Can you be FI with a mortgage?

[DiamondIce]

Hi all :)

I am deciding on the best trajectory for FI and would love some advise, feedback, comments, or anything else from the community here.

Here are a couple particulars.

1. Enjoy my work but as work is more fun when you don't need the money would be happier doing less. Earn about $140,000/a self employed.
2. Tax sheltered retirement account: $113,000 Canadian.
3. Tax Free Savings Acct. $60,000
4. Cash: About $20,000.
5. Pensions: about $120,000 value ($31,000 a year aged 65).
6. Real Estate: 2 units of a triplex. Market value $720,000-$740,000 with $470,000 mortgage. Would be *happier* owning own house.
7. Save about $5,000/month. Room for improvement.

So what is best strategy? Would love to have own house and work much less. Many ways to go here. One child.

[nereo]

You can absolutely be FI and hold a mortgage, just as you can be fully retired and keep a mortgage. 

As for your individual circumstances - we need more money information to really judge what your best strategy could be.  For starters, what are you brining in from your real estate, how much do you spend per month (outside of investments) and could you easily work less and still being in a decent income?  You age would also be useful (since you have a pension at 65).

Saving $5k/month and with ~$400k in assets you certainly could become FI in a couple of years, depending on your spending rate.

Edit:  fixed word (strikethru).  Sometimes my fingers type faster than my brian.

[ericrugiero]

Yes you can be FI with a mortgage.  The best way I've heard is to have enough money to support your lifestyle without the mortgage PLUS have enough extra invested to pay off the mortgage.  The money invested will probably earn more than your mortgage interest (assuming it's low) and you come out ahead long term.  The other school of thought is to pay it off and have less expenses.  Investing it is usually mathematically superior, paying it off might be safer.  It's a personal choice based on risk assessment. 

[ice1717]

Many ways to go here is right!

My approach is to calculate my FI number without my mortgage payment included in my expenses, and then add back in the remaining loan value to get my total 'stash amount needed.  My mortgage is 3.5% for another 24 years. 

Simplistically it looks like: ($ Needed = 25*expenses + remaining mortgage balance)

If I were you and liked the idea of "owing" my house, I would save the extra payments that could go to the mortgage in a taxable account and not pay an extra penny until I could pay it all off in one swoop. (or never if you decide you like the extra money laying around.)

Based on historical results... The fastest way to "working much less" is investing money, not sub-optimally paying off a low interest loan. 

[DiamondIce]

Thanks for each of these responses. :) I'm not sure how to answer them individually so will just talk generally here.

The rental income is $1400 a month gross or $1050 net, although sometimes I rent out a room for $725 a month. I'm 44, and yes I could very easily work less and bring in a good income. Right now 10 hours a day 6 days a week plus some evening paper work, but can bring this down to pretty much any hours and schedule I want, take vacation whenever, etc. Mortgage is $2000 a month, other home expenses about $800 a month, business expenses after tax credits about $1000 a month, other living expenses about $2000 a month. So personal expenses about $5000 a month and business expenses about $1000 a month. 

It is a 30 year mortgage with minimum payments. So yes totally agree with investing left over money in stock market instead of paying mortgage off fast.

As I read the comments, you help me realize this post is not so much about whether to pay off the mortgage but whether to wait until then to work less.

An option is to work less now, save less money, but live more? Or, power through and get to FI as quickly as possible. Or, follow some middle path, saving a lot, but not uncomfortably so. 

Another option is to sell the two units despite the $40000 closing costs and buying a house with a suite that rents out for a few hundred dollars more a month, and with a home office that can cut business expenses about $700/month. Perhaps buy something underpriced in need of some Mustachian fix-up sweat equity. Any thoughts on this option?

Hope I'm still making sense.

Cheers!

[EvenSteven]

You can absolutely be FI and hold a mortgage, just as you can be fully retired and keep a mortgage. 

As for your individual circumstances - we need more money to really judge what your best strategy could be.  For starters, what are you brining in from your real estate, how much do you spend per month (outside of investments) and could you easily work less and still being in a decent income?  You age would also be useful (since you have a pension at 65).

Saving $5k/month and with ~$400k in assets you certainly could become FI in a couple of years, depending on your spending rate.

Hey, I thought you did this for free!

[Enigma]

Yes, I am sure it is different in Canada than the US.  At least with a mortgage on investments, I can write the interest off as operating expenses and then the 20% capital gains taxes on the profit is less.  The write-off on one's house is no longer an option since the standard deduction is better than doing an itemization.

In the USA the best strategy would be to pay off your personal house (no tax advantage to paying on interest) and keep your investment property mortgages (tax advantage to paying on interest)

[nereo]

You can absolutely be FI and hold a mortgage, just as you can be fully retired and keep a mortgage. 

As for your individual circumstances - we need more money to really judge what your best strategy could be.  For starters, what are you brining in from your real estate, how much do you spend per month (outside of investments) and could you easily work less and still being in a decent income?  You age would also be useful (since you have a pension at 65).

Saving $5k/month and with ~$400k in assets you certainly could become FI in a couple of years, depending on your spending rate.

Hey, I thought you did this for free!

whoops.. freudian slip?  Corrected upthread.
:-)

[CCCA]

Definitely.  We are FI and still have a mortgage.  We could pay it off but chose not to.  It's really just a personal decision about what you feel most comfortable with.  I'm pretty sure that if you were trying to maximize the expected value of your future net worth, the best course would be to keep a low interest mortgage and stay invested in the markets.  But that also carries some downside risk.

[ice1717]

As I read the comments, you help me realize this post is not so much about whether to pay off the mortgage but whether to wait until then to work less.

An option is to work less now, save less money, but live more? Or, power through and get to FI as quickly as possible. Or, follow some middle path, saving a lot, but not uncomfortably so. 

The money questions are easy because it is just math.  Philosophical questions like work life balance are waaaaayyyyy harder.  We as a community don't often discuss FIRE in half measures to get to FI.  Most often it is how quickly you can get there.  Perhaps there should be levels of "Coast FI"?

1. (work way less) Pull back to "normal retirement" savings.  i.e. work enough that saving 20% will get you to a comfortable retirement at 65
2. (work a little less) Pull back to early, not EARLY, retirement. i.e. work enough that you are saving XX% of your income to retire at earlier age (50?55?)
3. (work hard for way less years, then work less for more years) Continue to work as-is to get to amount that allows you to coast to comfortable retirement at 65
4. (work hard a few years, then less for a few years) Continue to work as-is to get to amount that allows you to coast to early, but not EARLY, retirement
5. (work hard all the way to FIRE) Continue to work as-is to get to amount that allows you to FIRE

[robartsd]

As I read the comments, you help me realize this post is not so much about whether to pay off the mortgage but whether to wait until then to work less.

An option is to work less now, save less money, but live more? Or, power through and get to FI as quickly as possible. Or, follow some middle path, saving a lot, but not uncomfortably so. 

Another option is to sell the two units despite the $40000 closing costs and buying a house with a suite that rents out for a few hundred dollars more a month, and with a home office that can cut business expenses about $700/month. Perhaps buy something underpriced in need of some Mustachian fix-up sweat equity. Any thoughts on this option?

Hope I'm still making sense.

Yes, you're free to choose a different work/life balance which might change your FI date. If you like your work, but feel you're just doing it too much, you'll probably be happier doing it less even if that means you reach FI later.

I'm not sure I understand your housing situation. I think you currently own 2 units of a 3 unit building and rent out one unit for $1400/month. Sometimes you also rent out a room in the unit you live it at $725/month. You pay 2000/mo on a 470,000 mortgage for the property. You said you'd rather own your own home in your first post, but now you're saying you might sell to buy something else with a rental. Is your concern that you share ownership of the building with someone else? As an income property it doesn't sound very good, the rental from one unit only nets about enough to pay it's half of the mortgage - before considering maintenance and vacancy costs - and the mortgage is only about 2/3 the value of the property. I think I lean strongly towards selling.

What to get instead is a separate question. If you like how much time you spend in high productivity mode, but want more variety; a DIY fixer could be a good idea. If you're needing some time to relax, I wouldn't recommend it at this point.

You indicated about 5k in personal expenses (5k CAD ~ 3.7k USD - sounds like there's a good bit of fat to cut in the expenses department). You can cut back on expenses and earnings at a similar rate and still find your FI date moving earlier (due to gains in your current investments).

[DiamondIce]

As I read the comments, you help me realize this post is not so much about whether to pay off the mortgage but whether to wait until then to work less.

An option is to work less now, save less money, but live more? Or, power through and get to FI as quickly as possible. Or, follow some middle path, saving a lot, but not uncomfortably so. 

Another option is to sell the two units despite the $40000 closing costs and buying a house with a suite that rents out for a few hundred dollars more a month, and with a home office that can cut business expenses about $700/month. Perhaps buy something underpriced in need of some Mustachian fix-up sweat equity. Any thoughts on this option?

Hope I'm still making sense.

Yes, you're free to choose a different work/life balance which might change your FI date. If you like your work, but feel you're just doing it too much, you'll probably be happier doing it less even if that means you reach FI later.

I'm not sure I understand your housing situation. I think you currently own 2 units of a 3 unit building and rent out one unit for $1400/month. Sometimes you also rent out a room in the unit you live it at $725/month. You pay 2000/mo on a 470,000 mortgage for the property. You said you'd rather own your own home in your first post, but now you're saying you might sell to buy something else with a rental. Is your concern that you share ownership of the building with someone else? As an income property it doesn't sound very good, the rental from one unit only nets about enough to pay it's half of the mortgage - before considering maintenance and vacancy costs - and the mortgage is only about 2/3 the value of the property. I think I lean strongly towards selling.

What to get instead is a separate question. If you like how much time you spend in high productivity mode, but want more variety; a DIY fixer could be a good idea. If you're needing some time to relax, I wouldn't recommend it at this point.

You indicated about 5k in personal expenses (5k CAD ~ 3.7k USD - sounds like there's a good bit of fat to cut in the expenses department). You can cut back on expenses and earnings at a similar rate and still find your FI date moving earlier (due to gains in your current investments).

Yeah, I am leaning towards keeping an even keel on the work part, working with maybe an 8 of 10 effort, keeping a reasonable level of work life balance. Right now, I don't really see reaching FI sooner than 20-25 years though.

Yes that's exactly right. It is not really fun sharing a duplex with another owner. A three unit building with two owners is complicated and not free. I have owned a house freehold before and it is much happier.  Want to sell, but hard to accept $40,000 selling costs. Bought these 2 units in a rising market two years ago. Very expensive in my city. The numbers don't look good. $2000 mortgage with $800 utility and taxes are $2800 a month minus  $1050 rental income from the other unit/smaller suite is still much better than most alternatives in this town. The average house is $900,000. Going much less than my place gets a condo with all those nasty maintenance fees, or renting, which looses out on a seemingly ever rising albeit crawling market.

But a house with a larger rental suite and a home office with, as you suggest, some need of work to keep the purchase price below market might well recoup the lost sales costs of the other property and produce a happier situation to boot. Does this seem accurate?

Thoughts about DIY fixer. Here's the thing. I don't know about you, but I grew up on a farm and have a thing for working with my hands. No skills after an adult lifetime in the city though. So there's this bug. But financially, every day not working my business costs about $700 gross; it's hard to make that kind of profit doing home renovations. So for instance cutting back from 6 days a week to 4 days week of work and doing 2 days a week of learning, practicing, and building carpentry and other home skills may or may not be worth it. Would love to hear any ideas on this also.

[DiamondIce]

As I read the comments, you help me realize this post is not so much about whether to pay off the mortgage but whether to wait until then to work less.

An option is to work less now, save less money, but live more? Or, power through and get to FI as quickly as possible. Or, follow some middle path, saving a lot, but not uncomfortably so. 

Yeah that is definatley the complexity of these decisions. How hard to work now to retire early? Another way to think of it might be:

Option A: Go all "Rocky" and retire as early as possible at all costs.

Option B: Work hard but below the peak, taking breaks and avoiding too much discomfort.

Option C: Just retiring late like everyone else.


The money questions are easy because it is just math.  Philosophical questions like work life balance are waaaaayyyyy harder.  We as a community don't often discuss FIRE in half measures to get to FI.  Most often it is how quickly you can get there.  Perhaps there should be levels of "Coast FI"?

1. (work way less) Pull back to "normal retirement" savings.  i.e. work enough that saving 20% will get you to a comfortable retirement at 65
2. (work a little less) Pull back to early, not EARLY, retirement. i.e. work enough that you are saving XX% of your income to retire at earlier age (50?55?)
3. (work hard for way less years, then work less for more years) Continue to work as-is to get to amount that allows you to coast to comfortable retirement at 65
4. (work hard a few years, then less for a few years) Continue to work as-is to get to amount that allows you to coast to early, but not EARLY, retirement
5. (work hard all the way to FIRE) Continue to work as-is to get to amount that allows you to FIRE

[HBFIRE]

Yes, in fact in my view it's preferable as then a sizable portion of your expenses are inflation protected.  This should in theory increase the "safety" of your withdraw rate as it lowers with each passing year.