Your investment time horizon actually may be much shorter than 30 years. For example you may have a shorter term on your mortgage or if you are an average american you will sell the house in about 6 years. You have also forgotten to include knowing the exact value of paying extra on a mortgage in six months vs the uncertainty of what a mutual fund will be worth in six months.
Do not make the logical fallacy of saying that if a 4% withdraw rate would not work a more conservative plan would fail. I have seen this same logical fallacy many times on these forums which is basically "my plan is xxxx, if the future is worse than that no plan would have worked out anyway". I will give you that going with a more conservative plan does have diminishing returns although it is a fools errand to draw a line and say that anywhwere past a specific point is "overly conservative or will never happen".
You forgot to consider deflation. What is the probability of deflation occurring? Index funds do poorly during deflation and the remaining portion of a mortgage would actually increase.
A couple things:
1) You still have to use a 30 year horizon. Everyone cites the advantage of paying off a mortgage early as living in a house with no mortgage. Therefore, you must actually live in a house with a paid off mortgage to get the advantage. Because of the way mortgages are amortized, the advantage of paying the mortgage early comes in the years after you paid it off but before the end of the term. So, if you pay it off in year 15, you have lower expenses from year 15 to 30. After year 30 your expenses are the same. If you pay it off in year six, and sell in year six, then your mortgage payment remained the same amount the whole time and you simply get your money back at the time of sale. That's not an attractive proposition for most people. You must compare apples to apples.
2) I didn't say a different plan would fail. I said "you would have worse problems." If we have something worse than a 1929-style depression with 30% unemployment...I'm pretty sure the few percent different returns that we are talking about here aren't going to matter if something worse than that happens. It will be something really bad, and something none of us having this discussion can foresee.
You're also making the mistake of assuming paying down the mortgage early is conservative. Paying off the mortgage early is enormously risky. It means putting a substantial portion of your net worth a single, illiquid asset, that history says will appreciate only modestly at best. And as a topper, if you stop making payments (like if you say, lose your job), you loose the all the advantage of making early payments. From a risk management standpoint, that is totally, utterly, crazeballs. If you were regularly investing in cattle futures and you missed a regular contribution for three or four months and therefore lost your whole investment people would think you had totally lost your
fucking mind for going there in the first place. And you are taking all that risk for a ROI in the low single digits? That is flat nutso.
At this point, people usually say "Oh, well of course you should have substantial liquid assets before locking up your money where you can't get to it without high costs and lots of hassle."
Exactly my point! Even the proponents agree it is too risky to go there unless you can afford not to go there. Which is a great argument why you shouldn't go there in the first place. If you do want to go there, knock yourself out. But the
conservative argument is don't go there. I'm risk adverse, so massively risky investments with almost no ROI like pre-paying the mortgage gives me hives. Way to rich for my blood. I like safe, not crazeballs. A "safe"strategy that requires hedging isn't safe. Again, if you want to do insanely risky shit with almost not ROI, knock yourself out. The risk/reward is way, way, way, way, to unbalanced for me to even go there. My risk tolerance doesn't allow me to take insane gambles like this.
3) I most certainly didn't forget deflation. There have been several instances of deflation since WWII, and those time periods are included in the average number that I cited. I'm merely pointing out that if stock returns can be assumed to revert to the mean (entirely reasonable in my view), it is also entirely reasonable to assume inflation will revert to the mean as well. Pay off the mortgage proponents as a rule disregard inflation entirely in their calculations. Why do you think that is?
Next, our fractional reserve banking system guarantees inflation over any reasonable time period, and that doesn't include how much money the Federal Reserve also creates out of thin air. Those factors are why there is constant inflation built into the system. While central banks create money out of thin air, that amount is completely dwarfed by the amount created by private banks.
Given that, are you hoping deflation will work to your advantage? Really? Dayam dude. I'd like some of what you are smokin'. Talk about risky bets.