Stop worrying about the 4% rule

[boarder42]

Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

[DreamFIRE]

My quality of work has gone way up since I started working less, I’ve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but it’s been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that don’t actually work out in their favour, especially if it compromises their health and family’s wellbeing.

Part time for me would be great.  I'm using vacation days almost every week for the rest of the summer, so it will feel like part time for a while.  If I could truly go part time after that, I would still be eligible for healthcare benefits if I worked at least 24 hours/wk.  The problem is that my position is budgeted for full time, and it's unique in that I do a lot of specialized IT work that no one else knows how to do, and I don't think part time will fly with my director, at least not for long.  And by merely mentioning my interest in going part time, it might be enough for them to have someone start training with me in fear that I might leave (and they would probably be proven right in less than a year).  That would be no surprise for them to have me start training someone else, whether a new or existing employee, because they had a second person in my position for over a year before he quit, and that was due to the workload.  That would suck to spend a lot of time training someone over the next year because I have my own peaceful office and am quite independent now, so I'm keeping the thought of part time work and FIRE close to the vest until much closer to my target date.  I'll decide then if I want to offer working part time.

[boarder42]

Every job can be replaced we're all not as critical as we think we are. If you do good work the conversation is worth having

[boarder42]

Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

My quality of work has gone way up since I started working less, I’ve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but it’s been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that don’t actually work out in their favour, especially if it compromises their health and family’s wellbeing.

I feel like the same will be true for me. Have to see how I like it. But a baby life event is the perfect time. My Dept manager is all about family 

[DreamFIRE]

Every job can be replaced we're all not as critical as we think we are. If you do good work the conversation is worth having

Yes, and I plan to have that conversation in the spring if all goes well, at the same time I state my intentions that I will retire otherwise.  At that point, I know without a doubt they would have me start training someone and possibly ask if I would continue working part time for a while until I can get someone up to speed, and that's OK at that point.  I just don't want to have to deal with training someone while working full time as early as October through next spring.  That would totally suck for my last 8 months of work, even more so if I don't FIRE on schedule for some reason.  Things are pretty nice at work the way they are now, so I want things to continue that way for now.

The job is critical requiring 24/7 availability in that what I do much of the time, no other staff in my dept. can do, but that's not to say that I personally can't be replaced.  But someone has to do it, and there is a lot to learn, even for experienced people, as I know from working with the last co-worker with the same job title for over a year before he quit, he still had a lot to learn and wasn't nearly as efficient in accomplishing tasks and projects.  I've been working this position for over 17 years, which has of course advanced with more complexities over the years, and it's not something someone can just step in and take over in an instant with the same efficiency.  So, I think I would have a good shot of staying on part time, although maybe only a day or two instead of 24 hr/wk with benefits, and who knows for what duration, due to labor budget.  There's no guarantee they'll keep me on part time if I offer in October or afterwards, so I'm playing it close to the vest until next spring when the alternative will be to go ahead and FIRE completely.

[Retire-Canada]

Part time for me would be great.  I'm using vacation days almost every week for the rest of the summer, so it will feel like part time for a while.  If I could truly go part time after that, I would still be eligible for healthcare benefits if I worked at least 24 hours/wk.  The problem is that my position is budgeted for full time, and it's unique in that I do a lot of specialized IT work that no one else knows how to do, and I don't think part time will fly with my director, at least not for long.  And by merely mentioning my interest in going part time, it might be enough for them to have someone start training with me in fear that I might leave (and they would probably be proven right in less than a year).  That would be no surprise for them to have me start training someone else, whether a new or existing employee, because they had a second person in my position for over a year before he quit, and that was due to the workload.  That would suck to spend a lot of time training someone over the next year because I have my own peaceful office and am quite independent now, so I'm keeping the thought of part time work and FIRE close to the vest until much closer to my target date.  I'll decide then if I want to offer working part time.

Can you work from home? Is it possible to agree to the full-time job responsibilities and structure your day to be more efficient and perhaps get the work done in less than FT? Without being in an office with the distractions and the supervision maybe you can find a balance that is healthy and profitable?

[Retire-Canada]

Man. Thanks for these posts above. And also due to a conversation with a recent normal age retiree I think I have to go to 4-8s when my child is born. We have the money saved we don't need to work. It doesn't even delay our fire date at this point I need to go to 4-8s and stop worrying about the 6 figure bonuses I'll get in 2 years if I don't. Bc time is now more valuable than money and I need to make this step.

My quality of work has gone way up since I started working less, I’ve actually become a lot more profitable on a per-hour basis. That may not be the case for you, but it’s been amazing for me.
Good luck. Too many people undervalue present day time and energy and make trade offs that don’t actually work out in their favour, especially if it compromises their health and family’s wellbeing.

I feel like the same will be true for me. Have to see how I like it. But a baby life event is the perfect time. My Dept manager is all about family

Congrats to both of you. Getting a handle on what's important and finding a balance between money and health/happiness is a pretty key skill for a successful life. Boarder the baby is a great time to get the ball rolling. Both because it's important in and of itself for you and to support your wife, but also because it gives you a reason to make the switch at work without having to justify your choice.

To Mailkynn's point...I find that I am at least twice as efficient people expect on average. In some areas I am far more efficient and in some not quite so much. It does mean that I can bill a client 10hrs and actually do 3-5hrs of work to earn that money. So structuring my work for minimum visibility into my processes and maximum flexibility is awesome for me. I can ramp up my $/hr worked so that it's not all that hard to make money and work a reasonable amount of hours.

I don't find I get more efficient with a downshifted schedule, but each hour of work is less unpleasant for sure. I also feel much better since the rest of my life gets most of my time and attention...not my job. That lets me focus on my health, happiness and personal relationships.

[steveo]

Anyway, Financial Samurai has posted a bit about this recently (https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/).

That is a good article.

Hopefully by the time you reach 50, your net worth will be at least 20X your annual expenses. As soon as you get to 20X annual expenses, you can start considering downshifting or leaving an undesirable job altogether. If you can get to 20X your annual expenses at an earlier age, all the better.

By the time you have your “enough money,” there’s really no need to shoot for greater than a 5% annual return. If your net worth is indeed 20X your annual expenses or more, simple math dictates you can live off your net worth forever and never touch principal with a perpetual 5% return.

This is exactly what I am intending to do. The trick is getting to a 5% WR and then you can add some buffer or just retire. The point is that extra money is really only to keep score and even though I can understand this it's also in my opinion dumb. I'm not trying to be the wealthiest. I'm trying to live the best life that I can on my terms. Money is just a tool to enable that.

I suppose another point about money is that one of the reasons I save money is because I want the risk of having to support myself from a job to disappear. Some people may think they need to reach 20x expenses plus another buffer of 20x expenses in cash or bonds whereas to me you are in a really good situation once you get to 20x expenses. I view my current requirement/goal of getting to 20x expenses plus a buffer (albeit it a relatively small buffer) as being pessimistic but I suppose everyone has to work out that level for themselves.

[Retire-Canada]

I agree with your approach Steveo. I think 5%WR is a reasonable point to pull the trigger if you have a flexible FIRE plan and are prepared to take some action in the unlikely situation that you run into an issue. There is a solid case to be made for the opportunity cost benefit of retiring earlier than later.

I have some issues with the article. If people could lock in a 5% return after inflation guaranteed for the rest of their lives a lot of us would jump on that. The problem is the article omits the danger inflation presents to a FIREr. Once you get past the early phase of FIRE and survive the sequence of returns risk you next mission is to beat inflation. Going to a conservative portfolio is dangerous if it doesn't project you from inflation.

I don't think most of us are equity heavy because we want to get crazy rich. We are heavy in stocks because they are a great hedge against inflation.

Holding a lot of bonds will lower your chances of success in a long retirement. Numbers bellow are for a 40yr FIRE @4%WR using cFIREsim [all settings default unless noted]:

Stocks %/Bonds % = Success %

- 100/0 = 91.7%
- 90/10 = 91.7%
- 80/20 =90.7%
- 70/30 = 88.9%
- 60/40 = 82.4%

I posted this ^^ in another thread. Trying to find "safety" with a high bond allocation is actually more risky for your portfolio than sticking with something more aggressive. We worry a lot about the big crashes, but inflation is a serious threat as well and deserves as much of our attention.

If the article at the link addresses inflation risk in a sensible way I missed it so please point it out to me.

[DreamFIRE]

Can you work from home? Is it possible to agree to the full-time job responsibilities and structure your day to be more efficient and perhaps get the work done in less than FT? Without being in an office with the distractions and the supervision maybe you can find a balance that is healthy and profitable?

I could do the majority of my work from home, although not all of it, and along with office politics, it's a non-starter.  That discussion has come up with staff in my dept. in the past and was rejected.  A couple years back, I would have loved to work from home, but the good news is that with having my own quiet office for over a year, it makes for a pretty efficient working environment as it is, since I'm not currently having to spend time training someone and work independently most of the time.  I'm not chained to my desk and have a lot of flexibility as well.

I could handle all routine work and pressing issues in 24hr/wk as I will be doing most of the summer while using vacation days, but long term, it would be difficult to make much progress on projects with a continued shortened schedule.  I would also have about 25 days of benefit time to squeeze in during the year.  I always have some backlog as it is working 40+ hr/wk.  I'm doing what two of us used to do while working less hours, albeit the other guy wasn't carrying much of the workload.

So rather than expecting me to handle everything at 24hr/week, I think they would either hire a replacement full timer and have me work part time for training, or they would have one of the other guys in the dept. cross-train with me while I work part time.  But if either of those occurred, my part time work may only be on a temporary basis due to labor budget.  I can't see anyone else getting near my efficiency level anytime soon, so it could last for months or as long as I want, hard to say.  Although excellent healthcare benefits are available working 24+hr/week, I would settle for an even more reduced schedule.  I think I would really like working that schedule for a while, although it most likely would not be out of need.  After a year or so of that, I may be ready to move on, completely FIRE, and possibly relocate.

[maizefolk]

I don't think most of us are equity heavy because we want to get crazy rich. We are heavy in stocks because they are a great hedge against inflation.

Yup, at least for me this represents my motivation for staying extremely light on bonds (and hence heavier on stocks). Over the long term, a prolonged increase inflation seems like a much bigger risk than a stock market crash.

This is especially true for early retirees who, as you always do a great job of pointing out, have a bunch of options to reducing spending or bring in extra income during a stock market crash in the early years when we're vulnerable to SORR, while a portfolio eroded by inflation tends to creep up on you in your later years when it's harder to make course corrections.

[steveo]

I have some issues with the article. If people could lock in a 5% return after inflation guaranteed for the rest of their lives a lot of us would jump on that. The problem is the article omits the danger inflation presents to a FIREr. Once you get past the early phase of FIRE and survive the sequence of returns risk you next mission is to beat inflation. Going to a conservative portfolio is dangerous if it doesn't project you from inflation.

I agree with this. You won't get a guaranteed 5% return excluding inflation year on year. You need returns of 20% every so often to counteract small/negative returns that will occur. You are only going to get those returns if you have a decent equity allocation.

The most likely failure in your portfolio is due to inflation. Equities are the best (someone might have a better option but I doubt it) hedge against inflation. On the flip side once you get to a 5% WR and you have a reasonable equity allocation you should be okay assuming you get past SORR.

[matchewed]

Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

[Retire-Canada]

Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

I'm a fan of keeping a mortgage even up here in The Great White North where we don't get to lock in a low 30yr rate. As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.

I can see the sense in the idea of a rising equity glide path. I plan to do something along those lines

[sol]

As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.

This is certainly the generic advice given on this forum (keep the mortgage and stay invested) but the American tax system significantly complicates this plan, and I'm not at all sure it's the best advice anymore.

For example, last year's tax law removed the deductibility of mortgage interest, and effectively capped itemized deductions.  If many more people are now going to be taking the standard deduction, the mortgage is slightly less profitable than it was before.

As another example, carrying the mortgage may require you to show paper income in excess of one of the many threshhold levels in the US tax code (EITC, ACA, FAFSA, etc) and the resulting large step function in tax rates probably exceeds the nominal long term profit margin between the stock market and mortgage rates for millions of Americans.  I agree there is still an exploitable gap there, I'm just not sure it's worth losing health care coverage.

[boarder42]

As long as my high credit score gets me low interest rate relative to expected long term equities returns I'd rather keep my money invested and pay down a mortgage. A much bigger liquid portfolio seems like the less risky path to me than a smaller portfolio and a paid off house with $400K - $500K tied up in home equity.

This is certainly the generic advice given on this forum (keep the mortgage and stay invested) but the American tax system significantly complicates this plan, and I'm not at all sure it's the best advice anymore.

For example, last year's tax law removed the deductibility of mortgage interest, and effectively capped itemized deductions.  If many more people are now going to be taking the standard deduction, the mortgage is slightly less profitable than it was before.

As another example, carrying the mortgage may require you to show paper income in excess of one of the many threshhold levels in the US tax code (EITC, ACA, FAFSA, etc) and the resulting large step function in tax rates probably exceeds the nominal long term profit margin between the stock market and mortgage rates for millions of Americans.  I agree there is still an exploitable gap there, I'm just not sure it's worth losing health care coverage.

The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction.  add to that the fact that many of us have rates locked in from the bottom and its even better. 

[sol]

The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction.  add to that the fact that many of us have rates locked in from the bottom and its even better.

I think that argument makes more sense for richer people than for more typical mustachians.

If you get $14k in health insurance subsidies for being below 400% of the FPL (income of $80k for a family of three), then it's suddenly much harder to justify.  Using the 4% rule, you'd need $350k of mortgage money invested to cover that $14k/year, and that's assuming you had a 0% mortgage rate.  Most households that make $80k don't carry $350k in mortgage debt. 

You and I make more money than that, and carry bigger mortgages, and suddenly the math is less clear.  I'm not nearly as convinced as most people seem to be that carrying the mortgage is the right answer, not when I have three kids hitting the FAFSA in addition to the ACA subsidies to worry about.

[DreamFIRE]

The gap is decreasing as rates rise but even with ACA subsidies it still makes sense to maintain a mortgage now without the interest deduction.  add to that the fact that many of us have rates locked in from the bottom and its even better.

I think that argument makes more sense for richer people than for more typical mustachians.

If you get $14k in health insurance subsidies for being below 400% of the FPL (income of $80k for a family of three), then it's suddenly much harder to justify.  Using the 4% rule, you'd need $350k of mortgage money invested to cover that $14k/year, and that's assuming you had a 0% mortgage rate.  Most households that make $80k don't carry $350k in mortgage debt. 

You and I make more money than that, and carry bigger mortgages, and suddenly the math is less clear.  I'm not nearly as convinced as most people seem to be that carrying the mortgage is the right answer, not when I have three kids hitting the FAFSA in addition to the ACA subsidies to worry about.

Yep.  I was posting the same thing a couple weeks ago about losing ACA subsidies with the increased income required to make mortgage payments:

https://forum.mrmoneymustache.com/post-fire/retire-with-just-$620-000/msg2040707/#msg2040707

[steveo]

Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

You have to be very careful with this approach and understand your specific situation. I have no mortgage. I will keep a line of credit attached to my home available but only as an emergency source of funds.

Keeping your mortgage increases your SORR. If you are really worried about longevity risk but not SORR then it might be a good option. For me personally I have no interest in it. I'm not concerned about longevity risk because I should inherit money, I can downsize my size and I should be eligible for social security payments. If I get past the SORR years than I should be fine.

[Retire-Canada]

Keeping your mortgage increases your SORR.

Just out of curiosity I ran my numbers with a paid off mortgage and re-mortgaging my paid off house  and investing the equity. Both options get me to a 100% success rate in cFIREsim over 40yrs. I do think that having the mortgage and a bigger investment account provides more financial flexibility. So I'd rather have the mortgage.

I don't have a paid off house  so in reality I'll be somewhere in the middle I'll have something like a $300K mortgage when I FIRE and around $200K equity in the house and a straight up 4%WR. We are talking about moving in FIRE. If that happens we'll buy a joint property and I'll put in the minimum downpayment I can on the new place without needing mortgage insurance. The rest will go into my investments.

I'm in Canada so the whole ACA subsidy issue is irrelevant to me.

[steveo]

Keeping your mortgage increases your SORR.

Just out of curiosity I ran my numbers with a paid off mortgage and re-mortgaging my paid off house  and investing the equity. Both options get me to a 100% success rate in cFIREsim over 40yrs. I do think that having the mortgage and a bigger investment account provides more financial flexibility. So I'd rather have the mortgage.

I don't have a paid off house  so in reality I'll be somewhere in the middle I'll have something like a $300K mortgage when I FIRE and around $200K equity in the house and a straight up 4%WR. We are talking about moving in FIRE. If that happens we'll buy a joint property and I'll put in the minimum downpayment I can on the new place without needing mortgage insurance. The rest will go into my investments.

I'm in Canada so the whole ACA subsidy issue is irrelevant to me.

I'm pretty sure though that the mortgage is a negative when it comes to SORR.

So just say you have 2 million in assets at a 4% WR. So you can spend say 80k per year. You have a mortgage for 1 million. If the market crashes 50% you would have assets of 1 million and just say you have to reduce your spending to 4%. That leaves you with 40k to spend but your mortgage would still have to be serviced with the same amount of money. So if your mortgage costs 20k to service each year that would mean your spending excluding the mortgage drops from 60k to 20k.

I realise that this is an extremely simplistic example but the idea that a mortgage is so good for you is not as simple as it appears. If you have a mortgage you are betting on everything continuing to go up and leverage works for you. That is presumably a positive over the course of 20-30 years because over that period you should have better returns. You are though exposing yourself to increased SORR.

I view having a mortgage as increasing your SORR but decreasing your longevity risk. You can choose whatever option you want but it's not a free trade off.

[matchewed]

Which also ties into the whole keeping the mortgage question. As it being a fixed cost and usually a significant portion of a person's expenses you can actually see a decrease in the share of spending towards housing as all other expenses will rise with inflation and that won't.

So those solid inflation hedges being; investing in stocks and having a low interest rate mortgage.

Also Pfau had discussed going into bonds early in retirement to protect yourself from SORR and then converting back to a more aggressive asset allocation as you pass that risk in order to preserve your longevity.

You have to be very careful with this approach and understand your specific situation. I have no mortgage. I will keep a line of credit attached to my home available but only as an emergency source of funds.

Keeping your mortgage increases your SORR. If you are really worried about longevity risk but not SORR then it might be a good option. For me personally I have no interest in it. I'm not concerned about longevity risk because I should inherit money, I can downsize my size and I should be eligible for social security payments. If I get past the SORR years than I should be fine.

How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

[cerat0n1a]

How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

Consider two equivalent scenarios:

(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.

The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.

[boarder42]

To be clear. Historically it does not increase your risk for SORR killing your portfolio. Everytime SORR killed a portfolio it killed it with or without a mortgage. Those with a mortgage run out of money sooner but you still fail in both cases. I think this is often overlooked when we discuss this.

[matchewed]

How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

Consider two equivalent scenarios:

(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.

The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.

You didn't explain how though. You've just repeated the "because it does" argument. It doesn't actually change your AA as it is just easier to calculate a mortgage as a fixed expense rather than jump through the mental gymnastics to make it into a negative bond. Both paid off and people who carry the mortgage into FIRE still have housing related expenses.

I guess you could argue that the non housing expenses as a percentage of expenses is higher and that makes it higher. But let's try to quantify that risk a bit. Does it make some 96% chance to fail move to 75%? That's a big drop. Or does it move 96% to 95% which...meh

[cerat0n1a]

How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

Consider two equivalent scenarios:

(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.

The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.

You didn't explain how though. You've just repeated the "because it does" argument. It doesn't actually change your AA as it is just easier to calculate a mortgage as a fixed expense rather than jump through the mental gymnastics to make it into a negative bond. Both paid off and people who carry the mortgage into FIRE still have housing related expenses.

Have a look at:

https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

(and perhaps also the earlier posts e.g. part 14 & 15 which explain sequence of return risk more thoroughly.)

[Retire-Canada]

I'm pretty sure though that the mortgage is a negative when it comes to SORR.

So just say you have 2 million in assets at a 4% WR. So you can spend say 80k per year. You have a mortgage for 1 million. If the market crashes 50% you would have assets of 1 million and just say you have to reduce your spending to 4%. That leaves you with 40k to spend but your mortgage would still have to be serviced with the same amount of money. So if your mortgage costs 20k to service each year that would mean your spending excluding the mortgage drops from 60k to 20k.

If you were choosing between a paid off house worth $1M or getting a mortgage for $1M and investing it then your choice would be between:

- $1M invested and a $40K/yr spend at 4%WR with a paid off house
- $1M +$1M invested and a $40K/yr spend + the mortgage payments

Additionally if your portfolio started at $2M and you are following a 4%WR plan you don't change the WR amount downwards so that it's 4% of the current amount invested should the portfolio drop.

You can look at it like two separate investment accounts. One the standard FIRE account and one the home equity investment account. Since the FIRE account is the same as it would be with a paid off house the SORR is the same as it would be with a paid off house.

So then you are left with the SORR on the home equity account. At the start you have very little equity in the house so the risk is losing a small amount of equity. The mitigation plan would be the same as for FIRE in that a few years worth of bonds could be held to provide protection against a SORR and then either spent or left to be outrun by the equity portion of that account if early returns were not poor.

I ran these numbers in cFIREsim:

- $1M invested 70/30 with 0.1% fees
- 30yrs
- WR $53612/yr [not inflation adjusted] - this is what my mortgage calculator says is 52 weekly payments at 3.49% for $1M borrowed

I get a 98.3% historical success rate compared to the 95.8% for the main FIRE portfolio at 4%WR over 30yrs with same AA. So the mortgage portfolio is less risky than the FIRE portfolio. It also has one additional safety element...namely that you are building equity the whole time so that you could pull more equity out and reinvest it should you feel you are in one of the very few problematic starting years. I don't have any math to simulate that [thinking about it], but I suspect you could take that historical failure rate to zero with that option.

I'll be FIREing with a mortgage and will likely see that mortgage stay in place for the first 15-30yrs of FIRE depending on what happens when we relocate.

[boarder42]

yes Retire canada that math is correct and in the 1.7% of years it does fail it just fails faster than the non mortgage holder - so you still fail - so the SORR is the same in both situations meaning you're going to fail in either case its just a matter of when you fail. typically 5-10years earlier with a mortgage.  Which is why i'll never understand the SORR arguement.  b/c if you're trying to prevent FIRE failure not having a low fixed rate mortgage is not beneficial.

also you could add an income event to cfiresim and end the first mortgage and start a new mortgage with new parameters to simulate a perpetual mortgage like you're discussing.

[boarder42]

so i ran the simulation and added a 300k income event 10 years into the mortgage and stopped the original mortgage and restarted a 30 year mortgage with 1.1MM being the new balance since 800k is what is still owed at the end of 10 years with your numbers above and it increased the success rate to 99.15% .  this assumes you can get perpetual mortgages at 3.5% which is unlikely.

if you were able to do it again 10 years later you get to 100% success rate. proving that a perpetual mortgage actually stops SORR. assuming you can get a low rate

numbers re run with 5% interest rates on future finances 2 REFI's every 10 years - 99.15% chance of success

numbers re run with 7% interest rates on future refi's - 98.31%

i really think a perpetual mortgage with staged REFI's does the opposite of what many here are assuming.  it would prevent SORR.

[cerat0n1a]

I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

[boarder42]

I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

yeah agreed its different.  though mortgage interest deductions dont work for many anymore with our new tax law changes.  but your mortgage rates are also insanely low compared to ours right now.  i see UK people posting about sub 2% rates all the time.  leverage that til its gone.

[Retire-Canada]

I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter.

I'm in Canada and we don't have the locked in 30yr mortgages like the US. Typically we do 5yr mortgages. They can be fixed for the 5yrs or variable.  I like variable rate mortgages due to the low lending rate. My mortgage rate after inflation is ~0.7%. I'm still pro-mortgage.

[Retire-Canada]

so i ran the simulation and added a 300k income event 10 years into the mortgage and stopped the original mortgage and restarted a 30 year mortgage with 1.1MM being the new balance since 800k is what is still owed at the end of 10 years with your numbers above and it increased the success rate to 99.15% .  this assumes you can get perpetual mortgages at 3.5% which is unlikely.

if you were able to do it again 10 years later you get to 100% success rate. proving that a perpetual mortgage actually stops SORR. assuming you can get a low rate

numbers re run with 5% interest rates on future finances 2 REFI's every 10 years - 99.15% chance of success

numbers re run with 7% interest rates on future refi's - 98.31%

i really think a perpetual mortgage with staged REFI's does the opposite of what many here are assuming.  it would prevent SORR.

Another option...particularly with an expensive $1M home is to get a $500K mortgage and leave $500K equity in the home.  By year 10 you'll have ~$641K equity +/- any appreciation change + the balance of the mortgage investment account.

Thanks for the various points of view on the issue. It's good to hear what people are thinking.

[cerat0n1a]

I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

yeah agreed its different.  though mortgage interest deductions dont work for many anymore with our new tax law changes.  but your mortgage rates are also insanely low compared to ours right now.  i see UK people posting about sub 2% rates all the time.  leverage that til its gone.

One thing here is to use a mortgage to help with the gap between RE age and the age you can access retirement savings accounts. You might have a 'stache of a certain amount but can't touch some of it yet, so running a mortgage that you intend to pay off with the tax-free lump sum you can take upon retirement is relatively common even away from the FIRE "community."

[boarder42]

I guess it's also worth pointing out that local differences can have a significant effect on the calculations. Here in the UK, mortgage rates are typically fixed only for 2-5 years, and variable thereafter. There is no tax relief for mortgage interest and if you don't make the payments and lose the house, you still owe the money - you don't just hand in the keys and walk away. So your potential loss is certainly not limited to the small amount of equity you had at the start. The situation you have in the US, where federal government backed agencies intervene to subsidise/distort the mortgage market, makes it much more of a one-way bet.

yeah agreed its different.  though mortgage interest deductions dont work for many anymore with our new tax law changes.  but your mortgage rates are also insanely low compared to ours right now.  i see UK people posting about sub 2% rates all the time.  leverage that til its gone.

One thing here is to use a mortgage to help with the gap between RE age and the age you can access retirement savings accounts. You might have a 'stache of a certain amount but can't touch some of it yet, so running a mortgage that you intend to pay off with the tax-free lump sum you can take upon retirement is relatively common even away from the FIRE "community."

again this isnt an issue in america for most people we can all mostly get to our stache's due to most pension systems going away and with the advent of the tax advantaged accounts these can be accessed quite easily.

[steveo]

yes Retire canada that math is correct and in the 1.7% of years it does fail it just fails faster than the non mortgage holder - so you still fail - so the SORR is the same in both situations meaning you're going to fail in either case its just a matter of when you fail. typically 5-10years earlier with a mortgage.

This sounds extremely suspect to me. You fail quicker but total failure rates don't increase ? 5- 10 years later is a significant amount of time and lots can happen in that time period.

[steveo]

How does having the mortgage increase the SORR risk? If you have X expenses and you've saved your amount (25x the expenses) and have let's say some SORR risk Y. Yet I have X+650 expenses and saved my amount (25x my expenses). Don't I have identical SORR risk? Of course we're assuming all other things bring equal.

Consider two equivalent scenarios:

(mortgage paid off) - net worth X, expenses Y
(mortgage of $500k) - net worth X, amount which can be used to generate an income X+$500k, expenses, Y+ mortgage interest on $500k.

The second case is more exposed to SORR, even though it has greater mean expected long-term return - ignoring taxes, healthcare, whatever. You've effectively borrowed money to buy equities. A mortgage is like the opposite of a bond - rather than receiving money at a fixed interest rate, you're paying it out at a fixed interest rate. So your equity/bond ratio is (say) more like 150/-50 than 80/20.

You didn't explain how though. You've just repeated the "because it does" argument. It doesn't actually change your AA as it is just easier to calculate a mortgage as a fixed expense rather than jump through the mental gymnastics to make it into a negative bond. Both paid off and people who carry the mortgage into FIRE still have housing related expenses.

Have a look at:

https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

(and perhaps also the earlier posts e.g. part 14 & 15 which explain sequence of return risk more thoroughly.)

I think people should read this. ERN is pessimistic but his analysis is pretty good.

The case for having a mortgage is pretty simple: You can get a 30-year mortgage for about 4% right now. Probably even slightly below 4% when you shop around. Equities will certainly beat that nominal rate of return over the next 30 years. Open and shut case! End of the discussion, right? Well, not so fast! As we have seen in our posts on Sequence of Return Risk (Part 14 and Part 15), the average return is less relevant than the sequence of returns. Having a mortgage in retirement will exacerbate your sequence of return risk because you are frontloading your withdrawals early on during retirement to pay for the mortgage; not just interest but also principal payments. In other words, if we are unlucky and experience low returns early during our retirement (the definition of sequence risk) we’d withdraw more shares when equity prices are down. The definition of sequence risk!

The equity glidepath slope reverses in retirement! As we detailed in the previous two installments of the series (Part 19 and Part 20), a glidepath shifting from a moderate bond allocation at the commencement of retirement to a mostly equity portfolio later in retirement can serve as a hedge against Sequence Risk. But with a mortgage, we’d do the opposite. Having a mortgage is similar (though not identical, I know) to a short bond position, and paying off the mortgage means we shift money out of equities and into bonds. The wrong direction! That can only exacerbate Sequence Risk!

This point below is the key point that I'd make. It's a risk to return call if you want to keep a mortgage in retirement. The potential benefit is more money but if you don't need more money to me it comes across as a very poor trade off however other people may view the risk differently.

The lesson from this exercise: If you are risk-averse and like to hedge out the tail risk it’s best to have no mortgage and a moderate bond allocation. If you are a risk-taker (degenerate gambler?) then you might as well go all-in: Have a mortgage and 100% equities in the portfolio as well.

Who cares if we end up with $6 million instead of $7 million when we’re in our 80s? We are willing to pay that cost for the hedge against Sequence of Return Risk, i.e., the very unpleasant tail risk of running out of money after 30 or 40 years due to poor portfolio returns in the first few years after retirement.

[Retire-Canada]

I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE. Add in the option of pulling equity out and that risk goes to close to zero historically. I wouldn't work extra years of my life to accumulate more money than 4%WR, but I would accept and utilize some addition money if it was available.

Perhaps the fact that I am facing FIRE with a mortgage and don't have an option to live in a paid off house provides a different view point, but I am not seeing the risk you are. You can lose your paid off house in FIRE if you can't pay the taxes on it or if you can't afford to maintain it so it's not risk free accommodation for life.

[steveo]

I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE.

I don't think that this is factually correct. Over the long term leverage will work for you but over the short term you can get hit. I suggest reading big ERN's post or even my post above. You are increasing your exposure to SORR by having a mortgage.

Add in the option of pulling equity out and that risk goes to close to zero historically. I wouldn't work extra years of my life to accumulate more money than 4%WR, but I would accept and utilize some addition money if it was available.

I don't think that this is an issue here at all. You are still going to get to whatever WR you are going to get too. It's just with a mortgage you are more exposed to SORR.

Perhaps the fact that I am facing FIRE with a mortgage and don't have an option to live in a paid off house provides a different view point, but I am not seeing the risk you are. You can lose your paid off house in FIRE if you can't pay the taxes on it or if you can't afford to maintain it so it's not risk free accommodation for life.

I think that this is a different discussion. The discussion is really about is it worth buying a house. I suppose taxes and maintenance may play a role in this decision as well. These decisions are in my opinion going to be specific to the individual person.

If we are talking about retiring with or without a mortgage and the pros and cons of this to me the discussion is pretty clear cut. If you choose to have a mortgage you presumably increase your chance of ending up with more money over the course of your retirement at a cost of increasing your risk when it comes to SORR.

I think it's a personal decision about what you want to do based on your risk profile.

[Retire-Canada]

I think we've shown above your SORR on the mortgage is the same or better than your 4%WR FIRE and definitely better than your 5%WR FIRE.

I don't think that this is factually correct. Over the long term leverage will work for you but over the short term you can get hit. I suggest reading big ERN's post or even my post above. You are increasing your exposure to SORR by having a mortgage.

Then please point out the error in the results I posted above. I'm happy to be wrong and learn from it.

[Retire-Canada]

I ran these numbers in cFIREsim:

- $1M invested 70/30 with 0.1% fees
- 30yrs
- WR $53612/yr [not inflation adjusted] - this is what my mortgage calculator says is 52 weekly payments at 3.49% for $1M borrowed

I get a 98.3% historical success rate compared to the 95.8% for the main FIRE portfolio at 4%WR over 30yrs with same AA. So the mortgage portfolio is less risky than the FIRE portfolio. It also has one additional safety element...namely that you are building equity the whole time so that you could pull more equity out and reinvest it should you feel you are in one of the very few problematic starting years. I don't have any math to simulate that [thinking about it], but I suspect you could take that historical failure rate to zero with that option.

So I ran the cFIREsim simulation again and added in a $60K income event after 10yrs and then extended the mortgage run 10 more years for 40 total. I kept everything else the same. $60K happens to be the built up equity on that mortgage after 10yrs.

The result was 99.1% success against historical data.

If you wanted to get to 100% success against historical data you could take out a $900K mortgage and then at 10yrs you'd have $160K equity you could reinvest if you wanted to. It takes ~$80K to roll over to 100% success on cFIResim.

Let's recall the following [all using 80/20 AA] with cFIREsim:

- 4%WR success after 30yrs = 96.6%
- 4%WR success after 40yrs = 91.7%
- 5%WR success after 30yrs = 73.7%
- 5%WR success after 40yrs = 64.8%

So if these ^^ are risk levels we are comfortable with [Steveo you are pro 5%WR correct?] the mortgage risk is less.

[steveo]

Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

I can understand your initial analysis of a non-inflation adjusted payment but we should mention the potential downside risk here as well. The risk is that interest rates increase. The US is not a good example to use here for mortgage analysis as it isn't a free market for mortgages. There is a high amount of government intervention but even then I think you can increase your SORR via taking on a mortgage and there may also be various tax/benefits implications from holding the mortgage.

I think your second analysis is really pushing the boundaries of what could occur in reality and avoiding any discussion on the risk of that approach.

I'm confident that the idea of having a mortgage being definitely the right idea is far from removed from a nuanced discussion on withdrawal rates. Maybe in reality by having a mortgage you should also target a lower WR until you get past the SORR stage but again I think why bother. My goal is to reach financial independence not to be the richest.

[Retire-Canada]

Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

[Tyson]

Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

The bolded/underlined/italics - that statement is GREAT.  Really captures the heart of the logic behind not paying down the mortgage. 

[Exflyboy]

Yup and whether to pay down the mortgage or not is one of those fuzzy math deals where the numbers say never pay down a mortgage.

Emotions can tell us exactly the opposite though.

Disclaimer.. I paid mine off before starting to invest.. It worked out great but I would have had more $$ if I had not.

[steveo]

Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

The bolded/underlined/italics - that statement is GREAT.  Really captures the heart of the logic behind not paying down the mortgage.

This is another one of those picking the returns arguments though. My returns on housing have been great. Probably better than the stock market. I wouldn't though leverage more into the property market. To state that paying off the mortgage means you have your money working for you rather than in an unproductive expensive asset may be true but it also may be completely untrue. It's the same argument as stating invest in small cap stocks in Ethiopia because they are going to have a run. My take is you invest based on your asset allocation and use leverage if you are so inclined. If property is such a bad investment then don't invest in it. The leverage question is basically irrelevant.

I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.

[Tyson]

Retire-Canada - I think something is wrong with your analysis but I'm not sure what it is. I suggest that you read the article that was linked and go from there. Maybe you can pick what ERN is doing incorrectly. I think though your model is a simplistic model and if some options were tweaked such as increasing your repayments over time (interest rates could increase) then the analysis may change.

The one thing I noticed was ERN assumes a 2% inflation rate. cFIREsim uses historical inflation rates. Given the mortgage is not adjusted for inflation this handicaps it in ERNs simulation. I agree my use of cFIREsim is simple and I think that's a strength of this analysis. It's an easy tool for people to use and enter their own numbers for comparison. If you think my analysis is wrong run some of your own and share the results.

If you are in the US you can lock in rates for 30yrs so that seems reasonable to hold the rate steady in the analysis at least that far. ERN does the same thing. So you can ignore my 2nd 40yr analysis and just look at the 30yr results that are comparable to ERNs analysis. That still gives us a 98.3% success rate using cFIREsim's historical dataset.

I don't think my 5% WR (which I'm fine with) is comparable to having a mortgage. The mortgage adds a different take to the whole analysis. I still believe (via reading big ERN's article and using logic as I did above) that a mortgage increases your SORR but increases your chances of increased returns over a longer time period (say 30 years) and for me that is a dumb bet to take but I am not really worried about longevity risk or having the most money when I die.

To your bolded point a 5%WR is not comparable to investing the mortgage like we've shown above. It's a lot more risky.

Personally I am not looking to get super rich and I am not super rich hence wanting to have my money continue to work for me and not sit idle in a very expensive piece of land/building. While I feel pretty strongly that trading extra years of your life to go sub-4%WR is a bad transaction from an opportunity cost perspective I don't feel like having some additional money is a bad thing if I don't have to work for it and it's not super risky. So far you haven't made a compelling case for your increased SORR argument.

If I was spending 2% of my invested portfolio I wouldn't bother with investing the mortgage because I would have more money than I could ever realistically use.  I'm not even close to that at this point and I wouldn't keep working to make that happen, but I would let my money work for me while I am FIRE to hit a sub-4%WR.

Keeping in mind I am currently almost at 5%WR so I can't even see 2%WR from where I am standing. ;)

The bolded/underlined/italics - that statement is GREAT.  Really captures the heart of the logic behind not paying down the mortgage.

This is another one of those picking the returns arguments though. My returns on housing have been great. Probably better than the stock market. I wouldn't though leverage more into the property market. To state that paying off the mortgage means you have your money working for you rather than in an unproductive expensive asset may be true but it also may be completely untrue. It's the same argument as stating invest in small cap stocks in Ethiopia because they are going to have a run. My take is you invest based on your asset allocation and use leverage if you are so inclined. If property is such a bad investment then don't invest in it. The leverage question is basically irrelevant.

I should add that none of those comments add anything at all to the argument (which appears correct) that having a mortgage increases your SORR. If you are so inclined then go for it.

The house appreciates in value regardless of how much (or how little) the mortgage is paid off. 

I have no idea about SORR so I'll stay out of that discussion.  Fun to watch you guys hash though it, though.

[Roadrunner53]

Sorry, but what is SORR?

[secondcor521]

SORR = sequence of returns risk.  It's a relatively new phrase in early retirement jargon.  It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.

[Roadrunner53]

SORR = sequence of returns risk.  It's a relatively new phrase in early retirement jargon.  It refers to the fact that if you have a bad few years at the beginning of retirement, that you can get into trouble with sustaining your retirement because the remaining investments can't recover from the double whammy of bad returns plus your withdrawals.

Thank you for the explanation!