Author Topic: Question About My FIRE Plan  (Read 6392 times)

oldtoyota

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Question About My FIRE Plan
« on: July 05, 2014, 09:56:48 PM »
Problem: If I pay off mortgage at current rate, my calculation shows I need a certain sum to live on in retirement. If I pay off the amount earlier, I would not have that bill and would need far less to live on in retirement.

Assumptions/Considerations:
* If I don't leave my job before the fall when I am fully vested in the 401K, I will have reached my June 2015 projected financial goal. I'd be close to one year ahead of projections.
* If I can cut costs--esp the mortgage--we can live on spouse's take-home pay.
* In order to cut costs to appropriate level, we have to axe the mortgage.

Despite the fact that putting the $$ into investments may yield a higher rate of return over paying off the house, I also have to consider that it's a monthly expense requiring me to have more saved in retirement.

My projections show me paying off the mortgage IN THE SAME YEAR that I would reach the target amount needed in retirement if I still had a mortgage.

Confused yet?

If you are still with me, what is my best course of action here?

Possibilities:
"
A: Continue on as is with the 7-9 yr plan. Pay mortgage while saving same amount to hit the "have-mortgage-payment" retirement number.
B: Continue on the 3-5 yr plan. Focus on achieving target "non-mortgage" retirement number. Once this is achieved, throw all kinds of money at the mortgage instead of continuing to save more.

Anything else I should think of here?




shuffler

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Re: Question About My FIRE Plan
« Reply #1 on: July 05, 2014, 10:48:29 PM »
So you've got the classic question of "pay down mortgage vs. invest", with an added twist of a retirement coming up soon-ish.

Mathematically, I don't think the mortgage-vs.-investing question ought to hinge on your retirement date.  Either you expect that the market will return results greater than your mortgage's interest rate (plus tax-deduction considerations), or you think it won't.  That tells you whether or not you should pay the mortgage or invest.

Emotionally, you might decide to pay the mortgage for the peace-of-mind, and that's fine too.

If the interest rate on your mortgage is high enough to warrant paying it off first, then go ahead and do that.
If the interest rate is low enough that putting your money into the market makes more sense, then I would recommend that you do:

Option C:  Continue on the 3-5 yr plan. Focus on achieving target "non-mortgage" retirement number. Once this is achieved, re-evaluate your mortgage rate vs. your market expectations.  It may make financial sense to continue putting your money into the market, until these additional funds "cover" the remaining cost of your mortgage.  If so, then once you have it "covered", you can retire and pay the mortgage from these additional funds, leaving the money you saved in the initial 3-5 years fully available to fund the non-mortgage portion of your retirement.

Fishingmn

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Re: Question About My FIRE Plan
« Reply #2 on: July 06, 2014, 06:20:18 AM »
Set up a free account and run different scenarios through a good retirement calculator like this one - http://www.cfiresim.com/input.php

That will allow you to model the choices to see which one looks the best.

Exflyboy

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Re: Question About My FIRE Plan
« Reply #3 on: July 06, 2014, 07:46:06 AM »
This question comes up so often there really should be an FAQ's about it.

Shuffler pretty much nailed it. Owning the roof over your head is as much of an emotional decision than anything else.

Typically market returns will far outstrip your fixed rate mortgage.. i.e 11 to 12% vs whatver your mortgage costs you minus taxes on the interest.

But.. if you plan to pay off in say 7 years, will the market make more than say 4% over the next 7 years considering we have had a record run up.. Maybe, maybe not.

Personally I would not want to enter retirement without the house paid off.. so if you agree than its just a case of WHEN you pay it off.. now or later?

For me I paid off my mortgage while paying a fairly low rate into my 401k... It was the right decision at the time considering that I could have easily lost my job back then, but I could have done better if I had invested that money in the markets.. because I didn't lose my job..

Frank


oldtoyota

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Re: Question About My FIRE Plan
« Reply #4 on: July 06, 2014, 07:58:28 PM »
So you've got the classic question of "pay down mortgage vs. invest", with an added twist of a retirement coming up soon-ish.

Mathematically, I don't think the mortgage-vs.-investing question ought to hinge on your retirement date.  Either you expect that the market will return results greater than your mortgage's interest rate (plus tax-deduction considerations), or you think it won't.  That tells you whether or not you should pay the mortgage or invest.

Exactly. As you suggested, I am familiar with the regular answers to the more standard version of this question. I asked the question now and in this way because it drive me a little bonkers that I would pay off my mortgage in the exact year I would finally have enough to pay for my expenses (including the mortgage). It won't hurt to have too much, yet I'd love to exit the work world earlier rather than later.

Thank you for your response!

oldtoyota

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Re: Question About My FIRE Plan
« Reply #5 on: July 06, 2014, 08:06:02 PM »
This question comes up so often there really should be an FAQ's about it.

Shuffler pretty much nailed it. Owning the roof over your head is as much of an emotional decision than anything else.

Typically market returns will far outstrip your fixed rate mortgage.. i.e 11 to 12% vs whatver your mortgage costs you minus taxes on the interest.

But.. if you plan to pay off in say 7 years, will the market make more than say 4% over the next 7 years considering we have had a record run up.. Maybe, maybe not.

Personally I would not want to enter retirement without the house paid off.. so if you agree than its just a case of WHEN you pay it off.. now or later?

For me I paid off my mortgage while paying a fairly low rate into my 401k... It was the right decision at the time considering that I could have easily lost my job back then, but I could have done better if I had invested that money in the markets.. because I didn't lose my job..

Frank

Makes sense. I've seen similar questions posted before. I asked this one because I wanted to know if there was something I was missing in regards to paying off the house/retiring on the earlier-rather-than-later side. It bothers me a bit that my current plan has me paying off the house the same year I reach my target # to cover my expenses + mortgage.

I am maxing everything out and saving more on top of that to reach my goals.

I think I'll explore a possible refi and see what I learn. I will also consider the OPTION C listed above.

Thanks, all!

Cheddar Stacker

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Re: Question About My FIRE Plan
« Reply #6 on: July 06, 2014, 08:40:06 PM »
Hey OT.

I think you should just back the mortgage out from your FIRE number but not pay it off.

So in 2023 you would payoff the mortgage plus have enough Stache to provide a 4%(?) SWR that would cover all expenses including the mortgage. Correct?

Then as an estimate/guess, in 2020 you would have $30K still due on the mortgage, and 3 years worth of $1,500/month payments totaling $45K (assuming interest, taxes, insurance, etc.).  So run your numbers in 2020 and back that total mortgage payment out of your stache before calculating your SWR. Example: $1,200,000 - $45,000 = $1,155,000 * 4% = $46,200. If $46,200 fulfills your FIRE expenses you're ready.

Make sense?

You will be watching your stache disappear faster than 4% at first, but trust the math and retire when you're ready. It's ok to have debt when you retire. Here's to 2020. I hope to join you then.

oldtoyota

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Re: Question About My FIRE Plan
« Reply #7 on: July 07, 2014, 06:08:43 PM »
Hey OT.

I think you should just back the mortgage out from your FIRE number but not pay it off.

So in 2023 you would payoff the mortgage plus have enough Stache to provide a 4%(?) SWR that would cover all expenses including the mortgage. Correct?

Then as an estimate/guess, in 2020 you would have $30K still due on the mortgage, and 3 years worth of $1,500/month payments totaling $45K (assuming interest, taxes, insurance, etc.).  So run your numbers in 2020 and back that total mortgage payment out of your stache before calculating your SWR. Example: $1,200,000 - $45,000 = $1,155,000 * 4% = $46,200. If $46,200 fulfills your FIRE expenses you're ready.

Make sense?

You will be watching your stache disappear faster than 4% at first, but trust the math and retire when you're ready. It's ok to have debt when you retire. Here's to 2020. I hope to join you then.

Thank you. Makes sense!

arebelspy

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Re: Question About My FIRE Plan
« Reply #8 on: July 08, 2014, 02:15:53 PM »
Short answer:
If it's at a good rate, keep the mortgage.  The amount you'd use to pay it off can be invested and drawn down on to pay off the mortgage slowly, instead of in one big chunk.  The extra money sitting earning interest will likely put you ahead mathematically over time, so that when it does eventually pay off, you'll have more money than you would have had at that point if you had paid it off years before.

Yes, you will have higher expenses in ER with that mortgage, but you will have a higher stache to compensate.
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JCfire

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Re: Question About My FIRE Plan
« Reply #9 on: July 08, 2014, 02:24:32 PM »
Don't let your calculations trump reality.  Your calculations are full of simplifying assumptions which mean they only approximate the real world.  For example, it sounds like they assume that your expenses in year one of retirement are consistent with your expenses for the rest of your retirement, which you know won't be the case if you let your mortgage progress as scheduled.

Invest your money where it gives you the best return for the level of risk you're willing to take.  This likely means equities rather than pre-paying your low rate mortgage. 

Change your FIRE calculations to better reflect reality.  One way you can do this is to build in the assumption that you will pay off your remaining mortgage balance in a lump sum on the day you retire.

oldtoyota

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Re: Question About My FIRE Plan
« Reply #10 on: July 10, 2014, 08:43:58 PM »
Short answer:
If it's at a good rate, keep the mortgage.  The amount you'd use to pay it off can be invested and drawn down on to pay off the mortgage slowly, instead of in one big chunk.  The extra money sitting earning interest will likely put you ahead mathematically over time, so that when it does eventually pay off, you'll have more money than you would have had at that point if you had paid it off years before.

Yes, you will have higher expenses in ER with that mortgage, but you will have a higher stache to compensate.


Thank you!

Threshkin

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Re: Question About My FIRE Plan
« Reply #11 on: July 10, 2014, 09:05:15 PM »
For me it turned into a question of mental security.  I decided that even though the math said I was better off investing the money, I paid off my mortgage.  For me the piece of mind was worth the cost because I would not have a mortgage payment expense looming over my head if everything went pear shaped.

arebelspy

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Re: Question About My FIRE Plan
« Reply #12 on: July 11, 2014, 10:53:02 AM »
For me it turned into a question of mental security.  I decided that even though the math said I was better off investing the money, I paid off my mortgage.  For me the piece of mind was worth the cost because I would not have a mortgage payment expense looming over my head if everything went pear shaped.

Yeah, and I feel more secure having that money liquid, rather than trapped in a paid off house, if things went "pear shaped".  Knowing my accounts were dwindling and a big chunk of my net worth was stuck in the house, versus having a mortgage on the house and having a bigger chunk in my accounts would let me sleep better at night.

So I agree with the piece of mind part, but also want to point out that it goes both ways.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.