but as long as you are taking the time to keep responding
The "to prepay or not to prepay" debate is one of my favorite recurring topics in the forum and I always enjoy participating in discussions about it. Hopefully you still find this discussion useful, but if not, just say the word and I will stop prolonging it. I didn't intend to hijack your thread :)
Are you suggesting withdrawing as much as the account returns (supposedly an average of 7%), or more?
I'm suggesting withdrawing as much as necessary to fund your regularly scheduled monthly mortgage payments.
In your case (using the numbers from post # 19 above), at the moment your investment account grows to be equal to your then-outstanding mortgage principal balance, the initial withdrawal rate would be roughly 7.3% ($18,960 annual mortgage payments / ~$260k investment portfolio).
If the principal is getting lower, how am I coming out ahead?
Because the investment principal is growing at a faster rate than the loan principal is accruing interest.
Perhaps you would like to show me actual numbers?
I thought that's what I did in post # 19.
As you had calculated, if you make extra monthly principal payments of $2890 starting in month 13, you will pay off your mortgage in full in the 91st month of the loan (7 years and 7 months from now).
If, instead, you make the minimum mortgage payments and make monthly investments of $2890 per month starting in month 13 (and the investments earn a constant fixed rate of return of 7%), you will be able to pay off your mortgage in full in the 87th month of the loan (four months earlier than above) (in 87 months, your investments will have grown to just over $270k, while your outstanding loan balance will have decreased to just under $267k).
So, if you're using "mortgage-free status" as your retirement trigger, this approach enables you to retire four months earlier. But, again, as long as your investments will in fact outperform your mortgage rate, there's no reason to use "mortgage-free status" as your retirement trigger -- instead, you can keep both the investments and the mortgage, and be "even more" financially independent than if you pay off the mortgage.
By the reasoning there, everyone should logically roll over their mortgages indefinitely, take out home equity loans and put all the money into the stock market, as well as low interest credit cards and put living expenses on them so you could put all your cash into the market, etc.
Yes, as long as the debt is both
sufficiently cheap and
sufficiently long-term, the optimal approach (from both a return-maximization perspective and a financial-independence-acceleration perspective) is to borrow as much as possible and invest as much as possible. But most non-mortgage debt tends to lack at least one of these qualities, and mortgage debt could too -- in 30 years, prevailing mortgage rates may not be as low as they are today (which would defeat the purpose of the "indefinite roll over" plan).
The 7% is a long term average. Is bad years, it means I potentially have to work again, to make sure I make those payments, which don't get any lower just because the market crashed. My goal isn't to maximize returns, so I have no interest in continuing to gamble once the possibility of FI exists.
Yes, now you're inching back towards the "avoidance of uncertainty" rationale, which, as I said from the get-go, is a perfectly valid reason to prepay a mortgage. The stock market may not outperform mortgage prepayments, while the prepayment approach locks in a rate of return equal to the mortgage rate and avoids the gamble you take by relying on variable-performance investments to power you to FI. But, again, that's not the rationale you have been defending (instead, you've been arguing that
even if you could be certain that your investments will outperform your mortgage rate, you would achieve FI sooner by prepaying, which is just not true).
Moreover, the 7% fixed return example we've been using is just for ease of illustrating how investment outperformance speeds up FI. The same is true of any investment plan with a higher CAGR than your mortgage prepayment plan, even if the investments (like the stock market) do not have a fixed, steady straight-line return. If you're investing in the stock market in lieu of prepaying your mortgage, it's okay to dip into the investments during the down years to keep servicing your fixed-amount mortgage payments and still come out ahead, in the same way that it's okay for a retiree using a 4%-rule-based retirement plan to dip into her portfolio during down years to keep paying her living expenses and still not result in portfolio failure -- the 4% rule already accounts for market swings, and most historical success cases had at least some periods where the portfolio value fell below the initial amount.
My mortgage rate is 3.875% (with 28 years remaining until final maturity), and I'm making the minimum payments and plowing all excess dollars into the stock market. Your mortgage rate is quite a bit higher, at 4.625%. If I were in your shoes, perhaps I would decide to prepay my mortgage too. You need to make that decision for yourself, but you should do so using sound reasoning. If you decide to prepay your mortgage because you want to avoid the risk of bad stock market performance delaying your attainment of financial independence, that would make sense. If you decide to prepay your mortgage because you believe that approach will accelerate your attainment of financial independence even if it has a lower CAGR than the leveraged-investing approach, that makes no sense, because it is mathematically impossible.