Paying off Mortgage Early – How bad is it for your FI Date?

[foobar]

When your stocks drop 50% what are you going to be using to buy those "on sale" funds? Taking out a mortgage or a helo?:)  I could see a person playing an interest timing game. You stick you money in short term treasures and expect to lose 3% per year (versus paying off) and hope to make it up over the last 20 years when you can lock your money into treasuries paying 7+% (imagine if inflation goes up to 5% for example). I must admit to having a real lack of enthusiasm for bonds these days. At  5-6%  I could talk myself into them.  Right now I pretty much prefer cash (i.e. 6-18 month cds)  to taking on the interest rate risk.

Are you aware of any place that will offer me a 30 year fixed rate margin loan at <4% that will not be called if the asset drops 50%? They aren't remotely the same product.


Yes leverage adds risk but it also adds return. In this case the added return drastically outweighs the risk due to the extended time period. Imagine you shove all the money in to an S&P 500 fund (lets assume no taxes to keep it real easy and this is NOT how I would invest money I didn't need for 30 years) during the worst 30 year period ever. Hmm that's an 8% return.  Maybe we are starting a new worst 30 year period that will only return 2%. Its possible. But I wouldn't want to bet on it.

Here is a link to a good article on the subject. The author mentions the mental accounting often done to justify using mortgages for leverage. But what is even better is that he makes the case of increasing risk exposure in the remaining portfolio to improve potential returns. The logical conclusion is that one should get rid of bonds and use the proceeds for debt payments or trade bonds at the same time you are directing new money towards the mortgage. As always, the decision what to do in the individual case has to be, well, individualized...
Rest assured all of you who are paying off your mortgages early that it is much less of an emotional issue than is commonly perceived. Or, in other words, it may be of psychological benefit but it is supported by risk analysis and may lead to higher overall returns when done as part of a dynamic investment allocation strategy.

http://www.kitces.com/blog/why-is-it-risky-to-buy-stocks-on-margin-but-prudent-to-buy-them-on-mortgage/

Peter

There is no question that a young person with little invested and a 30 years low rate mortgage should continue investing in tax advantaged accounts and defer paying off the mortgage. There's really not much choice in the matter.

There is also no question that borrowing on margin is different because of the possibility of a margin call, although I would look at what happened to many people with underwater mortgages and job loss a few years ago as somewhat of a margin call equivalent. The fact remains that leveraged investments can turn ugly in a hurry.

What I am having trouble understanding is that many people have not only mortgage debt but also significant investments in bonds. I have never had more than 10% in bonds ( ok, had another 5% in TREA which I believed at the time to be bond-like, well it isn't but I was able to time it in 2009).
The reason is probably that asset allocation is often looked at as something happening just within the investment portfolio. So one hears that someone has an AA of 30/70 but then learns that the same person has a mortgage balance as large as their investment portfolio. That makes no sense at all.
In reality, this person is facing volatility risk of way more than a 100% stock allocation (referenced to all investable assets of course) with the bond investments only limiting upside potential. And upside potential is clearly all what counts for an investor with such a high stock allocation and that is all what a young person with good future earning potential and low net worth should be worrying about.

I think it is important to note that by considering carrying debt to be similar to holding negative bonds, the AA becomes more realistic in terms of real world consequences of volatility risk - that is the effect on net asset worth. I really do not care about how my investment portfolio is doing in isolation. I do care about net invested asset worth increase over time.

Stock market investments have the highest return potential but unfortunately also have the greatest dispersion of portfolio end value. The way to deal with this is asset allocation. Look at your AA with your debts figured in as negative bonds and see what you need to do to get to your desired AA (30/70, 40/60 or whatever).

If you don't look at debts as negative bonds you may end up not knowing the actual risk you are taking as a young person and you may end up way too conservative when you are older.

By the way, I am about one year away from FIRE and my current AA is way over 100% stock market but buying back my mortgage debt will get me to about 15% bonds within the year. This excludes real estate equity and annuities.

Peter

[PeteD01]

Peter,

I like that approach, viewing a mortgage as an inverse or negative bond.

but make sure you're comparing apples and apples.

a fixed 30 year nominal in us$ mortgage,  at say 4.5%, for someone in solid accumulation mode, seems to be a no brainer. As long as they instead of putting equity into the house they put extra equity into the rest of the portfolio. This represents a counter play to buying a 30 yr treasury. A fixed nominal 30yr mortgage is effectively an inflation hedge., plus should return well on the leveraged equity elsewhere ( ie I expect my portfolio of stock to average 9% nominal over 30 years, pre tax.)

But my bond portfolio is not in corresponding 30 yr treasuries, but mid duration (1 - 7 yr) mid rating bonds, yielding more than 3% and the rate will roll up if rates go up.

Yes, a 30 year mortgage is not the negative equivalent to a bond index fund investment in which the interest risk is attenuated in sufficiently long investment horizons.
However, there is no compelling reason for an investor with a relatively short time horizon who wishes to invest in bonds to invest in bond funds in expectation of higher rates, if equivalent rates are available in negative bonds she is already holding.
The question remains if bond funds will ever return enough to justify holding them for an investor with a long time horizon, who desperately needs stock market level returns to achieve her goals and even uses leverage to get there. In a way, the bond fund duration and long term interest rate roll up are considerations for the already well off investor.

Inflation poses a different problem: if inflation is high and one carries low interest debt, it is of advantage to keep the loan. If inflation is low there is nothing to be had in the present. With a long time horizon, different inflation conditions are more likely to be encountered and then and only then can the loan be considered an inflation hedge.

What is funny about all this is that the risk management view actually results in highly leveraged investing for the underfunded young investor, elimination of leverage for the adequately funded investor and in increasing leveraged investments for investors with otherwise fully funded retirements. In other words, when you are rich beyond your needs (that is volatility cannot affect your standard of living) you should think about leveraging again and keep the shorter duration of bond funds in mind.
Just think about having gone into the last meltdown with a moderately leveraged portfolio and a good chunk in bond funds without having to worry to make ends meet - that's how fortunes are made.

Peter

[aj_yooper]

+1, Peter!  Stages of investing.  That's why the argument is always so intense and unresolved.  William Bernstein does say that the younger investor would benefit by leverage.

[Mr Mark]

Plus, if you buy good properties and do a little improvement to it, a bit of market growth does wonderful things to equity when leveraged.

Take this year in my area. Prices are up 25% +  over the past 2 years. A 400k house, with a 300k 4% mortgage and 100k down, plus a bit of investment on some improvements,  say 10k, could go now for 600k. Less 7% fees, thats a killer roi. Tax free.

Looking back, almost all my big payouts have involved real estate.

[tomsang]

Interesting perspective. I agreed with most until he uses an example of paying down a 15% credit card or saving. Maybe he is saying that the stress of having the debt will cause the person to be mindful and pay it off within the year and will therefore only cost $100 of interest to get money locked up in an IRA. if you are Mustachian you invest or payoff based on expected returns vs. games to save or paydown.

http://finance.yahoo.com/news/debt-unstuck-123024913.html

[arebelspy]

Interesting perspective. I agreed with most until he uses an example of paying down a 15% credit card or saving. Maybe he is saying that the stress of having the debt will cause the person to be mindful and pay it off within the year and will therefore only cost $100 of interest to get money locked up in an IRA. if you are Mustachian you invest or payoff based on expected returns vs. games to save or paydown.

http://finance.yahoo.com/news/debt-unstuck-123024913.html

Oh god that's bad math.

Say you are 25 years old and are carrying a $1,000 balance on a credit card at 15% interest, and you get a $1,000 bonus at work. Which is better, paying off the credit card or saving the money and paying off the debt slowly during the next year? The instant payoff of paying down a 15% interest credit card balance is obvious (it would save you roughly $100 in interest payments, assuming you paid the card down throughout the year). But in the long run, $1,000 saved in an IRA for 30 years will be worth $10,935 (assuming an 8% annual return). The $100 savings on interest payments at age 25 is worth $830 by age 55. So, which is greater, $10,935 or $830?

Wow.

[Bob W]

Glad I finally found this thread!

IMHO paying off more than 30% of a mortgage is the opposite of badassity.  I would characterize it as wussassity.   

Psychologically have the money to pay cash for your home and then put it into a REIT that you name "paid off home account."   Then party on Garth because you have both an investment and a home you get to live in!   You still "own" it because on the boxes you check with the choices  "rent"  or "own" your home?   You always check "own."

That said consider the following. 
1.  A home is a titled item  -- that is the King or Government grants you a title.  The King or Government can and will tax you on that title.   There is also the chance the King may want his house back.   In the US,  (since we are approaching a Greek point of debt)  it is likely at some point there will be a national property tax that is very substantial.   So from a psychological standpoint you are fooling yourself if you think you "own" your home or that it is paid off.   The King owns your home.  You own a piece of paper.   
2.  A mortgage is a long term rental agreement.  Yes that is correct.  Read the fine print on that 40 page contract.   The bank owns the home.  You are renting at a super low rental rate.   You are also responsible for all repairs and maintaining the property.
3. Your home is too big and/or expensive.  Yes, I said it!  90% of readers of this thread are living in homes that are "clown houses."    A good rule of thumb is 400 sq foot per person.   Otherwise your are living in the house equivalent of a "Hummer."   Very unmustachian.  (by the way, MMM lives in the house equivalent of a "clown car." 
4.  Home prices do not always go up.   We have seen this recently.  In one scenario you put 50K down on a home and the home value goes down so much in the next 3 years that you lose 100K in total.   At least in the stock market your loss is limited to your initial investment. 
5.  Renting an appropriate size and priced home has many advantages.  A. You don't do maintenance.  B. Your risk is very limited.  C. Your need to/want to move risk is very limited as in you can move anytime you like.  D. Should you decide to take an extended trip you will have no worries back home. You are free.   E.  This is a truism -  "You don't own a home,  it owns you"  And that pull is deeply psychologically based.   It is why people struggle so much with this thing, because it has been drummed into their psyche from an early age to own a home.   

So if you must fool yourself and "own" a home  ---

Buy the smallest least expensive, on sale home,  you can and put down 20% while investing the value of your home.

Or

Rent the most appropriately sized, nice and inexpensive place you can find.   Invest the entire difference.

By the way,  if the starter of this thread has 1.5 mill in assets they are doing very well and way past the blog definition of FI.    Were it me,  I would dump the home concept and take a very,  very long RV trip followed by a very, very long world hiking trip.   That would give you 3-6 years to consider your home options. 

[tomsang]

Time to Refi?  Time to Restock?

"At its 52-week low of 4.10 percent, the rate on a 30-year mortgage is down from 4.53 percent at the start of the year. Rates have fallen even though the Federal Reserve has been trimming its monthly bond purchases, which are intended to keep long-term borrowing rates low. The purchases are set to end in October."

http://www.seattlepi.com/business/article/Average-US-30-year-mortgage-rate-at-4-1-percent-5718720.php

[mobyrocket]

tomsang,

I wanted to thank you for this thread.  After a fairly thorough review of the numbers you provided throughout this thread (others as well - especially the concept of the mortgage as bond portion of one's retirement), we are refinancing from a 15 year loan into a 30 year loan and reinvesting the difference from the monthly mortgage payment.  It actually allows us to top off our pretax savings as an added bonus.  We are completing this now as the rates are super low and we have a lot of confidence in our plan, in part, based on information in this thread.

Thank you mmm community and especially tomsang!

[fartface]

I like your FIRE Calc. calculations over the long term.

I was paying $550/month interest one year ago on my $350,000 home. After selling a rental property I applied $140,000 from the proceeds of the sale towards the principal on my home. I now pay $170/month interest and have a balance just under $70,000.

It felt good psychologically to do this. What if the market had dropped 20% or more last year? I am risk-adverse and reducing my monthly interest by $380/month was a "sure thing" I felt good about.  My home will be paid off within two years. My oldest daughter heads off to college in five years. This gives me three full years to apply that $1600/month mortgage payment towards college savings or ERE or whatever else I please. It's a choice I'm most comfortable with...so do what helps you sleep best at night. Good luck!

[TomTX]

And how do you plan on paying off the mortgage with that tax advantaged money?  After you take the money out to pay off the mortgage, are you not back to where we started with 200k that you can either pay off the mortgage or invest? And in this case the investment works out even better because you can roll that 200k into a Roth (yeah you have to work around with the 5 year rule) and generate no income forever. Wasting that tax space on paying off your mortgage early would be sad.

I'm glad this thread popped back up. You're right! Objection withdrawn.

[TomTX]

I see.. However, your credit score will improve if you pay off your mortgage early. I am pretty sure that you will not be having a hard time obtaining another mortgage.

I disagree with both of these (the latter if you're ER'd, the former in most cases).

Can you elaborate this?

Just to put a concrete example - I have a mortgage and an 850 FICO.* 

It is literally impossible to increase my FICO, yet I have a mortgage.

*Thanks for the free FICO every month, Discover! Yes, it's a real 850-scale FICO. Yes, it is rather silly, and bounces between 849/850 and 850/850 depending on whether they make the pull before or after we've paid the monthly credit card bill.

[Kevin Aster Tin Obin]

I have been battling the mortgage payoff decision for a year now.  Sold previous residence so cash is increased, have 2 mortgages, primary residence and investment property.  We already max out 401k/Roth for spouse and I, but keep putting monthly savings in savings account at 0.8% interest.. I need to think more about the reverse bond and feel like I should hold no bonds in my AA at vanguard...trying to get more cashflow to retire in 5 years.. Can use cash for another investment property down payment, pay down mortgage, or continue to buy stocks/index funds in a taxable account.. With markets at all time high, I struggle with the feeling to dump a few years worth of expenses into stocks this month instead of just paying down 4.25% mortgage as Schiller predicted 10yr returns at 4% from here...  But then of course I don't have that capital to do what I want with a buy/sell/withdrawal if needed.

[nottoolatetostart]

Glad I finally found this thread!

IMHO paying off more than 30% of a mortgage is the opposite of badassity.  I would characterize it as wussassity.   

Psychologically have the money to pay cash for your home and then put it into a REIT that you name "paid off home account."   Then party on Garth because you have both an investment and a home you get to live in!   You still "own" it because on the boxes you check with the choices  "rent"  or "own" your home?   You always check "own."

That said consider the following. 
1.  A home is a titled item  -- that is the King or Government grants you a title.  The King or Government can and will tax you on that title.   There is also the chance the King may want his house back.   In the US,  (since we are approaching a Greek point of debt)  it is likely at some point there will be a national property tax that is very substantial.   So from a psychological standpoint you are fooling yourself if you think you "own" your home or that it is paid off.   The King owns your home.  You own a piece of paper.   
2.  A mortgage is a long term rental agreement.  Yes that is correct.  Read the fine print on that 40 page contract.   The bank owns the home.  You are renting at a super low rental rate.   You are also responsible for all repairs and maintaining the property.
3. Your home is too big and/or expensive.  Yes, I said it!  90% of readers of this thread are living in homes that are "clown houses."    A good rule of thumb is 400 sq foot per person.   Otherwise your are living in the house equivalent of a "Hummer."   Very unmustachian.  (by the way, MMM lives in the house equivalent of a "clown car." 
4.  Home prices do not always go up.   We have seen this recently.  In one scenario you put 50K down on a home and the home value goes down so much in the next 3 years that you lose 100K in total.   At least in the stock market your loss is limited to your initial investment. 
5.  Renting an appropriate size and priced home has many advantages.  A. You don't do maintenance.  B. Your risk is very limited.  C. Your need to/want to move risk is very limited as in you can move anytime you like.  D. Should you decide to take an extended trip you will have no worries back home. You are free.   E.  This is a truism -  "You don't own a home,  it owns you"  And that pull is deeply psychologically based.   It is why people struggle so much with this thing, because it has been drummed into their psyche from an early age to own a home.   

So if you must fool yourself and "own" a home  ---

Buy the smallest least expensive, on sale home,  you can and put down 20% while investing the value of your home.

Or

Rent the most appropriately sized, nice and inexpensive place you can find.   Invest the entire difference.

By the way,  if the starter of this thread has 1.5 mill in assets they are doing very well and way past the blog definition of FI.    Were it me,  I would dump the home concept and take a very,  very long RV trip followed by a very, very long world hiking trip.   That would give you 3-6 years to consider your home options.

Oh my gosh....Love this! I too am teetering on paying off our 2.75% mortgage a little early and throwing a few extra dollars towards it each month. Whenever I have that thought when playing with my spreadsheets (which all support investing over paying the mortgage off, BTW), I will say to myself "rental, rental, this is a rental"

This post alone is very thought provoking. Thank you!

[MidWestLove]

"That said consider the following. 
1.  A home is a titled item  -- that is the King or Government grants you a title.  The King or Government can and will tax you on that title.   There is also the chance the King may want his house back.   In the US,  (since we are approaching a Greek point of debt)  it is likely at some point there will be a national property tax that is very substantial.   So from a psychological standpoint you are fooling yourself if you think you "own" your home or that it is paid off.   The King owns your home.  You own a piece of paper.   
"

I am not sure I understand this - would you mind expanding on it (or anyone else commenting on it)? if you think house is a titled item , then what your stock are (or for that matter every financial instrument that is not a hard asset)? all you "have" is a record entry in the computer , 100% visible to the "King" who can (and will, in times of desperation) change the rules whatever way the "King" wants. Be it mandatory confiscation (Cyprus style), mass freezing of the accounts while their worth decreased 1000x in 2.5 years (Soviet Union style 1991-1993), in desperate times, Kings do desperate things and they have the army and write the rules. Before people think I am a gold bug , I just do not see house as any more or less susceptible to King's whims and actually carrying utility for you vs pure 'paper' (now electronic) 'ownership' rights.


thank you

[MidWestLove]

and for those who are curious about "Kings" actions in Soviet Union , there were simple
- the expenses were far higher than receipts ( same situation as in US, with our King in much worse state)
- to pay for it, debt was monetized, and money supply was continuously increasing
- everything worked with no inflation until it did not
- King decided to rapidly decrease the amount of money in circulation with idea that everything will return to normal and printing/money creation could be continued at will.

so in January of 1991 King decided that
- only "new" money would be valid , personally signed by our King or whatever
- existing physical persons with SSN would be allowed to exchange up to X into "new" money (say 10,000)
- everything above X would be transferred into special accounts (liberty/freedom accounts , whatever)
- people would be allowed to take out (in new money) up to X amount a month (i.e. 500 a month)

what it has done
- immediately created black market due to disconnect between electronic and 'real'/new money
- created massive organized crime
- increased social friction to the point of the state collage
- triggered runaway inflation that took 8 years to tame. for comparison , in 1991 , 5 rubles were cost of 25 loafs of bread. By 1993, 5000 rubles would buy you a single loaf of bread (if you can find it)

whose who lived through this learned very well that
- every promise can (and will if it is convenient to the King) get broken.
- playing games with the state is like making deals with the devil - you will always lose.
- do not put too much stock into 'ownership' rights unless you physically control it and can post a guy with a rifle in front of it (and then worry about how to ensure that person with the rifle will not take over the same ownership as most organized crime teams did).

[BooksAreNerdy]

Right, but the idea is since you haven't paid it off, that money you WOULD have paid it off with would be invested and earning enough money to pay the mortgage each month and put some extra in your pocket.

Exactly.

I'm not getting the confusion here with folks asking about their expenses being different without a mortgage, and somehow having more flexibility with expenses if there is no mortgage to pay. If anything, having a lot of money tied up in a fixed asset like a house provides less flexibility to deal with uncertainties.

Maybe a simple example will help:

With a mortgage
-------------------------------------------------------
Monthly non-housing expenses: $2000
Current mortgage on house: $100,000
Monthly mortgage payment (at loan interest rate of 4%): $477
Total monthly expenses: $2477

Cash on hand: $100,000 (invested instead of paying off the house)
Passive income from cash on hand at 7%: $7000 annually = $583 monthly
Monthly expenses not covered by passive income: $1894

Without a mortgage
-------------------------------------------------------
Monthly non-housing expenses: $2000
Current mortgage on house: $0
Monthly mortgage payment: $0
Total monthly expenses: $2000

Cash on hand: $0
Passive income from cash on hand: $0
Monthly expenses not covered by passive income: $2000

As you can see OP, you end up with less money available for your total expenses each month, because you are losing the investing opportunity cost of your money tied up in the house. Also, you have no (or less) cash on hand to deal with life's uncertainties.

This makes sense to me, except for one thing. In the scenario where you pay cash for the house with no mortgage, you also have an extra $477/mo to invest since you have no mortgage payment. How does that factor in?

With mortgage:
A $100k investment at 7% for 30 years would be $566k.
We will have paid $171,720 for the mortgage, using your $477/mo figure.

With no mortgage:
Investing $477/mo at 7% for 30 years would be $475k.
We will have paid $100k for the house.

So, the investment acct has an extra $91k if you get a mortgage, but you have paid $71k for the interest. So, the net gain of having a mortgage is $20k.

Is that right? Is $20k really that much over a 30 year period? What about factoring in closing costs?

***edit***
So, the other thing to factor is that you wouldn't actually let that $100k sit untouched in the mortgage scenario. You would actually be drawing it down each month to pay the mortgage. So, using this calc (http://www.calcxml.com/calculators/how-long-will-my-money-last?skn=#results) it looks like you would have $118k at the end of it all, plus the 100k house that you paid $71k in interest for. How does that change things? It just confused me more and I honestly can't see what scenario is the best one.

[tomsang]

BooksAreNerdy-  The simple way to think about it is if you have a mortgage at 4% and your investments earn 7%, then it is pretty easy to see that putting more money into the bucket that gets you 7% vs. 4% is going to be advantageous.  I put together an Excel workbook to show this.  But what a lot of people miss is that in a point in the future you could liquidate some of your investments and payoff the mortgage and still have a chunk leftover.  Check out the workbook and let me know if it clarifies or confuses.

[tomsang]

With markets at all time high, I struggle with the feeling to dump $100K into stocks this month instead of just paying down 4.25% mortgage as Schiller predicted 10yr returns at 4% from here...  But then of course I don't have that capital to do what I want with a buy/sell/withdrawal if needed.

Markets are usually at an all time high unless there was a serious correction.  Regarding Shiller, do you have a link to that?  I believe he was saying a conservative estimate would be at 4% after inflation.  IE 6.5% - 7% before inflation.  A 30 year mortgage is an amazing hedge against inflation as your P&I are locked in at the current rate for 30 years.

[BooksAreNerdy]

BooksAreNerdy-  The simple way to think about it is if you have a mortgage at 4% and your investments earn 7%, then it is pretty easy to see that putting more money into the bucket that gets you 7% vs. 4% is going to be advantageous.  I put together an Excel workbook to show this.  But what a lot of people miss is that in a point in the future you could liquidate some of your investments and payoff the mortgage and still have a chunk leftover.  Check out the workbook and let me know if it clarifies or confuses.

Mostly clarifies, but I feel like I should add some more specifics to our particular situation as the workbook just can't address all of my various ins and outs.  Our current house is on the market, its sale would leave us about $130-150k cash.  We are looking at houses in the $100k range for our next purchase, as this range allows the house to be quite livable for our family or a future rental/investment should we ever desire it to be such. 

DH is planning to retire in 6 years at age 38.  We aim to have enough in taxable accts to hold us over for 20 years, and then enough in retirement accts to last indefinitely.  We would also like to have a total of 3 houses in this 80-100k range, one for living and two for rentals. 

DH is of the opinion that we want to minimize our costs/payments in retirement.  So, he would rather have a paid off house and paid off rentals.  DH's argument is than in a downturn, you want to be withdrawing as little as possible from investments.  ie, have low enough expenses that you could easily use a side hustle to pay the bills.  So, he would rather pay cash up front and make sure our expenses are low when we hit retirement.  I, otoh, am trying to figure out the exact math of which is better.  Funny enough, he is the engineer and I am the english lit major.  So, I do appreciate the hand holding as I struggle with the math.  :)

One thing in my post above that I didn't think of, was that if we didn't have a mortgage, we likely wouldn't budget an extra $477/mo (or $382 in the case of an 80k mortgage) into our post retirement budget to invest instead of making a mortgage payment.  So, that investment benefit goes away. 

Scenario A, no mortgage:
Pay $100k cash for house
$382/mo is invested (vs spent on mortgage payment) for next 6 years, netting $35k. Untouched, this would grow to $177k over the following 24 years.

Scenario B, mortgage:
Pay $157k for house; $20k down, $80k principal, $57k interest. 
Invest $80k and take out a monthly withdrawal of $382 to cover monthly P&I. At the end of 30 years, this acct is worth $183k.

In Scenario A, you end up with a value of $100k+$177k=$277k in home cost plus investment growth. 
In Scenario B, you end up with $100k+$183k-$57k=$226k as your total value from home cost plus investment growth, minus mortgage interest paid. 

So, in this situation, it looks like NOT having a mortgage would actually be a better move financially, as you would end up with an extra $51k at the end.  Does that seem right?  It isn't exactly comparing apples to apples as I had originally posted, but it gives more of a real life example. 

[tomsang]

If you already have more money than you know what to do with then having a paid off house makes sense.  If you are in the cusp, then having a low fixed rate mortgage and an 80/20 investment portfolio shows greater success. 

I haven't had enough time to look at your calc, but it sounds like there is something wrong with you analysis if it is showing a benefit of $51k by paying cash for your mortgage.  Are you including the investment returns?  I think the spreadsheet still works for your scenario.

[arebelspy]

If you already have more money than you know what to do with then having a paid off house makes sense.

So if you had multiple millions and someone offered you free money, you'd say "nah, I'm good"?

[Mr Mark]

If you already have more money than you know what to do with then having a paid off house makes sense.

So if you had multiple millions and someone offered you free money, you'd say "nah, I'm good"?

sometimes, yes, because it's not all just economics.

I think at MMM levels of FIRE income, circa 30k, having a non mortgage home can be an advantage in that it helps lower earned declared income, and this may assist in getting capital gains tax to zero, and getting under this magical 90k a year with zero tax due limit that I'm looking forward to! Plus helping to qualify for ACA subsidies, possibility reduced local taxes too.

So, while at my income level I'm opting for a 80% 30 yr fixed mortgage in FIRE, one should first do the math, cashflow post tax etc vs cashflow post tax option 2.

[tomsang]

If you already have more money than you know what to do with then having a paid off house makes sense.

So if you had multiple millions and someone offered you free money, you'd say "nah, I'm good"?

I do that now. There are many great ideas on this website to make or save $10 - $30. It usually entails minimal effort. I don't do it as it isn't worth my time. If people are so set with money and don't want the hassle of paying their mortgage or the idea that they have a mortgage then I don't knock them. If it is pushing off or putting you into a riskier SWR then I don think it is wise.

[arebelspy]

I don't do it as it isn't worth my time.

That wasn't what I was asking.  I don't do that either.  The question was about free money.  (If it takes time/effort, it's not free.)

Someone offers you a wad of cash, legally, would you say no, because you have enough?

[BooksAreNerdy]

I don't do it as it isn't worth my time.

That wasn't what I was asking.  I don't do that either.  The question was about free money.  (If it takes time/effort, it's not free.)

Someone offers you a wad of cash, legally, would you say no, because you have enough?

Though it doesn't relate to my question, I had to jump in here. I would hope that as soon as any one of us had enough, we would know when to say 'no thanks' to anything in excess. :)

To tomsang, yes, my calculations included returns at 7%. I can be more specific with the calculators I used, if needed.

[TomTX]

I don't do it as it isn't worth my time.

That wasn't what I was asking.  I don't do that either.  The question was about free money.  (If it takes time/effort, it's not free.)

Someone offers you a wad of cash, legally, would you say no, because you have enough?

I'm willing to be the first test subject for examining this theory.

Keep handing me wads of cash until I say "no,that's enough."

;)

[TomTX]

BooksAreNerdy-  The simple way to think about it is if you have a mortgage at 4% and your investments earn 7%, then it is pretty easy to see that putting more money into the bucket that gets you 7% vs. 4% is going to be advantageous.  I put together an Excel workbook to show this.  But what a lot of people miss is that in a point in the future you could liquidate some of your investments and payoff the mortgage and still have a chunk leftover.  Check out the workbook and let me know if it clarifies or confuses.

Mostly clarifies, but I feel like I should add some more specifics to our particular situation as the workbook just can't address all of my various ins and outs.  Our current house is on the market, its sale would leave us about $130-150k cash.  We are looking at houses in the $100k range for our next purchase, as this range allows the house to be quite livable for our family or a future rental/investment should we ever desire it to be such. 

DH is planning to retire in 6 years at age 38.  We aim to have enough in taxable accts to hold us over for 20 years, and then enough in retirement accts to last indefinitely.  We would also like to have a total of 3 houses in this 80-100k range, one for living and two for rentals. 

DH is of the opinion that we want to minimize our costs/payments in retirement.  So, he would rather have a paid off house and paid off rentals.  DH's argument is than in a downturn, you want to be withdrawing as little as possible from investments.  ie, have low enough expenses that you could easily use a side hustle to pay the bills.  So, he would rather pay cash up front and make sure our expenses are low when we hit retirement.  I, otoh, am trying to figure out the exact math of which is better.  Funny enough, he is the engineer and I am the english lit major.  So, I do appreciate the hand holding as I struggle with the math.  :)

One thing in my post above that I didn't think of, was that if we didn't have a mortgage, we likely wouldn't budget an extra $477/mo (or $382 in the case of an 80k mortgage) into our post retirement budget to invest instead of making a mortgage payment.  So, that investment benefit goes away. 

Scenario A, no mortgage:
Pay $100k cash for house
$382/mo is invested (vs spent on mortgage payment) for next 6 years, netting $35k. Untouched, this would grow to $177k over the following 24 years.

Scenario B, mortgage:
Pay $157k for house; $20k down, $80k principal, $57k interest. 
Invest $80k and take out a monthly withdrawal of $382 to cover monthly P&I. At the end of 30 years, this acct is worth $183k.

In Scenario A, you end up with a value of $100k+$177k=$277k in home cost plus investment growth. 
In Scenario B, you end up with $100k+$183k-$57k=$226k as your total value from home cost plus investment growth, minus mortgage interest paid. 

So, in this situation, it looks like NOT having a mortgage would actually be a better move financially, as you would end up with an extra $51k at the end.  Does that seem right?  It isn't exactly comparing apples to apples as I had originally posted, but it gives more of a real life example.

Your scenarios are not equal. You are double subtracting the $382 per month. And it looks like you are subtracting the interest AGAIN. Or I'm missing something.

Scenario A, no mortgage:
Pay $100k cash for house. At the end of 30 years, you have a house.

Scenario B, mortgage:
Pay $157k for house; $20k down, $80k principal, $57k interest. 
Invest $80k and take out a monthly withdrawal of $382 to cover monthly P&I. At the end of 30 years, this acct is worth $183k and you have a house.

Both houses are the same value at the end. Drop them from the calculation.

$382 you said covered P&I - the I being the interest on the loan. No need to subtract it yet again.

Scenario B ends up with an extra $183k.

[arebelspy]

Though it doesn't relate to my question, I had to jump in here. I would hope that as soon as any one of us had enough, we would know when to say 'no thanks' to anything in excess. :)

Depends on what you mean by excess.  I already have enough, and all excess goes to charity.  Therefore when I don't optimize and choose mathematically inferior strategies to give myself warm fuzzies, I am taking money out of those charities.  That free money I can get by optimizing and then add to my contributions is not something I'd say "no thanks" to, personally.

[BooksAreNerdy]

BooksAreNerdy-  The simple way to think about it is if you have a mortgage at 4% and your investments earn 7%, then it is pretty easy to see that putting more money into the bucket that gets you 7% vs. 4% is going to be advantageous.  I put together an Excel workbook to show this.  But what a lot of people miss is that in a point in the future you could liquidate some of your investments and payoff the mortgage and still have a chunk leftover.  Check out the workbook and let me know if it clarifies or confuses.

Mostly clarifies, but I feel like I should add some more specifics to our particular situation as the workbook just can't address all of my various ins and outs.  Our current house is on the market, its sale would leave us about $130-150k cash.  We are looking at houses in the $100k range for our next purchase, as this range allows the house to be quite livable for our family or a future rental/investment should we ever desire it to be such. 

DH is planning to retire in 6 years at age 38.  We aim to have enough in taxable accts to hold us over for 20 years, and then enough in retirement accts to last indefinitely.  We would also like to have a total of 3 houses in this 80-100k range, one for living and two for rentals. 

DH is of the opinion that we want to minimize our costs/payments in retirement.  So, he would rather have a paid off house and paid off rentals.  DH's argument is than in a downturn, you want to be withdrawing as little as possible from investments.  ie, have low enough expenses that you could easily use a side hustle to pay the bills.  So, he would rather pay cash up front and make sure our expenses are low when we hit retirement.  I, otoh, am trying to figure out the exact math of which is better.  Funny enough, he is the engineer and I am the english lit major.  So, I do appreciate the hand holding as I struggle with the math.  :)

One thing in my post above that I didn't think of, was that if we didn't have a mortgage, we likely wouldn't budget an extra $477/mo (or $382 in the case of an 80k mortgage) into our post retirement budget to invest instead of making a mortgage payment.  So, that investment benefit goes away. 

Scenario A, no mortgage:
Pay $100k cash for house
$382/mo is invested (vs spent on mortgage payment) for next 6 years, netting $35k. Untouched, this would grow to $177k over the following 24 years.

Scenario B, mortgage:
Pay $157k for house; $20k down, $80k principal, $57k interest. 
Invest $80k and take out a monthly withdrawal of $382 to cover monthly P&I. At the end of 30 years, this acct is worth $183k.

In Scenario A, you end up with a value of $100k+$177k=$277k in home cost plus investment growth. 
In Scenario B, you end up with $100k+$183k-$57k=$226k as your total value from home cost plus investment growth, minus mortgage interest paid. 

So, in this situation, it looks like NOT having a mortgage would actually be a better move financially, as you would end up with an extra $51k at the end.  Does that seem right?  It isn't exactly comparing apples to apples as I had originally posted, but it gives more of a real life example.

Your scenarios are not equal. You are double subtracting the $382 per month. And it looks like you are subtracting the interest AGAIN. Or I'm missing something.

Scenario A, no mortgage:
Pay $100k cash for house. At the end of 30 years, you have a house.

Scenario B, mortgage:
Pay $157k for house; $20k down, $80k principal, $57k interest. 
Invest $80k and take out a monthly withdrawal of $382 to cover monthly P&I. At the end of 30 years, this acct is worth $183k and you have a house.

Both houses are the same value at the end. Drop them from the calculation.

$382 you said covered P&I - the I being the interest on the loan. No need to subtract it yet again.

Scenario B ends up with an extra $183k.

Ah, I see how that is double subtracting interest in scenario B. However, I don't think you can ignore the potential added investment of $382 from cash purchase date until retirement, and then its growth during the time we would have had a loan. So, perhaps the actual gains in each situation (house being equal in both scenarios and removed from the calculations) is Scenario A is $177k and Scenario B  is $183k.

So, having a mortgage puts us about $6k ahead at the end of 30 years. $6000 is not a huge 'wad of cash' to me, especially over 30 years. And certinally not worth the added peace of mind of having lower expenses for 30 years in retirement.

This has been a fun and interesting calculation, to be sure. Thanks for the help!

[arebelspy]

However, I don't think you can ignore the potential added investment of $382 from cash purchase date until retirement

No, that doesn't exist in this scenario.  Think about it, you're pretending that the $382 is coming from your pocket, so by not having the mortgage you'd have that money freed up to invest.  But it's not - it's coming from the investment.  If you don't have the investment, you don't have that extra 382.

In other words, in both scenarios, A and B, you can invest ALL your extra money from your job after paying your other expenses (food, gas, etc.).  In the mortgage free option you invest all your job money, because you have no mortgage.  In the mortgage scenario, the INVESTMENT pays the mortgage, and you can invest all your job money.

In either scenario, you're investing all your job money.  There is no extra $382 you can magically invest in scenario A, because you're already investing all your extra money.

The only time what you're thinking would apply is if you were paying $382 from your job money in scenario B, then scenario A would have an extra $382 to invest.  Since it's not coming from that, but from the investment, you don't have that extra $382.

Therefore scenario B, having a mortgage, does, in fact, leave you with an extra $183,000.

[tomsang]

I updated the spreadsheet I created to show you how it works. 

As Tomtx mentioned you can eliminate some variables.  IE the house.  The house remains on both sides of the equation.  To make things simpler I would also eliminate the 20% down payment and just focus on the mortgage as the 80% is the only part that could be invested and the 20% is paying down the mortgage under both scenarios.

Under the Input page, note that I have it set up at a 4% investment return.  Go next to the answer by month.  Note that Column L shows 0 net benefit as the 4% invest rate is the same as the mortgage rate. 

Now go back to the Input sheet.  Input an investment rate.  I believe you were using 7%.  You will see on the Answer By Month Page Column L line 366 the benefit of keeping your mortgage for 360 months or 30 years is $182,309 if you can get a 7% return while having a 4% fixed rate mortgage.  You can play around with the Input sheet on what you want to use for variable, but it show that if you can get an investment return that is greater than your Mortgage Rate  then mathematically you are better off.

Let me know if this helps or confuses the situation.  When it comes down to it if you are assuming a 7% investment rate and have a 4% mortgage, then it is logical to put more dollars in the bucket that is earning the higher yield.

Good luck! 


[Mod Edit: Attachment removed.  Updated one two posts down.]

[arebelspy]

It has a broken link to another mortgage sheet it references.

[tomsang]

Updated links.  The links weren't effecting the calcs, just leftovers from me trying to reuse calcs from the previous spreadsheet.  Let me know if anything is funny!

[TomTX]

Ah, I see how that is double subtracting interest in scenario B. However, I don't think you can ignore the potential added investment of $382 from cash purchase date until retirement, and then its growth during the time we would have had a loan. So, perhaps the actual gains in each situation (house being equal in both scenarios and removed from the calculations) is Scenario A is $177k and Scenario B  is $183k.

Still wrong. Either there is NO "potential added investment" or you do it in both scenarios.

The (expected) increases in the $80k loan money you invest are paying the principal and interest on the loan.

There is NO justification to add magic outside money or "added investment" for the no-mortgage scenario.

Seriously. The difference in the scenarios is over $180,000 for "mortgage" with your stated parameters.

[BooksAreNerdy]

Holy balls, I understand! Thank you for the light bulb. I totally get it. The 'budget' stays the same, the money for the house/mortgage only comes from that lump sum. Why was I making that so complicated?!


OK, so how does it actually work to USE that investment? It goes into a taxable acct, then is it best to not touch it for a year so the gains become long term gains? Or is it like a Roth, where your contributions and gains are treated differently? Would I just make a monthly draw from the taxable acct or an annual draw? How will taxes on this acct effect the end value? We plan to be in a low enough tax bracket in retirement for capital gains to be at 0%. When I play around with the turbo tax tool, it looks like, we might somehow be in the 15% tax bracket right now since we max out 401k and IRAs. So, does that meann that it is possible for that whole 80k investment to grow tax free?

[Patrick A]

What an amazingly awesome thread.  Lots of great arguments and math, as well as some very emotionally (and mathematically) unstable ones too.  I actually just posted a thread about this exact topic and quickly deleted it because of the great discussion and answers provided here.  Thank you to all of the contributors!

My only question:  I am 26 with my super padded worst case FI date sometime in the next 10 years.  I am looking at buying a house very soon and considering mortgage length.  With 15 year at 3.2% and 30 year at 4.1%, should I go for a 30 year or 15 year?  I can guess the answer based on my reading of this thread and many others, but would love to hear some input and reasoning from others.

Thanks

[arebelspy]

Holy balls, I understand! Thank you for the light bulb. I totally get it. The 'budget' stays the same, the money for the house/mortgage only comes from that lump sum. Why was I making that so complicated?!

Absolutely, great way to think of it.  Your budget doesn't go up with a mortgage - your budget is the same, and the mortgage payment comes out of the higher investment money you have from not paying off the mortgage.

OK, so how does it actually work to USE that investment?

Treat it no differently than the rest of your investments.  You can think of it as a separate bucket if it helps you, but optimize your strategy/AA/tax efficiency with your WHOLE portfolio, that included.

[tomsang]

tomsang,

I wanted to thank you for this thread.  After a fairly thorough review of the numbers you provided throughout this thread (others as well - especially the concept of the mortgage as bond portion of one's retirement), we are refinancing from a 15 year loan into a 30 year loan and reinvesting the difference from the monthly mortgage payment.  It actually allows us to top off our pretax savings as an added bonus.  We are completing this now as the rates are super low and we have a lot of confidence in our plan, in part, based on information in this thread.

Thank you mmm community and especially tomsang!

Thanks for joining in on the discussions.  My goal is for people to understand why they are doing what they are doing, vs. the simplistic debt is evil and must be eliminated approach.  If after the discussion they choose to pay down their mortgage, then I am good with that if it is based on understanding the various variables.  A lot of people focus on one side of the equation - Saving Mortgage Interest vs. looking at both sides of the equation.  I am glad that the forum provided you a different perspective.  Enjoy those amazing 30 year fixed rates.  What rate did you get?         

[Mr Mark]

Once FI though, at low income levels (<$35k)  there may be tax advantage owning where you live, as the 'avoided rent' or mortgage payment, has to come from post tax income, whereas that free rent you get by owning is not declared income, so is effectively paid pretax.

It could also allow you to have a lower declared income for tax purposes, and hence gain tax credits and health insurance subsidies you wouldn't get if you had a mortgage and had to decalre and pay tax on that income draw from the stash. It could impact your capital gains tax, and tax paid paid on ordinary dividends perhaps.

In accumulation mode, or a significant earned income to declare,  I agree a fixed rate 30 yr deal is the way to go. You can always pay it off early at no fee anyway!

[BooksAreNerdy]

But wouldn't pulling out the lump sum to pay off the mortgage increase your income a HUGE amount for that year and trigger a ton owed in taxes?

[TomTX]

But wouldn't pulling out the lump sum to pay off the mortgage increase your income a HUGE amount for that year and trigger a ton owed in taxes?

Might take a couple of years, but you're only paying 15% on income up to ~$74,000 for a married couple. Plus $20,000 in standard deduction + exemptions.

[ender]

Once FI though, at low income levels (<$35k)  there may be tax advantage owning where you live, as the 'avoided rent' or mortgage payment, has to come from post tax income, whereas that free rent you get by owning is not declared income, so is effectively paid pretax.

The opposite is true, you would have been better off having invested the extra money during your working and higher income years, so when you pull it out (either with traditional 401k/IRA counting as income or capital gains) you are paying a lower marginal rate on the money.

It could also allow you to have a lower declared income for tax purposes, and hence gain tax credits and health insurance subsidies you wouldn't get if you had a mortgage and had to decalre and pay tax on that income draw from the stash. It could impact your capital gains tax, and tax paid paid on ordinary dividends perhaps.

This could be true, but you also must figure the additional costs of paying off the mortgage and either losing tax advantaged space or tax free growth on taxable accounts (given where long term capital gains taxes are if someone is FI they have a lot of 0% capital gains space each year).

In accumulation mode, or a significant earned income to declare,  I agree a fixed rate 30 yr deal is the way to go. You can always pay it off early at no fee anyway!

Financially it's always the best option unless you expect the long term market to be worse than your interest rate (adjusted slightly if you are able to itemize interest).

If you are choosing to forgo tax advantaged space (especially non-Roth options) for the sake of paying off the mortgage it becomes even worse financially, especially for those planning any type of ER.

[Kevin Aster Tin Obin]

Found an interesting result in mortgage payoff spreadsheet...

For a rental property, If one pays off the note, the fire date is months to years earlier..   This would be different near the end of a 30 year mortgage when the payoff date is in sight, but if only a few years in, why not payoff the mortgage, increase monthly cashflow, and be closer to FIRE than if just continued saving... 

ready for anyone to poke holes in my math..

[arebelspy]

Found an interesting result in mortgage payoff spreadsheet...

For a rental property, If one pays off the note, the fire date is months to years earlier..   This would be different near the end of a 30 year mortgage when the payoff date is in sight, but if only a few years in, why not payoff the mortgage, increase monthly cashflow, and be closer to FIRE than if just continued saving... 

ready for anyone to poke holes in my math..

The question is: what is the alternative to paying off that debt?  If you can invest it at a higher rate, you can FIRE earlier than you would if you paid it off, because the investment will pay that debt service + give you extra cash flow for living expenses.

Read Scenario 2 in MMM's post here: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

That applies to rentals as well as primary.

By getting more rentals with that money you're using to pay off your first rentals, assuming the ROI is greater than the mortgage rate, you'll FIRE earlier.

[arebelspy]

Re-read that scenario 2 a few times and make sure you understand every part of the math of it.

Now let's look at your scenario from your spreadsheet.

First of all, that's a pretty mediocre rental numbers-wise.  Unless the "monthly cash flow" is net after expenses, and the gross is more like double that.  EDIT: That appears to be cash flow after paying the mortgage, based on row 12, so it's actually not bad at all, it's actually really high, 17k net annual profit. Is that a typo in row 12? /END EDIT

But let's assume you take that 165k you could use to pay off the rental and instead put them as down payments on 4 other rentals at ~40k each that cash flow $4800 each annually after expenses and debt service (say, purchase price of 160k each, putting down 25%, 120k loan at 4.4%, gross rents 1800/mo, net 1000 after expenses minus P&I of $600/mo = 400/mo cash flow = 4800 annually).

Option 1: Use 165k to pay off mortgage.  Gain $830/mo to your cash flow due to not having P&I any more.

Option 2: You use the 165k to buy 4 properties as described.  Gain 1600 to your monthly cash flow (and you get all the extra appreciation benefits, depreciation tax benefits, principal paydown, etc. that you don't get in scenario 1 that I'm completely ignoring but also makes it WAY better).

Gaining 1600/mo rather than 830/mo will let you FIRE way sooner. In fact, if we put that in your spreadsheet, let's see what you get.

If we change "holding mortgage" to "buying more", stache amount is 85k, adjusted spending after rental income is now (original 18.6k - new 4800 x 4 = 19200 negative.  I.e. You're already FIRE!  (You spend 36k annually, bring in 17400 from your rental 1, bring in 19.2k from the new rentals, and you don't need any more income, you use the 85k you have left as cash reserves).

In option 2 you are much more leveraged, which adds risk, you have more properties to manage, etc. etc.  There are certainly downsides to scenario 2.

But my point wasn't to address leverage versus not, but just your math that paying off a mortgage reduces your time to FIRE.  It doesn't, if you have a better place for that money.  If you want FIRE as fast as possible, paying off low interest mortgages is not the way to go.  Cheap leverage is, especially if it's on something that cash flows well and so you don't need to worry too much if the paper value dips.

[tomsang]

Interesting article on whether to payoff your mortgage. I think it says that if you are mustachian that you should keep your mortgage. If you buy high and sell low than you should pay off your mortgage.

http://www.fool.com/how-to-invest/personal-finance/credit/2014/09/14/should-you-pay-off-a-mortgage-early-the-answer-may.aspx

[arebelspy]

Interesting article on whether to payoff your mortgage. I think it says that if you are mustachian that you should keep your mortgage. If you buy high and sell low than you should pay off your mortgage.

http://www.fool.com/how-to-invest/personal-finance/credit/2014/09/14/should-you-pay-off-a-mortgage-early-the-answer-may.aspx

That's actually not a bad point - the average investor has earned 2.5%, so most people should pay off their homes, as they'll have mortgages higher than that.  A buy and hold indexer, however, should probably expect quite a bit better than that.

The problem is that no one thinks they're the average investor, so this point of view will help almost no one.

Here's the groups of people:
1) People who think they can't beat the market, so they index.  They, reading this article, then will conclude they shouldn't pay it off.
2) People who think they can beat the market.  They, looking at average market returns, will conclude they shouldn't pay it off.

I don't think there's hardly anyone out there going "well I invest and consistently am bad at it, but am going to keep doing it, but I'll pay off my mortgage so I don't suck quite as much."

In other words, people who already accept they can't beat the market shouldn't pay it off, and people who don't accept that think  they're above average, by definition, so looking at how the average investor should pay it off doesn't help.

:)

[foobar]

Interesting article on whether to payoff your mortgage. I think it says that if you are mustachian that you should keep your mortgage. If you buy high and sell low than you should pay off your mortgage.

http://www.fool.com/how-to-invest/personal-finance/credit/2014/09/14/should-you-pay-off-a-mortgage-early-the-answer-may.aspx

That's actually not a bad point - the average investor has earned 2.5%, so most people should pay off their homes, as they'll have mortgages higher than that.  A buy and hold indexer, however, should probably expect quite a bit better than that.

I am a bit suspect of the 2.5% number (can't find the report where it comes from). It looks like the number that a financial asset management firm would through out to encourage you to invest with them. And if JP Morgan clients are only making 2.5%, I don't think they would be advertising that:)

[arebelspy]

Interesting article on whether to payoff your mortgage. I think it says that if you are mustachian that you should keep your mortgage. If you buy high and sell low than you should pay off your mortgage.

http://www.fool.com/how-to-invest/personal-finance/credit/2014/09/14/should-you-pay-off-a-mortgage-early-the-answer-may.aspx

That's actually not a bad point - the average investor has earned 2.5%, so most people should pay off their homes, as they'll have mortgages higher than that.  A buy and hold indexer, however, should probably expect quite a bit better than that.

I am a bit suspect of the 2.5% number (can't find the report where it comes from). It looks like the number that a financial asset management firm would through out to encourage you to invest with them. And if JP Morgan clients are only making 2.5%, I don't think they would be advertising that:)

http://www.businessinsider.com/typical-investor-returns-20-years-2014-8

Read the small print under the chart for how they calculated average asset allocation investor return.