"Imputed Rent" - Why Do We Bother Adding It Back In?

[Nords]

I found the imputed rent data on MMMs spending most helpful to show the real difference between paying off a house pre-FIRE or having a mortgage/renting during FIRE. Not necessarily the intention of showing it, but I found it quite eye-opening.

Same here. In my case, if I keep a mortgage payment in perpetuity (currently $600/mo), my stash would need to be substantially larger, by order of $180,000 to support that $600/mo mortgage expense using the 4% withdrawal rule. Or pay it off pre-FIRE and it's done.

That's the type of thinking that makes one FIRE much later than necessary (by paying off their mortgage).  :)

Because in the one comparison (keeping the mortgage), you're funding the mortgage payment in perpetuity, even though it's going to go away at some point, at which point you'll have an extra $600/mo, or $7200/yr over the other scenario.  Certainly not apples-to-apples.

Think about it this way: what is your mortgage balance?  THAT'S the extra amount you'd need to save (and you'd do it by, whenever you'd go to prepay your mortgage, investing it instead, so it wouldn't take any longer to save that extra amount than it would to pay off your mortgage, and it might take shorter cause of compounding).  That extra money sitting in stocks, earning you money, instead of sitting in house equity, earning you nothing, causes you to come out ahead, and means you can FIRE quicker.

Read more here: http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Paying off your house slows your FIRE date versus leaving the mortgage and investing the money you would use to pay off the mortgage.  Just think if it as needing to save: 25x my non-mortgage expenses PLUS my mortgage balance.  When your stache equals that, you can FIRE (rather than the "25x my total expenses, including mortgage" you were thinking of).

Hope that helps.  :)

Just to pile in on this mortgage discussion, I'll mention that we have two of them (homeowner and rental property) and they'll be paid off when I'm nearly 80 years old.

I have a 12-year spreadsheet tracking the return of taking a mortgage at 5.375% and investing the cash into a small-cap value fund, while making the mortgage payments from my pension and our investments.  Even after blundering into the Great Recession (sequence of returns risk) the investment is still comfortably ahead of the 5.375%... even though since then we've refi'd down to the current 3.625%.

Let's do a thought experiment:  If the U.S. government pays you a monthly inflation-adjusted annuity of approximately 2x your mortgage payment, and you can get that 30-year fixed-rate mortgage at 3.625%, would you borrow the money and invest it in the stock market?  Long-term CDs?  Or would you sleep more comfortably at night with a paid-for home?

One of those decisions is risk-taking math while the other is the behavioral financial psychology of loss aversion.  Both are perfectly valid.  Since I already have an annuitized income from one of the world's most trusted sources (or one that can at least print money) then I feel that I have the loss-aversion part covered and can take a little risk.

[Cassie]

I agree that it makes it easier for others to believe that they can do it when they see that his rent/mortgage an not included. The other thing I think is misleading is where he says he takes awesome trips on his budget. It takes a little digging to see posts where he states that his travel budget does not come out of the 24K but is part of his business expenses.  However, the bottom line is that Pete is trying to show people that there is a better way to live and not blow all your $. I hate when I hear people say they will never retire. Because they will eventually either due to circumstances, ill health, etc. Better to have planned for it then for it to be an unpleasant surprise.

[SwordGuy]

Paying off your house slows your FIRE date versus leaving the mortgage and investing the money you would use to pay off the mortgage.  Just think if it as needing to save: 25x my non-mortgage expenses PLUS my mortgage balance.  When your stache equals that, you can FIRE (rather than the "25x my total expenses, including mortgage" you were thinking of).

Exactly!   

I think the whole imputed income on housing costs is foolish.  If the man saved enough to pay off his mortgage, he paid it off.  It's done.   Gone.  Then he retired and he doesn't have to pay a mortgage.  Trying to figure out some crazy reason to add it back in is silly.   

[zephyr911]

I think the whole imputed income on housing costs is foolish.  If the man saved enough to pay off his mortgage, he paid it off.  It's done.   Gone.  Then he retired and he doesn't have to pay a mortgage.  Trying to figure out some crazy reason to add it back in is silly.

If this thread has established anything, it's that imputed rent is a valid component of the breakdown in some contexts. It all depends on what you're trying to establish. As with any tool, its appropriateness cannot be judged in a vacuum, but is rather highly context-dependent.

[TheAnonOne]

Paying off your house slows your FIRE date versus leaving the mortgage and investing the money you would use to pay off the mortgage.  Just think if it as needing to save: 25x my non-mortgage expenses PLUS my mortgage balance.  When your stache equals that, you can FIRE (rather than the "25x my total expenses, including mortgage" you were thinking of).

Exactly!   

I think the whole imputed income on housing costs is foolish.  If the man saved enough to pay off his mortgage, he paid it off.  It's done.   Gone.  Then he retired and he doesn't have to pay a mortgage.  Trying to figure out some crazy reason to add it back in is silly.

It's simply in there so when I say, I spend 30k a year, without a mortgage. It doesn't sound as extreme.

I don't see any extra value to the conversation beyond that point. It's also been proven again and again that paying off a mortgage early is a bad bet. Especially, if you can deduct the interest....

[tobitonic]

I agree that it makes it easier for others to believe that they can do it when they see that his rent/mortgage an not included. The other thing I think is misleading is where he says he takes awesome trips on his budget. It takes a little digging to see posts where he states that his travel budget does not come out of the 24K but is part of his business expenses.  However, the bottom line is that Pete is trying to show people that there is a better way to live and not blow all your $. I hate when I hear people say they will never retire. Because they will eventually either due to circumstances, ill health, etc. Better to have planned for it then for it to be an unpleasant surprise.

Agreed on all counts.