...a very large very low interest mortgage ($670 thousand,2.65%) and higher interest rates. As discussed in the "don't pay off your mortgage" thread investing instead of using cash to pay off my mortgage makes too much sense (to me, personally the debt is not something that stresses me or something I think about). But the mortgage is ~50% of my expenses, and saving ~2x the value of the mortgage in order to meet safe withdrawal minimum to pay off said mortgage seems insane.
We are at the root of the question with these simple facts. If your housing cost, even before maintenance or other expenses, is 50% of your expenses, and if your mortgage is for $670,000, you are probably over-housed. This may be considered normal by the locals where you live if you are in a HCOL area, but it goes against traditional investment advice not to spend more than 30% of income on housing.
If we accept you can only spend what you're spending, and then try to go back to traditional sources of advice for things like asset allocation, we run into contradictions such as the POYM/DPOYM dilemma, or difficulties around early retirement while holding such an expensive property around your neck. That is to say, we can't violate major guidance and then expect the rest of the theoretical system of FIRE to work. What are the taxes on a property worth nearly a million dollars? Ten or twenty grand per year and rising? How much extra must you save to cover just that?
I could be reading this wrong. Maybe what you mean is that the rest of your spending is so low that a 2.65% mortgage looms over it. Maybe you have a high savings rate despite it all. Maybe it's a 2BR condo in a trendy locale instead of a McMansion in a LCOL area. Despite the details, it's a distorted spending profile compared to what early retirement authors and analysts from the 1990s to 20-teens were assuming. You're kinda blazing your own trail, along with a lot of other people these days, and maybe it'll all work out.
No, I would never pay down a 2.65% mortgage in a world where 5.4% is available risk-free, and 7% is available with moderate risk. But I also don't know if I could FIRE with such a property's ongoing expenses. It's a tricky spot to be in, and if there is significant positive equity I'd strongly consider hitting the eject button and moving to a LCOL or MCOL place to retire. By doing that, one could have a paid-off house, a much lower spend rate, a lower WR, lower non-discretionary expenses, and a much better-tested FIRE profile.
In addition to this the fact, the return on bonds has been negative to minimal for such a long time (it looks like rates are going to not see significant cuts for some time) and money markets (specifically Vanguard VMRXX) pay so much more. As a result I have taken to shoving most of my excess cash into VMRXX instead of bonds(VLGSX). I now have ~5% of my portfolio in there, ~8% of my mortgage. Is this a crazy approach? I can always move it into bonds, albeit at a possible loss of gains if they move up quickly (and the money market stops paying) due to rate cuts. I still have ~8% in bonds from existing investments and ongoing 401k investment into bonds (VLGSX).
I have strayed from my investment plan, but I don't THINK I am taking undue risk; as I currently think of this cash as serving dual purpose of earning money while covering my mortgage balance, and helping me balance out my heavy stock portfolio. Am I missing signifiant risk? (I am not personally interested in active investing to hedge, I prefer investments to be a percentages game that I rarely think about, not something like cd ladders that have to fiddled with)
I don't think it's safe to assume rates are not going down any time soon. The Federal Reserve
thinks rates will fall, as does
the futures market. And these forecasts do not even take into account the possibility of a recession or financial crisis necessitating a faster series of rate cuts. There's a strong consensus that a 5.5% federal funds rate is high and restrictive in a world where
Core PCE is 2.8% and falling.
So thinking 2 steps ahead, what could happen is you sit in MM funds while bonds rally and their yields collapse in anticipation of rate cuts or in response to a recession. Then rates are cut and your MM yield immediately goes down. Suddenly, you're in a spot where bond yields have similarly gone down so there's no longer the opportunity to earn 5-6% in safe assets. At that point, any hopes of paying the mortgage through money market OR bond yields are crushed.
If you want to know why the
yield curve is inverted, this is it. Everybody wants to be locked into longer-term yields before expected rate cuts occur, and their voracious demand for 5 year to 30 year treasuries has driven down the yields for those assets. High rates at the short end of the curve are seen as a temporary thing that will be unwound soon, so many people's preference is to lock in a yield so they can plan for the future.
I would caution against relying on CDs or callable bonds to lock in yield, because if rates are cut most of these debts will be called and you'll just have to roll them into new CDs or bonds at lower rates. This is not a way to ensure your high fixed housing costs are covered during FIRE, and is only marginally better than the money market approach. Treasuries are so popular and have such low yields, in part, because they are not callable. One can actually plan around them.
So in summary, your fixed income allocation only works to cover your high fixed expenses if you lock in yield with longer-duration, non-callable stuff that has a lower yield right now. You can either save up enough to cover your costs via treasury bonds or other non-callable bonds, OR you can FIRE by reducing your fixed expenses by selling the house and paying cash for a home in a LCOL location (or renting in a LCOL location).
