Author Topic: Pay off mortgage by FIRE date?  (Read 4490 times)

FrugalFan

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Pay off mortgage by FIRE date?
« on: October 19, 2015, 07:25:42 PM »
I know there are a lot of threads debating the merits of paying off a mortgage vs investing. But what if you FIRE with several years left on your mortgage? In our case, that would mean saving up an extra $360000 (!) for the 4% SWR to cover the $14400 in mortgage payments, or withdrawing more than 4% for the first several years until the mortgage is paid off. In that situation would it be best to pay down the mortgage faster even if it means losing out on greater investment returns? As long as I keep working, we can invest $50 k per year. We could do all mortgage (paid off in 3.5 years), all investments, or maybe a mix, where we maximize investments in our tax-sheltered accounts and put what we would have put in our non-registered account into our mortgage?

If you want more details, our situation is a bit odd. My husband is 41 and I am 38. He wants to work until at least 55 and I want to stop or scale back sooner rather than later. My calculations tell me I could do that now, but that is assuming the markets don't tank for a long period of time and we have no unusually large or unplanned recurring expenses come up. As a consequence, I would feel more comfortable waiting until we have enough funds to cover our retirement expenses above and beyond what his pension will cover, even though if all goes well our money will keep growing and we will end up with more than we need (we can easily live off just his salary when I retire/scale back, but will be able to invest very little at that point).

nereo

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Re: Pay off mortgage by FIRE date?
« Reply #1 on: October 19, 2015, 07:40:12 PM »
I think you've made a miscalculation in your math.  If you have $14400 remaining on your mortgage when you retire, then you need absolutely no more than $14400 extra in your 'stache. If the $14.4k is per year than you will not need more than that total amoung left (and perhaps left - you did not include interest rates). The reason is that your mortgage will go away after a few years - it isn't an ongoing expense that you need 4% WR to cover forever.


Altons Bobs

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Re: Pay off mortgage by FIRE date?
« Reply #2 on: October 19, 2015, 10:11:21 PM »
You're not FI if you still have a mortgage, you can of course choose to still retire with a debt, but that's not FIRE.  I would just pay off the mortgage and not worry about it anymore.

Turnbull

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Re: Pay off mortgage by FIRE date?
« Reply #3 on: October 19, 2015, 10:45:48 PM »
You're not FI if you still have a mortgage, you can of course choose to still retire with a debt, but that's not FIRE.  I would just pay off the mortgage and not worry about it anymore.


What does having a mortgage have to do with financial independence?

AlwaysBeenASaver

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Re: Pay off mortgage by FIRE date?
« Reply #4 on: October 19, 2015, 11:09:49 PM »
It sounds like you have 3 (?) years left on your mortgage and pay 14,400 per year. I'm guessing this is a fixed rate mortgage since you have an exact amount to pay per year? If so, you only need to save up 43,200 extra. When calculating your SWR and total stash, don't include the 14,400/yr mortgage payment, and don't include the 43,200 portion of your net worth you save up to pay the mortgage. I hope that makes sense. You can adjust these numbers if it's not 3 years or whatever. The point is to consider the total amount you'll need to pay on the mortgage separate since it's only for a few years.

But also, it worries me that you need to assume the market doesn't tank for a long time and that you won't have any unexpected large expenses. Because, sometimes the market does tank for a long time, and almost always some large unexpected expenses come up, especially when you own a home.

AlwaysBeenASaver

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Re: Pay off mortgage by FIRE date?
« Reply #5 on: October 19, 2015, 11:10:53 PM »
You're not FI if you still have a mortgage, you can of course choose to still retire with a debt, but that's not FIRE.  I would just pay off the mortgage and not worry about it anymore.


What does having a mortgage have to do with financial independence?
+1

Playing with Fire UK

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Re: Pay off mortgage by FIRE date?
« Reply #6 on: October 20, 2015, 03:15:12 AM »
Having a mortgage and the money to pay it shouldn't stop you from stopping work. Agree you need the mortgage payments not 25x mortgage payments.

If you would be willing to find some paid work after leaving your regular job in the event of a downturn or major expense then this shouldn't stop you either. If you want to stop for good then you'll need more buffer.

nereo

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Re: Pay off mortgage by FIRE date?
« Reply #7 on: October 20, 2015, 06:27:17 AM »
You're not FI if you still have a mortgage, you can of course choose to still retire with a debt, but that's not FIRE.  I would just pay off the mortgage and not worry about it anymore.
Of course you can be FI and still have a mortgage.  The litmus test of being FI (Financially Independent) is whether you need to work to maintain your chosen lifestyle.  It is not determined by the presence or absence of debt, but by assets.

BeanCounter

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Re: Pay off mortgage by FIRE date?
« Reply #8 on: October 20, 2015, 07:00:05 AM »
You're not FI if you still have a mortgage, you can of course choose to still retire with a debt, but that's not FIRE.  I would just pay off the mortgage and not worry about it anymore.
Of course you can be FI and still have a mortgage.  The litmus test of being FI (Financially Independent) is whether you need to work to maintain your chosen lifestyle.  It is not determined by the presence or absence of debt, but by assets.
+1- agree completely. And while not having any debt is nice and easy, financially it's not always the best decision.
I am a firm believer in keeping a mortgage. It doesn't feel good when you see the interest you'll pay over time on the amortization tables. But if the rates are low enough it often makes sense to keep the mortgage and invest the money.
For our FIRE planning, I am building our stache requirements without the mortgage- but including property taxes, insurance and about 1.5% of value for maintenance and repairs (because these will never go away). Then I layer on the additional mortgage and interest.

FrugalFan

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Re: Pay off mortgage by FIRE date?
« Reply #9 on: October 20, 2015, 07:04:53 AM »
I think you've made a miscalculation in your math.  If you have $14400 remaining on your mortgage when you retire, then you need absolutely no more than $14400 extra in your 'stache. If the $14.4k is per year than you will not need more than that total amoung left (and perhaps left - you did not include interest rates). The reason is that your mortgage will go away after a few years - it isn't an ongoing expense that you need 4% WR to cover forever.

Yes, I meant $14.4 k per year, for six additional years after my husband retires. I never thought about saving just the extra six years of payments, but if I had that money I would probably just pay off the mortgage anyway. It is a helpful way to think about a few other temporary expenses, however, as our kids won't be in college for a few more years after we are both retired.

FrugalFan

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Re: Pay off mortgage by FIRE date?
« Reply #10 on: October 20, 2015, 07:10:52 AM »
It sounds like you have 3 (?) years left on your mortgage and pay 14,400 per year. I'm guessing this is a fixed rate mortgage since you have an exact amount to pay per year? If so, you only need to save up 43,200 extra. When calculating your SWR and total stash, don't include the 14,400/yr mortgage payment, and don't include the 43,200 portion of your net worth you save up to pay the mortgage. I hope that makes sense. You can adjust these numbers if it's not 3 years or whatever. The point is to consider the total amount you'll need to pay on the mortgage separate since it's only for a few years.

But also, it worries me that you need to assume the market doesn't tank for a long time and that you won't have any unexpected large expenses. Because, sometimes the market does tank for a long time, and almost always some large unexpected expenses come up, especially when you own a home.

We have 20 years left on the mortgage, and if we don't increase our payments we would have 6 years left after my husband retires (the 3.5 year figure is if we throw an extra 50k a year at it now, basically all of our savings). Rate is only fixed for 5 years and may well go up as it is very low now at 2.94%. As I mentioned in a previous post, if I did have the extra money saved by the time we retires,, I would just pay off the entire thing at that point.

As for your second point, that is why I want to keep working a bit longer now and save more even if my conservative calculations say we would be fine in 15 years when my husband retires. Fifteen years is a long time and a lot could happen between now and then.


FrugalFan

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Re: Pay off mortgage by FIRE date?
« Reply #11 on: October 20, 2015, 07:12:10 AM »
You're not FI if you still have a mortgage, you can of course choose to still retire with a debt, but that's not FIRE.  I would just pay off the mortgage and not worry about it anymore.
Of course you can be FI and still have a mortgage.  The litmus test of being FI (Financially Independent) is whether you need to work to maintain your chosen lifestyle.  It is not determined by the presence or absence of debt, but by assets.
+1- agree completely. And while not having any debt is nice and easy, financially it's not always the best decision.
I am a firm believer in keeping a mortgage. It doesn't feel good when you see the interest you'll pay over time on the amortization tables. But if the rates are low enough it often makes sense to keep the mortgage and invest the money.
For our FIRE planning, I am building our stache requirements without the mortgage- but including property taxes, insurance and about 1.5% of value for maintenance and repairs (because these will never go away). Then I layer on the additional mortgage and interest.

I agree. I will run my numbers again with a similar scenario.

 

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