### Author Topic: Personal Case Study [Split from Investment Order Thread]"  (Read 2935 times)

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##### Personal Case Study [Split from Investment Order Thread]"
« on: June 12, 2018, 09:21:02 AM »
MOD NOTE: Split this from the investment order sticky thread.

Why it is likely better to invest instead of paying a low interest rate mortgage early, if you have a long time until the mortgage is due:

I have been going back and forth with this conundrum for a while now and can't quite figure out the best way forward:

I have a 30 year mortgage (chosen so i had flexibility to pay off early or invest depending on circumstances as they evolve) at 3.75%. My worst case scenario is to retire in 15 years, so all my calculations are based on where i will be financially in 15 years. Using a compound interest calculator and predicting a 5.5% rate for VTSMX over that 15 year period, here are the scenarios i came up with:

1. Put \$5083/month into 401k/457b/403b/IRA's and 0 extra towards mortgage principal = \$1, 507, 966 with a remaining mortgage balance of \$256, 635
2. Put 3083/month into 401k/457b/403b/IRA's and \$2000 extra towards mortgage principal = \$1, 225, 997* with a remaining mortgage balance of \$0

*My mortgage is payed off in 11 years, meaning i would put an extra \$4000 a month into 401k/457b/403b/IRA's for the final 4 years, which really bumps this number up at the end.

So i have a couple of main issues with scenario 1:

1. I still have a mortgage balance of \$256, 635 - if i retire, then my annual spending in order to pay this off for another 15 years is going to be exponentially higher - putting my in higher tax brackets for these 15 years
2. Scenario two guarantees savings of \$182, 564 on mortgage interest, and allows my retirement portfolio more strength in that i'm not putting all my eggs in the VTSMX basket

Everyone's circumstances are different yes, but am i missing something here MDM that makes it an automatic thing for you to suggest that ignoring the "lower interest" but guaranteed mortgage savings in favor of higher predicted interest in the stock market is always the best route?

Welcome all Mustachian takes here!
« Last Edit: January 14, 2019, 05:20:05 PM by arebelspy »

#### MDM

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #1 on: June 12, 2018, 11:19:33 AM »
I have a 30 year mortgage (chosen so i had flexibility to pay off early or invest depending on circumstances as they evolve) at 3.75%. My worst case scenario is to retire in 15 years, so all my calculations are based on where i will be financially in 15 years. Using a compound interest calculator and predicting a 5.5% rate for VTSMX over that 15 year period, here are the scenarios i came up with:

1. Put \$5083/month into 401k/457b/403b/IRA's and 0 extra towards mortgage principal = \$1, 507, 966 with a remaining mortgage balance of \$256, 635
2. Put 3083/month into 401k/457b/403b/IRA's and \$2000 extra towards mortgage principal = \$1, 225, 997* with a remaining mortgage balance of \$0

*My mortgage is payed off in 11 years, meaning i would put an extra \$4000 a month into 401k/457b/403b/IRA's for the final 4 years, which really bumps this number up at the end.

So i have a couple of main issues with scenario 1:

1. I still have a mortgage balance of \$256, 635 - if i retire, then my annual spending in order to pay this off for another 15 years is going to be exponentially higher - putting my in higher tax brackets for these 15 years
2. Scenario two guarantees savings of \$182, 564 on mortgage interest, and allows my retirement portfolio more strength in that i'm not putting all my eggs in the VTSMX basket

Everyone's circumstances are different yes, but am i missing something here MDM that makes it an automatic thing for you to suggest that ignoring the "lower interest" but guaranteed mortgage savings in favor of higher predicted interest in the stock market is always the best route?
With scenario 1, it takes ~\$22,400/yr to pay \$256,635 over 15 years at 3.75%.  That may or may not put one in a higher tax bracket, and also may or may not affect premium tax credits, Medicare premiums, etc.  One should always look at one's individual circumstances, as even a general rule that applies to 90% leaves 10% to whom it doesn't apply.

Both scenario 1 and 2 have the same total monthly amount: \$5083.  Are you assuming that is pre-tax (in which case the amount going toward the mortgage principal is less than \$2000/mo) or after tax (in which case the invested money is going into Roth or taxable accounts), or some of each?

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #2 on: June 13, 2018, 10:39:33 AM »
I have a 30 year mortgage (chosen so i had flexibility to pay off early or invest depending on circumstances as they evolve) at 3.75%. My worst case scenario is to retire in 15 years, so all my calculations are based on where i will be financially in 15 years. Using a compound interest calculator and predicting a 5.5% rate for VTSMX over that 15 year period, here are the scenarios i came up with:

1. Put \$5083/month into 401k/457b/403b/IRA's and 0 extra towards mortgage principal = \$1, 507, 966 with a remaining mortgage balance of \$256, 635
2. Put 3083/month into 401k/457b/403b/IRA's and \$2000 extra towards mortgage principal = \$1, 225, 997* with a remaining mortgage balance of \$0

*My mortgage is payed off in 11 years, meaning i would put an extra \$4000 a month into 401k/457b/403b/IRA's for the final 4 years, which really bumps this number up at the end.

So i have a couple of main issues with scenario 1:

1. I still have a mortgage balance of \$256, 635 - if i retire, then my annual spending in order to pay this off for another 15 years is going to be exponentially higher - putting my in higher tax brackets for these 15 years
2. Scenario two guarantees savings of \$182, 564 on mortgage interest, and allows my retirement portfolio more strength in that i'm not putting all my eggs in the VTSMX basket

Everyone's circumstances are different yes, but am i missing something here MDM that makes it an automatic thing for you to suggest that ignoring the "lower interest" but guaranteed mortgage savings in favor of higher predicted interest in the stock market is always the best route?
With scenario 1, it takes ~\$22,400/yr to pay \$256,635 over 15 years at 3.75%.  That may or may not put one in a higher tax bracket, and also may or may not affect premium tax credits, Medicare premiums, etc.  One should always look at one's individual circumstances, as even a general rule that applies to 90% leaves 10% to whom it doesn't apply.

Both scenario 1 and 2 have the same total monthly amount: \$5083.  Are you assuming that is pre-tax (in which case the amount going toward the mortgage principal is less than \$2000/mo) or after tax (in which case the invested money is going into Roth or taxable accounts), or some of each?

See attachment for my full workings when i was drawing up simplistic scenarios - in my initial post i did neglect to add the extra i would have after allowing for tax savings if putting \$5083 into tax deferred accounts - if i did also put that in there each month my 15 year figure would be \$1630, 336 (extra 120k).

As you can see I was also toying with paying off the mortgage balance at 15 years in a lump sum and assuming a worst case scenario where i withdrew the 256k from VTSMX and then paid all the tax for that year (which i wouldn't do - i was just trying to get both balances after 15 years show mortgage at 0 - again, thinking that being rid of the mortgage payment is needed at time of FI).

The NET number at the far right projects coming out better by paying off mortgage early (that sum is all greens added and all reds subtracted). Even if we didn't include this ludicrous tax bill for a lump sum pay off for the investment options (which would swing the best NET into the favor of the "invest first and ignore mortgage" side, the difference seems insignificant enough to make it really worthwhile investing everything, when you can get the guaranteed savings with option 2?

Happy to be told i'm not accounting for something - or my calcs are off

Appreciate all input.

#### MDM

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #3 on: June 13, 2018, 11:29:59 AM »
What is the original mortgage principal (apology if I missed it)?

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #4 on: June 13, 2018, 02:14:59 PM »
What is the original mortgage principal (apology if I missed it)?

You didn't miss it - 400k

Thanks

#### boarder42

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #5 on: June 13, 2018, 03:35:45 PM »
basic math says your calcs are off you cant come out behind if something is making more annually 5.5% vs 3.75% - also your calc is extrememly conservative as it sits. you're removing inflation from the investment returns and adding a conservative factor. and not from your mortgage your mortgage either increase your returns by 2-3% to account for inflation or subtract that from your mortgage payment annually since it will decrease with inflation and add it to whats available to invest.  the first is easier than the second.

maybe MDM will go thru your math but 5.5% > 3.75% so if you arent counting the tax hit to lump sum pay it off then your math is wrong.

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #6 on: June 13, 2018, 03:56:31 PM »
basic math says your calcs are off you cant come out behind if something is making more annually 5.5% vs 3.75% - also your calc is extrememly conservative as it sits. you're removing inflation from the investment returns and adding a conservative factor. and not from your mortgage your mortgage either increase your returns by 2-3% to account for inflation or subtract that from your mortgage payment annually since it will decrease with inflation and add it to whats available to invest.  the first is easier than the second.

maybe MDM will go thru your math but 5.5% > 3.75% so if you arent counting the tax hit to lump sum pay it off then your math is wrong.

Yeah - it's not as simple as just 5.5% versus 3.75% tho - paying the mortgage early means for 4 out of the 15 years, i would have an extra 4k per month to throw into the investment portfolio, and that really catches it up in those 4 years to be not far off...

I take your point on inflation factors not being considered both ways which would likely increase the gap - and yes the 5.5 is somewhat conservative - but that's my personality :) - I'm just not sure there's enough of a gap between the two scenarios to not stick with the one that has the GUARANTEED savings

Thanks for your input

#### MDM

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #7 on: June 13, 2018, 05:32:17 PM »
I have a 30 year mortgage (chosen so i had flexibility to pay off early or invest depending on circumstances as they evolve) at 3.75%. My worst case scenario is to retire in 15 years, so all my calculations are based on where i will be financially in 15 years. Using a compound interest calculator and predicting a 5.5% rate for VTSMX over that 15 year period, here are the scenarios i came up with:

1. Put \$5083/month into 401k/457b/403b/IRA's and 0 extra towards mortgage principal = \$1, 507, 966 with a remaining mortgage balance of \$256, 635
2. Put 3083/month into 401k/457b/403b/IRA's and \$2000 extra towards mortgage principal = \$1, 225, 997* with a remaining mortgage balance of \$0

Minimum monthly payment for a \$400K, 30 year, 3.75% mortgage is \$1852.46.

If one has \$5083/mo available pre-tax, beyond what is need for the mortgage, and we assume a 22% tax rate, that's a total of \$1852.46/(1-22%) + \$5083 = \$7457.95/mo available pre-tax.

1. If all \$5083 goes into a 401k, after 180 months the 401k will have \$1,416,864 and the mortgage balance will be \$254,731 (based on Excel's FV function).
2. If \$3083 goes into a 401k, \$1560 is available for extra loan payments.  After 180 months the 401k will have \$1,018,882 and the mortgage balance will be \$0.  There is a small mortgage payment in month 147, leaving a \$0 mortgage balance.  Months 148 through 180 have the full \$7457.95 going to the 401k.

Following scenario 1, if one then withdraws \$1852.46 / (1-22%) = \$2374.95 each month from the \$1,416,864, after 180 more months the mortgage will be paid and the account will have \$2,565,019.

Following scenario 2, after 180 more months (of course the mortgage has already been paid) the account will have \$2,320,589.

The assumption of 22% tax on withdrawal - the same as the tax assumed while accumulating - is the most conservative for pre-tax saving.  If one expects to pay a higher rate on withdrawal, Roth should instead be used.

It really does boil down to the assumed investment return vs. the mortgage rate.  Money should be directed at whichever is higher.

Does that make sense?

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #8 on: June 14, 2018, 07:56:07 AM »

Following scenario 1, if one then withdraws \$1852.46 / (1-22%) = \$2374.95 each month from the \$1,416,864, after 180 more months the mortgage will be paid and the account will have \$2,565,019.

Following scenario 2, after 180 more months (of course the mortgage has already been paid) the account will have \$2,320,589.

The assumption of 22% tax on withdrawal - the same as the tax assumed while accumulating - is the most conservative for pre-tax saving.  If one expects to pay a higher rate on withdrawal, Roth should instead be used.

It really does boil down to the assumed investment return vs. the mortgage rate.  Money should be directed at whichever is higher.

Does that make sense?

Sure does - obviously it comes down to "predicted return versus guaranteed" - my main point was that, as i started to do the calcs based on your original recommendation that investing was a better option that paying off mortgage, i had expected the numbers to come out more heavily in favor of "putting all eggs in one basket" and ignoring the lower mortgage payments. Even after your calcs here, i'm not sure a difference of 240k (after 15 years) in favor of the "riskier" option makes it worthwhile.

Based on these numbers you highlighted http://allfinancialmatters.com/wp-content/uploads/2013/08/SandP500_5-Year_Rolling_Returns_with-CPI_calendar_year.pdf there are 15 year periods that are not great (e.g 98-2008). We have a live-wire president that doesn't seem to give anything much thought right now - this increases the chances he does something the market hasn't ever seen before so seems like it's potentially more volatile that ever for the next 2.5 years at least.

Hedging with the guaranteed interest savings on the mortgage will help me sleep better at night for now, i think.....

Thanks for brainstorming with me tho!

#### MDM

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #9 on: June 14, 2018, 08:36:13 AM »
...i'm not sure a difference of 240k (after 15 years) in favor of the "riskier" option makes it worthwhile.
We all have our own internal measures of worth.

Others will sleep better at night with the thought of having that extra \$240K - or more, should investment returns be closer to historical norms - and how many years that might reduce time to FI.

As the saying goes, YMMV.  And this is another good reason the investment order is "guidelines, not rules." :)

#### boarder42

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #10 on: June 14, 2018, 05:38:15 PM »

Following scenario 1, if one then withdraws \$1852.46 / (1-22%) = \$2374.95 each month from the \$1,416,864, after 180 more months the mortgage will be paid and the account will have \$2,565,019.

Following scenario 2, after 180 more months (of course the mortgage has already been paid) the account will have \$2,320,589.

The assumption of 22% tax on withdrawal - the same as the tax assumed while accumulating - is the most conservative for pre-tax saving.  If one expects to pay a higher rate on withdrawal, Roth should instead be used.

It really does boil down to the assumed investment return vs. the mortgage rate.  Money should be directed at whichever is higher.

Does that make sense?

Sure does - obviously it comes down to "predicted return versus guaranteed" - my main point was that, as i started to do the calcs based on your original recommendation that investing was a better option that paying off mortgage, i had expected the numbers to come out more heavily in favor of "putting all eggs in one basket" and ignoring the lower mortgage payments. Even after your calcs here, i'm not sure a difference of 240k (after 15 years) in favor of the "riskier" option makes it worthwhile.

Based on these numbers you highlighted http://allfinancialmatters.com/wp-content/uploads/2013/08/SandP500_5-Year_Rolling_Returns_with-CPI_calendar_year.pdf there are 15 year periods that are not great (e.g 98-2008). We have a live-wire president that doesn't seem to give anything much thought right now - this increases the chances he does something the market hasn't ever seen before so seems like it's potentially more volatile that ever for the next 2.5 years at least.

Hedging with the guaranteed interest savings on the mortgage will help me sleep better at night for now, i think.....

Thanks for brainstorming with me tho!

So you're choosing to market time and saying 240k in 15 years isn't that much money while also assuming you will have lower risk paying down a mortgage. I hate to break it to ya but unless you pay that whole thing off you're at greater risk than if you invested. You lose your job and your paying down the mortgage.  You're in rough shape. Lose it and you've been investing and you're in much better shape. Fear of the market going down due to the conditions you've stated is a recipe for disaster in your life. You had best educate yourself on the market and how in functions vs emotionally trying to time it and making a decision you think decreases risk to sleep better at night when you're actually increasing your risk.

#### boarder42

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #11 on: June 14, 2018, 05:39:36 PM »
Add that to the fact your foregoing tax advantaged savings possibly to do this and it makes it miles worse.

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #12 on: June 15, 2018, 07:35:10 AM »

Following scenario 1, if one then withdraws \$1852.46 / (1-22%) = \$2374.95 each month from the \$1,416,864, after 180 more months the mortgage will be paid and the account will have \$2,565,019.

Following scenario 2, after 180 more months (of course the mortgage has already been paid) the account will have \$2,320,589.

The assumption of 22% tax on withdrawal - the same as the tax assumed while accumulating - is the most conservative for pre-tax saving.  If one expects to pay a higher rate on withdrawal, Roth should instead be used.

It really does boil down to the assumed investment return vs. the mortgage rate.  Money should be directed at whichever is higher.

Does that make sense?

Sure does - obviously it comes down to "predicted return versus guaranteed" - my main point was that, as i started to do the calcs based on your original recommendation that investing was a better option that paying off mortgage, i had expected the numbers to come out more heavily in favor of "putting all eggs in one basket" and ignoring the lower mortgage payments. Even after your calcs here, i'm not sure a difference of 240k (after 15 years) in favor of the "riskier" option makes it worthwhile.

Based on these numbers you highlighted http://allfinancialmatters.com/wp-content/uploads/2013/08/SandP500_5-Year_Rolling_Returns_with-CPI_calendar_year.pdf there are 15 year periods that are not great (e.g 98-2008). We have a live-wire president that doesn't seem to give anything much thought right now - this increases the chances he does something the market hasn't ever seen before so seems like it's potentially more volatile that ever for the next 2.5 years at least.

Hedging with the guaranteed interest savings on the mortgage will help me sleep better at night for now, i think.....

Thanks for brainstorming with me tho!

So you're choosing to market time and saying 240k in 15 years isn't that much money while also assuming you will have lower risk paying down a mortgage. I hate to break it to ya but unless you pay that whole thing off you're at greater risk than if you invested. You lose your job and your paying down the mortgage.  You're in rough shape. Lose it and you've been investing and you're in much better shape. Fear of the market going down due to the conditions you've stated is a recipe for disaster in your life. You had best educate yourself on the market and how in functions vs emotionally trying to time it and making a decision you think decreases risk to sleep better at night when you're actually increasing your risk.

The 240k is assuming the market continues along "historical norms" - if the market has a bad 15 years from this point, and i havn't put anything towards the guaranteed mortgage savings, then it's exponentially worse than if the market does great for 15 years and i have the guaranteed mortgage savings. One scenario opens it up for everything to go fubar, the other protects against it and is "hedging".

I would argue it's somewhat ignorant to blindly throw everything into the scenario that you have no control over (market returns), simply because of what has happened in the past - the bubble has (very recently) burst, and can quite easily do it again. If that happens a couple years before planned FI and i still have the mortgage balance at that time, then i am stuck working to pay that off. If it bursts and i have 0 mortgage balance, i have more options as there's less bills to pay.

By all means, if there is some magic market knowledge you can throw at me, then go ahead - but so far from what i know about it, the most important factor is to respect the fact that you cannot control or predict it.

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #13 on: June 15, 2018, 07:39:55 AM »
Add that to the fact your foregoing tax advantaged savings possibly to do this and it makes it miles worse.

The 240k number included reinvesting the tax savings into the market over the 15 years - i had expected the 240k to be much higher because of this but because with paying off the mortgage it was gone after 11 years it allowed 4 years of additional market contributions each month of \$4000 - this allowed it to catch up pretty fast to get to the 240k number despite the extra tax during that time.

#### boarder42

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #14 on: June 15, 2018, 08:03:09 AM »
Add that to the fact your foregoing tax advantaged savings possibly to do this and it makes it miles worse.

The 240k number included reinvesting the tax savings into the market over the 15 years - i had expected the 240k to be much higher because of this but because with paying off the mortgage it was gone after 11 years it allowed 4 years of additional market contributions each month of \$4000 - this allowed it to catch up pretty fast to get to the 240k number despite the extra tax during that time.

240k is a quarter 25% of a 1MM dollar stache that most aspire to here.  would you FIRE with 750k? and spend 40k ? probably not so why not take an easy bet on coming out ahead.

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #15 on: June 15, 2018, 09:29:28 AM »
Add that to the fact your foregoing tax advantaged savings possibly to do this and it makes it miles worse.

The 240k number included reinvesting the tax savings into the market over the 15 years - i had expected the 240k to be much higher because of this but because with paying off the mortgage it was gone after 11 years it allowed 4 years of additional market contributions each month of \$4000 - this allowed it to catch up pretty fast to get to the 240k number despite the extra tax during that time.

240k is a quarter 25% of a 1MM dollar stache that most aspire to here.  would you FIRE with 750k? and spend 40k ? probably not so why not take an easy bet on coming out ahead.

Because it's not an easy bet - it's only an easy bet if you have seen the future and know for certain that the market will pay out at least 5.5% during that 15 year span. I am GUARANTEED to save 180k on mortgage interest with the hedging option. With that guaranteed savings it protects against the "catastrophe" option that exists if the market doesn't do what it's supposed to - if the market does fantastic then great, i have some money in there that is benefiting from that plus the guaranteed mortgage savings - that scenario still results in FI versus all eggs in one basket creates a scenario that potentially eliminates FI.

With the mortgage gone after 11 years it also allows me to decide what i do with the extra \$4k for the latter 4 years - put more into the market or invest in a rental property etc. More flexibility and diversification.

#### boarder42

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #16 on: June 15, 2018, 09:41:43 AM »
Add that to the fact your foregoing tax advantaged savings possibly to do this and it makes it miles worse.

The 240k number included reinvesting the tax savings into the market over the 15 years - i had expected the 240k to be much higher because of this but because with paying off the mortgage it was gone after 11 years it allowed 4 years of additional market contributions each month of \$4000 - this allowed it to catch up pretty fast to get to the 240k number despite the extra tax during that time.

240k is a quarter 25% of a 1MM dollar stache that most aspire to here.  would you FIRE with 750k? and spend 40k ? probably not so why not take an easy bet on coming out ahead.

Because it's not an easy bet - it's only an easy bet if you have seen the future and know for certain that the market will pay out at least 5.5% during that 15 year span. I am GUARANTEED to save 180k on mortgage interest with the hedging option. With that guaranteed savings it protects against the "catastrophe" option that exists if the market doesn't do what it's supposed to - if the market does fantastic then great, i have some money in there that is benefiting from that plus the guaranteed mortgage savings - that scenario still results in FI versus all eggs in one basket creates a scenario that potentially eliminates FI.

With the mortgage gone after 11 years it also allows me to decide what i do with the extra \$4k for the latter 4 years - put more into the market or invest in a rental property etc. More flexibility and diversification.

its a very easy bet why?

b/c the bet you're making with FIRE is that the future will be like the past thats how the 4% SWR came to be.

so if the future is like the past you're making a bet with about a 1% or less chance of coming true by betting paying down your mortgage that has a low fixed interest rate.  The odds that you hit the correct pay off window that your mortgage paydown beats investing especially tax advantaged investing is incredibly small -

flexibility comes from not having money tied up in a fixed asset it comes from having liquid(invested) where you can do whatever you want with it this freedom you speak of after you have paid off your mortgage is at a sacrafice of freedom now for what is likely to be a bad move.

you're looking at this from a very emotional side and not looking at statistical probability.  If you're that concerned that the markets cant beat your mortgage rate how comfortable are you going to be in FIRE - you'll need to go all the way down to a 1-2% SWR with the logic you're applying to paying down a mortgage.

you're also being conservative as hell with 5.5% turning out the 240k you are basically just skewing the data so far from statistical norms to try to prove a belief you want to prove.  Thats fine its just not how i choose to look at an analyze data.

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #17 on: June 15, 2018, 03:30:06 PM »
Add that to the fact your foregoing tax advantaged savings possibly to do this and it makes it miles worse.

The 240k number included reinvesting the tax savings into the market over the 15 years - i had expected the 240k to be much higher because of this but because with paying off the mortgage it was gone after 11 years it allowed 4 years of additional market contributions each month of \$4000 - this allowed it to catch up pretty fast to get to the 240k number despite the extra tax during that time.

240k is a quarter 25% of a 1MM dollar stache that most aspire to here.  would you FIRE with 750k? and spend 40k ? probably not so why not take an easy bet on coming out ahead.

Because it's not an easy bet - it's only an easy bet if you have seen the future and know for certain that the market will pay out at least 5.5% during that 15 year span. I am GUARANTEED to save 180k on mortgage interest with the hedging option. With that guaranteed savings it protects against the "catastrophe" option that exists if the market doesn't do what it's supposed to - if the market does fantastic then great, i have some money in there that is benefiting from that plus the guaranteed mortgage savings - that scenario still results in FI versus all eggs in one basket creates a scenario that potentially eliminates FI.

With the mortgage gone after 11 years it also allows me to decide what i do with the extra \$4k for the latter 4 years - put more into the market or invest in a rental property etc. More flexibility and diversification.

you're looking at this from a very emotional side and not looking at statistical probability.  If you're that concerned that the markets cant beat your mortgage rate how comfortable are you going to be in FIRE - you'll need to go all the way down to a 1-2% SWR with the logic you're applying to paying down a mortgage.

you're also being conservative as hell with 5.5% turning out the 240k you are basically just skewing the data so far from statistical norms to try to prove a belief you want to prove.  Thats fine its just not how i choose to look at an analyze data.

Ultimately both scenarios i presented get me to the number i need for 4% SWR after 15 years. The point I am making is the invest everything option has more of a chance to blow up than the invest 60% and pay off mortgage 40% option. I admit the mortgage option is more conservative - it is LIKELY that the 100% market option comes out ahead, but that option also has the chance to result in catastrophic failure. With the 40% towards mortgage option, there is a fail safe that the mortgage is gone if all else fails, and those payments no longer exist.

My scenarios were really meant to show that there is a risk/reward scale for all investment options, and the original post by MDM (which i do find most helpful) indicated it was always best to invest rather than pay down against the mortgage interest. I don't think it's that black and white.

I also admit the 100% market invest option does increase the chances that you reach your FI number earlier, and thus there is a benefit there that hasn't been factored in. Perhaps this makes it worth it to still have mortgage payments in FI - this has always just seemed counter-intuitive to me, and maybe part of it is also knowing that the bank is making \$\$\$ from me for 30 years.....

#### MDM

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##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #18 on: June 15, 2018, 04:52:38 PM »
Ultimately both scenarios i presented get me to the number i need for 4% SWR after 15 years.
If you are satisfied with that, taking the safer path is certainly defensible.

Quote
The point I am making is the invest everything option has more of a chance to blow up than the invest 60% and pay off mortgage 40% option. I admit the mortgage option is more conservative - it is LIKELY that the 100% market option comes out ahead, but that option also has the chance to result in catastrophic failure. With the 40% towards mortgage option, there is a fail safe that the mortgage is gone if all else fails, and those payments no longer exist.
Much, perhaps all, depends on the scenarios one imagines.  The likelihood of those scenarios will vary from person to person, as will the measure of success.

Quote
My scenarios were really meant to show that there is a risk/reward scale for all investment options, and the original post by MDM (which i do find most helpful) indicated it was always best to invest rather than pay down against the mortgage interest. I don't think it's that black and white.
Assumptions matter, because pretty much any conclusion can be supported if one's  assumptions are granted.  As noted in the original post,
"Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
(e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.

and
"these are guidelines not rules."

Quote
I also admit the 100% market invest option does increase the chances that you reach your FI number earlier, and thus there is a benefit there that hasn't been factored in. Perhaps this makes it worth it to still have mortgage payments in FI - this has always just seemed counter-intuitive to me, and maybe part of it is also knowing that the bank is making \$\$\$ from me for 30 years....
Paying interest to a bank has similarities to paying taxes to the IRS: one shouldn't focus on how much of each is paid, but rather how much is left over after those are paid.  E.g., in the traditional vs. Roth debate, a common Roth-favoring error is to compare amounts paid in taxes, ignoring the commutative property of multiplication.

#### boarder42

• Walrus Stache
• Posts: 9341
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #19 on: June 15, 2018, 06:51:37 PM »
I find it absolutely bat shit crazy you are ok with a 4% swr yet choose to use 5.5% returns when calculating the value of investing vs a mortgage.

Get over "paying the bank interest" it's a horribly awful statement when trying to make this decision.

That is all

• Stubble
• Posts: 108
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #20 on: June 18, 2018, 09:09:14 AM »
I find it absolutely bat shit crazy you are ok with a 4% swr yet choose to use 5.5% returns when calculating the value of investing vs a mortgage.

I really just took this http://allfinancialmatters.com/wp-content/uploads/2013/08/SandP500_5-Year_Rolling_Returns_with-CPI_calendar_year.pdf which has the average CPI adjusted return for the S&P 500 at 6.47% - taking 1% off to be extra conservative doesn't seem that BSC is it?

• Stubble
• Posts: 108
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #21 on: June 18, 2018, 09:18:19 AM »
Ultimately both scenarios i presented get me to the number i need for 4% SWR after 15 years.
If you are satisfied with that, taking the safer path is certainly defensible.

Indeed - defensible, just a bit conservative.

Quote
I also admit the 100% market invest option does increase the chances that you reach your FI number earlier, and thus there is a benefit there that hasn't been factored in. Perhaps this makes it worth it to still have mortgage payments in FI - this has always just seemed counter-intuitive to me, and maybe part of it is also knowing that the bank is making \$\$\$ from me for 30 years....
Paying interest to a bank has similarities to paying taxes to the IRS: one shouldn't focus on how much of each is paid, but rather how much is left over after those are paid.  E.g., in the traditional vs. Roth debate, a common Roth-favoring error is to compare amounts paid in taxes, ignoring the commutative property of multiplication.
[/quote]

Yes, i think part of my thinking also lies in not wanting to have my money stuck in a 403b and 401k till 59.5. I am maxing a 457b currently so i will have that available - but having a monthly mortgage payment at FI means that 457b account will start to diminish much faster.

I know there is the roth pipeline, which i've read over a couple times, but really have yet to get my head around exactly how it works and helps with this scenario.

#### MDM

• Senior Mustachian
• Posts: 10930
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #22 on: June 18, 2018, 09:33:46 AM »
Yes, i think part of my thinking also lies in not wanting to have my money stuck in a 403b and 401k till 59.5. I am maxing a 457b currently so i will have that available - but having a monthly mortgage payment at FI means that 457b account will start to diminish much faster.

I know there is the roth pipeline, which i've read over a couple times, but really have yet to get my head around exactly how it works and helps with this scenario.
The Roth pipeline starts with rolling the 401k/403b money into a traditional IRA, which may be done with no tax consequences at any time after leaving the 401k/403b employer.

Then, instead of having the money in a 401k/403b, you have it all in traditional IRAs.  Does that make the path to using it prior to age 59.5 clearer?

• Stubble
• Posts: 108
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #23 on: June 18, 2018, 02:21:20 PM »
Yes, i think part of my thinking also lies in not wanting to have my money stuck in a 403b and 401k till 59.5. I am maxing a 457b currently so i will have that available - but having a monthly mortgage payment at FI means that 457b account will start to diminish much faster.

I know there is the roth pipeline, which i've read over a couple times, but really have yet to get my head around exactly how it works and helps with this scenario.
The Roth pipeline starts with rolling the 401k/403b money into a traditional IRA, which may be done with no tax consequences at any time after leaving the 401k/403b employer.

Then, instead of having the money in a 401k/403b, you have it all in traditional IRAs.  Does that make the path to using it prior to age 59.5 clearer?

It sure does - it just seems too good to be true/too easy!

Yeah, some more detailed calcs required this week to take this into account.

Thanks

#### K-ice

• Pencil Stache
• Posts: 979
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #24 on: August 12, 2018, 11:50:14 PM »
Maybe someone from Canada will chime in with the equivalent of dump it into vtsax and forget about it but that's what I'd do while I was learning. Not pay higher fees in between.

The new VBAL or VGRO from Vanguard fill this role quite well.

I just found this thread and I was about to say the same thing.  Maybe even VCNS if you are more timid.

• Stubble
• Posts: 108
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #25 on: January 14, 2019, 11:00:35 AM »
Ok so this thread is super - and as a result i got the following plan in action for 2017:

1. 401k maxed out for wife's employer
2. Traditional IRA's maxed out for both of us
3. ESPP maxed out for wife's employer plan
4. HSA maxed out for wife's employer plan
5. FSA maxed out for my employer plan

I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth. This has also led me back to re-evaluating the rest of the retirement plan and looking for advice:

I have the option to contribute to a 403b or 457 through my employer, and hadn't considered this until i read the other post that talks about the IRA conversion pipeline that allows you to withdraw this penalty free - so my question is, should i also aim to max this out instead of what i have currently been doing (which is adding approx 18k per year to my principal mortgage*)?

* I must confess, that we are paying PMI of approx 2k per year on the mortgage as i was given some bad advice at the time of taking out our loan (my bad), so once i realized this, i became hell bent on removing it. In hindsight, this 18k per year could grow to cover the pmi and interest savings over the next 15 years (planned retirement date), so should i start putting this aside to get the tax savings (especially now that the ira conversion is possible with these two options)?

Thanks as always Mustacheville!

Hello again friends - so a year or so later our situation has changed a bit and I wanted to revisit the whole "to pay off or not to pay off the mortgage vs invest"

Here's the current scenario monthly:

\$1800 Mortgage Payments (30 years)
\$150 PMI (approx 15 k will be paid in PMI if nothing extra put to Mortgage)
\$1583 maxing out spouses 401k
\$1583 maxing out my 403b
\$1583 maxing out my 457b
\$483 going to HSA's/FSA's

\$433 going to ESPP stock plan
\$1000 going to 2 x Roth IRAs
\$700 undecided on invest in taxable VTSMX or pay off mortgage principle

So my question is - for these bottom 3 options where there is no immediate tax benefit, would i be better directing all of those payments at the Mortgage amount to remove PMI as a priority over these other accounts and then reassess once PMI is gone?

I've read the other posts on here about removing PMI but i'm struggling to work out how best to calculate what % intesret that PMI is costing me, and then compare it to the lost opportunity cost of investing whatever i put into VTSMX if i was to pay down some mortgage principal early. Is removing PMI a hair on fire emergency?

#### MDM

• Senior Mustachian
• Posts: 10930
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #26 on: January 14, 2019, 02:01:16 PM »
Is removing PMI a hair on fire emergency?
Not necessarily.  Depends on your circumstances.

Probably better if you start a separate thread for your particular situation.  Once you start it, you can provide a link to it from this thread.

#### robartsd

• Magnum Stache
• Posts: 3344
• Location: Sacramento, CA
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #27 on: January 14, 2019, 03:57:35 PM »
Hello again friends - so a year or so later our situation has changed a bit and I wanted to revisit the whole "to pay off or not to pay off the mortgage vs invest"

Here's the current scenario monthly:

\$1800 Mortgage Payments (30 years)
\$150 PMI (approx 15 k will be paid in PMI if nothing extra put to Mortgage)
\$1583 maxing out spouses 401k
\$1583 maxing out my 403b
\$1583 maxing out my 457b
\$483 going to HSA's/FSA's

\$433 going to ESPP stock plan
\$1000 going to 2 x Roth IRAs
\$700 undecided on invest in taxable VTSMX or pay off mortgage principle

So my question is - for these bottom 3 options where there is no immediate tax benefit, would i be better directing all of those payments at the Mortgage amount to remove PMI as a priority over these other accounts and then reassess once PMI is gone?

I've read the other posts on here about removing PMI but i'm struggling to work out how best to calculate what % intesret that PMI is costing me, and then compare it to the lost opportunity cost of investing whatever i put into VTSMX if i was to pay down some mortgage principal early. Is removing PMI a hair on fire emergency?
I don't think I'd consider foregoing the tax free growth of the Roth IRAs to remove PMI.

Since PMI only gets removed once you get your LTV below a threshold, why not invest until you have enough in your taxable accounts to lump sum PMI away?

• Stubble
• Posts: 108
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #28 on: January 14, 2019, 04:45:38 PM »
Hello again friends - so a year or so later our situation has changed a bit and I wanted to revisit the whole "to pay off or not to pay off the mortgage vs invest"

Here's the current scenario monthly:

\$1800 Mortgage Payments (30 years)
\$150 PMI (approx 15 k will be paid in PMI if nothing extra put to Mortgage)
\$1583 maxing out spouses 401k
\$1583 maxing out my 403b
\$1583 maxing out my 457b
\$483 going to HSA's/FSA's

\$433 going to ESPP stock plan
\$1000 going to 2 x Roth IRAs
\$700 undecided on invest in taxable VTSMX or pay off mortgage principle

So my question is - for these bottom 3 options where there is no immediate tax benefit, would i be better directing all of those payments at the Mortgage amount to remove PMI as a priority over these other accounts and then reassess once PMI is gone?

I've read the other posts on here about removing PMI but i'm struggling to work out how best to calculate what % intesret that PMI is costing me, and then compare it to the lost opportunity cost of investing whatever i put into VTSMX if i was to pay down some mortgage principal early. Is removing PMI a hair on fire emergency?
I don't think I'd consider foregoing the tax free growth of the Roth IRAs to remove PMI.

Since PMI only gets removed once you get your LTV below a threshold, why not invest until you have enough in your taxable accounts to lump sum PMI away?

Yes a good point - then a further calculation/prediction of returns vs extra taxes vs interest saved from the paying off of the mortgage needs to begin, and that's where i become befuddled once more :)

• Stubble
• Posts: 108
##### Re: Personal Case Study [Split from Investment Order Thread]"
« Reply #29 on: January 14, 2019, 05:04:23 PM »
Is removing PMI a hair on fire emergency?
Not necessarily.  Depends on your circumstances.

Probably better if you start a separate thread for your particular situation.  Once you start it, you can provide a link to it from this thread.

https://forum.mrmoneymustache.com/investor-alley/pay-off-pmi-is-hair-on-fire-emergency-versus-investing-in-taxable-accounts/

Right - our particular situation is we want to FIRE in 10 years. If we put that extra \$1700 a month from those bottom 3 accounts towards the mortgage we can have it paid in 10 years = no mortgage payments during retirement = lower cost of living and means the FIRE account should last longer in the long run.

Scenario 2 investing the \$1700 a month would have us up around \$250k in the FIRE fund but still 20 years of having those mortgage payments (an extra 21.6k or so per year coming out of that fund )

As robartsd's point suggests, we could just invest it all for 10 years and then payoff the mortgage in a lump sum when we fire to remove that mortgage payment at that point, but I can't get that equation to come out right at a projected 7% compounded, as it's not coming out significant enough to make me want to go with the non-guaranteed return of the full investing versus the guaranteed interest savings of getting rid of the mortgage. (we have around 62k in tax advantaged accounts each year so i've kinda hit the point where hedging to get rid of mortgage in addition to this seems like a sensible move)