving money on interest ($110,000 in this case) but you have lower expenses and need less money to cover the expenses.

tl;dr If someone could point me to a comprehensive and succinct analysis of paying off your mortgage vs. investing, that'd be great.
« Last Edit: October 08, 2018, 08:17:11 PM by MTBmustachian »

twig21

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #1 on: October 08, 2018, 08:33:35 PM »
It all comes down to your expected stock market return vs your mortgage rate (excluding tax implications which could go either way).

If you think you'll make more in the market than your mortgage rate than investing makes more sense.  If not paying the mortgage off makes more sense.  There is also the emotional impacts of not having a mortgage but those don't impact the math though could impact your decision.

The math is pretty simple.  Imagine you have your total mortgage balance in cash.  You can either save your mortgage interest every month or earn your investment interest.  So in simple terms if your mortgage is $100K and your mortgage rate is 4% and expected investment returns are 6%.  Then investing makes more sense because you'll earn $6K and only pay $4K in interest netting you $2K per year.  Investment returns aren't guaranteed obviously and your mortgage rate is so there is a risk factor.

Andy R

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #2 on: October 08, 2018, 08:33:51 PM »
Just one small point, if you have not paid off your mortgage in retirement, then the repayments will come out your stock market return which has market risk. If there is a very long sustained bear market (eg 1966-86) then since you are withdrawing more for living expenses due to needs to pay for the mortgage, you will increase your likelihood of depleting and possibly running out of money too early, whereas if you have paid off your mortgage, you are lowing your needs that are based on the market.

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #3 on: October 08, 2018, 08:52:47 PM »
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The math is pretty simple.  Imagine you have your total mortgage balance in cash.  You can either save your mortgage interest every month or earn your investment interest.  So in simple terms if your mortgage is $100K and your mortgage rate is 4% and expected investment returns are 6%.  Then investing makes more sense because you'll earn $6K and only pay $4K in interest netting you $2K per year.  Investment returns aren't guaranteed obviously and your mortgage rate is so there is a risk factor.

While yes this math seems simple, as I analyze these types of arguments, they don't seem to have any bearing on the actual idea of getting to the point of "retiring early."

MMM math is based on the amount of money you need in your portfolio to cover your annual expenses based on a 4% SWR (of course, he argues we could go as high as 5%, but I'll stick with 4% here). If you have a mortgage each month of $1,500 you'd need an extra $450,000 in your portfolio to cover your mortgage payment. And based on a 4% withdrawal rate, your investments aren't actually gaining any additional post-inflation value over time, so the idea of that money increasing in value isn't applicable.

On the flipside, if you could pay off your mortgage with that $450,000 (or you had already paid off the mortgage before reaching retirement) then you'd have no need for that money in your portfolio anyway.

In summary, it sounds to me like most of the people arguing for keeping their mortgage around aren't actually retired yet.

Also, I'd still love to read a more well-rounded analysis of this topic if anyone has a great article to point to...

One

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #4 on: October 08, 2018, 09:07:09 PM »
The pay off mortgage makes more sense the closer to retirement age and the higher the mortgage interest rate. If you are in your 20s and have a low mortgage interest rate you may be better off investing because you have a long time horizon and can take the risk of stock market volatility. You could also invest 1/2 of your money and pay 1/2 towards the mortgage. This gives you a balanced approach, allows you to have an emergency after tax investment fund that could lose or make money while also getting a guaranteed positive fixed rate from the extra mortgage payment. As you get closer to retirement it may make more sense to pay off the mortgage. Personally, I would not want to enter retirement with a mortgage. The articles may be biased if written by investment companies because they have no benefit in you paying off your mortgage.

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #5 on: October 08, 2018, 09:13:00 PM »
Thanks for the response! I'll respond in sections:

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The pay off mortgage makes more sense the closer to retirement age and the higher the mortgage interest rate. If you are in your 20s and have a low mortgage interest rate you may be better off investing because you have a long time horizon and can take the risk of stock market volatility.

This is the problem I'm seeing with a lot of the posts on this forum. Why are we assuming that someone in their 20s has a longer time horizon than someone in their 50s? Isn't the goal to retire early? If you're 20, wouldn't the goal to be to retire by 30? If you're 30, by the time you're 40? Etc.

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You could also invest 1/2 of your money and pay 1/2 towards the mortgage. This gives you a balanced approach, allows you to have an emergency after tax investment fund that could lose or make money while also getting a guaranteed positive fixed rate from the extra mortgage payment.

Yes this is what I'm leaning toward, but I'm considering the mortgage pay off in contrast to investing in a taxable account. Already maxing out all tax-advantaged investment accounts I have access to.

Quote
As you get closer to retirement it may make more sense to pay off the mortgage. Personally, I would not want to enter retirement with a mortgage.

Exactly. But if we're all trying to retire early, isn't retirement pretty close any way you look at it?

Radagast

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #6 on: October 08, 2018, 09:29:27 PM »
If you have a mortgage each month of $1,500 you'd need an extra $450,000 in your portfolio to cover your mortgage payment. And based on a 4% withdrawal rate, your investments aren't actually gaining any additional post-inflation value over time, so the idea of that money increasing in value isn't applicable.

On the flipside, if you could pay off your mortgage with that $450,000 (or you had already paid off the mortgage before reaching retirement) then you'd have no need for that money in your portfolio anyway.

In summary, it sounds to me like most of the people arguing for keeping their mortgage around aren't actually retired yet.

Also, I'd still love to read a more well-rounded analysis of this topic if anyone has a great article to point to...
Sorry I don't recall any articles. The 4% rule is inflation adjusted, while a 4% mortgage is not. Plus, the market has returned 6.7% annualized after subtracting inflation over the very long term in the US, and 5% globally since the 1200's. So the numbers favor you having more money by keeping the mortgage. However, if there is ever a time to pay the mortgage off, it is as a single large payment the month before you quit your job forever. First, that lowers sequence of returns risk. Second, the fact that you even reached your number makes it more likely that you are in a bit of a bubble, and at increased risk of a bad sequence. So I would never tell someone not to pay off a mortgage in the year they planned to quit, though US history does seem to show that paying off the mortgage was more likely to result in failure and in less money compared with keeping it. (And no other countries data would not make things better for paying it off. Higher inflation favors keeping the mortgage. The low return eras of most countries were commonly associated with high inflation, including wars when countries printed money to carry on the fight, or else their currency valuation went to zero or thereabouts when they lost.)

Radagast

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #7 on: October 08, 2018, 09:39:05 PM »
You could also invest 1/2 of your money and pay 1/2 towards the mortgage.
And as far as I can tell this is always a bad idea. Paying extra on the mortgage without paying it off always increases risk, because that is that much less in liquid assets you have laying around in case something goes wrong. It also (usually) lowers expected returns. Higher risk and lower expected return is the opposite of a good investing choice. You should demand a risk premium if you are considering regular payments over many years, eg. you should demand an expected mortgage return of 1% higher than expected stock returns to accept the lower liquidity. Until you on the verge of quitting. Then you are getting lower expected returns, but also lower (short-intermediate term) risk when you buy the rest of your house in one lump sum.

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #8 on: October 08, 2018, 09:50:17 PM »
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However, if there is ever a time to pay the mortgage off, it is as a single large payment the month before you quit your job forever.

Ok, so I had already run the numbers based on investing and then making a single lump sum payment when I'm ready to FIRE (vs making monthly principal payments)... but I just re-ran the numbers on this and now discovered my error :S

It wasn't in the actual math, but how I was analyzing it. Re-running the lump sum scenario shows I should come out approx. $48,000 ahead (assuming 7% market returns) vs making monthly payments.

Especially bearing this in mind, I still can't come up with a great argument for keeping the mortgage into retirement.

Telecaster

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #9 on: October 08, 2018, 10:34:07 PM »
Where is Boarder42 when you need him?


Nate79

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #10 on: October 08, 2018, 10:55:31 PM »
There is one significant benefit to not having a mortgage in retirement and that is the taxation of SS. Keeping a mortgage may mean more required taxable income (depending on the source of your funds) and if you go over the cliffs for SS taxation the amount of SS that is taxed dramatically increases. Not having a mortgage to pay makes it easier to keep your income in as low of a bracket as possible AND keep SS as minimally taxed as possible.

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Radagast

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #11 on: October 08, 2018, 11:34:49 PM »
There is one significant benefit to not having a mortgage in retirement and that is the taxation of SS. Keeping a mortgage may mean more required taxable income (depending on the source of your funds) and if you go over the cliffs for SS taxation the amount of SS that is taxed dramatically increases. Not having a mortgage to pay makes it easier to keep your income in as low of a bracket as possible AND keep SS as minimally taxed as possible.

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Yeah there are tax ramifications in the post-working-world because of higher required income with a mortgage, which are mentioned perhaps less than they should be.

Full_Beard

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #12 on: October 09, 2018, 12:21:46 AM »
I think you totally get it; I'm not sure what's unclear to you?

If you can pay off your mortgage and achieve FIRE with $163K less than if you were to keep the mortgage into FIRE, the only question I see is what you think that $163K would be worth at that point in time. No one can say for certain, so it makes sense to split the baby and hedge your bets. And frankly, if I were a bettor, I'd bet on a market downturn or slowdown beginning within the next 1-3 years, which tilts towards making a greater mortgage payment.

At one point in time, mortgage interest was deductible for most, so that added a variable into the mix. Today, with the significant bump in the standardized deduction, most folks who focus on FIRE don't have large mortgages and therefore not much interest, so they're unlikely to benefit from itemizing.

appleshampooid

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #13 on: October 09, 2018, 06:51:10 AM »
I was about to say "Paging boarder42", but I guess he recently got the banhammer. RIP.

Anyway I have to channel our departed friend and put in a plug for NOT paying off your mortgage (assuming you have a low rate, which everyone should at this point in history). It is true that if you enter retirement with a mortgage payment, you do need more in your stash. However, it's not correct to include this needed income as an ongoing, permanent expense related to the 4% rule. Because your mortgage does have an end date, as opposed to ongoing living expenses. I'm not mathy enough to tell you what the calculation is, but adding 25x your yearly mortgage obligation to your needed stash is over-compensating.

And this is totally missing the point of investing this money instead of paying down the mortgage - YES you will need a bigger stash, but you will HAVE a bigger stash by taking that money and investing it instead of dumping it into the mortgage!

Funds that go into your mortgage are hard to get out - sure it's possible to get a HELOC or a home equity loan, but these methods are never guaranteed. By investing cash in index funds, you can always have access to that money if you need it for an emergency.

So that's just my small plug. Unfortunately I don't have a succinct summary article for the OP. But here's a thread with lots and lots of people who are NOT paying off their mortgage for the other perspective: https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

appleshampooid

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #14 on: October 09, 2018, 07:12:06 AM »
Where is Boarder42 when you need him?
Ironically, banned for his behavior in a thread about early mortgage payoffs.     

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #15 on: October 09, 2018, 07:52:26 AM »
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However, it's not correct to include this needed income as an ongoing, permanent expense related to the 4% rule. Because your mortgage does have an end date, as opposed to ongoing living expenses.

I was just thinking about the mortgage end date this morning, and realized that my math above was wrong:

Quote
If you have a mortgage each month of $1,500 you'd need an extra $450,000 in your portfolio to cover your mortgage payment.

Instead, the math would look more like this for my situation:

Mortgage Principal Remaining at FIRE: $200,000
Years remaining on mortgage: 16
Mortgage Payment per month: ~$1600

So if I had $200,000 in my portfolio at FIRE dedicated to just my mortgage, I could draw down that amount of my portfolio to $0 since, as you said, it has an end date. So the math would look something like:

$200,000 - $19,200 mortgage payment per year = $180,800

$180,800 x 7% returns = $12,656 returns -> New Total of $193,456

So in the above example, while the portfolio would decrease over time, if I had $200,000 dedicated to paying off my mortgage, I'd be nowhere near using it all up due to continued investment gains. So in effect, I should be able to pay off my mortgage with less initial investment on my part, as long as I keep the cash invested.

Using this calculator: https://www.bankrate.com/calculators/savings/savings-withdrawal-calculator-tool.aspx it appears that in the above example, I'd end with ~$35,000 remaining in portfolio.

Taking it one step further, if I use this process, investing the planned principal payments in index funds (instead of paying on the principal) all the way to FIRE and stretching my mortgage out, to its final end date I'd have ~$177,000 more in my portfolio at the end of my mortgage. This means that either I'll have way more money than I'll need, or I could potentially move my FIRE date up significantly. Yay!

Think I'm finally starting to understand it. Can't believe this process/thinking isn't outlined start-to-finish anywhere ;) Simply saying that the interest rates on mortgages are lower than the market rate of return isn't explanatory enough for a newbie like me.

appleshampooid

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #16 on: October 09, 2018, 08:03:44 AM »
One of us...one of us...

I have an insanely expensive house (live in greater Boston area), and the debt load and monthly payments grind on my frugal nature. We're 18 months in to a 30 year loan, and at the start I was throwing an extra $300 or $400 at the mortgage while still investing additional surplus in the market. But boarder42 and others here actually convinced me to stop doing that. Our monthly obligation ($2700) would be killer to still have in FIRE, but there are a couple of caveats. We're not likely to live in this house once we retire - one of the reasons it is so expensive is that it is near a commuter rail station to make my commute tolerable. Once the commute is not a factor, it wouldn't make any sense to pay that premium.

Likely one of 2 things will happen - scenario 1 is we'll leave this house in the near future and move to a lower COL area (e.g. New Hampshire).  I'll either find work in that area or find a full-time remote job. Scenario 2 is we stay here while I'm still employed, and at FIRE either move to a similar area as above, or at worst we'll stay in the general vicinity (may be school continuity issue for our kid(s)) but move to a house that isn't as convenient for commuting. The prices can change pretty drastically in this area just a couple miles further away from the train. Under either scenario we'll sell this house long before the mortgage is done, and with property values in Boston probably turn a tidy profit (already up 8% in a year and a half). Not counting on this, but will be nice if it happens. And then have a more reasonably mortgage payment that we'll probably keep into FIRE and include in our 'stash calculations.

tl;dr - not paying extra anymore. Investing all surpluses.

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #17 on: October 09, 2018, 08:36:09 AM »
So if I had $200,000 in my portfolio at FIRE dedicated to just my mortgage, I could draw down that amount of my portfolio to $0 since, as you said, it has an end date.

Think I'm finally starting to understand it. Can't believe this process/thinking isn't outlined start-to-finish anywhere ;) Simply saying that the interest rates on mortgages are lower than the market rate of return isn't explanatory enough for a newbie like me.

I'm glad it's finally starting to click for you. It has been mentioned many times that the amount extra you need to cover the mortgage obligation is at most the current balance of the mortgage. Unfortunately this point often seems to get lost in the noise of bickering over emotions and "the math" (without showing math). The result is many people still assume you need to be able to cover the mortgage payment via the 4% rule which of course is going to look like it takes longer to get to FIRE.

One thing boarder42 used to mention is that you can plug numbers into cFIREsim to the statistical outcomes of holding a mortgage. This combats the argument that investment returns aren't guaranteed while paying off your mortgage is. Though he never gave specific directions (that I can remember). I am going to do so now (feel free to put in your own numbers). This assumes you had the choice between and extra $200k in investments + $200k mortgage or a paid off house right at your retirement date.

Paid off mortgage baseline
Retirement years from 2018 to 2067 (50 years)
$1 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Success rate: 82.65%

Keeping a mortgage
Retirement years from 2018 to 2067 (50 years)
$1.2 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Extra spending of $12k, 2018 to 2047, NOT inflation adjusted ($200k at 4.4% for 30 years fixed)
Success rate: 87.76%


Edit: I have fixed the second success rate as I had an input set wrong. Thanks @Bird In Hand for verifying my numbers!
« Last Edit: October 10, 2018, 11:07:47 AM by RWD »

Scortius

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #18 on: October 09, 2018, 10:31:32 AM »
Two minor points and a third that doesn't matter to most anymore.

1) People often forget to examine whether or not tax-advantaged space is available. If you are not already maxing your 401k to $18,500/year plus your IRA to $5,500/year (or double that if you're married), then we shouldn't even be having this discussion. You pay your mortgage off with after-tax money, which is money you have to pay to access. You're pretty much always better off maxing your available retirement accounts first.

2) As mentioned earlier, mortgages are independent of inflation. This is a great hedge against a possible inflation run-up, especially in this era of government debt-financed spending and a hot economy. Further, this also means you need to compare your mortgage rate against the non-inflation returns of the stock market, which is generally closer to 10% when you factor in dividend reinvestment rather than the more standard 7% used when discussing inflation adjusted returns.

3) Speaking of tax advantages, it was generally beneficial tax-wise to both contributed to your retirement accounts and also hold a mortgage due to the MID. Now that the standard deduction is so high, that may not be true, but given the state of politics and the eventual expiration of the personal credits added in to the recent tax bill, it may be something to think about given the uncertain nature of our current tax code.

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #19 on: October 09, 2018, 12:00:13 PM »
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People often forget to examine whether or not tax-advantaged space is available.

Right, so this is the next thing I'm looking at. Let's say in theory somebody has maxed out all of their tax-advantaged retirement accounts already and still has more money to invest. Which is better: taxable investment account or paying off your mortgage early?

I've read the thread on investing order, but it doesn't include anything about mortgage payoff so....

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #20 on: October 09, 2018, 12:17:27 PM »
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People often forget to examine whether or not tax-advantaged space is available.

Right, so this is the next thing I'm looking at. Let's say in theory somebody has maxed out all of their tax-advantaged retirement accounts already and still has more money to invest. Which is better: taxable investment account or paying off your mortgage early?

I've read the thread on investing order, but it doesn't include anything about mortgage payoff so....

The investment order post treats a mortgage like any other debt. Step 2 sets the threshold for debts that should be paid off before investing in a tax-sheltered account. Step 7 sets the threshold for debts that should be paid off before investing in a taxable account.

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #21 on: October 09, 2018, 12:20:08 PM »
Quote
People often forget to examine whether or not tax-advantaged space is available.

Right, so this is the next thing I'm looking at. Let's say in theory somebody has maxed out all of their tax-advantaged retirement accounts already and still has more money to invest. Which is better: taxable investment account or paying off your mortgage early?

I've read the thread on investing order, but it doesn't include anything about mortgage payoff so....

The investment order post treats a mortgage like any other debt. Step 2 sets the threshold for debts that should be paid off before investing in a tax-sheltered account. Step 7 sets the threshold for debts that should be paid off before investing in a taxable account.

Ahh got it. Thanks.

Bird In Hand

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #22 on: October 09, 2018, 04:00:41 PM »
Paid off mortgage baseline
Retirement years from 2018 to 2067 (50 years)
$1 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Success rate: 82.65%

Keeping a mortgage
Retirement years from 2018 to 2067 (50 years)
$1.2 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Extra spending of $12k, 2018 to 2047, NOT inflation adjusted ($200k at 4.4% for 30 years fixed)
Success rate: 96.94%

Thanks for posting these numbers.

Can you +/- replicate this in FIRECalc?  I'm a lot more familiar with that tool than I am cFIRESim, and I can't quite get your numbers in FIRECalc.  I don't know if it's due to different assumptions in the tools, or different parameters that we each chose (inflation, etc.).

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #23 on: October 09, 2018, 04:33:52 PM »
Paid off mortgage baseline
Retirement years from 2018 to 2067 (50 years)
$1 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Success rate: 82.65%

Keeping a mortgage
Retirement years from 2018 to 2067 (50 years)
$1.2 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Extra spending of $12k, 2018 to 2047, NOT inflation adjusted ($200k at 4.4% for 30 years fixed)
Success rate: 96.94%

Thanks for posting these numbers.

Can you +/- replicate this in FIRECalc?  I'm a lot more familiar with that tool than I am cFIRESim, and I can't quite get your numbers in FIRECalc.  I don't know if it's due to different assumptions in the tools, or different parameters that we each chose (inflation, etc.).

I am not as familiar with FIRECalc, but I gave it a shot. Not sure why it's different from cFIREsim, but it is still in favor of keeping the mortgage. I think all the input parameters were the same, so I would guess it's the dataset or other assumptions in the tool.

Paid off: 80.6% success with average final balance of $3.76 million
Keep mortgage: 83.7% success with average final balance of $4.43 million

twig21

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #24 on: October 09, 2018, 05:54:44 PM »
If you have a mortgage each month of $1,500 you'd need an extra $450,000 in your portfolio to cover your mortgage payment. And based on a 4% withdrawal rate, your investments aren't actually gaining any additional post-inflation value over time, so the idea of that money increasing in value isn't applicable.

How do you figure "your investments aren't actually gaining any additional post-inflation value over time"?

The money is increasing in value.  It should be increasing in 6-8% range.  At the 4% withdraw rate you should be able to preserve principal and be able to increase spending at the rate of inflation.

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #25 on: October 09, 2018, 08:22:52 PM »
If you have a mortgage each month of $1,500 you'd need an extra $450,000 in your portfolio to cover your mortgage payment. And based on a 4% withdrawal rate, your investments aren't actually gaining any additional post-inflation value over time, so the idea of that money increasing in value isn't applicable.

How do you figure "your investments aren't actually gaining any additional post-inflation value over time"?

The money is increasing in value.  It should be increasing in 6-8% range. At the 4% withdraw rate you should be able to preserve principal and be able to increase spending at the rate of inflation.

Hmm this depends a bit who you ask, doesn't it?

Most people agree you can expect 7% return on investment over time.
Subtract 4% for safe withdrawal rate.
Subtract 2-3% for inflation.
Your portfolio is gaining no value.

While the number of dollars goes up, it's not gaining any post-inflation value. Based on my understanding, this is the basis of the SWR.

Of course, MMM argues you could go as high (or maybe even higher) than a 5% SWR, and there's an entire thread about not worrying about the 4% rule.

MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #26 on: October 09, 2018, 08:41:36 PM »
Quote
and be able to increase spending at the rate of inflation.

Perhaps you don't what the term "inflation" actually means?

Telecaster

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #27 on: October 09, 2018, 09:31:42 PM »

Hmm this depends a bit who you ask, doesn't it?

Most people agree you can expect 7% return on investment over time.
Subtract 4% for safe withdrawal rate.
Subtract 2-3% for inflation.
Your portfolio is gaining no value.

While the number of dollars goes up, it's not gaining any post-inflation value. Based on my understanding, this is the basis of the SWR.

Of course, MMM argues you could go as high (or maybe even higher) than a 5% SWR, and there's an entire thread about not worrying about the 4% rule.

7% is the inflation adjusted number.  Stock market returns including dividends have averaged about 10% nominal returns over time.  The thinking behind the 4% rule is that stock market returns can vary greatly over long periods of time, as can inflation and bond returns which means your portfolio can become depleted if you hit a bad spell early on.  The 4% is sort of a worst case scenario withdrawal rate. 



MTBmustachian

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #28 on: October 09, 2018, 09:41:49 PM »

Hmm this depends a bit who you ask, doesn't it?

Most people agree you can expect 7% return on investment over time.
Subtract 4% for safe withdrawal rate.
Subtract 2-3% for inflation.
Your portfolio is gaining no value.

While the number of dollars goes up, it's not gaining any post-inflation value. Based on my understanding, this is the basis of the SWR.

Of course, MMM argues you could go as high (or maybe even higher) than a 5% SWR, and there's an entire thread about not worrying about the 4% rule.

7% is the inflation adjusted number.  Stock market returns including dividends have averaged about 10% nominal returns over time.  The thinking behind the 4% rule is that stock market returns can vary greatly over long periods of time, as can inflation and bond returns which means your portfolio can become depleted if you hit a bad spell early on.  The 4% is sort of a worst case scenario withdrawal rate.

Not according to Mr. Money Mustache: http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

Like I said, depends who you ask and which articles you read.

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #29 on: October 09, 2018, 09:58:18 PM »

Hmm this depends a bit who you ask, doesn't it?

Most people agree you can expect 7% return on investment over time.
Subtract 4% for safe withdrawal rate.
Subtract 2-3% for inflation.
Your portfolio is gaining no value.

While the number of dollars goes up, it's not gaining any post-inflation value. Based on my understanding, this is the basis of the SWR.

Of course, MMM argues you could go as high (or maybe even higher) than a 5% SWR, and there's an entire thread about not worrying about the 4% rule.

7% is the inflation adjusted number.  Stock market returns including dividends have averaged about 10% nominal returns over time.  The thinking behind the 4% rule is that stock market returns can vary greatly over long periods of time, as can inflation and bond returns which means your portfolio can become depleted if you hit a bad spell early on.  The 4% is sort of a worst case scenario withdrawal rate.

Not according to Mr. Money Mustache: http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

Like I said, depends who you ask and which articles you read.

That is just a simplification he made and he acknowledges that the real return is higher in a comment on that same article: "Actually I did mean 7% before inflation even though the long-term average has been more like 7% after inflation. This is another one of those safety margins."

And you don't need to read an article to find the long term returns, stock market data is readily available. 9.1% since 1871 (6.9% after inflation).
https://dqydj.com/sp-500-return-calculator/

Bird In Hand

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #30 on: October 10, 2018, 06:27:43 AM »
Paid off mortgage baseline
Retirement years from 2018 to 2067 (50 years)
$1 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Success rate: 82.65%

Keeping a mortgage
Retirement years from 2018 to 2067 (50 years)
$1.2 million in 75/25 stocks/bonds with a 0.1% expense ratio
Spending plan is $40k/year, inflation adjusted
Extra spending of $12k, 2018 to 2047, NOT inflation adjusted ($200k at 4.4% for 30 years fixed)
Success rate: 96.94%

Thanks for posting these numbers.

Can you +/- replicate this in FIRECalc?  I'm a lot more familiar with that tool than I am cFIRESim, and I can't quite get your numbers in FIRECalc.  I don't know if it's due to different assumptions in the tools, or different parameters that we each chose (inflation, etc.).

I am not as familiar with FIRECalc, but I gave it a shot. Not sure why it's different from cFIREsim, but it is still in favor of keeping the mortgage. I think all the input parameters were the same, so I would guess it's the dataset or other assumptions in the tool.

Paid off: 80.6% success with average final balance of $3.76 million
Keep mortgage: 83.7% success with average final balance of $4.43 million

Thanks for running that and providing the linked FIRECalc results.

Now I'm curious -- I would really like to get to the bottom of the FIRECalc/cFIRESim discrepancy in this case.  I'll see if I can replicate your results in cFIRESim.  The difference between 80.6% vs 83.7% is almost lost in the noise, but 82.7% vs 96.9% is a different story.

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #31 on: October 10, 2018, 08:01:50 AM »
Thanks for running that and providing the linked FIRECalc results.

Now I'm curious -- I would really like to get to the bottom of the FIRECalc/cFIRESim discrepancy in this case.  I'll see if I can replicate your results in cFIRESim.  The difference between 80.6% vs 83.7% is almost lost in the noise, but 82.7% vs 96.9% is a different story.

Best I can tell the core of FIRECalc hasn't been updated since 2007 and it's just been dataset updates since then. I think it's more likely that there is an error in FIRECalc than cFIREsim. I would also love to know what's causing it, there doesn't seem to be many people talking about why the results differ.
https://bucking-the-trend.com/get-to-know-bo-creator-of-cfiresim/
http://www.early-retirement.org/forums/search.php?do=finduser&u=3826

As a side note, I noticed that the FIRECalc support forum on early-retirement.org is censoring the word "cFIREsim"! Wow...

quelinda

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #32 on: October 10, 2018, 08:04:50 AM »
Does anyone care to give their opinion about my situation? (Silly question -- people love to give their opinion!)

I recently inherited a fair amount of money. My husband and I have no debt besides our mortgage. We owe about $165,000 at 2.75% & it will be paid off in less than ten years if we don't make any extra payments. He hopes to retire in about seven years (I'm a SAHM homeschooling our two boys).

We have been maxing out his 401K ($24,500 this year, as he's over 50) and HSA (saving receipts but not reimbursing ourselves).  Now with the inheritance we'll be able to max out IRAs for each of us (and contribute to the boys' 529 plans up to the amount that's tax deductible in our state). By my calculations, we'll have over a million by the time he'd like to retire.

I would like to pay off the house for a few reasons:

*Peace of mind.
*No more tax advantages with the new tax laws.
*Balancing our portfolio.
*If it were invested outside of a retirement account, we'd have tax consequences to consider, right?

We currently have the bulk of our investments (the 401K) in a Vanguard stock market index fund. If we were going to invest the $165,000, I'd feel the need to put it into a bond fund or something less risky than stocks to balance things out. But then why not just pay off the mortgage?
« Last Edit: October 10, 2018, 08:36:10 AM by quelinda »

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #33 on: October 10, 2018, 08:33:58 AM »
Does anyone care to give their opinion about my situation? (Silly question -- people love to give opinions on this!)

Sure. 2.75% is a ridiculously low rate that is lower than current bond and treasury yields (and they are rising). Inflation over the last year was 2.7%, so your mortgage is effectively costing you nothing. Even with a conservative investment (say 50/50 stocks/bonds) you should come out way ahead over 10 years compared to paying off the mortgage. If for some reason you want to have a disproportionate amount of capital tied up in real estate you should look into buying rental properties instead.

Yes, if you invest in a taxable brokerage account you will be taxed on realized capital gains (when you sell) and dividends. These tax rates are typically more favorable than your standard income tax brackets and if your income is low enough can even be zero. Total stock market index funds (like VTSAX) tend to be very tax efficient.
« Last Edit: October 10, 2018, 08:35:47 AM by RWD »

Radagast

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #34 on: October 10, 2018, 10:12:55 AM »
9 of 13 Vanguard tax exempt bond funds are yielding more than 2.75% right now, and intermediate term may join soon

Bird In Hand

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #35 on: October 10, 2018, 10:29:13 AM »
Thanks for running that and providing the linked FIRECalc results.

Now I'm curious -- I would really like to get to the bottom of the FIRECalc/cFIRESim discrepancy in this case.  I'll see if I can replicate your results in cFIRESim.  The difference between 80.6% vs 83.7% is almost lost in the noise, but 82.7% vs 96.9% is a different story.

Best I can tell the core of FIRECalc hasn't been updated since 2007 and it's just been dataset updates since then. I think it's more likely that there is an error in FIRECalc than cFIREsim. I would also love to know what's causing it, there doesn't seem to be many people talking about why the results differ.
https://bucking-the-trend.com/get-to-know-bo-creator-of-cfiresim/
http://www.early-retirement.org/forums/search.php?do=finduser&u=3826

As a side note, I noticed that the FIRECalc support forum on early-retirement.org is censoring the word "cFIREsim"! Wow...

lol @ censoring out 'cFIRESim'!

I tried my hand at running your scenarios in cFIRESim, but I couldn't come up with the same numbers you reported.

Payoff $200k: 82.65%
Invest $200k: 87.76%

Note that I got the same answer as you for the Payoff scenario.  I was able to get the same answer as you for the invest scenario by setting the $12k spending to recurring=false (in which case it only applies the spending for year 2018).

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #36 on: October 10, 2018, 11:04:11 AM »
I tried my hand at running your scenarios in cFIRESim, but I couldn't come up with the same numbers you reported.

Payoff $200k: 82.65%
Invest $200k: 87.76%

Note that I got the same answer as you for the Payoff scenario.  I was able to get the same answer as you for the invest scenario by setting the $12k spending to recurring=false (in which case it only applies the spending for year 2018).

Thank you for double checking my numbers. I must have inadvertently switched the recurring flag. Rerunning the simulation I also get 87.76% so I will update my original post. That is more within the margin of error when comparing to FIRECalc too.

YYK

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #37 on: October 10, 2018, 11:06:19 AM »
Another convert... boarder42 is smiling in heaven.

Telecaster

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #38 on: October 10, 2018, 03:19:09 PM »

I would like to pay off the house for a few reasons:

*Peace of mind.
*No more tax advantages with the new tax laws.
*Balancing our portfolio.
*If it were invested outside of a retirement account, we'd have tax consequences to consider, right?

*Peace of mind.  --  Is an illusion.   You are stuffing your money in an illiquid, slowly appreciating (if appreciating at all) assett, and if you ever want the money it is expensive and time consuming to access.  If it was anything other than a house people would say you are barking mad for even considering doing something like that.  Piece of mind is a big investment account that compounds over the years.   That's how you sleep like a baby. 

*No more tax advantages with the new tax laws.  -- Wasn't that great in the first place.   Benefited mainly the very wealthy.

*Balancing our portfolio. --  Excellent reason to keep your money of out the house!  Once it is in the house you are stuck and can't rebalance the money until you sell. 

*If it were invested outside of a retirement account, we'd have tax consequences to consider, right?  -- Yes! Another excellent reason to keep it out of the house!  If you pay taxes, that means your investments made money!   Making money is awesome.  That means you can retire earlier or enjoy a higher lifestyle in retirement.

quelinda

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #39 on: October 10, 2018, 05:01:37 PM »

I would like to pay off the house for a few reasons:

*Peace of mind.
*No more tax advantages with the new tax laws.
*Balancing our portfolio.
*If it were invested outside of a retirement account, we'd have tax consequences to consider, right?

*Peace of mind.  --  Is an illusion.   You are stuffing your money in an illiquid, slowly appreciating (if appreciating at all) assett, and if you ever want the money it is expensive and time consuming to access.  If it was anything other than a house people would say you are barking mad for even considering doing something like that.  Piece of mind is a big investment account that compounds over the years.   That's how you sleep like a baby. 

*No more tax advantages with the new tax laws.  -- Wasn't that great in the first place.   Benefited mainly the very wealthy.

*Balancing our portfolio. --  Excellent reason to keep your money of out the house!  Once it is in the house you are stuck and can't rebalance the money until you sell. 

*If it were invested outside of a retirement account, we'd have tax consequences to consider, right?  -- Yes! Another excellent reason to keep it out of the house!  If you pay taxes, that means your investments made money!   Making money is awesome.  That means you can retire earlier or enjoy a higher lifestyle in retirement.

Okay. BUT...what if my DH loses his job or becomes permanently disabled while the market is way, way down? I am a worrier, and the thought of having to come up with a $1650 monthly mortgage payment in the event that might happen is concerning to me.

I'm sure the numbers still work out in favor of the way you're discussing. And I'm sure peace of mind is an illusion. But I just can't wrap my head around *my* way being wrong.

RWD

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #40 on: October 10, 2018, 05:19:42 PM »
Okay. BUT...what if my DH loses his job or becomes permanently disabled while the market is way, way down? I am a worrier, and the thought of having to come up with a $1650 monthly mortgage payment in the event that might happen is concerning to me.

I'm sure the numbers still work out in favor of the way you're discussing. And I'm sure peace of mind is an illusion. But I just can't wrap my head around *my* way being wrong.

Pick an asset allocation that helps you sleep at night. For example, if you are 50/50 stocks bonds and stocks take a 53% hit (the worst year in history!) then you will still have $121k of your $165k which is plenty of money to continue to pay your mortgage for years to come. And bonus, you'll have $82.5k in bonds that can be rebalanced towards stocks to take advantage of the low prices.

minimalistgamer

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Re: Investment VS Mortgage Pay Off Summary Article?
« Reply #41 on: October 13, 2018, 11:19:23 AM »
I do not have a good article link to give you, so my apologies for that.

I am just going to make a comment regarding this. You can get very technical about paying off vs investing, and there is nothing wrong with that, but do not forget the psychological aspect of this.

We paid off our house in Jan 2017, and it was the best decision I ever made. I am 35 with a paid off house. I love it. That said, I do not plan to retire early. So take it for what its worth (probably nothing lol)