For the 100th time, to pay off mortgage or not

[kite]

The matter has been discussed to death over and over, but here's an aspect of it that I don't recall investigated. Help me validate or destroy the logic. Here's the situation:

We have ~$250K left with 3.5%. The rate is, historically, very low, and if the goal was to maximize TNW at the end of life, it would make sense to keep it, throwing all savings into ETFs. However, max(tnw) is not the goal - FIRE is. If we are to save enough to keep paying P&I on this mortgage, we need $510K (1700*12/0.04), which we can achieve in ~4 years. Or we can pay down $250K and be FIREd in ~2 years.

Not only that, income (including passive) is taxable, but avoided expenses are tax-free. A back of the envelope calculation shows that extra income required to pay P&I will increase our federal and state taxes, and reduce ACA subsidy by ~$4,000 a year, requiring another $90K in savings under the 4% rule - that's another 7-8 months delay to FIRE.

PS: Admittedly, the house is too big, too expensive, and in an area with high property and non-zero state taxes - but it all is still cheaper than a divorce, so let's take it as a given.

It's a math question, and there is a right (meaning better financial) answer.

But this:
However, max(tnw) is not the goal - FIRE is

Are they mutually exclusive?  Retiring Early is still retiring early even if it isn't at the first possible moment that it becomes financially possible.  I think there are baked in assumptions in the RE decision, ie.. it's often tied to a specific home anyway, so it's not at all "retire as soon as possible" but retire as soon as I can maintain this lifestyle. That's the thing that nudges the target net worth higher than is absolutely necessary.  It's still a math problem.  Given the known information, paying off early doesn't seem to make sense.

[ender]

As much as FIRE is a math question, the preponderance of "is the 4% rule safe enough?" and OMY threads is good evidence of the deep emotional component to FIRE.

[Dicey]

As much as FIRE is a math question, the preponderance of "is the 4% rule safe enough?" and OMY threads is good evidence of the deep emotional component to FIRE.

Happily, some of the recent and current cohorts now have OLY subsets. Winning!

Regarding the 4% Rule, I believe there would be less quibbling if people actually did the research to understood how it works. A tiny bit of studying could literally give back years of your life.

[DeniseNJ]

I think part of the question is: If I pay off the mortgage, I can retire sooner since I'll need less money. If I don't pay off the mortgage, I'll have to work longer since I'll need the cash flow. Extra W-2 wages mean lots of extra taxes (plus SS and Medicare).

But I don't think that's the case. If you save/invest the extra mortgage money, then when you FIRE you'll have that much extra to pay off the mortgage. Right? Unless you plan on keeping the mortgage after FIRE, but it doesn't sound like that.

[Dicey]

I think part of the question is: If I pay off the mortgage, I can retire sooner since I'll need less money. If I don't pay off the mortgage, I'll have to work longer since I'll need the cash flow. Extra W-2 wages mean lots of extra taxes (plus SS and Medicare).

But I don't think that's the case. If you save/invest the extra mortgage money, then when you FIRE you'll have that much extra to pay off the mortgage. Right? Unless you plan on keeping the mortgage after FIRE, but it doesn't sound like that.

Denise, I saw your eye-popping salary on another thread this morning, and then immediately thought of all the taxes you have to pay, living in the Garden State. Ouch.

I also live in a HCOLA, but never had a salary that topped $100k. My average was somewhere in the $55-60k range, at best. I used to think this way (see: bolded above), so I completely understand. However, I had a very persistent boyfriend, who explained and explained why he only put 20% down (when he had lots more) and never, ever prepaid his mortgage. It took a long, long time to sink in, because my mortgage payment was so huge compared to my income, but sink in it finally did.

It takes some time, but eventually your investments start to earn and grow. Then they start to earn more than you do.  Along the way, as your investments grow, you will want to throw more at them instead of the mortgage. Eventually, the day comes when your investment balances are greater than your mortgage, at which point you know could pay it off in one payment, but the thrill of watching your investment accounts balloon far exceeds the thrill of prepaying a mortgage, especially as inflation continues to erode the real cost of that mortgage payment. Wow! What a paradigm shift!

In fact, the earlier you start saving and investing, the fewer actual dollars you will have to earn to fund your retirement. That's a total win. Also, knowing that you are a normal person, walking through life like anyone else, except for the fact that you have a million plus in invested assets, never stops being a thrill. Beats the hell out of prepaying a cheap-ass mortgage.

In conclusion: If you see a yet another post on this topic from me and wonder why the hell I keep on an' on about this topic, just tell my old BF JKS (wherever he is*) I'm just paying it forward.

*OMG, I just discovered that he lives one town over from me. Last I heard, he lived in Jakarta!

[DeniseNJ]

I think part of the question is: If I pay off the mortgage, I can retire sooner since I'll need less money. If I don't pay off the mortgage, I'll have to work longer since I'll need the cash flow. Extra W-2 wages mean lots of extra taxes (plus SS and Medicare).

But I don't think that's the case. If you save/invest the extra mortgage money, then when you FIRE you'll have that much extra *in investment savings* to pay off the mortgage. Right? Unless you plan on keeping the mortgage after FIRE, but it doesn't sound like that.

Denise, I saw your eye-popping salary on another thread this morning, and then immediately thought of all the taxes you have to pay, living in the Garden State. Ouch.

I also live in a HCOLA, but never had a salary that topped $100k. My average was somewhere in the $55-60k range, at best. I used to think this way (see: bolded above), so I completely understand. However, I had a very persistent boyfriend, who explained and explained why he only put 20% down (when he had lots more) and never, ever prepaid his mortgage. It took a long, long time to sink in, because my mortgage payment was so huge compared to my income, but sink in it finally did.

Totally agree.  I added a bit up top to clarify that if you save/invest instead of pay a mortgage, you can pay it off at once at FIRE.

Yes, a fat salary seems like so much money . . . and it is, but not as much as it looks. That's a household income, 1st off so it's not like there's another stay at home parent running the show. And my NY, NJ, and property taxes are through the roof and only 10K is tax deductible.  And NJ taxes everything. Plus we don't qualify for any of the tax breaks. Waah, waah, I know. MPP for sure. I grew up super poor, living in the projects, eating gov't cheese, so I know I'd rather have it and taxes, than not have it. But I really thought it would be so much. It wasn't until I found MMM 2.5 yrs ago that I finally stopped feeling (and being) broke all the time.  It's not how much you make; it's how much you keep.

[nereo]

It's not how much you make; it's how much you keep.

That last sentence just jumped out at me for how true it is.

[epritch7]

For what it's worth here's how I look at it.

I too found that the stash required to carry the mortgage payment at the 4% SWR was higher than the amount required to just pay off the loan.  I calculate my number by taking my annual expenses minus the mortgage payment plus the total outstanding principle balance on the mortgage, this gives me the liquidity required to pay off the mortgage any time I so desire but the advantage of being able to hold that capital in assets that are contributing to growth.

I don't like paying off the mortgage early for several reasons.  First, to do so if you are earning you are paying with post tax income unless of coarse you have already maxed out all your available tax deferred options (I defer +/- $38.5k per year).  Second, with today's interest rates vs inflation you are basically getting paid to hold the mortgage.  Third, if there ever is money to be made on personal real estate it is made on leverage.  Say if you get 6% gain in valuation on your home annually, that annual return would be multiplied by the amount of leverage you have against the property (like buying stocks on margin), of course it can work in the opposite direction as well.  Last, homes are illiquid, too much so for me anyway.  I like the idea that I can sell assets and within 3-4 days have cash in my checking account, doubtful you can pull that off with real estate.

As a rule of thumb I like to keep around 20% of my NW leveraged against my primary residence, I typically will refinance once I get more than 5% out of whack on that rule.  Just a way to play the odds on the math winning out with holding the mortgage without risking my options to get and stay retired.  I also am concerned about taxes on retirement withdrawals but I have kept my mortgage payment low enough that it doesn't impact me negatively during tax season.