Carrying a mortgage into retirement - modeling risks

[VanillaGorilla]

First off, I apologize for adding fuel to the mortgage payoff debate fire. I also apologize for reposting from the "stop worrying..." thread, but I added a table of results that I'm very proud of.

I'm not going to try to answer the question whether you should pay off your mortgage or invest, I'm just going to try to answer the question of how much you need invested to retire with a mortgage vs without a mortgage, and the relative risk of the two options. Early Retirement Now wrote an essay on the subject but I don't agree with this methodology of assuming fixed 2% inflation through all historical cohorts.

Thought experiment: you have a $1M, 30 year mortgage and can live off $40k per year. What size portfolio will allow you to retire?
Simple answer: $2M. On your first day of retirement, pay off the mortgage (ignoring taxes). Now you have $1M left, and you decide to use a 4% withdrawal rate. You withdraw $40k per annum and live happily ever after.

More complicated: slowly pay down my mortgage with half the portfolio. Let's model how much is needed to cover the mortgage. The mortgage payment is obviously not CPI adjusted. Taxes and insurance have to be paid separately whether the loan is paid off or not, so ignored in this analysis.

Let's pick a 70/30 portfolio with annual fees of 0.04%. The "4% Rule" fails 5/125 cycles, or 4% of the time, so that's our baseline for "safe". A hypothetical $1M mortgage at 4% costs $57k annually in principle and interest, giving a 5.7% withdrawal rate. Plug a 5.7% withdrawal rate into cFireSIM and select "not CPI Adjusted". Failure rate: 3/125. So a 4% mortgage funded by a portfolio is safer than the "4% Rule".

A 3% mortgage is a 5.5% withdrawal rate. This fails 2/125 cycles. In fact, to match the failure rate of the "4% Rule" only $875k invested is needed to cover a $1M mortgage!

A 5% mortgage is a 6.4% withdrawal, which fails 15/125 cycles. This is much riskier than commonly accepted.
 
In tabular form:

Mortgage Rate |	Withdrawal Rate |	Failure Rate |
2%	4.40%	0.00%
3%	5.06%	1.60%
4%	5.70%	2.40%
5%	6.40%	15.20%

The "Mortgage Rate" is a 30 year fixed mortgage rate. The "Withdrawal Rate" is the annual mortgage payment, excluding taxes and insurance, divided by the size of the portfolio. The "Failure Rate" is how often, historically speaking, the portfolio would have been depleted before the loan was paid off.

Of course, the more conservative you are with your withdrawal rate, the less compelling the mortgage becomes. Luckily it's easy to repeat this analysis with shorter mortgage terms, different withdrawal rates, etc.

[bacchi]

Facing this situation today, one could build a 30 year TIPS ladder that throws off $57k/year for 30 years. It would cost $1.257M, ignoring taxes, and $1M of that would go to the principal. No chance of failure.

Withdrawing $57k/year from tax deferred accounts would likely wreck any ACA subsidies plan, though. Of course, pulling out $1M from investments to pay off the mortgage all at once would be a giant tax bill.

[Financial.Velociraptor]

I don't think are 'mathing out' every thing correctly.

Your withdrawal rate is whatever it is and your fire budget is burdened by whatever your payment is (or isn't if you pay it off).  Depending on how much you borrowed, 6% interest rate might put your PMI+ anywhere from 1k/mo to infinity.  I had a flat 6% interest rate in 2002 and with 97k borrowed, my monthly payment , with escrow, was a little under 1k.  For a "Mustachian" who no longer had work related expenses of frequent lunches out, work wardrobe, commuting, misc (40k-12k = 28k) is perfectly doable.  In fact, with the house paid off, I live on right around 25k/year without even being particularly frugal.   And my stash is substantially below a million and have been retired for almost 13 years with risk of failure decreasing as I get closer to the Holy Land of receiving monthly SS check - which will cut my then withdrawal in roughly half.

If you have a half a million (more?!?) home you are borrowing against, you clearly need more.  Else, sell the white elephant and move to Alabama.

[vand]

I think this question can be reframed as this:

If you split households into 2 groups; those who hold mortgages anda mortgage and those who don't, does the first group with the mortgages - who in theory have fixed a large portion their living costs - experience lower inflation than the group who don't hold a mortgage.

Furthermore, I would want to know if those who didn't hold a mortgage were renting or had a fully paid off home. 

Logically it would make sense if one of your largest household expenses was fixed that you would experience less personal inflation than most.. so the CPI escalation of living expenses implicit in the 4% rule should perhaps be tweaked accordingly

[Dicey]

IMO, the more relevant question is: What happens if I buy an affordable house, make the regular monthly payments and not one penny more, then sock everything I can into investments? "Most people" don't know how to save, but mustachians are not most people.

Once you have amassed a huge stache, you can chose whether to enter retirement with a mortgage or not. We re-fi'd all of the mortgages on our rental properties (no cash out) right before DH retired. We could have easily paid them off, but that would have been a sub-optimal decision.

Personally, I don't care what people do with their mortgages. My mission is to help them understand the math BEFORE  they do it. Any conversation about mortgages is good conversation.

[nereo]

Virtually no one takes out a 30y mortgage and retires the same month. If you’ve only got a year or two remaining the difference between paying it off and holding it to term is negligible, and gets into the volatility of short term markets. The overwhelming majority of people fall in the middle - a few years to an about two decades left on their 30 year. For them, the amount extra needed in one’s portfolio to hold a mortgage vs not looks a lot different than the scenario painted in the OP.

[VanillaGorilla]

Facing this situation today, one could build a 30 year TIPS ladder that throws off $57k/year for 30 years. It would cost $1.257M, ignoring taxes, and $1M of that would go to the principal. No chance of failure.

Of course - in today's era you can buy bonds that yield more than your mortgage. It's a more interesting analysis when bonds yield less than your loan. If you just take your living expenses including mortgage and multiply by 25 you might end up with a far larger portfolio than necessary.

Your withdrawal rate is whatever it is and your fire budget is burdened by whatever your payment is (or isn't if you pay it off).  Depending on how much you borrowed, 6% interest rate might put your PMI+ anywhere from 1k/mo to infinity.  I had a flat 6% interest rate in 2002 and with 97k borrowed, my monthly payment , with escrow, was a little under 1k.  For a "Mustachian" who no longer had work related expenses of frequent lunches out, work wardrobe, commuting, misc (40k-12k = 28k) is perfectly doable.  In fact, with the house paid off, I live on right around 25k/year without even being particularly frugal.   And my stash is substantially below a million and have been retired for almost 13 years with risk of failure decreasing as I get closer to the Holy Land of receiving monthly SS check - which will cut my then withdrawal in roughly half.

I'm not sure I follow - PMI? The point is that one shouldn't follow the "4% Rule" for covering mortgage expenses, since a fixed rate mortgage is not CPI adjusted. Are you worried about my toy example of a million dollar mortgage being too large? It's just round numbers to make things easier to follow. Feel free to scale however is appropriate. In my neighborhood a million dollar mortgage is unfortunately all too common.

I think this question can be reframed as this:

If you split households into 2 groups; those who hold mortgages anda mortgage and those who don't, does the first group with the mortgages - who in theory have fixed a large portion their living costs - experience lower inflation than the group who don't hold a mortgage.

Furthermore, I would want to know if those who didn't hold a mortgage were renting or had a fully paid off home. 

Logically it would make sense if one of your largest household expenses was fixed that you would experience less personal inflation than most.. so the CPI escalation of living expenses implicit in the 4% rule should perhaps be tweaked accordingly

Exactly - using historical data to model a fixed nominal expense does just that. The "4% Rule" turns into the "5.7% Rule".

Personally, I don't care what people do with their mortgages. My mission is to help them understand the math BEFORE  they do it. Any conversation about mortgages is good conversation.

Agreed! I once thought mortgages were a Dave Ramsey-esque liability, now I see them more as a hilariously subsidized government handout. I wish I had kept mine.

Virtually no one takes out a 30y mortgage and retires the same month. If you’ve only got a year or two remaining the difference between paying it off and holding it to term is negligible, and gets into the volatility of short term markets. The overwhelming majority of people fall in the middle - a few years to an about two decades left on their 30 year. For them, the amount extra needed in one’s portfolio to hold a mortgage vs not looks a lot different than the scenario painted in the OP.

Well everybody's situation is different, there's no way to model everybody's numbers. For example, someone retiring from a HCOL area and relocating upon retiring would be in precisely the position of having a 30 year mortgage that starts the day they retire. Modeling a shorter mortgage term is trivial with portfolio backtesting tools, and things only get safer with a shorter duration.

[ChpBstrd]

Mortgages are almost always a couple percent higher than the risk-free rate one could obtain by investing in treasuries at the same point in time. This means a person is always better off at any one given time paying off their mortgage rather than investing in a risk-free portfolio.

Now, if we're talking about a scenario where the person locked in the mortgage in late 2020, and they are considering investing in a safe asset portfolio now, then the answer is obvious. Keep the <4% mortgage and invest in 4.7% 20-year treasuries and/or a TIPS ladder to arbitrage the difference. This is a different answer than if the mortgage was 6.8% versus 4.7% for the treasuries. So when we add the time variable, the answer can vary.

We get into actuarial odds when we throw in the variable of mixing in some risky investments alongside the risk-free ones. Will the return on a 60/40 portfolio be higher than a mortgage rate? It's a question we can only guess at, and measure the historical failure rates. I think it's valid to treat the mortgage payments as a WR and calculate the odds of portfolio failure like we would a retirement budget, as was done here. However one must be careful to add back the discounted value of the principal one receives when the bonds mature. I'm not sure this was done here.

[VanillaGorilla]

However one must be careful to add back the discounted value of the principal one receives when the bonds mature. I'm not sure this was done here.

I'm not sure I follow entirely. That's assuming a 100% bond portfolio? Which isn't exactly 'risk free' - there's always the risk of the US government defaulting on Treasuries, right? Similarly, if you're into risk mitigation, carrying a mortgage frees you somewhat from the physical risk that your property value goes to zero (if you live in a zero recourse state). If your paid-off property gets destroyed, that's on you and your insurance. If your heavily mortgaged property is destroyed, you can default on the loan.

Pedantry aside, you can easily model the potential upside of investing your mortgage since cFireSIM reports the median, mean, and various other statistics on a likely portfolio end balance. In my toy example of a 30 year loan, the median portfolio ending balance is about equal to its starting value. So you started with a $1M loan, a $1M mortgage, and after 30 years the loan is gone and the expected portfolio balance is $1M.

The bigger my portfolio gets the more my view of risk becomes more expansive than the left tail, ie going broke. I'm more likely to consider the risk of a multi-decade bear bond market, the risk of a reduced ending value of my portfolio, the risk of physical loss of tangible assets, the risk of losing my physical well-being. What's more likely over the next thirty years: that my California property is destroyed by earthquake or wildfire, or that the US equity market goes to zero?

Also: for anybody curious, I recently paid off my mortgage. It was an ARM and the rate was getting onerous. Sending in the last payment was deeply anticlimactic and there is zero measure of satisfaction attained. I'm still on the hook for taxes and insurance, so it's just a matter of the monthly liability being somewhat smaller, rather than zero. Paying down a loan for emotional reasons doesn't work for me, apparently.

[Telecaster]

I'm not sure I follow - PMI? The point is that one shouldn't follow the "4% Rule" for covering mortgage expenses, since a fixed rate mortgage is not CPI adjusted. Are you worried about my toy example of a million dollar mortgage being too large? It's just round numbers to make things easier to follow. Feel free to scale however is appropriate. In my neighborhood a million dollar mortgage is unfortunately all too common.

You can model it in cFIREsim (and FIREcalc too, I believe).  There is an adjustment tab at the bottom.  Include spending and set the inflation type to flat. 

[Financial.Velociraptor]

Your withdrawal rate is whatever it is and your fire budget is burdened by whatever your payment is (or isn't if you pay it off).  Depending on how much you borrowed, 6% interest rate might put your PMI+ anywhere from 1k/mo to infinity.  I had a flat 6% interest rate in 2002 and with 97k borrowed, my monthly payment , with escrow, was a little under 1k.  For a "Mustachian" who no longer had work related expenses of frequent lunches out, work wardrobe, commuting, misc (40k-12k = 28k) is perfectly doable.  In fact, with the house paid off, I live on right around 25k/year without even being particularly frugal.   And my stash is substantially below a million and have been retired for almost 13 years with risk of failure decreasing as I get closer to the Holy Land of receiving monthly SS check - which will cut my then withdrawal in roughly half.

I'm not sure I follow - PMI? The point is that one shouldn't follow the "4% Rule" for covering mortgage expenses, since a fixed rate mortgage is not CPI adjusted. Are you worried about my toy example of a million dollar mortgage being too large? It's just round numbers to make things easier to follow. Feel free to scale however is appropriate. In my neighborhood a million dollar mortgage is unfortunately all too common.

PMI = Principal, Mortgage(Insurance), Interest.  Your payment may include escrowed insurance and taxes (the "+").  The 4% rule is intended to cover your FIRE budget.  For some people, that includes rent or mortgage. 

Look at it this way, you are effectively "short" a fixed income investment.  Instead of investing the proceeds, you used it to purchase a home.  Your asset allocation is now overly tilted to equity and your FI allocation might even be negative!  In do as I say and not as I did fashion (I paid my mortgage off in 2007), and if I could do it again, I would have kept the mortgage and accumulated municipal bonds instead of paying extra on mtg.  The interest on mtg has a tax advantage.  By accumulating an offsetting FI assets you are nullifying your short FI risk.  Munis are tax advantaged so you are basically doing tax arbitrage. 

Something like NEA, a closed end fund that is trading at a nice discount to NAV, and yields over 7% fed tax free fits the bill nicely.  It pays monthly so as you accumulate shares, your net interest paid starts going to zero.  Eventually, your coupons cover your entire PMI.  When the mortgage matures at payoff, you have, in this case a roughly $1MM bond portfolio kicking off about 70k in annual tax free income.  Probably time to rebalance but a nice "problem" to have.  And since interest rates are currently high, the fed lowering rates means your portfolio will achieve bonus capital gains!  That would also give you a change to refinance the mtg at a lower rate and widen your interest rate and tax arbitrage opp.

[Must_ache]

Over a 15-yr or 30-yr time horizon I don't think we need to worry about putting our money in something safe (apart from having an emergency fund if your situation is precarious). 

It seems straightforward to me that an S&P index fund will almost certainly outperform an after-tax 3% return of paying down yesteryear's mortgage.  Bump that up to 7% and it isn't clear at all, now it might be better to take the sure thing and pay down the mortgage.  And there's a spectrum in between where it simply depends on your risk tolerance.

I just think it's sad that so many articles focus on the interest you're saving from paying down a mortgage and don't talk about the opportunity cost of investmet returns.

[Phazed]

Once you decide to buy a house, you will want to start paying attention to mortgage rates. Check once a month at least. Because rates move all the time, you will want to find a good mortgage broker who can work with you. It was much harder for us because I've never had a real job so there is no W-2. Tried some banks, they just shook their heads and said "go away". But we have exceptional credit and could afford the house we wanted so I eventually found a broker who deals with people like us.

Then, you have to determine your risk level. Mine is very high. Yours may not be. I always use adjustable rate mortgages (5/1 ARM) when I think rates will not go higher (i.e. they will stay the same or go lower). When the refi cost is covered by a few years of payment savings, I refi to a new ARM.

When rates seem to bottom, lock in a 30 year rate. If you were wrong, refi again when it makes sense. My broker charges almost nothing for a refi so even half a point makes sense.

Pay it off? Never. We'll carry our mortgage into retirement because it's the cheapest money you can get.

OTOH, if having a mortgage means you can't sleep at night, pay it off. Yes, it's a poor economic decision but peace of minds counts for a lot.

[mistymoney]

has anyone looked at the tax side of higher income due to the mortgage? and included the home RE tax freeze that a lot of places have for lower income seniors and how that might affect what is most favorable?

[TheAnonOne]

has anyone looked at the tax side of higher income due to the mortgage? and included the home RE tax freeze that a lot of places have for lower income seniors and how that might affect what is most favorable?

I think this is important, if you only have to pull 40k annually and essentially pay no tax, vs having to pull... 70k annually, pay income tax and lose ACA subsidies. That might push people over into the "maybe it's not as much of a slam dunk option" camp.

[iris lily]

Virtually no one takes out a 30y mortgage and retires the same month…

Oh honey, you are so wrong.

I’m still shaking my head after watching two of my friends who retired each take on a brand new mortgage. Two separate households. Brand new mortgages. Probably 30 year mortgages.

[VanillaGorilla]

has anyone looked at the tax side of higher income due to the mortgage? and included the home RE tax freeze that a lot of places have for lower income seniors and how that might affect what is most favorable?

It's very hard to model taxes in a generic fashion - there's just too much variation from person to person. Obviously ACA subsidies, FAFSA income, tax rates etc all need to be taken into consideration in deciding a personal course of action. My overall point is that 30 year fixed rate mortgages are potentially a lot safer than people realize.

Virtually no one takes out a 30y mortgage and retires the same month…

Oh honey, you are so wrong.

I’m still shaking my head after watching two of my friends who retired each take on a brand new mortgage. Two separate households. Brand new mortgages. Probably 30 year mortgages.

Anybody committing to geographic arbitrage will absolutely be in a position to buy a new mortgage at the very start of their retirement. There are plenty of people on this forum who have bought a house either at the beginning of their retirement, or very close to it in absolute terms (ie within a few years).

I personally am trying to moving beyond a naive 'all debt is bad' view of the world. If you invest then you're committing to an implicit contract with all of society, and judicious use of leverage is just another societal contract.

It's a bit humorous to note how many (lay)people are so risk averse investing - predicting market collapses or other doomsday scenarios, but everybody is totally comfortable with a federally subsidized 30 year mortgage, and nobody is predicting the collapse of our banking system. Somehow nobody ever discusses the risk of Bank of America or Wells Fargo's insolvency in the coming decades.

[theolympians]

However one must be careful to add back the discounted value of the principal one receives when the bonds mature. I'm not sure this was done here.

I'm not sure I follow entirely. That's assuming a 100% bond portfolio? Which isn't exactly 'risk free' - there's always the risk of the US government defaulting on Treasuries, right? Similarly, if you're into risk mitigation, carrying a mortgage frees you somewhat from the physical risk that your property value goes to zero (if you live in a zero recourse state). If your paid-off property gets destroyed, that's on you and your insurance. If your heavily mortgaged property is destroyed, you can default on the loan.

Pedantry aside, you can easily model the potential upside of investing your mortgage since cFireSIM reports the median, mean, and various other statistics on a likely portfolio end balance. In my toy example of a 30 year loan, the median portfolio ending balance is about equal to its starting value. So you started with a $1M loan, a $1M mortgage, and after 30 years the loan is gone and the expected portfolio balance is $1M.

The bigger my portfolio gets the more my view of risk becomes more expansive than the left tail, ie going broke. I'm more likely to consider the risk of a multi-decade bear bond market, the risk of a reduced ending value of my portfolio, the risk of physical loss of tangible assets, the risk of losing my physical well-being. What's more likely over the next thirty years: that my California property is destroyed by earthquake or wildfire, or that the US equity market goes to zero?

Also: for anybody curious, I recently paid off my mortgage. It was an ARM and the rate was getting onerous. Sending in the last payment was deeply anticlimactic and there is zero measure of satisfaction attained. I'm still on the hook for taxes and insurance, so it's just a matter of the monthly liability being somewhat smaller, rather than zero. Paying down a loan for emotional reasons doesn't work for me, apparently.

Pertaining to your last paragraph, we were in much the same boat. We had a house with a mortgage and bought a house at an insane interest rate. We intended to retire to the second house, which is in another state. I retired. We sold off the first house and sat on a bunch of cash from the sale.

The question was to payoff the second house, which we live in, or sit on the cash and life off that, invest, or etc. It has been explained to me that paying off your residence is an EMOTIONAL decision. In the end we paid off the house house. It felt good, but as you alluded to, anticlimactic. In any case I see us as more financially secure as the residence is owned free and clear with a minimal property tax rate.

As these posts show , others have different ideas.

[joshrosenthal5000]

I am 12 years from retirement and do not have a mortgage payment.  I own my house outright so my taxes and insurance costs are under $3.5k now.  Let’s round that to $5k to cover routine maintenances and double that to include overall maintenance budget then I am looking at $10k annual housing expenses.  Let make that $5k annual sunken cost and set aside $5k on 1 January of each year to invest in a dividend paying blue chip or index instead of cash.  Whenever the house needs a roof, the checking or saving account will be used to pay for it, preferably in cash to get any additional discounts.  Then the home maintenance investment account can freely grow more.  I do not include utilities in home expenses because I own the local utilities and the dividend payments far exceed the monthly bills.

My current trajectory is likely to be mortgage-free in retirement.  I am also likely going to be a digital nomad at that time do the house is likely given to family or turn into income generating asset or sold to buy land somewhere peaceful.  However, if interest ever gets below 3%, I’ll take out a mortgage to the max amount and find a discount handful of discounted blue chips or index funds or large peace of land to put the money toward.  I am confident that I can make more than 3% a year either in dividends and or capital gain so the house becomes a collateral for a low cost business loan while I get to live in it rent-free.

[ROF Expat]

I paid off my mortgage when I RE'd. 

I view paying off my mortgage as diversifying my assets to financially protect myself even against black swan events.  In my state, investments in a 401k and the house are largely protected against bankruptcies and lawsuits.  And, if other elements of my FIRE plan fall apart (a market crash or a pension bankruptcy, for example) having a paid of house in a HCOL area gives me the option to downsize and move to a LCOL area. 

I admit that this is mathematically suboptimal and pretty extreme financial conservatism.  It makes more sense to me than burying guns and gold coins in the backyard and hoarding canned food in the basement though.

[iris lily]

Just today I heard Dave Ramsey say rich people do two things:

1) invest regularly over a long time

2)  pay off their mortgage

Of course, this is simplistic Ramsey advice, but so much of his audience needs that simplicity.

The bit about “paying off mortgage to get rich” is likely more about people who are disciplined with money and saving it, and less about the financial advantages of paying off a mortgage.

[neo von retorch]

Virtually no one takes out a 30y mortgage and retires the same month.

Does a refinance count? Because if I could refinance my 5.95% mortgage to 4.5% or lower right now... I would basically be "instantly" FIRE ;)

(Not quite - currently expecting 2026 to be the magic year. But damn close at any rate. I do projections of what it would look like to pay off the mortgage, and what my expenses would be, as well as my reduced investments; next to projections of how things look now with the mortgage but more money invested.)

[mistymoney]

Virtually no one takes out a 30y mortgage and retires the same month.

Does a refinance count? Because if I could refinance my 5.95% mortgage to 4.5% or lower right now... I would basically be "instantly" FIRE ;)

(Not quite - currently expecting 2026 to be the magic year. But damn close at any rate. I do projections of what it would look like to pay off the mortgage, and what my expenses would be, as well as my reduced investments; next to projections of how things look now with the mortgage but more money invested.)

Agree it all depends on rates. and how you hedge the risk.

So if rate is 3% and LTT are 4.4%, and you put an amount=balance into LTT - is that enough hedge? Maybe scale it through 30 years of bills, notes, bonds, etc. But is that balance of prinicpal enough or do you need to include the interest payment too...

And then you've got a whole bunch tied up in lower performing assets. Not that theres anything wrong with that....if that's who you are...

And then all the 'other' considerations such as taxes if the safe money on the balance is in pretax, then you have higher tax rates which may really suck if black swan shows up....

For me, the amount of money I'd need to take out of pretax to pay off the mortgage - even over a few years - would be heavily taxed so doing it slowly over the normal life of the mortage makes more sense. No need to pay 32/35% taxes to retire even a 6% mortgage.

Other who have large taxable or roth accounts, might think about other implications. But most of my money is in pretax.

[nereo]

Just today I heard Dave Ramsey say rich people do two things:

1) invest regularly over a long time

2)  pay off their mortgage

Of course, this is simplistic incorrect Ramsey advice...

Further proof that Ramsey just makes shit up on a routine basis.
Many, many rich people have learned how to responsibly use debt to make themselves a hell of a lot wealthier. The best run and most profitable corporations view debt in a similar manner. Basically, if there is something (anything!) with a higher expected ROI, put money there first. Was reading a statistic the other day that 20% of current mortgages are under 3%, and nearly half are under 4%. So the demographic is huge

[iris lily]

Just today I heard Dave Ramsey say rich people do two things:

1) invest regularly over a long time

2)  pay off their mortgage

Of course, this is simplistic incorrect Ramsey advice...

Further proof that Ramsey just makes shit up on a routine basis.
Many, many rich people have learned how to responsibly use debt to make themselves a hell of a lot wealthier. The best run and most profitable corporations view debt in a similar manner. Basically, if there is something (anything!) with a higher expected ROI, put money there first. Was reading a statistic the other day that 20% of current mortgages are under 3%, and nearly half are under 4%. So the demographic is huge

Sure, but Ramsey listeners are for the most part unable to use debt responsibly, as you outline.

Once the typical Ramsey listener gets themselves out of mountains of debt (debt that is NOT doing anything for their financial improvement) and spends some time really learning about money, they may be ready to move on from Dave Ramsey advice.

There is a reason why his financial program is laid out in “baby steps.” It isn’t purported to be sophisticated.

And I have heard a few calls to Dave Ramsey where someone is juggling many debt-plates-in-the-air without the wherewithal to achieve success. Those guys are convinced they know how to utilize debt to their advantage, but they don’t because it is ready to come crashing down OR it already did.

[nereo]

Just today I heard Dave Ramsey say rich people do two things:

1) invest regularly over a long time

2)  pay off their mortgage

Of course, this is simplistic incorrect Ramsey advice...

Further proof that Ramsey just makes shit up on a routine basis.
Many, many rich people have learned how to responsibly use debt to make themselves a hell of a lot wealthier. The best run and most profitable corporations view debt in a similar manner. Basically, if there is something (anything!) with a higher expected ROI, put money there first. Was reading a statistic the other day that 20% of current mortgages are under 3%, and nearly half are under 4%. So the demographic is huge

Sure, but Ramsey listeners are for the most part unable to use debt responsibly, as you outline.

Once the typical Ramsey listener gets themselves out of mountains of debt (debt that is NOT doing anything for their financial improvement) and spends some time really learning about money, they may be ready to move on from Dave Ramsey advice.

There is a reason why his financial program is laid out in “baby steps.” It isn’t purported to be sophisticated.

And I have heard a few calls to Dave Ramsey where someone is juggling many debt-plates-in-the-air without the wherewithal to achieve success. Those guys are convinced they know how to utilize debt to their advantage, but they don’t because it is ready to come crashing down OR it already did.

I understand who DR’s audience is. As you said, most are not able to use debt responsibly, or to build wealth strategically. Which is my whole point here : rich people aren’t rich because they pay off their mortgage(as he claims) but because they make smarter financial decisions.

This isn’t about levels of sophistication - it’s about DR making bogus claims simply to fit his narrative.

[elysianfields]

I paid off my mortgage when I RE'd. 

I view paying off my mortgage as diversifying my assets to financially protect myself even against black swan events.  In my state, investments in a 401k and the house are largely protected against bankruptcies and lawsuits.  And, if other elements of my FIRE plan fall apart (a market crash or a pension bankruptcy, for example) having a paid of house in a HCOL area gives me the option to downsize and move to a LCOL area. 

I admit that this is mathematically suboptimal and pretty extreme financial conservatism.  It makes more sense to me than burying guns and gold coins in the backyard and hoarding canned food in the basement though.

@ROF Expat do you view your Federal pension as something less than 100% guaranteed?  If so, why, and what sort of probability do you assign to the failure of your pension?

[clarkfan1979]

has anyone looked at the tax side of higher income due to the mortgage? and included the home RE tax freeze that a lot of places have for lower income seniors and how that might affect what is most favorable?

I proposed this concept in the past. I was trying to make an argument that it might be worth it to pay off the lower interest rate mortgage, if the cost of the monthly mortgage payment forces you into the 22% tax bracket from the 12% tax bracket in your retirement years, pulling from retirement accounts. 

I was told I was wrong, but I don't think I ever got a satisfactory answer as to why I was wrong. The math provided didn't make any sense to me. I didn't pursue it and let it die. 

[ROF Expat]

@ROF Expat do you view your Federal pension as something less than 100% guaranteed?  If so, why, and what sort of probability do you assign to the failure of your pension?

Raising the issue of pension failure was more about my spouse's non-USG pension.  That said, my confidence in my USG pension isn't quite what it once was.   Some years back, I would have said that I viewed my pension as the equivalent of holding Treasury notes.  My view changed somewhat after the Trump Administration budget proposal for 2018 called for eliminating the COLA for all (not just future) FERS retirees.

https://www.fedsmith.com/2017/05/23/2018-budget-proposes-eliminating-colas-increasing-retirement-contributions/

Obviously, the proposal didn't succeed, but the fact that the WH could unilaterally propose such a fundamental change seemed significant to me.  From an investment allocation perspective, I still view my pension as much like a US Government bond which makes me comfortable with keeping almost 100% of my investments in stocks (I plan on being able to meet all my normal living expenses in retirement with pensions alone).  From a risk perspective, I previously believed that retroactively changing the rules of the game would be as unthinkable as defaulting on a bond.  I don't think a failure is likely, but a change in the rules that costs me money is no longer unthinkable. 

I don't think any kind of collapse is likely, much less imminent, but my father grew up during the great depression and my mother's family lost everything during the second world war.  Both sides of the family were ultimately very successful financially, but I don't have that "it could never happen to me" mindset.  As an FSO I saw people in several countries who thought of themselves as middle class lose everything. 

As a result, I tend to err on the side of caution.  I wouldn't push my strategy on anyone else, but I do put elements of it out there as an option for consideration. 
 
 

[joshrosenthal5000]

Just today I heard Dave Ramsey say rich people do two things:

1) invest regularly over a long time

2)  pay off their mortgage

Of course, this is simplistic Ramsey advice, but so much of his audience needs that simplicity.

The bit about “paying off mortgage to get rich” is likely more about people who are disciplined with money and saving it, and less about the financial advantages of paying off a mortgage.

I refused to listen to ramsey even in college and knew nothing about finance.  I was horrible with finance but never got into debt outside my first car and first house.  Car was paid off in a year and house was paid off in exactly 15 years.  DR is really meant for idiots.  It is miraculous that common sense influencers make so much from YT repeating the same info.  The latest craze is trying to look modestly poor to pretend to be low key rich.  Man, I had been doijg it since I turned 25 and had a kid on the way.  It is called being responsible and considerate middle class.

[joshrosenthal5000]

I paid off my mortgage when I RE'd. 

I view paying off my mortgage as diversifying my assets to financially protect myself even against black swan events.  In my state, investments in a 401k and the house are largely protected against bankruptcies and lawsuits.  And, if other elements of my FIRE plan fall apart (a market crash or a pension bankruptcy, for example) having a paid of house in a HCOL area gives me the option to downsize and move to a LCOL area. 

I admit that this is mathematically suboptimal and pretty extreme financial conservatism.  It makes more sense to me than burying guns and gold coins in the backyard and hoarding canned food in the basement though.

@ROF Expat do you view your Federal pension as something less than 100% guaranteed?  If so, why, and what sort of probability do you assign to the failure of your pension?

Can I still collect USG pension if one renounce citizenship.  If a peace loving people  object to their tax dollars being spent on weapons that kill and maim people and renounce it, do they still collect it since they paid into it and are actually entitled to it unlike border hoppers getting paid monthly and free lodging.  I’ll get citizenship at whichever country I reside and it would most likely be a country that has history of not waging war against others.

[iris lily]

Just today I heard Dave Ramsey say rich people do two things:

1) invest regularly over a long time

2)  pay off their mortgage

Of course, this is simplistic Ramsey advice, but so much of his audience needs that simplicity.

The bit about “paying off mortgage to get rich” is likely more about people who are disciplined with money and saving it, and less about the financial advantages of paying off a mortgage.

I refused to listen to ramsey even in college and knew nothing about finance.  I was horrible with finance but never got into debt outside my first car and first house.  Car was paid off in a year and house was paid off in exactly 15 years.  DR is really meant for idiots.  It is miraculous that common sense influencers make so much from YT repeating the same info.  The latest craze is trying to look modestly poor to pretend to be low key rich.  Man, I had been doijg it since I turned 25 and had a kid on the way.  It is called being responsible and considerate middle class.

I like listening to Dave Ramsey because I like his no nonsense approach.  But yeah, I didn’t start listening to Dave Ramsey until last year and by then I had accumulated several million. I didn’t need some radio guy to lead me into the path of wealth.

But I do enjoy Dave and I enjoy listening to the people who call him, some of them idiots. But not all of them.

Sometimes I feel sorry for the folks who call and other times it’s like watching the Jerry Springer show. Yesterday I heard an call where a new wife called in because her husband has three different children from three different baby mamas, and he owes $56,000 in back child support. Their household income is $35,000 annually

I don’t know what to do with Americans like that.

[iris lily]

But then, today Dave’s caller discovered her account had $18 million in it, yes.

Reverse Jerry Springer.

She had worked for a techncomoany several years ago and had stock that greatly appreciated fast and beyond her expectations. Dave gave her some general ideas about how to approach this new reality, but told her to get a good tax advisor and good investment advice.

[FLBiker]

Just to add a bit of international flavor --

We moved from the US to Canada 4 years ago, and the difference in how mortgages (and taxes) work here has me leaning more towards paying off the mortgage.  Mortgages here are typically amortized over 25 years, but they mature every 5/7/10 years.  We have a "closed 5-year fixed" mortgage -- "closed" meaning we can only pre-pay a set amount (I think it's $20K per year, but we aren't prepaying it), "fixed" meaning the interest rate is fixed (at 2.5%) and "5-year" meaning it matures at 5 years, at which point we need to get a new mortgage for the remainder (or pay it off).

As interest rates have been climbing, we've been socking away cash to pay down / off the mortgage.  We're currently sitting on ~$140K CAD in GICs (like CDs in the US) and we'll have ~$170K CAD left on our mortgage when it matures.  Thus, we'll either get a new 5 year fixed mortgage for the remaining $30K or use some other assets to just pay it off in full.  If interest rates fall between now and July, we might reconsider.  At the same time, I like the idea of going into RE (we're very close to FI, if not there) without a mortgage as it would enable us to keep our income lower which seems advantageous in a higher tax location like Canada.

[mistymoney]

has anyone looked at the tax side of higher income due to the mortgage? and included the home RE tax freeze that a lot of places have for lower income seniors and how that might affect what is most favorable?

I proposed this concept in the past. I was trying to make an argument that it might be worth it to pay off the lower interest rate mortgage, if the cost of the monthly mortgage payment forces you into the 22% tax bracket from the 12% tax bracket in your retirement years, pulling from retirement accounts. 

I was told I was wrong, but I don't think I ever got a satisfactory answer as to why I was wrong. The math provided didn't make any sense to me. I didn't pursue it and let it die.

I guess it depends where you put the money in the first place? and then take it out? so if you skip 22% taxes into pretax, and take out later at 22% not a big deal?

but the senior tax freeze is something to consider though.

[SeattleCPA]

Mortgages are almost always a couple percent higher than the risk-free rate one could obtain by investing in treasuries at the same point in time. This means a person is always better off at any one given time paying off their mortgage rather than investing in a risk-free portfolio.

Now, if we're talking about a scenario where the person locked in the mortgage in late 2020, and they are considering investing in a safe asset portfolio now, then the answer is obvious. Keep the <4% mortgage and invest in 4.7% 20-year treasuries and/or a TIPS ladder to arbitrage the difference. This is a different answer than if the mortgage was 6.8% versus 4.7% for the treasuries. So when we add the time variable, the answer can vary.

We get into actuarial odds when we throw in the variable of mixing in some risky investments alongside the risk-free ones. Will the return on a 60/40 portfolio be higher than a mortgage rate? It's a question we can only guess at, and measure the historical failure rates. I think it's valid to treat the mortgage payments as a WR and calculate the odds of portfolio failure like we would a retirement budget, as was done here. However one must be careful to add back the discounted value of the principal one receives when the bonds mature. I'm not sure this was done here.

Agree with everything @ChpBstrd says here. But FWIW I think the boldfaced part is really relevant for folks who want to include bonds in their portfolio.

[mistymoney]

has anyone looked at the tax side of higher income due to the mortgage? and included the home RE tax freeze that a lot of places have for lower income seniors and how that might affect what is most favorable?

I proposed this concept in the past. I was trying to make an argument that it might be worth it to pay off the lower interest rate mortgage, if the cost of the monthly mortgage payment forces you into the 22% tax bracket from the 12% tax bracket in your retirement years, pulling from retirement accounts. 

I was told I was wrong, but I don't think I ever got a satisfactory answer as to why I was wrong. The math provided didn't make any sense to me. I didn't pursue it and let it die.

I guess it depends where you put the money in the first place? and then take it out? so if you skip 22% taxes into pretax, and take out later at 22% not a big deal?

but the senior tax freeze is something to consider though.

oh another wrinkle to this that applies to me, but other states may do it differently.

State income tax is about 5%, which I avoid with pretax. later in retirement, there is no state income tax on 401k withdrawal.