The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: LLL on April 13, 2017, 08:39:34 PM
-
It distresses me that I have seen more than one person decide to not pay-off their mortgage early “Pay-off” because they think mathematically it is incorrect to do so. I have written this post to dispel the myth.
The typical argument is constructed as so, the average rate of return for the stock market (Nominal of 10.7% / Real return of 8.5%) is higher than the current interest rate of 4% on my 30-year mortgage. Therefore, I will have a higher net worth if I “Invest” extra money instead of making additional principle payments my mortgage. The problem is they consider risk a qualitative factor and dismiss it from the calculation.
When you include risk in the calculation, Pay-off or Invest are both shown to be reasonable and mathematically correct alternatives. That’s right, one is not a feel-good option that is mathematically incorrect. However, it’s really hard to measure, quantify, project, and display risk. But I decided to give it a try.
The Scenario:
Frank just bought a house with a 30-year, 4% interest rate, $165,000 mortgage. He has an extra $1,500 per month after maxing out all tax advantaged accounts. What would happen if he put that discretionary money towards Pay-off or Invest? Nobody on the planet knows that answer, however we can make some educated projections.
The graph below was based on the above assumptions and stock market returns for rolling periods from 1870 to Present. The red line is Frank’s net worth if he puts the $1,500 towards Pay-off. The gray lines are all the outcomes that would have occurred, in the historical period described above, if he had chosen to Invest. The black line is the average of all the gray lines.
(https://preview.ibb.co/kDjAAk/1.png) (https://ibb.co/f46e35)
facebook photos hosting (https://imgbb.com/)
The expected or average of the historical data is $20K higher than the expected result of Pay-off. However, there is a large variance in the outcomes that would have happened if Frank, at some point in the past, decided to Invest instead; he could have ended up $60K worse off by not paying off his mortgage early.
If Frank had decided to Invest at a date in the past in the data set, he would be riding one of those gray lines at random, which could have worked out great for him or been a swift kick to the backside. However, if he had payed off the mortgage early he would have selected the red line and would know exactly the track he was on and where he would end up.
Another interest way to look at the data; Under invest Frank would have a net worth of $0 between year 4 and year 10 while under Pay-off he would reach this mark at 7 years.
This graph emphasizes the actual outcomes of Invest if employed in the past. However, it is not accurate to assume that Frank’s expected value would be greater by $20k than Pay-off if he started in 2017. This statement would assume that the next eight years of stock market returns will be no better or worse than the last 145 years and the probability of any given rate of return occurring is exactly proportion to what occurred during the last 145 years. While this is possible it is very unlikely.
Stock returns in theory are equal to the risk-free rate plus an equity risk premium. Given that the risk-free rate is 0.80%, hence the low mortgage rates, while the normal risk-free rate has been around 4% is it reasonable to assume stock prices are more likely to under-perform historical averages than out-perform? Vanguard seems to think so.
(https://preview.ibb.co/m5jXO5/2.png) (https://ibb.co/bBbOVk)
facebook photos hosting (https://imgbb.com/)
2017 Vanguard Market Outlook
I have not covered the other factors that influence this decision such as liquidity, asset protection, or psychology which I may in a future post. The purpose of this post was to evaluate the math. In conclusion, the choice between Pay-off and Invest is a risk-reward trade off.
-
Very interesting. You took a 30 year mortgage example, and applied a 7 year period analysis to the situation? I'm not understanding this: The graph below was based on the above assumptions and stock market returns for rolling periods from 1870 to Present. Is it a 7 year rolling period of returns?
A few thoughts, assuming I interpreted your statement and graph correctly:
1. Why not apply the same period of time as the mortgage? ie for a 30 year mortgage, provide a 30 year period of returns. A 15 year mortgage, 15 years of returns.
2. Does the math include any potential tax savings from the interest deduction, by not paying off the mortgage and investing it?
3. When you include risk in the calculation... is there a way to model the risk of the house depreciating / going underwater and having that cash locked in it as well?
I guess overall this doesn't make sense to me. Why apply a 7 or 8 year period of returns for a long term mortgage that is 15 or 30 years?
And the central question here is, will the stock market outperform a 4% fixed rate, tax deductible mortgage over the same period, ie 15 or 30 years? If the stock market will not outperform a low fixed rate mortgage, then this country has some serious problems ahead of it, imho.
-
Very interesting. You took a 30 year mortgage example, and applied a 7 year period analysis to the situation? I'm not understanding this: The graph below was based on the above assumptions and stock market returns for rolling periods from 1870 to Present. Is it a 7 year rolling period of returns?
A few thoughts, assuming I interpreted your statement and graph correctly:
1. Why not apply the same period of time as the mortgage? ie for a 30 year mortgage, provide a 30 year period of returns. A 15 year mortgage, 15 years of returns.
2. Does the math include any potential tax savings from the interest deduction, by not paying off the mortgage and investing it?
3. When you include risk in the calculation... is there a way to model the risk of the house depreciating / going underwater and having that cash locked in it as well?
I guess overall this doesn't make sense to me. Why apply a 7 or 8 year period of returns for a long term mortgage that is 15 or 30 years?
And the central question here is, will the stock market outperform a 4% fixed rate, tax deductible mortgage over the same period, ie 15 or 30 years? If the stock market will not outperform a low fixed rate mortgage, then this country has some serious problems ahead of it, imho.
I'd wager a guess that if you apply 30 year return periods, investing will show a decisive mathematical victory.
-
Maybe it's just me and redounds to my discredit--
BUT- whenever I read yet another post that conflates the words principle and principal, treating them as interchangable, I suddenly lose the energy to go on with trying to figure out what the poster is mainly driving at.
It's kind of a kryptonite thing, not that I am any kind of Super-being.
Sorry....
-
Very interesting. You took a 30 year mortgage example, and applied a 7 year period analysis to the situation? I'm not understanding this: The graph below was based on the above assumptions and stock market returns for rolling periods from 1870 to Present. Is it a 7 year rolling period of returns?
A few thoughts, assuming I interpreted your statement and graph correctly:
1. Why not apply the same period of time as the mortgage? ie for a 30 year mortgage, provide a 30 year period of returns. A 15 year mortgage, 15 years of returns.
2. Does the math include any potential tax savings from the interest deduction, by not paying off the mortgage and investing it?
3. When you include risk in the calculation... is there a way to model the risk of the house depreciating / going underwater and having that cash locked in it as well?
I guess overall this doesn't make sense to me. Why apply a 7 or 8 year period of returns for a long term mortgage that is 15 or 30 years?
And the central question here is, will the stock market outperform a 4% fixed rate, tax deductible mortgage over the same period, ie 15 or 30 years? If the stock market will not outperform a low fixed rate mortgage, then this country has some serious problems ahead of it, imho.
I'd wager a guess that if you apply 30 year return periods, investing will show a decisive mathematical victory.
Maybe it's because when you pay extra into a mortgage, it no longer runs for 15-30 years. It could very well be paid off after 7 years, at which point you'd put all excess into the market anyway.
Therefore it's only the 7 years of paying extra into the mortgage that matter for the purpose of the analysis?
-
Nice analysis! I'm surprised there are quite a few 30 year periods where the market failed to beat the 4% return of the mortgage payoff.
Based on http://allfinancialmatters.com/2015/12/15/sp-500-30-year-rolling-total-returns/, there are none. Don't know if that is true if one does a day-by-day analysis of all 30 year periods.
-
Correct me if I'm wrong, but it looks like you are assuming that the house will always increase in value.
The stock market can go up and down, as well as house prices. I don't think it's correct to average historic stock market returns and not average increases or decreases in housing prices.
-
Very interesting. You took a 30 year mortgage example, and applied a 7 year period analysis to the situation? I'm not understanding this: The graph below was based on the above assumptions and stock market returns for rolling periods from 1870 to Present. Is it a 7 year rolling period of returns?
A few thoughts, assuming I interpreted your statement and graph correctly:
1. Why not apply the same period of time as the mortgage? ie for a 30 year mortgage, provide a 30 year period of returns. A 15 year mortgage, 15 years of returns.
2. Does the math include any potential tax savings from the interest deduction, by not paying off the mortgage and investing it?
3. When you include risk in the calculation... is there a way to model the risk of the house depreciating / going underwater and having that cash locked in it as well?
I guess overall this doesn't make sense to me. Why apply a 7 or 8 year period of returns for a long term mortgage that is 15 or 30 years?
And the central question here is, will the stock market outperform a 4% fixed rate, tax deductible mortgage over the same period, ie 15 or 30 years? If the stock market will not outperform a low fixed rate mortgage, then this country has some serious problems ahead of it, imho.
OP, answers to the above post would be appreciated.
I also don't see why you would apply a 7 year time frame to this analysis when comparing it to leveraging a debt with a 30 year term.....
Sent from my SM-G935F using Tapatalk
-
Ok I get it now, the example mortgage is paid off in 7 years with the extra payments, so a 7 year rolling window is used to compare. That makes sense now - it shows that on average, 7 years in you'd have a paid off house, but your stock account is 20k less than what you would have had if you invested instead.
Quick correction to your assumption.
If you were to pre pay, your stock account would not have 20k less. Your net worth would be 20k less. But it would be tied up in the house.
So at the end of 7 years you would have a paid off house but, if you were to invest, that money would now be in the stock market instead of a house.
This makes a huge difference in your long term net worth growth because if you were to invest you would have a "jump start" because you are essentially front loading your portfolio by holding the mortgage.
That front loaded amount then compounds at a much higher rate, because it's a larger pile of investments.
In order to do this calculation correctly you would need to run two scenarios and base them off of an entire 30 year term.
The first scenario Frank would invest the 1500 extra in the stock market for the entire 30 year period dollar cost averaging his way in.
The second scenario Frank would have no money going towards investments for 7 years. He would then invest 1500 plus the principal/interest payments he use to be paying for the next 23 years.
In both scenarios Frank would have a paid off house. But the real question is in what scenario would Frank have a larger portfolio at the end?
Sent from my SM-G935F using Tapatalk
-
^^^ Indeed that is the calculation I'd like to see.
-
Nice graphs. Curious where you are getting this data from? Is it extracted from an xcel spreadsheet? I'd love to get my hands on the spreadsheet if it is and run my own set of different scenarios.
Sent from my SM-G935F using Tapatalk
-
Very interesting. You took a 30 year mortgage example, and applied a 7 year period analysis to the situation? I'm not understanding this: The graph below was based on the above assumptions and stock market returns for rolling periods from 1870 to Present. Is it a 7 year rolling period of returns?
A few thoughts, assuming I interpreted your statement and graph correctly:
1. Why not apply the same period of time as the mortgage? ie for a 30 year mortgage, provide a 30 year period of returns. A 15 year mortgage, 15 years of returns.
2. Does the math include any potential tax savings from the interest deduction, by not paying off the mortgage and investing it?
3. When you include risk in the calculation... is there a way to model the risk of the house depreciating / going underwater and having that cash locked in it as well?
I guess overall this doesn't make sense to me. Why apply a 7 or 8 year period of returns for a long term mortgage that is 15 or 30 years?
And the central question here is, will the stock market outperform a 4% fixed rate, tax deductible mortgage over the same period, ie 15 or 30 years? If the stock market will not outperform a low fixed rate mortgage, then this country has some serious problems ahead of it, imho.
OP, answers to the above post would be appreciated.
I also don't see why you would apply a 7 year time frame to this analysis when comparing it to leveraging a debt with a 30 year term.....
Sent from my SM-G935F using Tapatalk
Sorry been busy with a few other things.
1. i am using rolling 30 stock market returns. See other posts for the scale reasons and larger periods examined.
2. No tax savings assumed. $165,000 * 4.00% =$6,600, far below the standard deduction. Frank is a cranky SOB and does not give enough to in combination with his mortgage to get over the standard deduction hurdle. Oh, and he is married.
3. The house going under can happen with or without a mortgage and is more likely to happen with a mortgage. As a mortgage is paid down you could re-borrow the money with a HELOC.
For tax year 2016: $4050 exemption + $4050 exemption + $6600 interest = $14,700 (plus property taxes). The MFJ standard deduction is $12,600.
This claim makes me doubt the validity of the rest of the math.
Edit: I'm wrong. Don't mind me.
-
For tax year 2016: $4050 exemption + $4050 exemption + $6600 interest = $14,700 (plus property taxes). The MFJ standard deduction is $12,600.
This claim makes me doubt the validity of the rest of the math.
While it is true that 4050*2 + 6600 = 14700, exemptions are separate from deductions. See 2016 Form 1040 (https://www.irs.gov/pub/irs-pdf/f1040.pdf).
-
Nice graphs. Curious where you are getting this data from? Is it extracted from an xcel spreadsheet? I'd love to get my hands on the spreadsheet if it is and run my own set of different scenarios.
Sent from my SM-G935F using Tapatalk
Yep, it is based on a excel spreadsheet. I will have to clean it up and post it.
Please do! I'd love to mess around with this :)
Maybe do a Google Doc share?
Sent from my SM-G935F using Tapatalk
-
For tax year 2016: $4050 exemption + $4050 exemption + $6600 interest = $14,700 (plus property taxes). The MFJ standard deduction is $12,600.
This claim makes me doubt the validity of the rest of the math.
While it is true that 4050*2 + 6600 = 14700, exemptions are separate from deductions. See 2016 Form 1040 (https://www.irs.gov/pub/irs-pdf/f1040.pdf).
42 Exemptions. If line 38 is $155,650 or less, multiply $4,050 by the number on line 6d. Otherwise, see instructions
If AGI is under $155,650, is the end result not the same?
Edit: Ahh I see, they are itemized separately. My bad. : )
I easily clear the standard deduction every year with a $120k mortgage at 3.75%, fwiw...I am single, though.
-
Nice plot for the 30 year. Can you show the average trend lines? Thanks.
-
Nice plot for the 30 year. Can you show the average trend lines? Thanks.
Ah yes, average trend would be great.
Also, it looks like you are tracking the house as a debt in this calculation.
I think a simpler way to project this scenario would be to start with just looking at the investment portfolio which would start at $0.
When comparing this scenario we can basically ignore the mortgage for the most part. The only thing of significance is the amatorization schedule shift that will be observed by the pre pay scenario.
The pre pay scenario would then be a 0 on your chart until after 7 years when the mortgage is paid off. Then years 8 through 30 the pre pay frank would be investing 2,287.74 (1500+787.74 of mortgage P/I) per month into his brokerage account.
The invest Frank would be investing 1,500.00 over the entire 30 year period.
I'd love to see a graph that shows just the portfolio of pre pay Frank trying to catch up to invest first Frank over years 0 to 30.
Excited to get my hands on this excel spreadsheet. So many different scenarios to run! :D
Sent from my SM-G935F using Tapatalk
-
I made a slightly different plot based of request by FrozenBits.
(http://i65.tinypic.com/2viglsl.png)
As you can see, Invest beats Prepay over every single 30 year period starting at the beginning of years 1928 to 1987.
Data is from: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Edit: Figure is updated. I needed the numbers to be multiplied by 12 as the investment calcuations were made yearly.
-
1. i am using rolling 30 stock market returns. See other posts for the scale reasons and larger periods examined.
2. No tax savings assumed. $165,000 * 4.00% =$6,600, far below the standard deduction. Frank is a cranky SOB and does not give enough to in combination with his mortgage to get over the standard deduction hurdle. Oh, and he is married.
3. The house going under can happen with or without a mortgage and is more likely to happen with a mortgage. As a mortgage is paid down you could re-borrow the money with a HELOC.
2. itemized deduction is often superior because you can itemize 2 of the biggest items - mortgage interest, and state / local taxes (income tax, property tax, etc). Depending on how much Frank and his wife earn, and how much they pay in state taxes, it could result in a nice deduction from Federal income.
3. HELOC, assuming one could obtain it when economy is doing poor and housing prices are depressed, would be much more expensive and difficult to obtain. Especially if one is FIRE and has no job, will have to show good cash flow to obtain HELOC, which begs the question of why they need a loan in the first place if they have good cash flow. So it's a catch 22, for someone who is heavily invested in their house and don't have enough liquidity / investments to help meet emergency needs during down times.
-
Interestingly enough, out of both scenarios and all rolling periods, Frank ends with the most money starting in year 1970 with the strategy of.......
drum roll please....
Paying off the mortgage early!
I'm curious how this was calculated.
In 1970, the 30 year fixed rate was 7.25%. So to beat that, the stock market had to do better than that.
http://www.doctorhousingbubble.com/federal-reserve-fighting-inflation-in-the-1970s-and-restraining-the-housing-market-today-the-federal-reserve-is-juicing-the-housing-market-trying-to-cause-inflation-researching-the-1970s-and-1980s/
http://www.stockpickssystem.com/historical-rate-of-return/
The stock market had 5.82% return in the 70's, 17.57% in the 80's, and 18.17% in the 90's, for an average return of 13.85% over the 3 decades. How could the mortgage rate of 7.25% beat 13.85%?
-
Interestingly enough, out of both scenarios and all rolling periods, Frank ends with the most money starting in year 1970 with the strategy of.......
drum roll please....
Paying off the mortgage early!
I'm curious how this was calculated.
In 1970, the 30 year fixed rate was 7.25%. So to beat that, the stock market had to do better than that.
http://www.doctorhousingbubble.com/federal-reserve-fighting-inflation-in-the-1970s-and-restraining-the-housing-market-today-the-federal-reserve-is-juicing-the-housing-market-trying-to-cause-inflation-researching-the-1970s-and-1980s/
http://www.stockpickssystem.com/historical-rate-of-return/
The stock market had 5.82% return in the 70's, 17.57% in the 80's, and 18.17% in the 90's, for an average return of 13.85% over the 3 decades. How could the mortgage rate of 7.25% beat 13.85%?
Indeed, my plot shows that investing beats prepay by almost $200K starting in 1970. Plus 1970's 30 year period includes the tech late 1990s peak.
-
Interestingly enough, out of both scenarios and all rolling periods, Frank ends with the most money starting in year 1970 with the strategy of.......
drum roll please....
Paying off the mortgage early!
I'm curious how this was calculated.
In 1970, the 30 year fixed rate was 7.25%. So to beat that, the stock market had to do better than that.
http://www.doctorhousingbubble.com/federal-reserve-fighting-inflation-in-the-1970s-and-restraining-the-housing-market-today-the-federal-reserve-is-juicing-the-housing-market-trying-to-cause-inflation-researching-the-1970s-and-1980s/
http://www.stockpickssystem.com/historical-rate-of-return/
The stock market had 5.82% return in the 70's, 17.57% in the 80's, and 18.17% in the 90's, for an average return of 13.85% over the 3 decades. How could the mortgage rate of 7.25% beat 13.85%?
Indeed, my plot shows that investing beats prepay by almost $200K starting in 1970. Plus 1970's 30 year period includes the tech late 1990s peak.
Thanks for running the numbers and the chart, that was what I was expecting to see. I would have assumed if someone obtained a mortgage in 1980 with a rate of almost 20%, it would have made more sense to pay off that mortgage than invest, as the stock market returns were far lower than 20% after that period of time. I just don't understand how the math would work starting in 1970 when the mortgage rate was only 7.25%.
-
At what point do we need a new forum sub-group for all the threads about early mortgage payoff? :P
-
In order to do this calculation correctly you would need to run two scenarios and base them off of an entire 30 year term.
The first scenario Frank would invest the 1500 extra in the stock market for the entire 30 year period dollar cost averaging his way in.
The second scenario Frank would have no money going towards investments for 7 years. He would then invest 1500 plus the principal/interest payments he use to be paying for the next 23 years.
In both scenarios Frank would have a paid off house. But the real question is in what scenario would Frank have a larger portfolio at the end?
I just ran these two scenarios in cFIREsim. It reports, contrary to Virtus' claim, that there was no historical period in which the mortgage prepayment strategy would have come out ahead. (Once Virtus publishes his/her data, we can try to compare to cFIREsim's data and assumptions to determine the source of the discrepancy.) According to cFIREsim, the absolute worst historical case for the "no mortgage prepayment" scenario resulted in a final portfolio value that exceeded the final portfolio value of the absolute worst historical case for the "mortgage prepayment" scenario by more than $132K.
Results
In the "mortgage prepayment" scenario, the portfolio ending value statistics in cFIREsim were as follows:
Average: $ 1,181,218
Median: $ 967,525
Highest: $ 2,815,498
Lowest: $ 433,935
In the "no mortgage prepayment" scenario, the portfolio ending value statistics in cFIREsim were as follows:
Average: $ 1,476,351
Median: $ 1,330,471
Highest: $ 3,267,481
Lowest: $ 565,958
Methodology
I used the following methodology in running the cFIREsim backtests:
In both scenarios, I set the investment allocation to 100% equities, left the invest fees at the default setting of 0.18%, and set the initial yearly spending to zero.
In the "mortgage prepayment" scenario, I added an "other income" line item of $27,456 commencing in year 2024, and set it as non-inflation adjusted. This represents the annual amount of funds that would be plowed into investments under this scenario (an amount per month equal to $788 (principal + interest) + $1500) commencing when the mortgage loan is paid off after seven years.
In the "no mortgage prepayment" scenario, I added an "other income" line item of $18,000 commencing immediately (in year 2017), and set it as non-inflation adjusted. This represents the annual amount of funds that would be plowed into investments under this scenario ($1500 per month) from the get-go.
-
Oh, you Americans and your mortgage-interest tax deductions.
Most countries do not do this. Certainly not Canada.
This helps tilt many of us up north toward paying off the damn mortgage. (Even if your deduction mainly helps millionaires.)
One other factor that propels people toward doing this is the painful awareness that our parents faced 18-10% mortgage interest in the 1980s.
So recent low rates have been seen as a historic window of opportunity to get mortgages paid down. If not entirely off.
-
What about pre-paying the mortgage to get rid of PMI? My amortization schedule shows I'll be paying approximately $56/month in PMI for about nine years ($672/year, or $6,048 total). I've checked with my lender and they will remove PMI once we hit 80% equity.
I figure getting rid of the PMI in itself adds to my rate of return in pre-paying the mortgage. In other words, getting rid of PMI adds to the rate of return on pre-paying the mortgage.
Any analysis on this? This seems to be a good balance--prepay only to the extent to get rid of PMI, then let it ride, which conveniently enough will coincide closely with our FIRE date.
-
What about pre-paying the mortgage to get rid of PMI? My amortization schedule shows I'll be paying approximately $56/month in PMI for about nine years ($672/year, or $6,048 total). I've checked with my lender and they will remove PMI once we hit 80% equity.
I figure getting rid of the PMI in itself adds to my rate of return in pre-paying the mortgage. In other words, getting rid of PMI adds to the rate of return on pre-paying the mortgage.
Any analysis on this? This seems to be a good balance--prepay only to the extent to get rid of PMI, then let it ride, which conveniently enough will coincide closely with our FIRE date.
It's not too tough, you can calculate a schedule of pre-payment to get you to 20% equity (I assume you meant 80% remaining). At that point, look at how much extra you spent in accelerated payments. Calculate that compared to the total amount of mortgage interest that you don't have to pay due to those payments, plus the $6,048 (minus the PMI that you did pay during that period). That will give you your rate of return on your accelerated payment schedule. It may be worth it, it may not, depending on your interest rate and how quickly you can hit 20%.
-
One other factor that propels people toward doing this is the painful awareness that our parents faced 18-10% mortgage interest in the 1980s.
So recent low rates have been seen as a historic window of opportunity to get mortgages paid down. If not entirely off.
I would have come to the opposite conclusion. Funny :)
-
What about pre-paying the mortgage to get rid of PMI? My amortization schedule shows I'll be paying approximately $56/month in PMI for about nine years ($672/year, or $6,048 total). I've checked with my lender and they will remove PMI once we hit 80% equity.
I figure getting rid of the PMI in itself adds to my rate of return in pre-paying the mortgage. In other words, getting rid of PMI adds to the rate of return on pre-paying the mortgage.
Any analysis on this? This seems to be a good balance--prepay only to the extent to get rid of PMI, then let it ride, which conveniently enough will coincide closely with our FIRE date.
The PMI question is more complicated. When I bought my first house with 3% down in 1998, there was quick appereciation and the PMI was gone in two years. One variable is the house appreciation (or rather than a stochastic approach you could set appreciation as some fixed value X% and calculate the amount of time you would expect to pay PMI).
-
Interestingly enough, out of both scenarios and all rolling periods, Frank ends with the most money starting in year 1970 with the strategy of.......
drum roll please....
Paying off the mortgage early!
I'm curious how this was calculated.
In 1970, the 30 year fixed rate was 7.25%. So to beat that, the stock market had to do better than that.
http://www.doctorhousingbubble.com/federal-reserve-fighting-inflation-in-the-1970s-and-restraining-the-housing-market-today-the-federal-reserve-is-juicing-the-housing-market-trying-to-cause-inflation-researching-the-1970s-and-1980s/
http://www.stockpickssystem.com/historical-rate-of-return/
The stock market had 5.82% return in the 70's, 17.57% in the 80's, and 18.17% in the 90's, for an average return of 13.85% over the 3 decades. How could the mortgage rate of 7.25% beat 13.85%?
Indeed, my plot shows that investing beats prepay by almost $200K starting in 1970. Plus 1970's 30 year period includes the tech late 1990s peak.
Thanks for running the numbers and the chart, that was what I was expecting to see. I would have assumed if someone obtained a mortgage in 1980 with a rate of almost 20%, it would have made more sense to pay off that mortgage than invest, as the stock market returns were far lower than 20% after that period of time. I just don't understand how the math would work starting in 1970 when the mortgage rate was only 7.25%.
The analysis does not use differing mortgage rates. It uses the same mortgage rate of 4% in all scenarios.
In this case, it makes paying off the mortgage even less worthwhile, compared to the average stock market return of 13.85% from 1970 - 2000. As Brooklynguy noted, it would be good to see your exact underlying data to understand the source of the data, and how you did the calculations.
-
One other factor that propels people toward doing this is the painful awareness that our parents faced 18-10% mortgage interest in the 1980s.
So recent low rates have been seen as a historic window of opportunity to get mortgages paid down. If not entirely off.
I would have come to the opposite conclusion. Funny :)
Exactly. If I had a 18 - 20% mortgage, I would be paying that puppy off as fast as I can, or refinance every time the interest rate dropped 2 - 3% to step down the interest rate cost. At current 4% mortgage rate levels, I'd ride that puppy out as long as I can.
-
Virtus -- Looks like you and I have a significant difference in our results for 30 year networths when we compare from 1928 onwards.
-
-The calculations do include taxes on long-term capital gains/dividends at a rate of 15%. All gains and losses are realized in the year they are recognized. Yes this is an oversimplification because gains can be deferred and only $3,000 of losses can be recognized against regular income in any year. At some point you have to make simplifications to make the model creation not become a full-time job. Further even deferred gains will be recognized at some point in the future and thus represent a deferred tax liability.
This assumption creates an enormous drag on investment performance that won't exist in the real world, and might go a long way toward explaining why your results differ so drastically from both my results in reply # 30 (which used cFIREsim and its underlying data sources and assumptions) and rpr's results in reply # 24 (which used FRED data and unspecified assumptions), both of which indicated that there was never a historical 30-year period in which Frank's "pay-off" strategy would have outperformed Frank's "invest" strategy.
While it might be justifiable to assume for simplicity's sake that unrealized capital gains will eventually be taxed upon disposition (though, as mustachians know or ought to know, even that won't necessarily be true in the real world), I don't think it is justifiable to assume that unrealized capital gains will be taxed as if they were realized. That creates totally unrealistic tax drag on investment performance, making the model depart from reality to a much greater extent than simply ignoring tax effects altogether would have done.
-
brooklynguy -- Thanks for providing a possible explanation.
Virtus -- I'd be curious if you could turn off impact of taxes on your model. Just want to see if we get similar answers then. Thanks.
-
(http://i64.tinypic.com/2vjwm0i.jpg)
In all seriousness though, the whole mortgage payoff deal has lead to some very interesting discussions.
-
In order to do this calculation correctly you would need to run two scenarios and base them off of an entire 30 year term.
The first scenario Frank would invest the 1500 extra in the stock market for the entire 30 year period dollar cost averaging his way in.
The second scenario Frank would have no money going towards investments for 7 years. He would then invest 1500 plus the principal/interest payments he use to be paying for the next 23 years.
In both scenarios Frank would have a paid off house. But the real question is in what scenario would Frank have a larger portfolio at the end?
Average: $ 1,181,218
Median: $ 967,525
Highest: $ 2,815,498
Lowest: $ 433,935
In the "no mortgage prepayment" scenario, the portfolio ending value statistics in cFIREsim were as follows:
Average: $ 1,476,351
Median: $ 1,330,471
Highest: $ 3,267,481
Lowest: $ 565,958
Yep, this is what I would expect to see, and what I have seen when running the numbers in the past. Worst case scenario invest beats pre pay by 132k, average beats pre-pay by 295k, and highest is 452k.
Now, the best chance for pre-pay Frank to actually come out ahead is if he shortens his time to mortgage payoff. If he pays the home off in 2 years it is possible that he could surpass invest Frank, but only if invest Frank has the market tank on during years 1-2. Talk about worse case scenario.
-
Out of curiosity I ran my situation. $260k mortgage with ~22k annual payments for 15 years, 3.0% interest rate. We went for a 15 years when we refinanced down from 4.75% to split the difference so to speak, and to keep payments about the same.
Net present value today of those payments in $351k earning 3%with a 2% inflation rate. Firecalc says my inflation adjusted investment sticking with my current 80/20 portfolio could range from ~250k to 1.1M, average of $620k. Investing won 81% of the time under this scenario without even talking about deductions.
I'm pretty happy sticking with my current plan of just paying it off over 15 years. Odds are decidedly in my favor, and I'd rather increase the odds of being able to retire better and/or sooner with a modest 20% risk that if we get a historically bad 15 years of returns that I might have to work another year or two due to my choice.
-
Glad we just bought a cheap house and never moved up. Mortgage paid off in just a few years and more for investment.
-
It is not that far away from reality. Dividends and capital gains realized through turnover will be recognized when realized. Capital gains that are deferred will be realized at a latter date.
But there is no turnover whatsoever for the entirety of the 30-year period (during which stocks are bought, but none are sold). I can understand the tax assumption on dividends, but not on unrealized capital gains (which represent the lion's share of the total return). So artificially assuming tax liability on unrealized capital gains creates an unrealistic and significant drag on investment performance. Even if you assume that the capital gains will be taxed upon disposition after the 30-year period, the tax-deferred growth during that period provides a significant performance boost.
But it doesn't look like the tax assumptions were the sole source of the discrepancies between your results and mine and rpr's, because your new chart with 0% assumed taxes still shows the "payoff" alternative outperforming in some cases (while in my and rpr's backtests it never did).
-
Interestingly enough, out of both scenarios and all rolling periods, Frank ends with the most money starting in year 1970 with the strategy of.......
drum roll please....
Paying off the mortgage early!
I'm curious how this was calculated.
In 1970, the 30 year fixed rate was 7.25%. So to beat that, the stock market had to do better than that.
http://www.doctorhousingbubble.com/federal-reserve-fighting-inflation-in-the-1970s-and-restraining-the-housing-market-today-the-federal-reserve-is-juicing-the-housing-market-trying-to-cause-inflation-researching-the-1970s-and-1980s/
http://www.stockpickssystem.com/historical-rate-of-return/
The stock market had 5.82% return in the 70's, 17.57% in the 80's, and 18.17% in the 90's, for an average return of 13.85% over the 3 decades. How could the mortgage rate of 7.25% beat 13.85%?
Indeed, my plot shows that investing beats prepay by almost $200K starting in 1970. Plus 1970's 30 year period includes the tech late 1990s peak.
Thanks for running the numbers and the chart, that was what I was expecting to see. I would have assumed if someone obtained a mortgage in 1980 with a rate of almost 20%, it would have made more sense to pay off that mortgage than invest, as the stock market returns were far lower than 20% after that period of time. I just don't understand how the math would work starting in 1970 when the mortgage rate was only 7.25%.
The analysis does not use differing mortgage rates. It uses the same mortgage rate of 4% in all scenarios.
In this case, it makes paying off the mortgage even less worthwhile, compared to the average stock market return of 13.85% from 1970 - 2000. As Brooklynguy noted, it would be good to see your exact underlying data to understand the source of the data, and how you did the calculations.
You are making the mistake of looking at averages and forgetting about volatility. If frank chose the invest strategy, his investments would be hammered in 1973 and 1974. If he follows the Pay-off strategy, his house payment would disappear in 1977,allowing him to invest more per year than the Invest strategy over the next 10 years of strong returns.
Nominal/ Real
1970 4% -2%
1971 15% 11%
1972 19% 15%
1973 -15% -22%
1974 -27% -35%
All returns were sourced from: www.moneychimp.com
So in short, if you believe the market will tank, and have double digit negative losses, it is a no brainer to stay the heck out of the market. Keep the money in cash, or pay off the mortgage, and that will beat the investing strategy (almost everything will beat investing, in this case, including buying beanie babies), assuming you cash out of the losses as well.
So only in a very specific, rare, circumstance, was your scenario able to beat the investing strategy. So unless we have the exact same situation (prepay your mortgage over a 7 year period, during which the market tanks), which is highly improbable, basically prepay never beats investing.
Thanks for the explanation. It seems you almost have to mock up a situation deliberately for the prepay strategy to come out ahead, whereas in 99.99% of all other scenarios (basically staying out of the market during some of the worst years), the investing strategy beats prepay.
If we all could predict when the worst years of the market would be, we would be rich beyond compare.
-
I made an updated plot based on the moneychimp data link (http://www.moneychimp.com/features/market_cagr.htm (http://www.moneychimp.com/features/market_cagr.htm)) provided by virtus.
(http://i67.tinypic.com/dhd36o.png)
In all except one 30 year period (1925), invest beat prepay. We still have the discrepancy.
PS: If anyone is interested, I'd be happy to share my google sheet via PM.
-
It is not that far away from reality. Dividends and capital gains realized through turnover will be recognized when realized. Capital gains that are deferred will be realized at a latter date.
But there is no turnover whatsoever for the entirety of the 30-year period (during which stocks are bought, but none are sold). I can understand the tax assumption on dividends, but not on unrealized capital gains (which represent the lion's share of the total return). So artificially assuming tax liability on unrealized capital gains creates an unrealistic and significant drag on investment performance. Even if you assume that the capital gains will be taxed upon disposition after the 30-year period, the tax-deferred growth during that period provides a significant performance boost.
But it doesn't look like the tax assumptions were the sole source of the discrepancies between your results and mine and rpr's, because your new chart with 0% assumed taxes still shows the "payoff" alternative outperforming in some cases (while in my and rpr's backtests it never did).
Capital gains are taxed not only upon sale but also turnover. Vanguard's turnover is low in most funds but between dividends, turnover, and the taxes upon liquidate including taxes in the calculation produces a more accurate result.
https://www.fidelity.com/tax-information/tax-topics/mutual-funds
So one other assumption is that Fred and Wife are maxing out both of their 401ks, IRAs and HSAs as well I assume.
-
So in short, if you believe the market will tank, and have double digit negative losses, it is a no brainer to stay the heck out of the market. Keep the money in cash, or pay off the mortgage, and that will beat the investing strategy (almost everything will beat investing, in this case, including buying beanie babies), assuming you cash out of the losses as well.
So only in a very specific, rare, circumstance, was your scenario able to beat the investing strategy. So unless we have the exact same situation (prepay your mortgage over a year period, during which the market tanks), which is highly improbable, basically prepay never beats investing.
Thanks for the explanation. It seems you almost have to mock up a situation deliberately for the prepay strategy to come out ahead, whereas in 99.99% of all other scenarios (basically staying out of the market during some of the worst years), the investing strategy beats prepay.
If we all could predict when the worst years of the market would be, we would be rich beyond compare.
In short, every time one of those little orange dots is above the little blue dots you would have been better off, starting at that year in history, paying off your mortgage rather than investing. The data I provided was one time the little orange dot was above the blue dot. Are 99.99% of the blue dots above the orange dots? Nope. If you look at the various graphs there are many times the orange dots are above the blue dots and vice versa.
so in short, if you're on pace to pay off your mortgage in 7 years, instead of 15 or 30 years, there are a few potential 7 years of volatility during which it would be wiser to stay out of the market during those 7 years, instead of being invested, assuming you're lucky enough to pre-pay the mortgage during those periods (same as market timing essentially).
I'm curious what the hard numbers are, assuming one is lucky enough to time the market at the worst periods and stay out of it while plowing the cash into a mortgage. What is the delta between the 2 amounts of net worth?
-
So in short, if you believe the market will tank, and have double digit negative losses, it is a no brainer to stay the heck out of the market. Keep the money in cash, or pay off the mortgage, and that will beat the investing strategy (almost everything will beat investing, in this case, including buying beanie babies), assuming you cash out of the losses as well.
So only in a very specific, rare, circumstance, was your scenario able to beat the investing strategy. So unless we have the exact same situation (prepay your mortgage over a year period, during which the market tanks), which is highly improbable, basically prepay never beats investing.
Thanks for the explanation. It seems you almost have to mock up a situation deliberately for the prepay strategy to come out ahead, whereas in 99.99% of all other scenarios (basically staying out of the market during some of the worst years), the investing strategy beats prepay.
If we all could predict when the worst years of the market would be, we would be rich beyond compare.
In short, every time one of those little orange dots is above the little blue dots you would have been better off, starting at that year in history, paying off your mortgage rather than investing. The data I provided was one time the little orange dot was above the blue dot. Are 99.99% of the blue dots above the orange dots? Nope. If you look at the various graphs there are many times the orange dots are above the blue dots and vice versa.
so in short, if you're on pace to pay off your mortgage in 7 years, instead of 15 or 30 years, there are a few potential 7 years of volatility during which it would be wiser to stay out of the market during those 7 years, instead of being invested, assuming you're lucky enough to pre-pay the mortgage during those periods (same as market timing essentially).
I'm curious what the hard numbers are, assuming one is lucky enough to time the market at the worst periods and stay out of it while plowing the cash into a mortgage. What is the delta between the 2 amounts of net worth?
these few years are coupled with inflation. inflation further deflates real returns.
-
I'm curious what the hard numbers are, assuming one is lucky enough to time the market at the worst periods and stay out of it while plowing the cash into a mortgage. What is the delta between the 2 amounts of net worth?
Better yet, is there a signal, like a fibonacci retracement on the candle wick?
-
so we've really got
1. market timing at play here
2. grossly over estimated tax consequences when investing vs prepaying
3. a black box of data still that no one can replicate the OPs numbers.
You can manipulate math in any way to make it look like you come out ahead by changing variables but it still doesnt work out based on the common assumptions we make around here for FIRE.
-
I made an updated plot based on the moneychimp data link (http://www.moneychimp.com/features/market_cagr.htm (http://www.moneychimp.com/features/market_cagr.htm)) provided by virtus.
(http://i67.tinypic.com/dhd36o.png)
In all except one 30 year period (1925), invest beat prepay. We still have the discrepancy.
PS: If anyone is interested, I'd be happy to share my google sheet via PM.
Are you factoring in inflation?
Why are you factoring inflation into this scenario?
Inflation should only be factored in if you have an expense that is affected by it IMO.
If you are factoring in inflation, how are our factoring it in? Just reducing the overall return?
Sent from my SM-G935F using Tapatalk
-
I made an updated plot based on the moneychimp data link (http://www.moneychimp.com/features/market_cagr.htm (http://www.moneychimp.com/features/market_cagr.htm)) provided by virtus.
(http://i67.tinypic.com/dhd36o.png)
In all except one 30 year period (1925), invest beat prepay. We still have the discrepancy.
PS: If anyone is interested, I'd be happy to share my google sheet via PM.
Are you factoring in inflation?
Why are you factoring inflation into this scenario?
Inflation should only be factored in if you have an expense that is affected by it IMO.
If you are factoring in inflation, how are our factoring it in? Just reducing the overall return?
Sent from my SM-G935F using Tapatalk
I built in the functionality to the spreadsheet to use real or nominal returns. Including inflation or not including inflation is a complicated topic and depends to some degree on what question you are trying to answer. If the question was what would be the results if Frank chose "Invest" but then paid off the mortgage when he hit a net worth of 0, then inflation should not be included in the analysis on the return side. However, if Frank was looking at the 30 year time range and wanted to know what his terminal net worth would be then it would have to be included.
There are two sides to inflation. The first is on the expense side. If he spends money from his portfolio in the future, it will have less buying power than it will today. The other side is his income should fluctuate with CPI-U.
Ideally when I have the time, I want to build in an inflation adjustment for the income side ($1,500) that uses the historical CPI-U.
In general, high inflation tilts the argument much more strongly towards not paying off a house. Mortgage payments are fixed, and thus are cheaper to pay off in the future. In general, the stock market is a reasonable guard against inflation as your equity is in companies that rise in value with inflation (or much higher in economies of rapid growth). Housing values mirror inflation as well, but you realize that gain regardless of whether or not you pay off the house early.
If you're comparing how much buying power you have at the end of the scenario, it doesn't really matter, since each final value will be scaled by the same amount.
-
In general, high inflation tilts the argument much more strongly towards not paying off a house. Mortgage payments are fixed, and thus are cheaper to pay off in the future. In general, the stock market is a reasonable guard against inflation as your equity is in companies that rise in value with inflation (or much higher in economies of rapid growth). Housing values mirror inflation as well, but you realize that gain regardless of whether or not you pay off the house early.
If you're comparing how much buying power you have at the end of the scenario, it doesn't really matter, since each final value will be scaled by the same amount.
Agreed. In fact when carrying a fixed interest debt, deflation would be a lot more worrisome.
-
Correct. But one of the reasons the 70s appear to be better for pay offers in addition to paying insane amounts of taxes is when the inflation is factored into the real returns it makes them look like dog shit. If the market returns 100% and inflation is 200% you have a real return of around -100%. In the real world this helps the guy with a mortgage a shit ton more than the guy with a paid off house but the way op is using real returns it hurts the guy investing a ton. One reason why the 70s appear to be worse for. Investing than they truly were.
-
I do enjoy the charts and banter. For those that are interested The Mortgage Professor has a gob of threads on this here:
https://www.mtgprofessor.com/ArticleCategories/Prepayment_of_Mortgage_Balance.html
This thread seems particularly relevant:
https://www.mtgprofessor.com/A%20-%20Early%20Payoff/another_look_at_mortgage_repayment_as_investment.htm
It is entertaining to see all the other variables and assumptions tuned, but to me it pretty well boils down to:
1. If you can get more investing in other projects and your time horizon is longish the better financial decision is to invest in those projects assuming they have manageable amounts of risk
2. If you can't get more investing in other projects you should pay down your mortgage. With rates as low as they are right now this seems like it is very easy to do for most people with moderate timelines
3. If your timeline is short for whatever reason you're unlikely to be able to stomach the extra risk and principal repayment or simply hoarding the cash may be better options depending on your situation
These threads are impossible to follow because this is a debate that is impossible to have in the abstract. What is the owner's time horizon? What is their tax situation? How stable is their job? How is the rest of their portfolio allocated? How marketable are their skills on the open market in all market cycles? Are they the only breadwinner in the family or does their spouse work? Do they come from a wealthy family? In short, what is their tolerance for risk?
Completely rational beings can have very different answers to these questions. Finance is SOCIAL science. Saying that someone should "do the math" necessarily has to factor in a risk discussion. There is generally data to describe observations of index funds or other homogeneous investment alternatives. However, there isn't generally data in threads like this to describe the investor's risk tolerance. This risk would necessarily involve quantifying many if not all of the items listed above and probably many more.
It's fine to have useful guidelines here, but absent more precise data about one's personal situation I am not sure how anyone can prove anything.
-
Correct. But one of the reasons the 70s appear to be better for pay offers in addition to paying insane amounts of taxes is when the inflation is factored into the real returns it makes them look like dog shit. If the market returns 100% and inflation is 200% you have a real return of around -100%. In the real world this helps the guy with a mortgage a shit ton more than the guy with a paid off house but the way op is using real returns it hurts the guy investing a ton. One reason why the 70s appear to be worse for. Investing than they truly were.
Agreed, real returns in an inflationary environment will always help the fixed rate scenario unless the assumption is investments will not keep up with inflation over an extended period of time.
-
2. if you look at previous posts, the simulation was also run with a tax rate of 0%, 15%, and 30%. A reasonable tax rate and two absurd tax rates. The data did not show material divergence.
There's no material divergence between a realized yearly tax rate of 0% and a realized yearly tax rate of 30% on capital gains?
I think your formulas are off. Let's see the spreadsheet.
-
1. How many people live where they can buy a house for 165,000?
2. Of those people, how many of them can actually manage to pay off their mortgage in just 7 years?
I wonder how those numbers look if the mortgage payoff takes more than 7 years?
OP, can we please see the calculations for 10, 20, or (gasp) 30 year mortgage payoff intervals?
-
The analysis does not use differing mortgage rates. It uses the same mortgage rate of 4% in all scenarios.
When I did my analysis which did try to vary mortgage rates based on projections of what a conventional 30 year mortgage rate would have been at different years in the past one of the questions that came up was whether that was realistic, since we know that today mortgages are going for ~4% so it is good to have both approaches represented.
That said, running the analysis out to 30 years, however fast the actual mortgage is paid off works out a lot better because until that point you still have different investment strategies for your two scenarios.
Reproduced below for comparison purposes.
(https://i1.imgpile.com/i/v8tRS.png) (https://imgpile.com/i/v8tRS)
All values assume a starting mortgage of $100k and $2k of monthly income that can either be thrown entirely at the mortgage until it is gone, and then invested in stocks, or used to make the minimum monthly payment on the mortgage and invest the difference in the stock market.
Out of 1391 start months with at least 30 years of stock market data, paying off your mortgage was the better outcome in 175 months (12.6% of the time). The average benefit of making only minimum mortgage payments for 30 years was ~$122k (in dollars inflation adjusted to the start of the 30 year period), and the median benefit was ~$82,700.
Adding in the assumption that our simulated person had already exceeded their standard deduction, that mortgage interest was tax deductible, and that their marginal tax rate was 25% produced more favorable results.
-
^^^ Most people also don't live in the same place for 30 years or more, whether paying (or prepaying) a mortgage.
Many will also change their investment allocation over time (e.g. adding bonds in the preservation phase, as retirement time approaches).
Lots and lots of different factors that could be implemented...
I appreciate the efforts going into the graphs to try to compare prepaying a mortgage vs standard payments + investing. It may be helpful to some in deciding which path to follow. An interesting discussion, either way.
-
2. itemized deduction is often superior because you can itemize 2 of the biggest items - mortgage interest, and state / local taxes (income tax, property tax, etc). Depending on how much Frank and his wife earn, and how much they pay in state taxes, it could result in a nice deduction from Federal income.
I think that people who itemize should do the math to figure out what their "real" interest rate is when factoring in that deduction. Then use their real, after-tax interest rate in their predictions. You can't really bake it into any assumptions though. And of course, when factoring in taxes, you also have to make sure you're using after-tax market returns.
Many of my clients don't itemize despite having a mortgage, because we live in a low income tax state which has a relatively low cost of living. Thus, property taxes and mortgage interest combined with the average family's income tax does not amount to enough to itemize.
It's one of the things I make sure to point out to them so that they can make appropriate decisions about mortgages. Too often, people assume they're getting a big tax deduction for their mortgage when they are actually getting none.
-
In general, high inflation tilts the argument much more strongly towards not paying off a house. Mortgage payments are fixed, and thus are cheaper to pay off in the future. In general, the stock market is a reasonable guard against inflation as your equity is in companies that rise in value with inflation (or much higher in economies of rapid growth). Housing values mirror inflation as well, but you realize that gain regardless of whether or not you pay off the house early.
If you're comparing how much buying power you have at the end of the scenario, it doesn't really matter, since each final value will be scaled by
the same amount.
Agreed. In fact when carrying a fixed interest debt, deflation would be a lot more worrisome.
I agree as well. For the purposes of this discussion factoring in inflation does not make sense. (Also, if you did that, you'd have to calculate how your housing payments were decreasing each month in "nominal dollars" because of inflation which just gets messy and introduces a lot more potential for error.)
-
so we've really got
1. market timing at play here
2. grossly over estimated tax consequences when investing vs prepaying
3. a black box of data still that no one can replicate the OPs numbers.
You can manipulate math in any way to make it look like you come out ahead by changing variables but it still doesnt work out based on the common assumptions we make around here for FIRE.
1. Marketing timing? No, we have volatility.
2. if you look at previous posts, the simulation was also run with a tax rate of 0%, 15%, and 30%. A reasonable tax rate and two absurd tax rates. The data did not show material divergence.
3. I have provided the data I based the simulations on.
So basically your saying that you don't care what the math says you BELIEVE not paying-off the mortgage early will allow you to come out ahead. That's fine, you can believe what you want. I will do the math and make informed decisions.
You're saying that in certain periods of market volatility, prepaying a mortgage can be better than investing. In order for that to be a reliable option, you need to know when that time is. How is that not market timing?
-
@ maizeman -- Nicely done. I will go look for your thread with this simulation. In fact it is a lot more realistic than mine which assumed a fixed rate of 4%. Nonetheless there is reasonable agreement in the shapes of the curves -- especially the dip around the mid-1920s.
-
Oh I should have posted that! Here it is (in FrozenBits thread on mortgage payoffs): https://forum.mrmoneymustache.com/share-your-badassity/i-didn't-pay-off-my-mortgage-and-i-feel-fucking-great!/msg1451266/#msg1451266
Yes, I agree the shapes of our curves are quite similar, with the biggest difference likely being that difference between a fixed interest rate mortgage and a varying one over time (and almost always >4%). I'm using the shiller dataset for interest rates and stock market returns, which I think is the same dataset used by moneychimp. So definitely count me as yet another validation through independent re-implementation.
-
Oh I should have posted that! Here it is (in FrozenBits thread on mortgage payoffs): https://forum.mrmoneymustache.com/share-your-badassity/i-didn't-pay-off-my-mortgage-and-i-feel-fucking-great!/msg1451266/#msg1451266
Yes, I agree the shapes of our curves are quite similar, with the biggest difference likely being that difference between a fixed interest rate mortgage and a varying one over time (and almost always >4%). I'm using the shiller dataset for interest rates and stock market returns, which I think is the same dataset used by moneychimp. So definitely count me as yet another validation through independent re-implementation.
Yeah, your dataset is very intriguing. Is this an excel doc as well? If so could I get me hands on it?
At this point I have several that I am digging into and looking for errors or anything that could be of use in factoring a multitude of scenarios.
Sent from my SM-G935F using Tapatalk
-
Oh I should have posted that! Here it is (in FrozenBits thread on mortgage payoffs): https://forum.mrmoneymustache.com/share-your-badassity/i-didn't-pay-off-my-mortgage-and-i-feel-fucking-great!/msg1451266/#msg1451266
Yes, I agree the shapes of our curves are quite similar, with the biggest difference likely being that difference between a fixed interest rate mortgage and a varying one over time (and almost always >4%). I'm using the shiller dataset for interest rates and stock market returns, which I think is the same dataset used by moneychimp. So definitely count me as yet another validation through independent re-implementation.
Yeah, your dataset is very intriguing. Is this an excel doc as well? If so could I get me hands on it?
At this point I have several that I am digging into and looking for errors or anything that could be of use in factoring a multitude of scenarios.
Sent from my SM-G935F using Tapatalk
I am not sure which dataset you're asking for. You can download the shiller data on the stock market, interest rates, and inflation as an excel sheet here (http://www.econ.yale.edu/~shiller/data.htm).
The graph above is based on some messy python code which I -- while being rather embarrassed by it -- would be willing to post if it is of interest/use. In the interim I've made an excel document with the final results from each starting month. Everything is based on a $100k mortgage. But if you live in a part of the country where house prices are higher, just multiply everything* and the pattern should stay the same. Let me know if the excel sheet doesn't make sense, has weird formatting issues (created it in LibreOffice), or if I've misunderstood your question.
*If one thinks an average mortgage is $400k then multiply the monthly payment and final net worth values by 4.
-
I have a question about inflation as regards stocks and mortgage rates. With stocks, their 'actual' return is 10% on average, but we subtract 3% because of inflation to get a 'real' return of 7%, correct?
If that's true, shouldn't we do the same with mortgage interest? If your mortgage is 4% shouldn't you subtract 3% from it to get a 'real' return of 1%?
Am I wrong about this?
-
@Frozenbits, For easier comparisons, I'm also attaching (edit: a spreadsheet with) the outputs of my code with a hardwired 4% interest rate which should be more directly comparable to rpr's results. Graphical comparison below as well.
(https://i0.imgpile.com/i/edGj4.png) (https://imgpile.com/i/edGj4)
-
I have a question about inflation as regards stocks and mortgage rates. With stocks, their 'actual' return is 10% on average, but we subtract 3% because of inflation to get a 'real' return of 7%, correct?
If that's true, shouldn't we do the same with mortgage interest? If your mortgage is 4% shouldn't you subtract 3% from it to get a 'real' return of 1%?
Am I wrong about this?
You are correct, that is why anyone looking into this should be comparing our mortgage rates with non-inflation stock market returns. So we would compare a 4% mortgage to a 9.6% average market return.
-
@Frozenbits, For easier comparisons, I'm also attaching the outputs of my code with a hardwired 4% interest rate which should be more directly comparable to rpr's results. Graphical comparison below as well.
(https://i0.imgpile.com/i/edGj4.png) (https://imgpile.com/i/edGj4)
Nice! Thanks for sharing.
-
You are correct, that is why anyone looking into this should be comparing our mortgage rates with non-inflation stock market returns. So we would compare a 4% mortgage to a 9.6% average market return.
Probably missing "-adjusted" after "non-inflation" (see Inflation-Adjusted Return (http://www.investopedia.com/terms/i/inflation_adjusted_return.asp)) but I think your intent is clear: don't subtract inflation when looking at market returns.
It depends on the decision you are trying to make.
What decision would be made better by ignoring inflation? Because market returns are likely to be affected by inflation while a locked-in mortgage rate will not, it seems reality dictates the inclusion of inflation...?
-
Exactly. We are comparing a flow of cash that is certain, with a flow of returns that are uncertain. Hence his analysis of the variations that historically occurred for the uncertain flow of returns is highly appropriate.
In fact, it is perfectly possible for market returns to be WORSE than any of the historic worst case scenarios. If fact, if we used a broader set of global markets to drive the scenarios we would have a much larger range of possible outcomes. For example, buy 100% Japanese equities in 1990 vs a fixed 4% mortgage payoff and run that one.
I see this point come up a lot. I will stipulate that if you look at the history of stock and bond returns over the last 150 years in different individual countries, a lot of them have much worse "worst case" scenarios than historical data for the USA. Those worst case scenarios almost all tend to start in years that span world war II and be in countries with significant on the ground fighting, civilian deaths, and destruction of infrastructure during the war. That's my personal benchmark for the type of scenario I cannot prepare for through FIRE.
For the specific scenario you mentioned, if someone bought a house in japan in 1991 they saw the house lose 2/3s of its value over the next twenty years.
(http://www.doctorhousingbubble.com/wp-content/uploads/2011/05/CO-JPP-F02.gif)
I don't know what real estate laws are like in the Japan, but in the USA they would have been better off investing in stocks, taking the huge hit to their stock values (still down ~50% from 1991) and giving the bank keys in lieu of foreclosure than prepaying the mortgage and seeing every single dollar of their equity wiped out by the continued collapse in housing prices and having no net worth at all.
Edit to respond to your edit:
I can't imagine European stocks purchased in 1939 did well up to 1969, vs a fixed 4% return. Maybe they did recover well. Anyone have global equities data?
Sadly no. The datasets exist, but to get the needed raw numbers one would need to pay for them. Also, I don't know about you, but I certainly wouldn't have wanted my net worth tied up in house equity in Berlin or London from 1939-1945.
-
All good points, however my main point stands. We don't know the future and the US returns have been unusually stable and consistent over the last 100 years or so.
I think you're missing my main point, which is that extreme events outside the range of what the US has experienced over the last 150 years tend to mean there are enough other, bigger, societal problems going on that I'd generally be more concerned about the physical safely of myself and those I care about than my net worth.
You cant consider house values when comparing mortgage vs equities. If you own the house, you eat the value losses regardless.
I certainly can consider housing values. If you don't want to factor them in to your own models that's your decision.
I had many friends 50% underwater in japan faithfully paying their mortgage at 0%.
As I said above, I don't know what real estate laws (or cultural practices) are like in Japan. I was talking about what options would have applied if something like the last 25 years in Japan happened here in the states. (And admittedly there are even some states where you'd be on the hook for lost equity if the bank short sells the house, but I believe they are the exception rather than the rule.)
You are changing the narrative to support a view. In Japan, some mortgages are passed across generations. The value of a foreclosure hedge against drops in home values are not part of our model, and should not be part of the argument, for the most part. The home is a durable consumer good. The debt is debt.
You're making statements about which aspects of risk you do and don't want to consider. Your position above was that data from the USA didn't adequately capture the risk of investing in the stock market. My point was that a model where paying off the mortgage is a 100% safe return on investment doesn't adequately capture the risk of having more of your net worth tied up in home equity.*
*2/3s drop in housing prices where you can walk away from your home and mortgage. Having the house blown up by german or allied bombers. Nuclear war. <-- have a look, the last one is almost certainly specifically excluded from your home owners insurance.
-
You are correct, that is why anyone looking into this should be comparing our mortgage rates with non-inflation stock market returns. So we would compare a 4% mortgage to a 9.6% average market return.
Probably missing "-adjusted" after "non-inflation" (see Inflation-Adjusted Return (http://www.investopedia.com/terms/i/inflation_adjusted_return.asp)) but I think your intent is clear: don't subtract inflation when looking at market returns.
It depends on the decision you are trying to make.
What decision would be made better by ignoring inflation? Because market returns are likely to be affected by inflation while a locked-in mortgage rate will not, it seems reality dictates the inclusion of inflation...?
The scenario I am thinking of, is the strategy of investing extra money until it equals the mortgage balance then pay-off the mortgage. In theory you could adjust your returns for inflation than back them out since you will be using the money to pay-off a loan that does not adjust for inflation. However, it would be much easier to just use nominal returns.
But that isn't the scenario you presented....
Sent from my SM-G935F using Tapatalk
-
A few things:
-Most states are recourse not non-recourse.
-Even if I lived in a non-recourse state I would still try to repay the loan. I value integrity over money.
-If you live in a recourse state and a nuke destroyed your house, you still owe your mortgage
-Home equity, legally speaking, is safer than index funds in a brokerage account. Look up home exemption.
- The idea of a risk-free-rate of return, was not made up by people arguing for paying-off the mortgage early. It is a widely recognized term used in the investing community. See below.
http://www.investopedia.com/terms/r/risk-freerate.asp
You are correct on the relative frequency of recourse vs non-recourse states. Apologies for my confusion on that bit. It seems a lot of our disagreements boil down to that point. For example, if my house was destroyed in a nuclear attack, the bank could certainly reclaim the land/ruins. I wouldn't be on the hook for servicing the mortgage on the destroyed home. I don't think that's a matter of integrity, it's a matter of following the terms of the contract and the laws governing that contract which both parties entered into with eyes open. But you're certainly welcome to your own opinion, and even to judge my integrity as lacking if you like.
I don't disagree that there is thing as a risk free rate of return. I do disagree with paying off ones mortgage being such a risk free return. Home equity is certainly safer than index funds (both in terms of fluctuation in value and in terms of protection from bankruptcy proceedings). But it is not 100% safe in extreme events.
It seems we've narrowed down the specific point where our world views diverge, which has been interesting, but I'm not sure what else there is to say on this topic.
-
Ugh I don't care about the math..my mortgage is paid off, there's 25k in an emergency fund for any house repairs,and i don't have to work while living a very nice life in a great house in a great area..if shit hit the fan tomorrow i could live on next to nothing without any mortgage payments and not checking investments every day to see if they've gone up or down. That peace of mind should ensure that I don't die from a stress related illness. I hate math anyway..as long as i'm okay i really don't care.
-
I hate math anyway....
Might not be the thread for you, then. ;)
Unless you are trying to overcome that phobia. :)
-
so we've really got
1. market timing at play here
2. grossly over estimated tax consequences when investing vs prepaying
3. a black box of data still that no one can replicate the OPs numbers.
You can manipulate math in any way to make it look like you come out ahead by changing variables but it still doesnt work out based on the common assumptions we make around here for FIRE.
1. Marketing timing? No, we have volatility.
2. if you look at previous posts, the simulation was also run with a tax rate of 0%, 15%, and 30%. A reasonable tax rate and two absurd tax rates. The data did not show material divergence.
3. I have provided the data I based the simulations on.
So basically your saying that you don't care what the math says you BELIEVE not paying-off the mortgage early will allow you to come out ahead. That's fine, you can believe what you want. I will do the math and make informed decisions.
You're saying that in certain periods of market volatility, prepaying a mortgage can be better than investing. In order for that to be a reliable option, you need to know when that time is. How is that not market timing?
Market timing is: http://www.investopedia.com/terms/m/markettiming.asp
That's not what paying off the house early is. It is a risk-reward decision similar to selecting what percentage of your portfolio will be in stocks and bonds.
From your link:
Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods such as technical indicators or economic data. Because it is extremely difficult to predict the future direction of the stock market, investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain invested.
You're arguing that you should pay off a mortgage and then invest later (moving out of and into the market) because the market underperforms in selective 7-year periods.
However, there is a large variance in the outcomes that would have happened if Frank, at some point in the past, decided to Invest instead; he could have ended up $60K worse off by not paying off his mortgage early.
In conclusion, the choice between Pay-off and Invest is a risk-reward trade off.
It's a similar concept to just stockpiling cash until you feel the market is about to go up, except you're getting a 3-4% return instead of ~1% on a savings account.
-
It absolutely is an ethical problem. In your mortgage contract, you are agreeing to do everything in your power to pay the mortgage payment. So when you don't pay your a mortgage you are breaking your word. I would call lying, an ethical problem.
You must have an interesting mortgage document. None of mine have ever said I agree "to do everything in my power to pay the mortgage payment."
Contracts are made and broken under the law. Rates offered reflect that fact. Consequences for breaking a contract reflect that fact. If I can walk away free from an underwater house - the mortgage company who wrote the documents by the way was certainly aware of that and charged an appropriate rate for their risk.
-
Hey Steve, it is obvious that you feel very strongly about this topic so as you requested I will drop it going forward.
If it makes you feel any better, yes I obviously agree that if we take the two assumptions of the original model I posted (US stock returns from 1871-present, treating a mortgage as a 100% safe investment), and break the first assumption to add additional risk but leave the second assumption unmodified and unquestioned, then yes it makes paying off a mortgage a more favorable choice than the 12.6% odds of paying off a mortgage early being the best choice financially that I found above.
Whether it is fair to reexamine one assumption of the model but not the other is where we're clearly never going to find common ground.
-
I hate math anyway....
Might not be the thread for you, then. ;)
Unless you are trying to overcome that phobia. :)
Favorite
How do you fire or retire with any confidence if you hate or don't understand math.
-
It absolutely is an ethical problem. In your mortgage contract, you are agreeing to do everything in your power to pay the mortgage payment. So when you don't pay your a mortgage you are breaking your word. I would call lying, an ethical problem.
You must have an interesting mortgage document. None of mine have ever said I agree "to do everything in my power to pay the mortgage payment."
Contracts are made and broken under the law. Rates offered reflect that fact. Consequences for breaking a contract reflect that fact. If I can walk away free from an underwater house - the mortgage company who wrote the documents by the way was certainly aware of that and charged an appropriate rate for their risk.
Totally true. Virtus and everyone else shouldn't infer anything from their mortgage documents. Everything that needs to be in it, is in it in writing. Nobody at the bank is upset with you or feels slighted if you do a strategic foreclosure or just stop making payments for some reason. There is an expected % of mortgages that will default and you are one of them, it's not a big deal.
Just speaking generally with regards to contracts, there are often cases where the loss or penalty you will incur by breaking a contract is less than the loss you would incur if you maintained the contract. In that case it makes sense to break it, and everybody entering the contract understood that, and priced accordingly, including penalties or other consequences if any that will be imposed for the break.
-
Virtus -- Thanks for providing your spreadsheet. I have tested it for the case of nominal returns with no taxes and no inflation -- to keep things simple. And -- We get the exact same results for the Invest part. There seems to be a small difference in the prepayment calculation. I will investigate further. Here is both our data plotted. Virtus and my simulations lie on top of each other. For this case it does appear that invests beats prepay almost all of the time except for 1925.
(http://i68.tinypic.com/dy58ye.jpg)
-
In general, high inflation tilts the argument much more strongly towards not paying off a house. Mortgage payments are fixed, and thus are cheaper to pay off in the future. In general, the stock market is a reasonable guard against inflation as your equity is in companies that rise in value with inflation (or much higher in economies of rapid growth). Housing values mirror inflation as well, but you realize that gain regardless of whether or not you pay off the house early.
If you're comparing how much buying power you have at the end of the scenario, it doesn't really matter, since each final value will be scaled by
the same amount.
Agreed. In fact when carrying a fixed interest debt, deflation would be a lot more worrisome.
I agree as well. For the purposes of this discussion factoring in inflation does not make sense. (Also, if you did that, you'd have to calculate how your housing payments were decreasing each month in "nominal dollars" because of inflation which just gets messy and introduces a lot more potential for error.)
cFIREsim lets you factor in inflation in this manner (except I think you meant to say "real/inflation-adjusted dollars" instead of "nominal dollars"). The results reported in reply # 30 (http://reply # 30) above show the portfolio ending values for Virtus' original scenarios in inflation-adjusted dollars (without accounting for any potential tax consequences, and using cFIREsim's assumptions and underlying data sources).
-
Thanks brooklynguy. Between that and the comparison rpr posted last night of not-inflation adjusted results, it seems like the unexpected results Virtus originally reported for mortgage payoff vs stock market returns have been narrowed down to something about how the inflation adjustment is being handled in their spreadsheet that is different from the cFIREsim approach.
-
Thanks brooklynguy. Between that and the comparison rpr posted last night of not-inflation adjusted results, it seems like the unexpected results Virtus originally reported for mortgage payoff vs stock market returns have been narrowed down to something about how the inflation adjustment is being handled in their spreadsheet that is different from the cFIREsim approach.
yes virtus's setup is only using inflation to be detrimental to the investor which in turn has produced better than normal results for the pay down guy in comparison to the investor.
-
1) I do not believe that buying or selling debt particularly a mortgage and government debt has the same risk profile as buying or selling equities. Therefor those models are not fully accurate as they do not reflect that risk. If equities are riskier than debt it would be pretty obvious that equities command a higher return. Same could be said about junk bonds vs treasuries. You expect higher return on junk bonds, but the return is not 100% guaranteed.
2) If you are at 100% equities than making those comparisons above are reasonable to your situation, but it is not everyone's scenario. For example I am currently 67.5/32.5 on my asset allocation or 85%/15% if I consider my home as a negative bond. Also, leveraging your home to increase your equities beyond 100% which is really what we are discussing here should theoretically increase returns but again at the cost of increasing risk. Yes historically equities have worked out well and hopefully continue to do so, but again that comes with increased risk.
3) We have shown before that retiring with a mortgage puts you at higher risk for portfolio failure early on, but increases your chances of portfolio survival 10-25 years later. That makes complete sense since having more equities and higher expenses increases your risk. For those who are interested and capable of returning to work it might not be a big deal, but for others this may not be a reasonable option and maybe decreasing early portfolio failure is much more valuable than long term portfolio survival. This is particularly true for certain specialties where being out of the game makes you un-hirable in the future. This is why I will have my mortgage paid off when I fully retire and why a 15 year instead of a 30 year mortgage was the right choice for me.
4) Pre-paying your mortgage early on during your wealth building phase puts most of your wealth into 1 asset class (your home.) This is poor diversification and likely increases your risk. This becomes very true early in a career where you have a high likelihood of moving. I am sure we have met many people who were forced to sell for a significant loss.
5) I fear that we have too many people on this forum who have not experienced a massive loss in their portfolio during a downturn. I see it on bogleheads, these "100% equities threads" that pop up all the time now that times are good. You wouldn't see them that often during 2009-2011.
6) Risk is real and unfortunately it is understated in all these discussions. We are not spreadsheets and our emotions do have some affect on our decision making. This is especially true during catastrophic events.
-
1) I do not believe that buying or selling debt particularly a mortgage and government debt has the same risk profile as buying or selling equities. Therefor those models are not fully accurate as they do not reflect that risk. If equities are riskier than debt it would be pretty obvious that equities command a higher return. Same could be said about junk bonds vs treasuries. You expect higher return on junk bonds, but the return is not 100% guaranteed.
2) If you are at 100% equities than making those comparisons above are reasonable to your situation, but it is not everyone's scenario. For example I am currently 67.5/32.5 on my asset allocation or 85%/15% if I consider my home as a negative bond. Also, leveraging your home to increase your equities beyond 100% which is really what we are discussing here should theoretically increase returns but again at the cost of increasing risk. Yes historically equities have worked out well and hopefully continue to do so, but again that comes with increased risk.
3) We have shown before that retiring with a mortgage puts you at higher risk for portfolio failure early on, but increases your chances of portfolio survival 10-25 years later. That makes complete sense since having more equities and higher expenses increases your risk. For those who are interested and capable of returning to work it might not be a big deal, but for others this may not be a reasonable option and maybe decreasing early portfolio failure is much more valuable than long term portfolio survival. This is particularly true for certain specialties where being out of the game makes you un-hirable in the future. This is why I will have my mortgage paid off when I fully retire and why a 15 year instead of a 30 year mortgage was the right choice for me.
4) Pre-paying your mortgage early on during your wealth building phase puts most of your wealth into 1 asset class (your home.) This is poor diversification and likely increases your risk. This becomes very true early in a career where you have a high likelihood of moving. I am sure we have met many people who were forced to sell for a significant loss.
5) I fear that we have too many people on this forum who have not experienced a massive loss in their portfolio during a downturn. I see it on bogleheads, these "100% equities threads" that pop up all the time now that times are good. You wouldn't see them that often during 2009-2011.
6) Risk is real and unfortunately it is understated in all these discussions. We are not spreadsheets and our emotions do have some affect on our decision making. This is especially true during catastrophic events.
Risk should be changed to volatile in almost every instance in your post. Risk and volatility are not the same thing. If you truly believe there is RISK in equities why do you hold any, why not hold only low volatility bonds and wait til those cover your FIRE needs.
Most historic cFIREsim runs when holding a mortgage do show you run out of money faster if you happen to hit one of the worst times to retire. But the same situation when presented with earning an extra 5k or the ability to withdraw 5k less in the early years on a 50k spend + mortgage creates a portfolio that almost never fails and increasing that to 10k makes it never fail. You dont have to replace your entire income in FIRE you can use a variable withdrawal method and a mortgage. And supplement your withdrawals with work or by cutting back spending. I dont think stocks are risky ... they are just volatile.
-
The one thing that would be interesting to look at is tax consequences of needing more money in early retirement to pay on the mortgage. If you need XX/yr without a mortgage and XX + $15k with the mortgage, that's $15k less you can fit into your roth conversion ladder. Obviously this is only important to someone at the retirement phase, but could have implications on a 30 year mortgage for many, especially if they continue to refi @ 4% and put the equity into investments.
-
Brooklyn has done that math. And it just doesn't come out ahead. I'm sure he'll share links to his posts about it.
-
1) I do not believe that buying or selling debt particularly a mortgage and government debt has the same risk profile as buying or selling equities. Therefor those models are not fully accurate as they do not reflect that risk. If equities are riskier than debt it would be pretty obvious that equities command a higher return. Same could be said about junk bonds vs treasuries. You expect higher return on junk bonds, but the return is not 100% guaranteed.
2) If you are at 100% equities than making those comparisons above are reasonable to your situation, but it is not everyone's scenario. For example I am currently 67.5/32.5 on my asset allocation or 85%/15% if I consider my home as a negative bond. Also, leveraging your home to increase your equities beyond 100% which is really what we are discussing here should theoretically increase returns but again at the cost of increasing risk. Yes historically equities have worked out well and hopefully continue to do so, but again that comes with increased risk.
3) We have shown before that retiring with a mortgage puts you at higher risk for portfolio failure early on, but increases your chances of portfolio survival 10-25 years later. That makes complete sense since having more equities and higher expenses increases your risk. For those who are interested and capable of returning to work it might not be a big deal, but for others this may not be a reasonable option and maybe decreasing early portfolio failure is much more valuable than long term portfolio survival. This is particularly true for certain specialties where being out of the game makes you un-hirable in the future. This is why I will have my mortgage paid off when I fully retire and why a 15 year instead of a 30 year mortgage was the right choice for me.
4) Pre-paying your mortgage early on during your wealth building phase puts most of your wealth into 1 asset class (your home.) This is poor diversification and likely increases your risk. This becomes very true early in a career where you have a high likelihood of moving. I am sure we have met many people who were forced to sell for a significant loss.
5) I fear that we have too many people on this forum who have not experienced a massive loss in their portfolio during a downturn. I see it on bogleheads, these "100% equities threads" that pop up all the time now that times are good. You wouldn't see them that often during 2009-2011.
6) Risk is real and unfortunately it is understated in all these discussions. We are not spreadsheets and our emotions do have some affect on our decision making. This is especially true during catastrophic events.
Risk should be changed to volatile in almost every instance in your post. Risk and volatility are not the same thing. If you truly believe there is RISK in equities why do you hold any, why not hold only low volatility bonds and wait til those cover your FIRE needs.
Most historic cFIREsim runs when holding a mortgage do show you run out of money faster if you happen to hit one of the worst times to retire. But the same situation when presented with earning an extra 5k or the ability to withdraw 5k less in the early years on a 50k spend + mortgage creates a portfolio that almost never fails and increasing that to 10k makes it never fail. You dont have to replace your entire income in FIRE you can use a variable withdrawal method and a mortgage. And supplement your withdrawals with work or by cutting back spending. I dont think stocks are risky ... they are just volatile.
Boarder42, I invest in equities because I am comfortable accepting the risk with my hope of expected returns. Frankly, I think you are delusional if you think there is 0 risk investing in equities. The risk is real. Re-read everything I wrote above. It generally agrees with every one of your points but, I don't believe 100% in equities is right for me at this stage in my life, and believe it is safer for some to get rid of the mortgage when they retire.
The worst case scenario I can think of for me would be a great depression like event right as I retire. Which is why I fully agree with not paying down the mortgage until you are about to retire. It covers the higher potential growth while you are still working with eventually the decreased risk of lower fixed expenses during retirement. For me, it is the best scenario. Others can choose differently for themselves.
I will leave you with this one quote by John Maynard Keynes (may be attributed to a few others)
"The Market Can Remain Irrational Longer Than You Can Remain Solvent"
-
The worst case scenario I can think of for me would be a great depression like event right as I retire. Which is why I fully agree with not paying down the mortgage until you are about to retire. It covers the higher potential growth while you are still working with eventually the decreased risk of lower fixed expenses during retirement. For me, it is the best scenario. Others can choose differently for themselves.
Yup....this is pretty much my line of thinking too. Use the early cash flows to invest and those closer to RE to pay down/off the mortgage to decrease risk.
-
1) I do not believe that buying or selling debt particularly a mortgage and government debt has the same risk profile as buying or selling equities. Therefor those models are not fully accurate as they do not reflect that risk. If equities are riskier than debt it would be pretty obvious that equities command a higher return. Same could be said about junk bonds vs treasuries. You expect higher return on junk bonds, but the return is not 100% guaranteed.
2) If you are at 100% equities than making those comparisons above are reasonable to your situation, but it is not everyone's scenario. For example I am currently 67.5/32.5 on my asset allocation or 85%/15% if I consider my home as a negative bond. Also, leveraging your home to increase your equities beyond 100% which is really what we are discussing here should theoretically increase returns but again at the cost of increasing risk. Yes historically equities have worked out well and hopefully continue to do so, but again that comes with increased risk.
3) We have shown before that retiring with a mortgage puts you at higher risk for portfolio failure early on, but increases your chances of portfolio survival 10-25 years later. That makes complete sense since having more equities and higher expenses increases your risk. For those who are interested and capable of returning to work it might not be a big deal, but for others this may not be a reasonable option and maybe decreasing early portfolio failure is much more valuable than long term portfolio survival. This is particularly true for certain specialties where being out of the game makes you un-hirable in the future. This is why I will have my mortgage paid off when I fully retire and why a 15 year instead of a 30 year mortgage was the right choice for me.
4) Pre-paying your mortgage early on during your wealth building phase puts most of your wealth into 1 asset class (your home.) This is poor diversification and likely increases your risk. This becomes very true early in a career where you have a high likelihood of moving. I am sure we have met many people who were forced to sell for a significant loss.
5) I fear that we have too many people on this forum who have not experienced a massive loss in their portfolio during a downturn. I see it on bogleheads, these "100% equities threads" that pop up all the time now that times are good. You wouldn't see them that often during 2009-2011.
6) Risk is real and unfortunately it is understated in all these discussions. We are not spreadsheets and our emotions do have some affect on our decision making. This is especially true during catastrophic events.
Risk should be changed to volatile in almost every instance in your post. Risk and volatility are not the same thing. If you truly believe there is RISK in equities why do you hold any, why not hold only low volatility bonds and wait til those cover your FIRE needs.
Most historic cFIREsim runs when holding a mortgage do show you run out of money faster if you happen to hit one of the worst times to retire. But the same situation when presented with earning an extra 5k or the ability to withdraw 5k less in the early years on a 50k spend + mortgage creates a portfolio that almost never fails and increasing that to 10k makes it never fail. You dont have to replace your entire income in FIRE you can use a variable withdrawal method and a mortgage. And supplement your withdrawals with work or by cutting back spending. I dont think stocks are risky ... they are just volatile.
Boarder42, I invest in equities because I am comfortable accepting the risk with my hope of expected returns. Frankly, I think you are delusional if you think there is 0 risk investing in equities. The risk is real. Re-read everything I wrote above. It generally agrees with every one of your points but, I don't believe 100% in equities is right for me at this stage in my life, and believe it is safer for some to get rid of the mortgage when they retire.
The worst case scenario I can think of for me would be a great depression like event right as I retire. Which is why I fully agree with not paying down the mortgage until you are about to retire. It covers the higher potential growth while you are still working with eventually the decreased risk of lower fixed expenses during retirement. For me, it is the best scenario. Others can choose differently for themselves.
I will leave you with this one quote by John Maynard Keynes (may be attributed to a few others)
"The Market Can Remain Irrational Longer Than You Can Remain Solvent"
the entire basis of most people's FIRE is on the fact that the market always goes up. It may be volatile but it always goes up. Even you are assuming that with your 60% equity allocation. in your quote irrational is volatile. Risk is not equivalent to volatility. risk can be a by product of having no plan in place for volaitily but RISK is thrown around far too much in these forums as a reason for investing to be bad. You increase your risk by not planning for volatility but in general i'm of the opinion that the market is not a risk over the long haul.
-
The one thing that would be interesting to look at is tax consequences of needing more money in early retirement to pay on the mortgage. If you need XX/yr without a mortgage and XX + $15k with the mortgage, that's $15k less you can fit into your roth conversion ladder. Obviously this is only important to someone at the retirement phase, but could have implications on a 30 year mortgage for many, especially if they continue to refi @ 4% and put the equity into investments.
Brooklyn has done that math. And it just doesn't come out ahead. I'm sure he'll share links to his posts about it.
I don't recall having done any modeling on this question for specific scenarios using specific tax rates, but the related point that I regularly (and possibly excessively) harp on is that retaining a mortgage loan does not necessitate having extra taxable income to cover the required mortgage payments on a dollar-for-dollar basis. Ordinarily if you choose to retain your mortgage loan instead of paying it off you wouldn't need an extra $15k of annual taxable income unless the annual required mortgage payments were some large multiple of $15k. My most recent post on that point was this one (https://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-you-do-and-pay-off-your-mortgage-early/msg1493684/#msg1493684).
-
the entire basis of most people's FIRE is on the fact that the market always goes up. It may be volatile but it always goes up. Even you are assuming that with your 60% equity allocation. in your quote irrational is volatile. Risk is not equivalent to volatility. risk can be a by product of having no plan in place for volaitily but RISK is thrown around far too much in these forums as a reason for investing to be bad. You increase your risk by not planning for volatility but in general i'm of the opinion that the market is not a risk over the long haul.
I think most people would agree with you that there isn't much risk over the long haul. The trouble is that not everyone has a long haul horizon. As you get closer to needing to live off your stash your long haul is much shorter and the downside from holding riskier assets increases. Again, social sciences aren't hard sciences and you can't just "do the math." One's ability to tolerate risk depends on a whole host of things that are somewhat hard to quantify precisely and make a math problem out of them.
-
6) Risk is real and unfortunately it is understated in all these discussions.
Any suggestions on how to quantify a general process for choosing among options with unequal risk? Or this specific "mortgage vs. invest" choice?
Seems wrong to say "I don't care about risk: investing is the choice for me."
Also seems wrong to say "Always take the safer route: investing has risk so mortgage payment is the choice for me."
Does seem reasonable to look at the "most likely" outcome, consider the likelihood and consequences of unfavorable events, and choose based on those results. Other thoughts?
-
Again, social sciences aren't hard sciences and you can't just "do the math." One's ability to tolerate risk depends on a whole host of things that are somewhat hard to quantify precisely and make a math problem out of them.
But research attempts to measure the amount of risk a person is comfortable with at a point in time in their life and set the asset allocation accordingly.
-
i'd really like to see the age demographic on the paydown vs invest side. I'd tend to think the younger crowd falls on the invest side more than the older crowd. The older people on these forums typically find this place trying to figure out how to retire on a much more standard age/schedule/asset allocation. They are planning to have money only support them for 30 years and are only looking at a small picture. While the younger generation finds this place looking for early retirement specifically and can step back and is more open to some of the more A typical ideas that float around here.
Maybe i'm an outlier as a younger person who feels that even more so than supporting my FIRE time line, the increase in automation and jobs moving away at what will become exponential in my childrens life time that even maximizing returns once FIREd makes much more sense to sustain my future family and charitable giving(b/c our society is gonna need it) than trying to be conservative and just make enough that i can get by. keeping a 90/10 or even higher amount of stock to bond ratio is what we're planning for ... and greater than 60% of the time with a mortgage that money grows to ridiculous levels using the 4% rule. and its safe with minor flexibility during the first 5 years 100% of the time using Variable withdrawal methods.
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
-
the entire basis of most people's FIRE is on the fact that the market always goes up. It may be volatile but it always goes up. Even you are assuming that with your 60% equity allocation. in your quote irrational is volatile. Risk is not equivalent to volatility. risk can be a by product of having no plan in place for volaitily but RISK is thrown around far too much in these forums as a reason for investing to be bad. You increase your risk by not planning for volatility but in general i'm of the opinion that the market is not a risk over the long haul.
You are correct, we all hope markets produce some growth so that we can live on our wealth. But there is no rule out there that says that markets will always grow. I hate to throw out Japan at you since almost everyone would, but the reality is that it is a possibility. Even if long term growth does occur having a huge downturn in equities that lasts a decade is a real possibility before markets return which is the basis for my quote. I can easily survive a 1-3 year recession. But can I survive a 10 year recession? That is the real risk which is why when I retire I will not have 100% equities and I will not have a mortgage. I would not be able to survive a 50% loss in my wealth if it is sustained for a prolonged period of time. Lets say I have $1million and live on $40k. If the markets collapse for a decade and I am able to be flexible and cut my spending by 25% my wealth is still $500k going down by $30k/yr over 5-10 years. I would be devastated and be forced to go back to work which I have no intention of doing. Yes this is hypothetical, but during the great depression equities dropped by 80% from 1929 to 1932 and believe me there was little chance of finding work.
Risk is not just about the volatility of your portfolio, the risk is real especially when you must survive off that portfolio.
-
Again, social sciences aren't hard sciences and you can't just "do the math." One's ability to tolerate risk depends on a whole host of things that are somewhat hard to quantify precisely and make a math problem out of them.
But research attempts to measure the amount of risk a person is comfortable with at a point in time in their life and set the asset allocation accordingly.
Fair point....but the amount they're comfortable with and what ends up being "optimal" are probably two very different numbers. If one comes from a wealthy family or has awesome job skills such that a layoff or loss of business income won't materially impact their bread winning capacity during a bad slump they're more likely to rationally take more risk.
I have read about 10 of these long posts on this topic now and I can't help but think many of the posters are younger and haven't been through a lot of nasty cycles. I too thought I was pretty invincible until the gnarly crisis of '09.
During the last several years I have secured a lot of extra resources (lines of credit, family commitments, platforms, alternative streams of income, etc.) that simply weren't available to me 10 years ago. This allows me to be comfortable taking more risk. I am not sure how I would ever really quantify this with any degree of accuracy though.
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
This would work horribly. Just wait for a bull run like we're having now, you'll be putting all your money into your house while the market soars up and up. Strategies like these are no better than your average Las Vegas gambler's favorite "system".
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
This would work horribly. Just wait for a bull run like we're having now, you'll be putting all your money into your house while the market soars up and up. Strategies like these are no better than your average Las Vegas gambler's favorite "system".
By work horribly you mean, work no worse than the worse of the other two systems being proposed... with possible upside.
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
This would work horribly. Just wait for a bull run like we're having now, you'll be putting all your money into your house while the market soars up and up. Strategies like these are no better than your average Las Vegas gambler's favorite "system".
By work horribly you mean, work no worse than the worse of the other two systems being proposed... with possible upside.
Yes and no, but I caution you against trying something like this. Yes, it won't do any worse than the worst of the two options. No, it doesn't really have potential upside. Rather, if you look at my example, it's actually more likely to ensure that you end up closer to the worst of the two scenarios. Yes, you may grab a bunch of stock during a correction, but then you'll be paying money into your house when the market continues its upward trajectory. On the other hand, if there's a long-term recession, you'll be putting more money on average into the market and not into your more stable mortgage payment.
If you want the best of both worlds, you're probably better off picking an allocation of the two options that works best for you and sticking to it. This is no different than choosing a specified portfolio allocation of US stock, international stock, and bonds and sticking to that. Market timing ends up putting you on the wrong side of the curve more often than not.
Personally, if your horizon is long enough, the analysis seems to show that over all historical 30 years periods, investing is better. If your horizon is shorter, then you may want to consider a more balanced approach, depending on your ability to handle market volatility.
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
This would work horribly. Just wait for a bull run like we're having now, you'll be putting all your money into your house while the market soars up and up. Strategies like these are no better than your average Las Vegas gambler's favorite "system".
By work horribly you mean, work no worse than the worse of the other two systems being proposed... with possible upside.
Yes and no, but I caution you against trying something like this. Yes, it won't do any worse than the worst of the two options. No, it doesn't really have potential upside. Rather, if you look at my example, it's actually more likely to ensure that you end up closer to the worst of the two scenarios. Yes, you may grab a bunch of stock during a correction, but then you'll be paying money into your house when the market continues its upward trajectory. On the other hand, if there's a long-term recession, you'll be putting more money on average into the market and not into your more stable mortgage payment.
If you want the best of both worlds, you're probably better off picking an allocation of the two options that works best for you and sticking to it. This is no different than choosing a specified portfolio allocation of US stock, international stock, and bonds and sticking to that. Market timing ends up putting you on the wrong side of the curve more often than not.
Personally, if your horizon is long enough, the analysis seems to show that over all historical 30 years periods, investing is better. If your horizon is shorter, then you may want to consider a more balanced approach, depending on your ability to handle market volatility.
It's cool and all. I just would like to see it plugged into the model and how it all shakes out.
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
You'll come out way behind what you would have just investing for 30 years.
-
I don't understand how we have multiples of these threads (and I still love to read through them!).
The math is always very clear.
Yes, there are situations were it might not work out, or you have some special circumstances, or you hate debt, or whatever (and I don't think the Invest "side" argues against people making personal choices).
But the math doesn't really change. Historically speaking, Invest wins.
-
For completeness and to hopefully dampen all of the new threads seeking to prove what is not capable of being proved I will point you all to the CAPM resources I was able to find easily online:
http://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdf
https://en.wikipedia.org/wiki/Capital_asset_pricing_model
CAPM has problems in the real world, but does a pretty good job of demonstrating that none of this discussion can be had in isolation. All of the numbers cited in this thread would need to be combined with the numbers from the rest of each person's portfolios to have any meaningful discussion of the topic. Each person will have a different Markowitz efficient frontier similar to this:
https://en.wikipedia.org/wiki/Capital_asset_pricing_model#/media/File:Markowitz_frontier.jpg
that is defined by their own situation. It has been over a decade since I studied this stuff so it is a bit hazy, but the short answer is everyone's situation is different.
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
You'd get a result that is about midway between the "pay down your mortgage" curve and the "invest in the stock market curve" because a little more than half the time you'd be putting extra money in the market and a little less than half the time you wouldn't be. Although to be clear we're discussing a simulation where you pay down the mortgage if the market was up the previous month, and and you invest in the stock market if the the market was down the previous month, right?
-
Paying down the mortgage gets me 4% return, investing in the market gets me almost 10% return, if I'm OK with volatility. I'm OK with volatility.
-
The one thing that would be interesting to look at is tax consequences of needing more money in early retirement to pay on the mortgage. If you need XX/yr without a mortgage and XX + $15k with the mortgage, that's $15k less you can fit into your roth conversion ladder. Obviously this is only important to someone at the retirement phase, but could have implications on a 30 year mortgage for many, especially if they continue to refi @ 4% and put the equity into investments.
Brooklyn has done that math. And it just doesn't come out ahead. I'm sure he'll share links to his posts about it.
I don't recall having done any modeling on this question for specific scenarios using specific tax rates, but the related point that I regularly (and possibly excessively) harp on is that retaining a mortgage loan does not necessitate having extra taxable income to cover the required mortgage payments on a dollar-for-dollar basis. Ordinarily if you choose to retain your mortgage loan instead of paying it off you wouldn't need an extra $15k of annual taxable income unless the annual required mortgage payments were some large multiple of $15k. My most recent post on that point was this one (https://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-you-do-and-pay-off-your-mortgage-early/msg1493684/#msg1493684).
For example if my spending in early retirement was $50k/yr without a mortgage and $65k/yr with a mortgage. I understand you don't need 25x the mortgage to make the mortgage payment, but you still need to come up with the extra income to make the monthly payments. For example, pulling an extra $15k from your taxable investments. While it is not taxable in and of itself assuming you are in the 15% bracket it does add to your income, which could lessen the bucket you have for your Roth conversion ladder each year.
-
I understand you don't need 25x the mortgage to make the mortgage payment, but you still need to come up with the extra income to make the monthly payments.
No, you don't need extra income [edit: that is, not in the full amount of the required mortgage payments, or anywhere close to that amount] because you have the invested funds that you could have used to pay off the mortgage loan to use as your source of funds for the mortgage payments. As long as those investments generate most of their returns through capital appreciation (as stock index funds do), you will accrue relatively little income as a result of holding them (which is why I objected to Virtus' use of the completely unrealistic assumption that unrealized capital gains will incur taxes). And as you sell those investments to fund the mortgage payments, only the capital gains (and not the return of investment principal) will represent taxable income, which should be a relatively small portion of the investment sale proceeds in the early years of a leveraged-investing-via-mortgage strategy (when your cost basis in the investments is still relatively high).
-
We are flexible, so we can be evil and time the market.
I'd like to see what happens if, on any down month in the market I invest, and any up month in the market I decide to prepay.
You come out poorly from this system because >2/3 of the time the market is going up, that is, it only goes down about ~1/3 of the time. I'm not sure how months relate to yearly data, maybe one of the others here has that in their excel file or whatnot, but:
The market had 134 positive years and 55 negative years (the market was up 71% of the time)
http://basehitinvesting.com/the-stock-market-a-look-at-the-last-200-years/
Also:
Nearly 7% of all market trading days have seen new all-time highs since 1950.
....
The average returns following an all-time high one, three and five years out into the future have been similar to the average gains over this entire period.
http://awealthofcommonsense.com/2016/11/dont-be-afraid-of-all-time-highs-in-the-stock-market/
-
The one thing that would be interesting to look at is tax consequences of needing more money in early retirement to pay on the mortgage. If you need XX/yr without a mortgage and XX + $15k with the mortgage, that's $15k less you can fit into your roth conversion ladder. Obviously this is only important to someone at the retirement phase, but could have implications on a 30 year mortgage for many, especially if they continue to refi @ 4% and put the equity into investments.
Brooklyn has done that math. And it just doesn't come out ahead. I'm sure he'll share links to his posts about it.
I don't recall having done any modeling on this question for specific scenarios using specific tax rates, but the related point that I regularly (and possibly excessively) harp on is that retaining a mortgage loan does not necessitate having extra taxable income to cover the required mortgage payments on a dollar-for-dollar basis. Ordinarily if you choose to retain your mortgage loan instead of paying it off you wouldn't need an extra $15k of annual taxable income unless the annual required mortgage payments were some large multiple of $15k. My most recent post on that point was this one (https://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-you-do-and-pay-off-your-mortgage-early/msg1493684/#msg1493684).
For example if my spending in early retirement was $50k/yr without a mortgage and $65k/yr with a mortgage. I understand you don't need 25x the mortgage to make the mortgage payment, but you still need to come up with the extra income to make the monthly payments. For example, pulling an extra $15k from your taxable investments. While it is not taxable in and of itself assuming you are in the 15% bracket it does add to your income, which could lessen the bucket you have for your Roth conversion ladder each year.
We have a very expensive mortgage for this place at 1535 a month. And we spend alot relative to mustachians. We plan for spending including mortgage up to the top of the 15% bracket.
You're missing deductions. In your example the youd have at least 8k in personal exemption with no kids and 12600 in standard. So you'd have 20k in deductions. Roth contribution plus so little of the taxable actually being income is what makes it work and the only years you have to be really careful are the 5 year bridge.
-
The one thing that would be interesting to look at is tax consequences of needing more money in early retirement to pay on the mortgage. If you need XX/yr without a mortgage and XX + $15k with the mortgage, that's $15k less you can fit into your roth conversion ladder. Obviously this is only important to someone at the retirement phase, but could have implications on a 30 year mortgage for many, especially if they continue to refi @ 4% and put the equity into investments.
Brooklyn has done that math. And it just doesn't come out ahead. I'm sure he'll share links to his posts about it.
I don't recall having done any modeling on this question for specific scenarios using specific tax rates, but the related point that I regularly (and possibly excessively) harp on is that retaining a mortgage loan does not necessitate having extra taxable income to cover the required mortgage payments on a dollar-for-dollar basis. Ordinarily if you choose to retain your mortgage loan instead of paying it off you wouldn't need an extra $15k of annual taxable income unless the annual required mortgage payments were some large multiple of $15k. My most recent post on that point was this one (https://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-you-do-and-pay-off-your-mortgage-early/msg1493684/#msg1493684).
For example if my spending in early retirement was $50k/yr without a mortgage and $65k/yr with a mortgage. I understand you don't need 25x the mortgage to make the mortgage payment, but you still need to come up with the extra income to make the monthly payments. For example, pulling an extra $15k from your taxable investments. While it is not taxable in and of itself assuming you are in the 15% bracket it does add to your income, which could lessen the bucket you have for your Roth conversion ladder each year.
We have a very expensive mortgage for this place at 1535 a month. And we spend alot relative to mustachians. We plan for spending including mortgage up to the top of the 15% bracket.
You're missing deductions. In your example the youd have at least 8k in personal exemption with no kids and 12600 in standard. So you'd have 20k in deductions. Roth contribution plus so little of the taxable actually being income is what makes it work and the only years you have to be really careful are the 5 year bridge.
True, I was just asking the question. I'm on the keep the mortgage side, just trying to think of potential concerns in early retirement. In that situation your are at around $20k/yr in conversions that can fit into the 15% tax bracket instead of $35k/yr. One other thing (at least at this point) is the impact it could have on ACA help. Just a quick look at the Kaiser institute calculator shows an extra $140/month for healthcare coverage with an AGI of $60k vs $75k for a family of 3.
-
The one thing that would be interesting to look at is tax consequences of needing more money in early retirement to pay on the mortgage. If you need XX/yr without a mortgage and XX + $15k with the mortgage, that's $15k less you can fit into your roth conversion ladder. Obviously this is only important to someone at the retirement phase, but could have implications on a 30 year mortgage for many, especially if they continue to refi @ 4% and put the equity into investments.
Brooklyn has done that math. And it just doesn't come out ahead. I'm sure he'll share links to his posts about it.
I don't recall having done any modeling on this question for specific scenarios using specific tax rates, but the related point that I regularly (and possibly excessively) harp on is that retaining a mortgage loan does not necessitate having extra taxable income to cover the required mortgage payments on a dollar-for-dollar basis. Ordinarily if you choose to retain your mortgage loan instead of paying it off you wouldn't need an extra $15k of annual taxable income unless the annual required mortgage payments were some large multiple of $15k. My most recent post on that point was this one (https://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-you-do-and-pay-off-your-mortgage-early/msg1493684/#msg1493684).
For example if my spending in early retirement was $50k/yr without a mortgage and $65k/yr with a mortgage. I understand you don't need 25x the mortgage to make the mortgage payment, but you still need to come up with the extra income to make the monthly payments. For example, pulling an extra $15k from your taxable investments. While it is not taxable in and of itself assuming you are in the 15% bracket it does add to your income, which could lessen the bucket you have for your Roth conversion ladder each year.
We have a very expensive mortgage for this place at 1535 a month. And we spend alot relative to mustachians. We plan for spending including mortgage up to the top of the 15% bracket.
You're missing deductions. In your example the youd have at least 8k in personal exemption with no kids and 12600 in standard. So you'd have 20k in deductions. Roth contribution plus so little of the taxable actually being income is what makes it work and the only years you have to be really careful are the 5 year bridge.
True, I was just asking the question. I'm on the keep the mortgage side, just trying to think of potential concerns in early retirement. In that situation your are at around $20k/yr in conversions that can fit into the 15% tax bracket instead of $35k/yr. One other thing (at least at this point) is the impact it could have on ACA help. Just a quick look at the Kaiser institute calculator shows an extra $140/month for healthcare coverage with an AGI of $60k vs $75k for a family of 3.
yeah there is a math game with the ACA as well. but i fully expect that to be 100% different by the time i reach FIRE in 4-7 years. selling tradelines has greatly decreased my working time if its still around in 4 years. holy cow its alot of free money.
-
Oooh I had to research what "selling tradelines" is.... Sounds like an easy way to make a little bit extra on the side... but damn it sounds risky. Don't think I'll be doing that.
-
Paying down the mortgage gets me 4% return, investing in the market gets me almost 10% return, if I'm OK with volatility. I'm OK with volatility.
It's a no-brainer...unless...could there be any flaw in this thinking?
-
Paying down the mortgage gets me 4% return, investing in the market gets me almost 10% return, if I'm OK with volatility. I'm OK with volatility.
It's a no-brainer...unless...could there be any flaw in this thinking?
just total market collapse. in which case most everyones FIRE plans fail as well. so i dont think its relevant IMO. we're here to FIRE paying of my house makes that take longer and increases the chances i run out of money in RE. if there is a total market collapse i lose my FIRE plans anyways so who cares if i own my home. i likely would have to rethink how the entire financial world works and start over regardless of if my house was paid off. so i'll maximize my returns based on what we know historically to be true, and not bet on total FIRE failure by paying down my home
-
I get a sense that some of the hyper enthusiasm is fueled by folks who have taken both large loans and significant market risk and want to feel good about their choices. Personally, i always held a lot of market risk via a very high savings rate and aggressive investing. However i also always bought way less home than i could afford. This meant that my home loan was relatively small relative to my net worth, which is my personal philosophy.
In every single case a smaller loan is better. Bigger loans (relative to locale) mean bigger taxes, more utilities and more repairs.
Having a smaller house trumps the whole debate; it cuts living expenses down. However, you can still cue up the folks who will justify their large loans as a hedge, an investment, or something else. Few people will admit to buying an over sized property though; but I think controlling housing costs is the biggest factor in NW (I can't think of any larger expense I have than housing; taxes, utilities, repairs).
Once we assume people buy moderate houses then, and only then, is it appropriate to debate mortgage vs. invest. I chose mortgage, cause I'm CDN, I skip the whole interest deduction and loans run 5 year lengths which increase volatility a lot. However I also have a HELOC to invest (live off) after the next downturn; its my security blanket to compensate for the downturns.
How does it work for Americans when you need to pull $30K/year even in downturns from the investments? My HELOC smooth's out the withdrawals so I can delay 5 years (pay the interest with the HELOC too). Does the timing of withdrawals matter? After 5 years I would be in trouble, but in a market crash that lasted 5 years I would also be destroyed selling off. Do y'all keep 3 years cash on hand to avoid the downturn sell off risk?
-
I get a sense that some of the hyper enthusiasm is fueled by folks who have taken both large loans and significant market risk and want to feel good about their choices. Personally, i always held a lot of market risk via a very high savings rate and aggressive investing. However i also always bought way less home than i could afford. This meant that my home loan was relatively small relative to my net worth, which is my personal philosophy.
In every single case a smaller loan is better. Bigger loans (relative to locale) mean bigger taxes, more utilities and more repairs.
Having a smaller house trumps the whole debate; it cuts living expenses down. However, you can still cue up the folks who will justify their large loans as a hedge, an investment, or something else. Few people will admit to buying an over sized property though; but I think controlling housing costs is the biggest factor in NW (I can't think of any larger expense I have than housing; taxes, utilities, repairs).
Once we assume people buy moderate houses then, and only then, is it appropriate to debate mortgage vs. invest. I chose mortgage, cause I'm CDN, I skip the whole interest deduction and loans run 5 year lengths which increase volatility a lot. However I also have a HELOC to invest (live off) after the next downturn; its my security blanket to compensate for the downturns.
How does it work for Americans when you need to pull $30K/year even in downturns from the investments? My HELOC smooth's out the withdrawals so I can delay 5 years (pay the interest with the HELOC too). Does the timing of withdrawals matter? After 5 years I would be in trouble, but in a market crash that lasted 5 years I would also be destroyed selling off. Do y'all keep 3 years cash on hand to avoid the downturn sell off risk?
Yes owning a smaller house is more mustachian,
mowing your lawn is more mustachian
not paying down your mortgage in the US today is more mustachian.
this "fear" of downturn sell off risk is highly overstated here. you started pumping money into the market years before you have to sell it off. would some of the later investments be sold at a loss in a downturn yes. but all historical modeling shows you're safer in the long term by having a mortgage when you're FIREd and the only real risk will present it self in the first 5 years or so. When your not far removed from the work force and could go back part time to make up the gap if you had to. also adjusting your withdrawal by as little as 10% down in the event of a down turn while keeping a mortgage creates a scenario in which you likely never run out of money barring the hyper inflation that even the mortgage couldnt offset in 1966, but did a much better job offsetting than having a paid off house.
-
i also am not looking to feel good about my choice but to show others they should make the same choice and feel better about it than the feeling they get paying down their mortgage. in general this forum fits the following
1. US based
2. FIREing at 40 or less
3. using Equities and some version of the 4% rule to primarily fund their FIRE.
so in general they should be keeping their mortgages b/c it presents less risk to FIRE over the long run and expedites FIRE. Now if you understand all of this and you still choose to pay it down awesome. Just like some here get satisfaction out of not mowing their own lawn. but it shouldnt be applauded as a good thing. it should be looked at the same way as eating out or paying for lawn service. less than ideal but with an understanding of the tradeoff you're making for whatever personal reason you chose to come up with.
do i own a larger house yes. But when my wife and i made the decision to move to the house we looked at the math and it added 2 years to our FIRE date. but we determined the house was worth it for our enhanced quality of life to be lake front.
Far too many in these forums gloss over payoff vs invest as equal options when one is far superior and cuts years off a FIRE time line. As long as that choice is evaluated and the math is understood, more power to ya. but more often than not it is not correctly understood and people make the wrong arguements to try to make the math look good for paying down their mortgage but its highly unlikely this can ever be accomplished with today's rates and historic returns.
-
I would also add, most of these 'I can prove that paying off the mortgage beats investing' threads rely on some cherry-picked example of paying off the mortgage during a period of negative market returns then investing the extra for the up-swing. Like investing in lottery tickets can be a great return on investment for that "1-in-a-billion" winner, for the vast majority, you are better off if you stick to the historically successful strategy of not wasting your money on a long-shot.
-
I would also add, most of these 'I can prove that paying off the mortgage beats investing' threads rely on some cherry-picked example of paying off the mortgage during a period of negative market returns then investing the extra for the up-swing. Like investing in lottery tickets can be a great return on investment for that "1-in-a-billion" winner, for the vast majority, you are better off if you stick to the historically successful strategy of not wasting your money on a long-shot.
thats a good analogy. i'm gonna use that.
-
I would also add, most of these 'I can prove that paying off the mortgage beats investing' threads rely on some cherry-picked example of paying off the mortgage during a period of negative market returns then investing the extra for the up-swing. Like investing in lottery tickets can be a great return on investment for that "1-in-a-billion" winner, for the vast majority, you are better off if you stick to the historically successful strategy of not wasting your money on a long-shot.
This is inaccurate because the lottery has a negative expected return. Both investing and early mortgage pay-off have positive expected returns (with investing there needs to be a sufficient time horizon). Also this thread does not claim "paying off the mortgage beats investing" it accurately claims that paying off the mortgage early has less risk than investing. My analysis did not cherry-pick data it considered all rolling 30-year periods between 1870 and 1873.
how does it accurately claim it has less risk. i havent seen evidence that there is inherently less risk. you've shown there is more risk historically b/c in your data and even with the incorrect taxing and inflation applied improperly in very rare circumstances did the mortgage paydown come out ahead. so you're betting on smaller probability which is higher risk. You're betting on green in the risk game while we're betting on black and red.
-
i also am not looking to feel good about my choice but to show others they should make the same choice and feel better about it than the feeling they get paying down their mortgage. in general this forum fits the following
1. US based
2. FIREing at 40 or less
3. using Equities and some version of the 4% rule to primarily fund their FIRE.
I'd like to know where you get your empirical data for the make up of this forum. I don't meet 2 of the 3 criteria that you state above. If your advice to not pay off your mortgage is dependent on the above assumptions, then you need to start stating that when you are giving advice or you are misleading people.
-
This is inaccurate because the lottery has a negative expected return. Both investing and early mortgage pay-off have positive expected returns (with investing there needs to be a sufficient time horizon). Also this thread does not claim "paying off the mortgage beats investing" it accurately claims that paying off the mortgage early has less risk than investing. My analysis did not cherry-pick data it considered all rolling 30-year periods between 1870 and 1873.
how does it accurately claim it has less risk. i havent seen evidence that there is inherently less risk. you've shown there is more risk historically b/c in your data and even with the incorrect taxing and inflation applied improperly in very rare circumstances did the mortgage paydown come out ahead. so you're betting on smaller probability which is higher risk. You're betting on green in the risk game while we're betting on black and red.
Virtus tends to focus on a single risk -- namely, the risk that one's capital allocation strategy's actual return will underperform its expected return, which is unquestionably greater in a leveraged-investing-via-mortgage strategy (at least one that uses stocks as its investment vehicle) than in a mortgage-payoff strategy (which is precisely the reason why the former's expected return is higher than the latter's). But, as has been pointed out to Virtus before (https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg1383201/#msg1383201), by doing this Virtus is ignoring the broad array of other, arguably more significant, risks faced by aspiring and actual early retirees, many of which are mitigated by a leveraged-investing-via-mortgage strategy.
-
Virtus tends to focus on a single risk -- namely, the risk that one's capital allocation strategy's actual return will underperform its expected return, which is unquestionably greater in a leveraged-investing-via-mortgage strategy (at least one that uses stocks as its investment vehicle) than in a mortgage-payoff strategy (which is precisely the reason why the former's expected return is higher than the latter's). But, as has been pointed out to Virtus before (https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg1383201/#msg1383201), by doing this Virtus is ignoring the broad array of other, arguably more significant, risks faced by aspiring and actual early retirees, many of which are mitigated by a leveraged-investing-via-mortgage strategy.
"the risk that one's capital allocation strategy's actual return will underperform its expected return" That's an interesting way of defining it, and I think it gets at some of the emotional biases that come into play when assessing risk.
Imagine a hypothetical scenario where I roll a 6 sided die and based on the number that comes up someone pays me some amount of money.
Scenario A: If I roll 2-6 I receive $12k, but if I roll a 1 I receive nothing. The expected value of rolling the die is $10k, and odds that the actual return will underperform its expected return are ~17%.
Scenario B: If I roll 1-5 I receive $12k, if I roll a six I receive $24k. The expected value of rolling the die is $14k, but the odds that the actual return will underperform the expected return are 5/6 or ~83%.
By the definition of risk above, scenario A is less "risky" than scenario B.
-
This is inaccurate because the lottery has a negative expected return. Both investing and early mortgage pay-off have positive expected returns (with investing there needs to be a sufficient time horizon). Also this thread does not claim "paying off the mortgage beats investing" it accurately claims that paying off the mortgage early has less risk than investing. My analysis did not cherry-pick data it considered all rolling 30-year periods between 1870 and 1873.
how does it accurately claim it has less risk. i havent seen evidence that there is inherently less risk. you've shown there is more risk historically b/c in your data and even with the incorrect taxing and inflation applied improperly in very rare circumstances did the mortgage paydown come out ahead. so you're betting on smaller probability which is higher risk. You're betting on green in the risk game while we're betting on black and red.
Virtus tends to focus on a single risk -- namely, the risk that one's capital allocation strategy's actual return will underperform its expected return, which is unquestionably greater in a leveraged-investing-via-mortgage strategy (at least one that uses stocks as its investment vehicle) than in a mortgage-payoff strategy (which is precisely the reason why the former's expected return is higher than the latter's). But, as has been pointed out to Virtus before (https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg1383201/#msg1383201), by doing this Virtus is ignoring the broad array of other, arguably more significant, risks faced by aspiring and actual early retirees, many of which are mitigated by a leveraged-investing-via-mortgage strategy.
As always BG, your comment is excellent, but probably too nuanced to be grasped fully. And I can understand PS and Vitus taking umbrage at my 'lottery analogy', being maybe a bit heavy handed, but easier to understand.
So, from what BG said, investing in t-bills (or a fixed, low rate mortgage (because a high rate mortgage is dumb if you can refinance at any time and lower your payments - which is a 'yuge' feature of this 15 or 30 year inflation hedge btw)) is actually 'riskier' over extended periods because the expected return becomes more definitely below the more volatile equity return. Over sufficiently long periods, you become like the lottery participant - paying a penalty to enjoy the ride you've been taken on.
But, just to head off the next rebuttal, sure 100% US equities could under-perform historically low yielding bonds for 30 years. Maybe even diversifying into a distribution of mostly large cap, with a dose of mid and small cap domestic equities, add some developed world and sprinkled with REITs and Emerging Markets... maybe even that magic formula underperforms bonds. You are still in good shape as long as inflation stays at 2% or increases (since your mortgage is a fixed debt). Or maybe Vitus and PS really are betting on the zombie apocalypse (which they think is more likely than winning the lottery)?
-
I'll support you, 100%, in the comment that 90/10 AA should not be criticized. And I'm sorry that it was somewhat insulting to be compared to survivalists on the internet, but there is certainly a guns, gold, and ammo element out there. I've appreciated your work Vitus, but history is what it is, investing in certainty is less profitable than be willing to accept some volatility (misunderstood as risk) over long (and maybe even longer expected, if we are optimistic) periods.
Also, I'm just one of those 'experienced veterans' that want to help the next generation not repeat some of my inexperience and failures. I bought my first house in 2001. I think it was a 6%/30 year rate. We had our first child, and both of us were working because my job was insecure. We actually did prepay the (very low at the time) mortgage with the double income, thinking it would be great to pay off our house so one of us could retire early. Holy crab-cakes if only we had been investing that money in the stock market instead.
To conclude my story, we sold our first (not entirely paid off) home at a profit (that was hobbled by realtor fees and paying back some home office tax deductions). But throughout the years on our second home, I've enjoyed the flexibility in tax deductions and refinancing to lower rates (and investing all that extra non-pre paid, lower payment moolah). By paying off a mortgage early, with money that could be invested in anything that you think could out perform your 'refinancable' low fixed interest, well - you must just have to think that the future for investing is gonna really suck for your lifetime, you're not going to have tax deductions above the standard deduction, that inflation is going to stay low for the duration of the loan, etc., etc..
-
Is there a reason we can't use industry standard markers for risk-adjusted returns?
The VTSAX Sharpe ratio is about .9 - Meaning that the fund is somewhat risky.
It has a lifetime earning of about 10% on average.
We're comparing a 4% risk-free rate.
6% / 10.7 (the standard deviation of VTSAX) = .56
This turns the the return into a fairly risky investment.
Or with the Sortino Ratio where VTSAX is typically 1.6 is instead changed to about 1.
It's not an impossible bet, in fact you have a pretty good chance of winning. But it puts the risk of this deal somewhere around a developed international stock. If you include international stocks in your portfolio, you have a good chance of coming out ahead. If you believe in investing over paying off your mortgage, but think international funds are too risky, I think there is some collision.
-
Is there a reason we can't use industry standard markers for risk-adjusted returns?
Maybe because the main complaint is [the Sharpe] ratio relies on the notions that risk equals volatility and that volatility is bad (https://en.wikipedia.org/wiki/Sharpe_ratio)?
The validity of those notions is part of the debate here.
-
Is there a reason we can't use industry standard markers for risk-adjusted returns?
Maybe because the main complaint is [the Sharpe] ratio relies on the notions that risk equals volatility and that volatility is bad (https://en.wikipedia.org/wiki/Sharpe_ratio)?
The validity of those notions is part of the debate here.
correct volatility does not equal risk. if you understand the market can be volatile and you're somewhat flexible in your FIRE plans you can have plans in place that reduce or eliminate volatility risk based on what the markets have done historically.
As to the 90/10 comment above a 90/10 AA is better than a 100/0 with a paid off house making up 10% of your total assets. you have more risk in your paid off home it is not liquid even with a HELOC and if the plan is to HELOC to get equity out in bad times why not just take the better path of having your mortgage still opened. when you historically test 90/10 vs 100/0 - 90/10 has a distint advantage in greatly decreasing downside volatility while still maintaining almost the same returns. the amount of extra income gained at the cost of higher downside volatiliy is something everyone needs to evaluate themselves but for me it isnt there. on the flip side a paid off home increase the chances of FIRE failure and losing everything later into FIRE when its less likely you can get a PT job in your field or are less physically able to perform some labor jobs that could supplement the rough patch. More over historically bonds have averaged higher returns than the current mortgage rates so if one were to pay down their house in 7 years at todays rates and if/when bonds recover back to the norm you can no longer secure a mortgage at the past rate you paid off and that money is sunk in a fixed asset and the amazing leverage you could have had is gone.
there is higher risk having a paid off house at today's rates than having invested capital if you plan for equities to fund your FIRE and i personally dont think its a matter of opinion.
-
I don't want to be in the position of arguing in favor of bonds. But the feature bond investments have that a partially paid off mortgage does not is that one ends up rebalancing in and out of them. In the average scenario over the long term this doesn't increase yields over either 100% stocks or buying 10% bonds and 90% bonds and never rebalancing. But it does increase yield over the average of the returns of the two asset classes weighted by your initial percent allocation to each.
In addition, the conventional wisdom, right or wrong, is that you want few bonds early in the accumulation phase and that the time to have them be more of your portfolio (if ever) is right before FIRE. Paying off your mortgage right away and then investing in the stock market produces the opposite profile where a lot of your savings are going towards "bond-like" assets early in the accumulation phase, and once your house is paid off you start increasing your allocation to stocks and keep increasing it until FIRE.
If someone was proposing a model where they'd keep 10% of their net work in home equity and rebalance into more home equity as the stock and/or bond portion of their portfolio rose, and out of home equity when the value of their home portfolio fell, that would be interesting. Depending on what portion of your asset allocation you set to "home equity" your expected return would be a little to a lot lower than a stock portfolio, but you would reduce volatility and get some diversification/rebalancing bonus above the weighted average of the returns for different asset classes. However:
A) mortgages don't really allow for rebalancing (maybe you could get close with a HELOC? That's a whole separate debate (boarder also touched on this issue directly above)).
B) As your portfolio grew towards FIRE and the value of your home was less than 10% of your total net worth, would you have to start buying additional homes to keep up with your preferred asset allocation? Or worse, have to buy a bigger house? (I suspect the actual solution would be to fill the gap between home value and the percent of your portfolio that should be allocated to home equity with bonds.)
C) Since deciding on asset flows depends on total equity in the home, we'd need to historical data on housing prices in different markets to backtest it. And that data just doesn't exist over the timeframes being used for the simulations.
D) Most critically: As far as I can tell, no one is actually proposing this strategy.
Speaking of datasets:
Virtus, I had a couple of questions about your latest simulation, if you don't mind. Are you using data from an index of different types of bonds? Or are you using the shiller data on the returns of 10 year government bonds from 1871-present? What marginal income tax rate, if any, are you assuming for taxes on bond coupons? Is this the result of your simulation without inflation or with inflation corrections to market yields?
-
there is higher risk having a paid off house at today's rates than having invested capital if you plan for equities to fund your FIRE and i personally dont think its a matter of opinion.
It depends on how you define "risk." We tend to use that word loosely, without precisely defining what it means, which is the reason everyone always ends up talking past each other in these debates. If "risk" means "exposure to an adverse possibility," we should be clear about which specific adverse possibility or possibilities we are referring to, or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities.
Virtus is, without question, correct that as between leveraged-stock-investing-via-mortgage and mortgage-payoff, the former exposes you to each of the following possibilities, none of which are present in the latter: the possibility of underperforming the expected return, the possibility of underperforming the worst-case possible outcome of the other strategy, and the possibility of loss of capital. Leveraged-stock-investing-via-mortgage is therefore riskier in each of these specific respects.
However, there is a panoply of other risks that are (or should be) material to the decision-maker, and that therefore should also be accounted for in the analysis, including, not least of which for the aspiring early retiree, the risk of having to work longer than necessarily before achieving self-declared financial independence. I agree with you that, on balance, when all relevant risks are taken into consideration, paying off "fixed-rate non-callable government-favoured low-interest tax-deductible long-term possibly-non-recourse debt secured by an instrument on which creators are generally slow to foreclose" (as Cathy aptly described today's available mortgage debt in the post cited in the one I linked to above) is risker than retaining such debt and investing the proceeds in the stock market.
-
This is inaccurate because the lottery has a negative expected return. Both investing and early mortgage pay-off have positive expected returns (with investing there needs to be a sufficient time horizon).
This is inaccurate because investing has a positive expected return regardless of the time horizon.
-
Is there a reason we can't use industry standard markers for risk-adjusted returns?
Maybe because the main complaint is [the Sharpe] ratio relies on the notions that risk equals volatility and that volatility is bad (https://en.wikipedia.org/wiki/Sharpe_ratio)?
The validity of those notions is part of the debate here.
And the Sortino ratio that describes downside volatility?
-
Paying down the mortgage gets me 4% return, investing in the market gets me almost 10% return, if I'm OK with volatility. I'm OK with volatility.
It's a no-brainer...unless...could there be any flaw in this thinking?
just total market collapse. in which case most everyones FIRE plans fail as well. so i dont think its relevant IMO. we're here to FIRE paying of my house makes that take longer and increases the chances i run out of money in RE. if there is a total market collapse i lose my FIRE plans anyways so who cares if i own my home. i likely would have to rethink how the entire financial world works and start over regardless of if my house was paid off. so i'll maximize my returns based on what we know historically to be true, and not bet on total FIRE failure by paying down my home
Well, there are alternative scenarios between a net 6% return on the borrowed money (maximum optimism) and "total market collapse" (maximum pessimism). I think other posters have made the case well in this and concurrent threads. There is a real chance that stock market returns will be below 4% for the time period an investor has.
This doesn't preclude getting to FI, of course. Most of us get to FI by earning a lot and saving a huge part of it. Investment returns are just icing on the cake in many cases (was in mine).
-
A) mortgages don't really allow for rebalancing (maybe you could get close with a HELOC? That's a whole separate debate (boarder also touched on this issue directly above)).
A)You could re-balance using future cash in flows. Frank would then split his $1,500 per month to keep his net worth lets say 80% equities and 20% house equity (Or whatever ratio he decided).
Thanks for the answers on methodology, Virtus. I've singled out one point from the above as the most interesting to think about (although a little off topic).
Say you have a target asset ratio of 20% home equity, 80% broad stock market index. You start out with 20% in equity in your primary residence (let's say the house is worth $250,000 which is high for where I live, but low for a lot of coastal mustachians) and $200k invested in the stock market. The stock market is growing at 8%/year and your house is appreciating at 4%/year (just a little above inflation). After 1 year (assuming no new investment), your house is worth $260,000 and your equity has grown to $60,000. Meanwhile the value of your stocks has grown to $216k which is now ~78% of your total portfolio of $276. Great. To get back to a 80/20 split, you need to invest an extra $24,000 in your stocks (brings the total to $240k), plus 4x how ever much money you'd have paid off on your mortgage even making minimum payments (so another ~$14k assuming this is the first year of a 30 year mortgage at 4%). Net result: first $38k of extra money goes into the stock market, then 4:1 split between buying stocks and paying down the mortgage for any extra money.
If it's a bad year for stocks though, and they close 8% lower at the end of the year, now your home equity is still $60k, but your stock portfolio needs $56k of new cash to come back up to where it should be plus 14k to make up for mortgage pay down. Net result: first $70k of extra money goes into the stock market, then 4:1 split between buying stocks and paying down the mortgage for any extra money.
I guess my point is just that, if your goal is maintain a fixed ratio of home equity to stock investments, that in an average year one would end up putting a lot more of their surplus cash into the stock market than into prepaying the mortgage. And in a down year for the stock market it is very easy to end up in a situation where it'd take an awful lot of new investment to rebalance your portfolio without being able to pull money out of your home equity the way you can pull it out of a bond fund. Doesn't mean the approach isn't valid. Just that there are some logistical hurdles to implementing it in practice, and the end result probably wouldn't look a lot like paying off the mortgage as quickly as possible.
-
Well, there are alternative scenarios between a net 6% return on the borrowed money (maximum optimism) and "total market collapse" (maximum pessimism). I think other posters have made the case well in this and concurrent threads. There is a real chance that stock market returns will be below 4% for the time period an investor has.
A lot of the discussion about predicting future stock market returns tends to focus on "real" returns. And there are indeed some folks predicting real returns in the 4-5% over the next couple of decades.
For comparing against the mortgage one has to use nominal returns. Even assuming zero risk of increased inflation going forward, 4% nominal returns would imply something like 1.5% real returns.
This doesn't preclude getting to FI, of course. Most of us get to FI by earning a lot and saving a huge part of it. Investment returns are just icing on the cake in many cases (was in mine).
Investment returns may not have been important in you getting to FIRE. They're pretty essential to most in remaining FIRE. At 1.5% real returns, a 25x annual expenses stash would be exhausted in 31-32 years.
-
I'll support you, 100%, in the comment that 90/10 AA should not be criticized. And I'm sorry that it was somewhat insulting to be compared to survivalists on the internet, but there is certainly a guns, gold, and ammo element out there. I've appreciated your work Vitus, but history is what it is, investing in certainty is less profitable than be willing to accept some volatility (misunderstood as risk) over long (and maybe even longer expected, if we are optimistic) periods.
Also, I'm just one of those 'experienced veterans' that want to help the next generation not repeat some of my inexperience and failures. I bought my first house in 2001. I think it was a 6%/30 year rate. We had our first child, and both of us were working because my job was insecure. We actually did prepay the (very low at the time) mortgage with the double income, thinking it would be great to pay off our house so one of us could retire early. Holy crab-cakes if only we had been investing that money in the stock market instead.
To conclude my story, we sold our first (not entirely paid off) home at a profit (that was hobbled by realtor fees and paying back some home office tax deductions). But throughout the years on our second home, I've enjoyed the flexibility in tax deductions and refinancing to lower rates (and investing all that extra non-pre paid, lower payment moolah). By paying off a mortgage early, with money that could be invested in anything that you think could out perform your 'refinancable' low fixed interest, well - you must just have to think that the future for investing is gonna really suck for your lifetime, you're not going to have tax deductions above the standard deduction, that inflation is going to stay low for the duration of the loan, etc., etc..
Thanks for the real-life example, EV2020. Your post deserves a huge bump, so BUMP!
-
Well, there are alternative scenarios between a net 6% return on the borrowed money (maximum optimism) and "total market collapse" (maximum pessimism). I think other posters have made the case well in this and concurrent threads. There is a real chance that stock market returns will be below 4% for the time period an investor has.
This doesn't preclude getting to FI, of course. Most of us get to FI by earning a lot and saving a huge part of it. Investment returns are just icing on the cake in many cases (was in mine).
Well the average 30 year returns on the S&P 500 are around 9.6%. Though you are looking at net so I'm assuming you are looking at inflation adjusted returns? In that case the average would be around 6.7% inflation adjusted. This doesn't take into account taxes but assuming you are not selling off the funds then you are only looking at being taxed on dividends which would be minimal.
Maybe you should pull a Dave Ramsey and assume 12% return on the maximum optimist side. :)
You never know, we could go through a massive bull market over the next 30 years. Many times in the past people have predicted the market to "slow down" and it usually just adjusts and grows. New technology gets invented and we continue to progress at an amazing rate. I honestly think the next 30 years will result in some amazing changes.
-
Well, there are alternative scenarios between a net 6% return on the borrowed money (maximum optimism) and "total market collapse" (maximum pessimism). I think other posters have made the case well in this and concurrent threads. There is a real chance that stock market returns will be below 4% for the time period an investor has.
A lot of the discussion about predicting future stock market returns tends to focus on "real" returns. And there are indeed some folks predicting real returns in the 4-5% over the next couple of decades.
For comparing against the mortgage one has to use nominal returns. Even assuming zero risk of increased inflation going forward, 4% nominal returns would imply something like 1.5% real returns.
This doesn't preclude getting to FI, of course. Most of us get to FI by earning a lot and saving a huge part of it. Investment returns are just icing on the cake in many cases (was in mine).
Investment returns may not have been important in you getting to FIRE. They're pretty essential to most in remaining FIRE. At 1.5% real returns, a 25x annual expenses stash would be exhausted in 31-32 years.
I think this is very fundamental and particularly important to remember.
Retiring at 30 with 25X annual spending saved relies upon positive market (or something) real returns to avoid running out of funds. It is not a bad bet to make, but various folks think differently. The typical Bogleheads poster would perhaps argue that the 30 year old is taking a big gamble that they may end up living on SS in old age. That said, many of them will die with millions unspent. Different choices.
This is where resilience and backup plans come in. I dont buy the arguement that a sufficient backup plan is a statement like 'the markets always go up, so we are ok (source: backtesting)' or 'a crash is like the zombie apocalypse, so we are all hosed, anyway, hence i need no plan (source: your favorite ostrich) '. At least it is not enough for me. My plan is to retire with a more conservative portfolio and well above 50X. However, when i originally set my wealth goal, my minimum was at about 25x level. I did not chose to stop then, so i am not very mustachian, i admit. Those who do want to stop at the earliest possible moment likely should bet on leverage. That epic thread about market_timer on bogleheads is a cautionary tale however.
These discussions have always fascinated me. Some people look at a 30yr old trying to retire at 4% withdrawal rate and say they are taking a huge risk. Although, I'd argue there is risk if they continue working. If they FIRE, they are taking on risk in a theoretical situation where market returns do not keep up with their spending. On the other hand, if the continue working they are taking a guaranteed risk that they will lose that amount of time doing something they really don't want to do.
So FIRE and OMY syndrome really boil down to two different types of risk.
FIRE= theoretical risk
OMY= guaranteed risk
I am also looking at this assuming the imaginary 30yr really want's to quit and peruse other things. If you love your job and would hate leave, that's a totally different scenario.
-
Why not just save up 30x expenses and pay off your mortgage as part of FIRE? Seems like it solves all the risk that's being discussed here.
-
Why not just save up 30x expenses and pay off your mortgage as part of FIRE? Seems like it solves all the risk that's being discussed here.
But then I'd have to work longer.... lol
-
Why not just save up 30x expenses and pay off your mortgage as part of FIRE? Seems like it solves all the risk that's being discussed here.
But then I'd have to work longer.... lol
Well, then people can make that call, between "work as little as possible" vs. "be as safe as possible".
-
Why not just save up 30x expenses and pay off your mortgage as part of FIRE? Seems like it solves all the risk that's being discussed here.
But then I'd have to work longer.... lol
Well, then people can make that call, between "work as little as possible" vs. "be as safe as possible".
I guess my point is you are not getting rid of risk by working longer. You are negating a financial risk by taking on a guaranteed risk of losing a certain amount of time.
Whether it's worth it will be different for every individual situation.
-
Why not just save up 30x expenses and pay off your mortgage as part of FIRE? Seems like it solves all the risk that's being discussed here.
No, it removes some risks at the cost of leaving you more exposed to other risks, chief among them, in my view as it pertains to my own situation, the risk that you end up delaying retirement longer than necessary. I'm also much more worried about the long-term impact of inflation on my retirement plan (which leveraged-investing-via-mortgage does a good job of protecting against) than I am about hitting a bad patch of market returns early in the sequence (which leveraged-investing-via-mortgage heightens your exposure to).
-
Why not just save up 30x expenses and pay off your mortgage as part of FIRE? Seems like it solves all the risk that's being discussed here.
But then I'd have to work longer.... lol
Well, then people can make that call, between "work as little as possible" vs. "be as safe as possible".
to be as safe as possible one must take the worst year of inflation and assume that happens forever. then they must save up to cover all of their expected expenses plus inflation at the longest life a human has ever lived in cash ... then one would be dead before they got their and would not have retired at all.
-
I'm just pointing out that "pay off the mortgage or invest in stocks" is not necessarily an either-or choice. You could do both.
Optimal? Depends on what 'optimal' means to you. If it means 'retire as soon as possible', then it's not optimal. If it means 'have the least risk of running out of $$ and losing your home', then it is.
-
I'm just pointing out that "pay off the mortgage or invest in stocks" is not necessarily an either-or choice. You could do both.
Optimal? Depends on what 'optimal' means to you. If it means 'retire as soon as possible', then it's not optimal. If it means 'have the least risk of running out of $$ and losing your home', then it is.
no b/c you can invest vs pay down your mortgage and satisfy both of those thats the common misconception being discussed here.
-
This doesn't preclude getting to FI, of course. Most of us get to FI by earning a lot and saving a huge part of it. Investment returns are just icing on the cake in many cases (was in mine).
Investment returns may not have been important in you getting to FIRE. They're pretty essential to most in remaining FIRE. At 1.5% real returns, a 25x annual expenses stash would be exhausted in 31-32 years.
Oh sure, we need a positive real return. But lasting 30 years is the basic 4% rule.
I think a lumpy 4% real return is a reasonable number for planning purposes. Say 5-6% nominal. 4% mortgage, 1-2% advantage using leverage. Yeah, it's worth a gamble for the folks 10 or 15 years away from FIRE. It's not the slam dunk that some posters make out, though. Not from here.
-
This doesn't preclude getting to FI, of course. Most of us get to FI by earning a lot and saving a huge part of it. Investment returns are just icing on the cake in many cases (was in mine).
Investment returns may not have been important in you getting to FIRE. They're pretty essential to most in remaining FIRE. At 1.5% real returns, a 25x annual expenses stash would be exhausted in 31-32 years.
Oh sure, we need a positive real return. But lasting 30 years is the basic 4% rule.
I think a lumpy 4% real return is a reasonable number for planning purposes. Say 5-6% nominal. 4% mortgage, 1-2% advantage using leverage. Yeah, it's worth a gamble for the folks 10 or 15 years away from FIRE. It's not the slam dunk that some posters make out, though. Not from here.
its single handedly one of the easiest things you can choose to do to increase FIRE safety and decrease time to FIRE. mowing your lawn = effort, making lunch = effort, moving closer to work= effort, hang drying clothes = effort, choosing to put money in vanguard vs a home = negligible mouse clicks.
-
One other factor that plays into my own decision to save up enough $$ to pay off the mortgage before FIRE is that I have a high paying job ($120k/year) but it took me a good solid 20 years to get to this level. And once I quit, that level of income won't be coming back.
So I'm OK using that firehose of $$ while I have it. Is that OMY? Yeah, probably. Am I OK with that? Yes, yes I am.
Oh, I should note that I'm a long way from FIRE, so I'm still very much in the accumulation phase.
And I do dump all my extra $$ into stocks because stocks don't even have to hit 9% or even 7% to even out against my mortgage. They just have to do 4% or better. So the $$ goes to stocks. If they hit 9%, great, nest egg gets big enough to pay off the mortgage sooner. If they only do 4%, well, no real loss.
-
I'm just pointing out that "pay off the mortgage or invest in stocks" is not necessarily an either-or choice. You could do both.
Optimal? Depends on what 'optimal' means to you. If it means 'retire as soon as possible', then it's not optimal. If it means 'have the least risk of running out of $$ and losing your home', then it is.
no b/c you can invest vs pay down your mortgage and satisfy both of those thats the common misconception being discussed here.
Statements like this are what i find so frustrating. It is like the stock market is some kind of magic money machine.
Its not a misconception. There is an important caveat.
You can satisy both only IF market returns meet your ASSUMPTIONS about future returns. If markets do not meet your assumptions the leverage strategy INCREASES the risk of losing your home. You can argue that the probability markets fail to exceed a certain level is zero, but that does not make it the truth. Deflecting arguements that bring up the 'risk of not being able to retire as early as you want' is a distortion of the normal way of looking at investment and returns. Financial products do not care about how you spend what they earn you or why you are investing.
To use your examples, saving money is guaranteed to help you get there faster, just as owning a boat is almost guaranteed to slow your progress. Leveraged investing in stocks is not guaranteed to help accelerate towards FIRE. A good idea, yes. Likely, yes. Guaranteed, no.
PS frankly, the flow of funds into Vanguard and the intensity of these comments assuring young people that index funds are the key to a work free life have me worried we just might be hitting Japan levels of exuberance. I lived in TOKYO from 1989-1992. One of my clients was selling golf memberships for millions. People believed real estate and stocks could only go up....
and by saving til youre at 50x you're assuming you wont be dead before then or the earth wont get hit by an asteroid. asteroid is extreme. but death is probably the same likelihood of the scenario people claim to be fearful of with stocks.
-
Deflecting arguements that bring up the 'risk of not being able to retire as early as you want' is a distortion of the normal way of looking at investment and returns.
When performing the cost-benefit decision-making analysis, all relevant risks should be taken into account, not only those that fit within the narrow scope of the term "risk" as it is traditionally defined in the field of finance. For an aspiring early retiree, the risk of prolonging achievement of financial independence is, in my mind, one of the most salient risks worth considering.
-
Is there a reason we can't use industry standard markers for risk-adjusted returns?
Maybe because the main complaint is [the Sharpe] ratio relies on the notions that risk equals volatility and that volatility is bad (https://en.wikipedia.org/wiki/Sharpe_ratio)?
The validity of those notions is part of the debate here.
And the Sortino ratio that describes downside volatility?
While the Sortino ratio addresses and corrects some of the weaknesses of the Sharpe ratio, neither statistic measures ongoing and future risks; they both measure the past “goodness” of a manager’s or investment’s return stream. (http://www.redrockcapital.com/Sortino__A__Sharper__Ratio_Red_Rock_Capital.pdf)
In other words - and this is a question to which I do not know the answer - for what specific value of any of these ratios would the invest/pre-pay choice be mathematically equivalent? If that question is answerable, it would be interesting to understand the answer. If that question is not answerable, then back to our regularly scheduled programming....
-
I see all to often especially when times are good that people confuse real risk with volatility thinking they are the same thing when in reality they are not. For me, my biggest risk comes when I retire and must live off my savings. Finding work will not be an option. Therefor on my retirement I will try to minimize that risk by having lower fixed expenses. Lower fixed expenses allows me more flexibility during bad times and therefor minimizes my risk. Basically my plan is to keep my mortgage until I am ready to fire and then at that point aggressively pay it off.
I do not think there is a single person on this thread who can promise me that we will not have a 10+ year recession in the future.
For me the risk of having a prolonged recession as I retire is a real potential threat. By cutting out a $25k/yr mortgage payment I am in much better shape to handle that risk. Until retirement there is no need to eliminate that mortgage.
.
-
I see all to often especially when times are good that people confuse real risk with volatility thinking they are the same thing when in reality they are not. For me, my biggest risk comes when I retire and must live off my savings. Finding work will not be an option. Therefor on my retirement I will try to minimize that risk by having lower fixed expenses. Lower fixed expenses allows me more flexibility during bad times and therefor minimizes my risk. Basically my plan is to keep my mortgage until I am ready to fire and then at that point aggressively pay it off.
I do not think there is a single person on this thread who can promise me that we will not have a 10+ year recession in the future.
For me the risk of having a prolonged recession as I retire is a real potential threat. By cutting out a $25k/yr mortgage payment I am in much better shape to handle that risk. Until retirement there is no need to eliminate that mortgage.
.
how is finding work not an option? there are millions of ways to make a dollar. and typically you only need to make ~10% of your spending level to offset the downside historically.
-
I see all to often especially when times are good that people confuse real risk with volatility thinking they are the same thing when in reality they are not. For me, my biggest risk comes when I retire and must live off my savings. Finding work will not be an option. Therefor on my retirement I will try to minimize that risk by having lower fixed expenses. Lower fixed expenses allows me more flexibility during bad times and therefor minimizes my risk. Basically my plan is to keep my mortgage until I am ready to fire and then at that point aggressively pay it off.
I do not think there is a single person on this thread who can promise me that we will not have a 10+ year recession in the future.
For me the risk of having a prolonged recession as I retire is a real potential threat. By cutting out a $25k/yr mortgage payment I am in much better shape to handle that risk. Until retirement there is no need to eliminate that mortgage.
.
how is finding work not an option? there are millions of ways to make a dollar. and typically you only need to make ~10% of your spending level to offset the downside historically.
My ego, and my skill level will not allow me to take a job paying so significantly less than what I make today. Also, if/when I retire I will also let my license laps considering the many hours and dollars it costs to renew it. Keep in mind boarder, not everyone is in the same situation as you. I have a feeling you really believe that risk is only volatility when in reality it is much more than that. We all hope that markets follow history, but that is also not guaranteed. We accept that risk in order to get higher returns. There is no guarantee that we will not be the next Japan or another Great Depression. I hedge those risks by having a much lower fixed income when I retire. Your confusion with everyones response is that you believe there really is no risk. I hope you are right, but even history has proven you wrong. I wonder, if you had a substantial loss during the 2009 recession, if you lived through having your investments cut in half, losing your job, and being forced to live off your devalued assets, selling every month for huge losses for the next 3-5 years while the markets recover and you maybe are able to find new work. That is real risk and it will rattle most people. Some people have nerves of steel and can handle that stress, but those are very rare people.
-
I see all to often especially when times are good that people confuse real risk with volatility thinking they are the same thing when in reality they are not. For me, my biggest risk comes when I retire and must live off my savings. Finding work will not be an option. Therefor on my retirement I will try to minimize that risk by having lower fixed expenses. Lower fixed expenses allows me more flexibility during bad times and therefor minimizes my risk. Basically my plan is to keep my mortgage until I am ready to fire and then at that point aggressively pay it off.
I do not think there is a single person on this thread who can promise me that we will not have a 10+ year recession in the future.
For me the risk of having a prolonged recession as I retire is a real potential threat. By cutting out a $25k/yr mortgage payment I am in much better shape to handle that risk. Until retirement there is no need to eliminate that mortgage.
.
how is finding work not an option? there are millions of ways to make a dollar. and typically you only need to make ~10% of your spending level to offset the downside historically.
My ego, and my skill level will not allow me to take a job paying so significantly less than what I make today. Also, if/when I retire I will also let my license laps considering the many hours and dollars it costs to renew it. Keep in mind boarder, not everyone is in the same situation as you. I have a feeling you really believe that risk is only volatility when in reality it is much more than that. We all hope that markets follow history, but that is also not guaranteed. We accept that risk in order to get higher returns. There is no guarantee that we will not be the next Japan or another Great Depression. I hedge those risks by having a much lower fixed income when I retire. Your confusion with everyones response is that you believe there really is no risk. I hope you are right, but even history has proven you wrong. I wonder, if you had a substantial loss during the 2009 recession, if you lived through having your investments cut in half, losing your job, and being forced to live off your devalued assets, selling every month for huge losses for the next 3-5 years while the markets recover and you maybe are able to find new work. That is real risk and it will rattle most people. Some people have nerves of steel and can handle that stress, but those are very rare people.
i understand sequence of returns risk and if your goal is to never make another dollar after you walk out the door then your plan is much more aligned with your situation and works and is a lump sum pay down after FI which eliminates the risks associated iwth gradual paydown while trying to reach FIRE.
-
EnjoyIt and I have the exact same plan, nice! :) I would also like to point out an advantage for doing this - if you pay off the mortgage your costs go down in FIRE. For me, my costs are:
$30k without mortgage
$60k with mortgage
If I pay off the mortgage and have 'only' $30k income, I get into a much better tax bracket and I also qualify for much better ACA subsidies (or whatever is in place at that time).
-
EnjoyIt and I have the exact same plan, nice! :) I would also like to point out an advantage for doing this - if you pay off the mortgage your costs go down in FIRE. For me, my costs are:
$30k without mortgage
$60k with mortgage
If I pay off the mortgage and have 'only' $30k income, I get into a much better tax bracket and I also qualify for much better ACA subsidies (or whatever is in place at that time).
if the ACA is still in place or there is some monetary benefit to having my mortgage paid off i may pay it off as well but i dont think subsidies will be around .... i'm all for the best choices from a math to risk ratio and would gladly pay off my home if it made financial sense for the given situation. i just dont think with even the current subsidies paying off my home wins when you consider the ACA still. and i dont plan ot do the math on something that will likely be changed in 3 months. and probably change 3 -4 more times before i FIRE in 5-7 years. Healthshare is still the most affordable option for me if its still around.
-
I see all to often especially when times are good that people confuse real risk with volatility thinking they are the same thing when in reality they are not. For me, my biggest risk comes when I retire and must live off my savings. Finding work will not be an option. Therefor on my retirement I will try to minimize that risk by having lower fixed expenses. Lower fixed expenses allows me more flexibility during bad times and therefor minimizes my risk. Basically my plan is to keep my mortgage until I am ready to fire and then at that point aggressively pay it off.
I do not think there is a single person on this thread who can promise me that we will not have a 10+ year recession in the future.
For me the risk of having a prolonged recession as I retire is a real potential threat. By cutting out a $25k/yr mortgage payment I am in much better shape to handle that risk. Until retirement there is no need to eliminate that mortgage.
.
how is finding work not an option? there are millions of ways to make a dollar. and typically you only need to make ~10% of your spending level to offset the downside historically.
My ego, and my skill level will not allow me to take a job paying so significantly less than what I make today. Also, if/when I retire I will also let my license laps considering the many hours and dollars it costs to renew it. Keep in mind boarder, not everyone is in the same situation as you. I have a feeling you really believe that risk is only volatility when in reality it is much more than that. We all hope that markets follow history, but that is also not guaranteed. We accept that risk in order to get higher returns. There is no guarantee that we will not be the next Japan or another Great Depression. I hedge those risks by having a much lower fixed income when I retire. Your confusion with everyones response is that you believe there really is no risk. I hope you are right, but even history has proven you wrong. I wonder, if you had a substantial loss during the 2009 recession, if you lived through having your investments cut in half, losing your job, and being forced to live off your devalued assets, selling every month for huge losses for the next 3-5 years while the markets recover and you maybe are able to find new work. That is real risk and it will rattle most people. Some people have nerves of steel and can handle that stress, but those are very rare people.
Man that sucks. I had a girl in my cohort and when we were finishing up our PhDs we were at a conference, drinking a few beers and talking. We got to talking about making a living and getting jobs. I asked her what she would do if she didn't get a job in consulting or a job related to her PhD. I said if it came down to it I'd work at a grocery store, or a fast food restaurant for money if I needed to. She told me she would move back in with her mother because doing that type of work was beneath a person with a PhD. My dad retired with a full pension of $80k/yr and got bored so he decided to go work at a grocery store stocking shelves part time. He's a multi-millionaire with a pension of near 6 figures and he stocks shelves in a grocery store for $11/hr, lol.
-
There's an ongoing relevant thread at Bogleheads with a survey:
Anybody purposely loading up on mortgage debt?
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=110407
Survey says:
Yes, in the past 4 years, I have refinanced, taken significant money out, and put it into my asset allocation 10%
No, I have kept my mortgage as is 33%
No, I have paid off, or aggressively paid down my mortgage 57%
Interesting. Different crowd there, though. Older.
-
There's an ongoing relevant thread at Bogleheads with a survey:
Anybody purposely loading up on mortgage debt?
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=110407
Survey says:
Yes, in the past 4 years, I have refinanced, taken significant money out, and put it into my asset allocation 10%
No, I have kept my mortgage as is 33%
No, I have paid off, or aggressively paid down my mortgage 57%
Interesting. Different crowd there, though. Older.
yeah i think they're in line with what you'd expect. older much more conservative crowd. many of whom cant fathom retiring with a 4% SWR and will tell you you're bat shit crazy.
-
Older and have lived through several recessions which make them risk averse. Some are the 3% and 2% SWR which is extreme and I agree with you. But calling them bat shit crazy is a bit out of line. Not everyone who pays off their mortgage is bat shit crazy.
Border, I asked you a question that I hope you could answer in some way please:
I wonder, if you had a substantial loss during the 2009 recession, if you lived through having your investments cut in half, losing your job, and being forced to live off your devalued assets, selling every month for huge losses for the next 3-5 years while the markets recover and you maybe are able to find new work. That is real risk and it will rattle most people. Some people have nerves of steel and can handle that stress, but those are very rare people.
-
Older and have lived through several recessions which make them risk averse. Some are the 3% and 2% SWR which is extreme and I agree with you. But calling them bat shit crazy is a bit out of line. Not everyone who pays off their mortgage is bat shit crazy.
Border, I asked you a question that I hope you could answer in some way please:
I wonder, if you had a substantial loss during the 2009 recession, if you lived through having your investments cut in half, losing your job, and being forced to live off your devalued assets, selling every month for huge losses for the next 3-5 years while the markets recover and you maybe are able to find new work. That is real risk and it will rattle most people. Some people have nerves of steel and can handle that stress, but those are very rare people.
Pretty sure boarder was saying that certain Bogleheads think people are bat shit crazy for planning a 4% withdrawal rate. I don't believe he was calling bogleheads bat shit crazy..... Although if you are planning a 2-3% withdrawal rate I would call you bat shit conservative lol
-
Older and have lived through several recessions which make them risk averse. Some are the 3% and 2% SWR which is extreme and I agree with you. But calling them bat shit crazy is a bit out of line. Not everyone who pays off their mortgage is bat shit crazy.
I would call a 2% SWR bat shit crazy. It's not supported by anything but fear.
-
Older and have lived through several recessions which make them risk averse. Some are the 3% and 2% SWR which is extreme and I agree with you. But calling them bat shit crazy is a bit out of line. Not everyone who pays off their mortgage is bat shit crazy.
I would call a 2% SWR bat shit crazy. It's not supported by anything but fear.
I fully agree that a 2% SWR is way way too conservative. But that is not the norm over at Bogleheads. The majority still subscribe to the 4% with a few people in the 3-3.5% Personally I think 3% is extreme as well, but some of those people want to definitely leave a legacy to their kids and 3% will very likely do that.
-
Correct I was saying boggleheads consider 4% bat shit crazy. But anything under 3.5% is bat shit crazy imo as it's never happened before.
If 2009 happens right after I retire I follow my plan of variable withdrawal and drop my withdrawal by 10%. Not going to say I wouldn't be concerned. I'd likely also make some money to make up for more than that 10% I'm dropping. But part time work for few years probably just buying and selling crap like I do anyways and the wife taking pictures which we'll do every year in fire will supplement all we would need historically if we hit something like the late 60s or 1929.
When you're old I get it retirement is never making another dollar. When I'm 37 and can still wakeboard bc my knees aren't shot and do many other things a younger body can do. I'll try to get out as early as our lifestyle allows and tackle some extra dollars as needed. I will however use the shiller pe to help gauge my date bc I have some seriously golden diamond encrusted handcuffs with my company ESOP. That returns just insane returns that I can get by working just 6 months of any year so I may stretch it out a year extra with 6 months in sabbaticals.
-
Correct I was saying boggleheads consider 4% bat shit crazy. But anything under 3.5% is bat shit crazy imo as it's never happened before.
If 2009 happens right after I retire I follow my plan of variable withdrawal and drop my withdrawal by 10%. Not going to say I wouldn't be concerned. I'd likely also make some money to make up for more than that 10% I'm dropping. But part time work for few years probably just buying and selling crap like I do anyways and the wife taking pictures which we'll do every year in fire will supplement all we would need historically if we hit something like the late 60s or 1929.
When you're old I get it retirement is never making another dollar. When I'm 37 and can still wakeboard bc my knees aren't shot and do many other things a younger body can do. I'll try to get out as early as our lifestyle allows and tackle some extra dollars as needed. I will however use the shiller pe to help gauge my date bc I have some seriously golden diamond encrusted handcuffs with my company ESOP. That returns just insane returns that I can get by working just 6 months of any year so I may stretch it out a year extra with 6 months in sabbaticals.
Actually the 4% withdrawal rate has failures in it. so 3.5% is indeed much safer that 4%. But when you add in human nature of just spending less when times are tough 4% should survive 100% of the time historically.
So, Just to be clear, you have not experienced the 2009 recession with a significant loss while also losing your job in the process? BTW, when no one has money, that means few are buying the stuff you are selling and most definitely even less are going to be paying cash pictures.
Boarder, your math is sound, your thinking is also sound, but I believe you undervalue real risk. Maybe I am wrong and you have nerves of steal, but until you sustain that large lose, I don't think you will ever really know what your mind and emotions can tolerate. Just imagine you have 20x expenses and within just a few months you are down to 10x. Everywhere you turn the news and people around you are saying doom and gloom. You think you know better, but the doom and gloom just keeps getting beat into you. Everyone is talking about buying gold, houses around you are foreclosing, people all around you are losing their jobs and you don't know if you are next. That is some serious shit and most people have a hard time handling it all and still staying the coarse.
Message boards like this and bogleheads are luckily there to hopefully keep you grounded. My wealth has skyrocketed since 2009 and a 50% loss would be really tough on me. That is the reason why I have 30% in bonds. I know I can live off my bonds for many years and never have to sell equities if times are tough and I lose employment for a few years.
-
Risk of working too long greatly out weighs fear of catastrophic failure based on historic returns. 2008 wouldn't have been catastrophic to a 4% swr.
-
Risk of working too long greatly out weighs fear of catastrophic failure based on historic returns. 2008 wouldn't have been catastrophic to a 4% swr.
You'll actually have to wait until 2037 or 2038 to definitively proclaim that 2008 was not catastrophic to 4% swr. There has been a lot of speculation that a 2000 retiree will fail (http://investingforaliving.us/2011/05/30/will-the-year-2000-retiree-destroy-the-4-rule/), and 2008 is a piece of that (along with a little bit of sequence risk). The accumulation phase is totally different from withdrawal, market declines are much more permanently damaging.
-
There has been a lot of speculation that a 2000 retiree will fail (http://investingforaliving.us/2011/05/30/will-the-year-2000-retiree-destroy-the-4-rule/)....
A similar look four years later, while not wildly optimistic, posits that the 2000 retiree will succeed: 4% Rule Results Since The Tech Bubble & Financial Crisis? (https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/)
Yes, it ain't over 'til it's over, so we don't know....
-
It's definitely a mixed bag of comments dredged from the past, but this 2012 post at Early-Retirement.org has some good insight in to how folks felt about the ups and downs of the market (http://www.early-retirement.org/forums/f28/updated-situation-for-2000-retirees-61830.html). Little did they know at the time, that the market was going on an unbroken tear that made all of them far more wealthy today than they were at the time they posted.... hopefully we all have this problem of being overly conservative and defensive, only to have excessive riches showered on us year after year....
At this point in the bull market run, I'm willing to bet most new FI dreamers are wondering how folks outspend a constantly rising market; that 4% means the retirement portfolio rises more or less than 4% every year, but is always positive.
-
Personally I'd welcome a 2008 crash now. I have a very secure job. If it's going to happen I'd like it to happen earlier vs later since I'm still in accumulation. By very secure I mean my company has only had 2 layoffs ever both sub 1% and they were more house cleaning efforts. If the market continues what is doing now for the next 4 -5 years I'll probably hit FiRE numbers early but I probably won't FiRE as the markets would be insanely overvalued. But if we simply had a break even to down year. Or Trump taxes increase earnings substantially the shiller pe will fall right back around 25. And In the next few years 2009 and 2008 will fall off the 10 year look back which should also help normalize the shiller.
-
Personally I'd welcome a 2008 crash now. I have a very secure job. If it's going to happen I'd like it to happen earlier vs later since I'm still in accumulation. By very secure I mean my company has only had 2 layoffs ever both sub 1% and they were more house cleaning efforts. If the market continues what is doing now for the next 4 -5 years I'll probably hit FiRE numbers early but I probably won't FiRE as the markets would be insanely overvalued. But if we simply had a break even to down year. Or Trump taxes increase earnings substantially the shiller pe will fall right back around 25. And In the next few years 2009 and 2008 will fall off the 10 year look back which should also help normalize the shiller.
Ha! Wouldn't everyone, with the benefit of hindsight? Any crash would be life-altering when we know the depths and the duration. But how would you feel going into a Japan 30-year slump? Especially if you don't know how long or how deep it goes? Sorry my frien, no crystal ball available.
-
Personally I'd welcome a 2008 crash now. I have a very secure job. If it's going to happen I'd like it to happen earlier vs later since I'm still in accumulation. By very secure I mean my company has only had 2 layoffs ever both sub 1% and they were more house cleaning efforts. If the market continues what is doing now for the next 4 -5 years I'll probably hit FiRE numbers early but I probably won't FiRE as the markets would be insanely overvalued. But if we simply had a break even to down year. Or Trump taxes increase earnings substantially the shiller pe will fall right back around 25. And In the next few years 2009 and 2008 will fall off the 10 year look back which should also help normalize the shiller.
Ha! Wouldn't everyone, with the benefit of hindsight? Any crash would be life-altering when we know the depths and the duration. But how would you feel going into a Japan 30-year slump? Especially if you don't know how long or how deep it goes? Sorry my frien, no crystal ball available.
Yep better save til your money can sit in the safe til you have enough that adjusted for the worst inflation. Better also add a safety factor to that bc you never know. Then you get to die working. FiRE success!
-
Personally I'd welcome a 2008 crash now. I have a very secure job. If it's going to happen I'd like it to happen earlier vs later since I'm still in accumulation. By very secure I mean my company has only had 2 layoffs ever both sub 1% and they were more house cleaning efforts. If the market continues what is doing now for the next 4 -5 years I'll probably hit FiRE numbers early but I probably won't FiRE as the markets would be insanely overvalued. But if we simply had a break even to down year. Or Trump taxes increase earnings substantially the shiller pe will fall right back around 25. And In the next few years 2009 and 2008 will fall off the 10 year look back which should also help normalize the shiller.
Ha! Wouldn't everyone, with the benefit of hindsight? Any crash would be life-altering when we know the depths and the duration. But how would you feel going into a Japan 30-year slump? Especially if you don't know how long or how deep it goes? Sorry my frien, no crystal ball available.
Yep better save til your money can sit in the safe til you have enough that adjusted for the worst inflation. Better also add a safety factor to that bc you never know. Then you get to die working. FiRE success!
I quoted you in full Boarder. I am referring ONLY to your statement. If you left an implication out of your statement, then I'm not responsible for the context.
-
What's your point then. My point wasn't hindsight after the 08 crash. That's what you inferred. I was specifically asked if I lived thru and what I did or would do. You just posted straw man remarks to my statement. If you have a point make it.
-
What's your point then. My point wasn't hindsight after the 08 crash. That's what you inferred. I was specifically asked if I lived thru and what I did or would do. You just posted straw man remarks to my statement. If you have a point make it.
You never really answered my question.
Also, no business is outside of failure. New disruptive players will always come into the game and put your current corporation at risk.
I truly believe you misunderstand real risk and getting others on this board to follow. I think it is a little bit dangerous especially when you have never experienced a real life altering event.
-
What's your point then. My point wasn't hindsight after the 08 crash. That's what you inferred. I was specifically asked if I lived thru and what I did or would do. You just posted straw man remarks to my statement. If you have a point make it.
You never really answered my question.
Also, no business is outside of failure. New disruptive players will always come into the game and put your current corporation at risk.
I truly believe you misunderstand real risk and getting others on this board to follow. I think it is a little bit dangerous especially when you have never experienced a real life altering event.
Thanks for your opinion on risk. Mine differs.
-
What's your point then. My point wasn't hindsight after the 08 crash. That's what you inferred. I was specifically asked if I lived thru and what I did or would do. You just posted straw man remarks to my statement. If you have a point make it.
You never really answered my question.
Also, no business is outside of failure. New disruptive players will always come into the game and put your current corporation at risk.
I truly believe you misunderstand real risk and getting others on this board to follow. I think it is a little bit dangerous especially when you have never experienced a real life altering event.
Thanks for your opinion on risk. Mine differs.
Your risk is definitely different. But that is the point, people perceive risk very differently and not one answer should fit all people's situation. Like I said, I fully agree with your math and your conclusions. I just disagree with your definition of risk. There is a reason why every financial advisor in the world recommends holding some percentage in bonds. There must be a reason for that. It definitely isn't to garner more AUM fees since bonds underperform equities.
-
What's your point then. My point wasn't hindsight after the 08 crash. That's what you inferred. I was specifically asked if I lived thru and what I did or would do. You just posted straw man remarks to my statement. If you have a point make it.
You never really answered my question.
Also, no business is outside of failure. New disruptive players will always come into the game and put your current corporation at risk.
I truly believe you misunderstand real risk and getting others on this board to follow. I think it is a little bit dangerous especially when you have never experienced a real life altering event.
I've seen this come up a lot and it's really starting to bother me. I've had multiple people tell me my risk adverseness would be different if I was heavily invested through 2009. Basically they tell me "well you don't get it because you haven't lived it". While that statement has some truth, it's bullshit. I've done hundreds of hours in researching investing and different strategies and I am personally fine with the amount of risk I am taking with a 100% equity portfolio. We have multiple back up plans in place in case the economy goes to crap and even if the worse case scenario happens I know we will be fine. It seems like certain members on this forum try to discredit the risk adverseness of others based just on the fact that they haven't experienced a "life altering event".
Yes, both my wife and I could lose our jobs tomorrow. Then over next week the market could tank 50% forcing us to live off of half of our portfolio. That would suck, but we would be totally fine. We would start cutting expenses to the bare minimum and looking for work right away. If our portfolio was slashed in half it would still be enough to survive on for 5 years. This is in my mind our worse case scenario and it has probably a .05% chance of happening. I would also like to speculate that any Mustachian in this scenario has a much better chance of getting by or even picking up work then the average co-worker.
While reading through some of these comments regarding risk, they tend to come off as fear mongering instead of actual risk awareness. Very doom and gloom perspective which is just depressing. "What if Japan happens to the US!" Well, we would all be screwed and I would be worried more about the average persons basic needs being met than what my portfolio is doing. Could this possibly happen? Yes, but it's outside of my control so there is no way in hell I'm going to worry about it.
Anyways, I wouldn't discredit the younger people on here when it comes to their personal risk adverseness. We are pretty fucking smart compared to your average Joe...
-
Boarder,
Your risk assessment for yourself is very likely solid and works for you. I highly doubt that everyone around you has done similar research and has a similar understanding as you. The reality is that I am not fear mongering. Losing half your wealth, losing your job, watching houses around you forclosing, and everyone around you talking about doom and gloom really happened. That was exactly what happened in 2009. Another example is 1929 markets tanked by 80%. Not only could these things happened, they actually happened. So please don't think this is fear mongering. This is reality.
Looks like you are very aware and comfortable with that risk. Others may be much more risk averse or simply have not made the same risk assessments as you have. For those people 100% equities may not be the right decision. Equally those people may need to have lower fixed expenses. This can be especially true if they work in a volatile industry where employment may cease relatively quickly. Risk is not just volatility which you claim it is. Risk is real and different people have different risk profiles based on their personal situation. You simply can't put your risk profile onto everyone.
-
After 1929 laws were changed to make sure that didn't happen again.
After 2008 laws were changed to protect against that happening again.
Could these things happen yes. Are they likely no. You are betting on. Green. We are betting on the rest of the wheel. I am comfortable with that level of risk most here should be.
I mean really you're siting examples that are over 70 years apart and the worst example of all is the hyper inflation of the 70s that killed the 66 retirement. Which again the fed has put laws and regulations in place to make sure it doesn't happen to that level again.
Will there be some correction again for some reason we can't predict. Most likely yes. How fast it will recover we won't know.
But I'll bet on statistical probability based on historic returns every day. And understand volatility will accompany that and plan for it to mitigate the risk you're all running from missing tons of gains in the wealth building stage by keeping insanely (imo) large piles of bonds. If the level of any doom and gloom happens you speak of the amount of bonds you have at 30% won't matter. Pizza Steve will be ok with his 2% swr but he'll have sacrificed years maybe a decade of extra work or more for that. Locking in the risk of years not fired.
-
Also, long-time investors tend to remember the losses more acutely than the gains. I still remember, in my 20's, that I should've taken some of that tech stock money out for an advanced degree or a better car, or maybe even some bonds (although I was only 26 and 30-year bonds at 6% seemed pretty lame - ha!). I think I 'made' and lost about 200k (4 years of investing every extra penny and moving from hot stock to hotter stock, then about the same amount of months of gut wrenching declines starting around March 2000). Didn't get burned too bad in 2008 because I was more defensive, but I got back in too soon and still lost ~300k (on a much bigger balance), before the rebound. But you remember how you felt losing money on paper because it is traumatic, and there are plenty of folks that screw up the 'ignore the headlines / stay the course' advice. There are also people that need the money and cannot simply tighten their belt forever (college, medical, family, etc.).
I think people have good intentions when they offer up their point of view on younger investors not understanding how investing in a market decline is more difficult than just 'getting stocks on sale'. I also understand the 'working longer than necessary' is a risk if you hate your work and value the freedom - but that one is more easy to manage to be honest. No-one can force an unwilling employee to work for a paycheck.
-
The advice I give will help more people retire sooner and successfully based on historic returns. Everyone should have contingency. And frozen and I have both spoken to flexibility we plan to use in fire to mitigate risk. We haven't said do this retire x times faster and 4% is guaranteed.
Did I lose hundreds of thousands in 2008 no did I lose that in 2001 no. Was I investing on my own with money I saw drop substantially for me at my given place in life yes. I started actively trading stocks at 10. Took me over 17 years to find research and understand indexing was the way to go.
-
After 1929 laws were changed to make sure that didn't happen again.
After 2008 laws were changed to protect against that happening again.
Could these things happen yes. Are they likely no. You are betting on. Green. We are betting on the rest of the wheel. I am comfortable with that level of risk most here should be.
I mean really you're siting examples that are over 70 years apart and the worst example of all is the hyper inflation of the 70s that killed the 66 retirement. Which again the fed has put laws and regulations in place to make sure it doesn't happen to that level again.
Will there be some correction again for some reason we can't predict. Most likely yes. How fast it will recover we won't know.
But I'll bet on statistical probability based on historic returns every day. And understand volatility will accompany that and plan for it to mitigate the risk you're all running from missing tons of gains in the wealth building stage by keeping insanely (imo) large piles of bonds. If the level of any doom and gloom happens you speak of the amount of bonds you have at 30% won't matter. Pizza Steve will be ok with his 2% swr but he'll have sacrificed years maybe a decade of extra work or more for that. Locking in the risk of years not fired.
Some good points, but before 2008 there were laws that existed that people hoped would protect them and then 2008/2009 hit. Also, not everyone is you, makes as much money as you, is in the same industry as you, and wants to retire exactly like you. Maybe I want to live on $100k/yr, am 2-3 years away from having $2.5 million and simply not interested having my investments drop by 7 figures for the possible chance of making an extra 1% return during those 2-3 years. The benefit does not outlay the risk. Maybe I am in in the oil and gas industry working on a horizontal fracking field. And I know that if oil prices go down another 10% the fields will close down and I am out of work for god knows how long. I currently make $120k/yr and I need to make sure that I have enough money to sustain myself for a reasonable length of time. Maybe I can work at Walmart for minimum wage, but it doesn't cover all my costs. I may want to keep some cash in CDs or bonds for that event. Maybe I am an Engineer with a Down's syndrome child who requires special needs that I need help with. I must make sure I have enough money on hand or the ability to work to pay for those needs on top of my own retirement savings. Losing my job and having another 50% drop in my wealth can be devastating. Maybe I am a CEO of a medium company making $500k/yr and once I quite and out of work for a year I will never make that kind of money again. Not everyone is you and thinking their actions are stupid or irrational is flat out wrong. Teaching people about the mathematics is the right thing to do and allowing them to decide what their risk profile is with the new information is their best course of action. Telling them that their risk profile is stupid or wrong provides little value since you simply can't judge that.
I agree that a 2% SWR is too extreme for me and can provide math that shows why, but if PizzaSteve can not enjoy life because all he does is worry and actually have the stress affect his wealth and well being, then maybe 2% is the right withdrawal rate for PizzaSteve. 2% is ridiculous for me, it is ridiculous for you, but it may just be the right answer for him. Maybe his goal is to leave a huge pile of cash to his kids. Who are we to judge what risk Steve is able to withstand?
-
@B42 - I'll gladly admit, I could be totally wrong. The market could keep going up for 30 more years for all I know, but that's not a difficult thing to plan for IMHO. The best part about a forum is that differences of opinions are shared in a respectful manner. What happened in the past was very real for me, so I speak to that in what I hope is a helpful way, mostly to be a little 'counter-cultural' since I've had both good and bad experiences with employment, retirement (at least, having an on-again-off-again retired spouse), and investing. I feel that most Mustachian's have had bad employment experiences, good investment experiences, and little to no retirement experience. But that's why I like to be here as opposed to Bogleheads (lots of up and down market experience, which was helpful until I had my own), Early-Reirement.org (way too much positive retirement experience and poor employment experiences). Mustachians seem to have a good mix (although I do miss some FI / non-ER, and non-FI / non-ER folks that seem to have dropped out).
-
Not to rain on the parade, but some of my career experiences would curl Boarder42's hair i bet.
You were involved in Pizza Gate? Just kidding.
This is a relatively new forum, but looking at Bogleheads that has been around much longer you can go back in time and read the threads on 100% equities right before 2008/2009 and how quickly the tune changed afterwards. You can even go back to 2011 and see how people responded when the market had a 15% correction. It just go to show how new investors who never experienced real market turmoil perceive their own risk tolerance. The above comment is not a shot at Boarder who may very well understand his risk and have legit plans for himself.
-
As long as you're still in earning/accumulation phase, why does it bother anyone what the market does? I see it the same way I see my house value - whether it's up or down is really not material until I sell it.
-
As long as you're still in earning/accumulation phase, why does it bother anyone what the market does? I see it the same way I see my house value - whether it's up or down is really not material until I sell it.
It may or may not. It all depend also on how secure your job is. The market going down should not matter to much in the long run if it rebounds. The market going down and losing your job may force you to start selling equities at a depressed value so that you can afford your mortgage and food. I would assume this risk is much lower for mustachians who already live well below their means and can likely survive on the other spouses salary and just not make retirement contributions until the unemployed becomes employed again. But if the family is a single earner the risk becomes more real.
The other risk is actually emotional. I know, emotions should not matter, but picture a world where all the markets are down. Everyone around you talks about collapsing economies, homes are foreclosing everywhere you look, and there seams to be no way to find gainful employment. For most people, psychologically, the world becomes very scary and it starts to make sense that pulling out of the market is the right decision. Right now we all know that historically staying the course is the right decision, but that decision really becomes much more difficult in that scenario. This is exactly what happened in 2001 and 2009 for most investors. I have not experienced other recessions but bet similar sentiment happened then as well. Let me put it a different way. If you have 5x your expenses saved and lost 2.5x the world is not too bad. But picture you were at 20x and now your stache is 10x in the world I just described. Size actually matters when it comes to how you react.
Lastly, history does not have to repeat itself exactly.
Luckily we have forums such as this and bogleheads that may help you stay the course in rough times.
-
As long as you're still in earning/accumulation phase, why does it bother anyone what the market does? I see it the same way I see my house value - whether it's up or down is really not material until I sell it.
It may or may not. It all depend also on how secure your job is. The market going down should not matter to much in the long run if it rebounds. The market going down and losing your job may force you to start selling equities at a depressed value so that you can afford your mortgage and food. I would assume this risk is much lower for mustachians who already live well below their means and can likely survive on the other spouses salary and just not make retirement contributions until the unemployed becomes employed again. But if the family is a single earner the risk becomes more real.
The other risk is actually emotional. I know, emotions should not matter, but picture a world where all the markets are down. Everyone around you talks about collapsing economies, homes are foreclosing everywhere you look, and there seams to be no way to find gainful employment. For most people, psychologically, the world becomes very scary and it starts to make sense that pulling out of the market is the right decision. Right now we all know that historically staying the course is the right decision, but that decision really becomes much more difficult in that scenario. This is exactly what happened in 2001 and 2009 for most investors. I have not experienced other recessions but bet similar sentiment happened then as well. Let me put it a different way. If you have 5x your expenses saved and lost 2.5x the world is not too bad. But picture you were at 20x and now your stache is 10x in the world I just described. Size actually matters when it comes to how you react.
Lastly, history does not have to repeat itself exactly.
Luckily we have forums such as this and bogleheads that may help you stay the course in rough times.
I did live through the 2009 crash, and I do have job instability. I did have investments, but I also pre-paid my mortgage, a lot. The situation I found myself in was no job, not enough in savings/investments, and a mortgage that I had not been able to pay off before SHTF. So, for me, paying down the mortgage only makes sense if you can do it very quickly and have it done fast. Otherwise, it's better to invest. Even selling off some stocks (or bonds) at lower prices is better than having it in the mortgage. When the next payment was due, I couldn't say "hey, give me a 6 month break, I prepaid!"
For me, I ended up coming to the conclusion that I need more liquidity. So I am aggressively saving. I almost have more in savings than I have on the balance of my mortgage. Once I get significantly more in savings/investments than the mortgage balance, I'll make the decision to pay it off (or not). But I will definitely have it paid off before FIRE. I can't imagine going into FIRE with a big expense like a mortgage payment every month.
-
As long as you're still in earning/accumulation phase, why does it bother anyone what the market does? I see it the same way I see my house value - whether it's up or down is really not material until I sell it.
It may or may not. It all depend also on how secure your job is. The market going down should not matter to much in the long run if it rebounds. The market going down and losing your job may force you to start selling equities at a depressed value so that you can afford your mortgage and food. I would assume this risk is much lower for mustachians who already live well below their means and can likely survive on the other spouses salary and just not make retirement contributions until the unemployed becomes employed again. But if the family is a single earner the risk becomes more real.
The other risk is actually emotional. I know, emotions should not matter, but picture a world where all the markets are down. Everyone around you talks about collapsing economies, homes are foreclosing everywhere you look, and there seams to be no way to find gainful employment. For most people, psychologically, the world becomes very scary and it starts to make sense that pulling out of the market is the right decision. Right now we all know that historically staying the course is the right decision, but that decision really becomes much more difficult in that scenario. This is exactly what happened in 2001 and 2009 for most investors. I have not experienced other recessions but bet similar sentiment happened then as well. Let me put it a different way. If you have 5x your expenses saved and lost 2.5x the world is not too bad. But picture you were at 20x and now your stache is 10x in the world I just described. Size actually matters when it comes to how you react.
Lastly, history does not have to repeat itself exactly.
Luckily we have forums such as this and bogleheads that may help you stay the course in rough times.
I did live through the 2009 crash, and I do have job instability. I did have investments, but I also pre-paid my mortgage, a lot. The situation I found myself in was no job, not enough in savings/investments, and a mortgage that I had not been able to pay off before SHTF. So, for me, paying down the mortgage only makes sense if you can do it very quickly and have it done fast. Otherwise, it's better to invest. Even selling off some stocks (or bonds) at lower prices is better than having it in the mortgage. When the next payment was due, I couldn't say "hey, give me a 6 month break, I prepaid!"
For me, I ended up coming to the conclusion that I need more liquidity. So I am aggressively saving. I almost have more in savings than I have on the balance of my mortgage. Once I get significantly more in savings/investments than the mortgage balance, I'll make the decision to pay it off (or not). But I will definitely have it paid off before FIRE. I can't imagine going into FIRE with a big expense like a mortgage payment every month.
I find your situation to be just one more reason why paying extra into a mortgage early in your career makes so little sense. By not having the mortgage paid off when SHTF you actually put yourself into increased risk by not having extra cash on hand. The same scenario but instead of putting that extra cash into a mortgage you instead invested in equities and a small percentage in bonds. Not only will your overall wealth be higher, you also had some bonds saved up to continue paying your mortgage until you were able to find another job. I find that to be much less risky.
-
Thanks for the thoughtful response EnjoyIt.
Not to rain on the parade, but some of my career experiences would curl Boarder42's hair i bet. When you dig deep into modern corporate capitalism, and our governance institutions, one finds some scary ass skeletons.
deleted your personal part in case you decide to
your personal experiences are anecdotal. you have to look at the whole history of everything IMO. which has proven to be very risk free but volatile. if you plan for the volatility you mitigage most of the risk there. i understand there are many ways to plan for volatility and if absolutely never making another dollar is the goal one way to do that is to hold more bonds and pay off your house. but some of the cases you guys throw around are extreme and highly unlikely and in most cases will kill even the best laid over saved FIRE plans.
-
Thanks for the thoughtful response EnjoyIt.
Not to rain on the parade, but some of my career experiences would curl Boarder42's hair i bet. When you dig deep into modern corporate capitalism, and our governance institutions, one finds some scary ass skeletons.
deleted your personal part in case you decide to
your personal experiences are anecdotal. you have to look at the whole history of everything IMO. which has proven to be very risk free but volatile. if you plan for the volatility you mitigage most of the risk there. i understand there are many ways to plan for volatility and if absolutely never making another dollar is the goal one way to do that is to hold more bonds and pay off your house. but some of the cases you guys throw around are extreme and highly unlikely and in most cases will kill even the best laid over saved FIRE plans.
The examples I describe are real life examples. I did not invent anything. These are examples of real people from our past. Real people's lives don't fit so neatly on a graph of volatility. I keep telling you that not everyone is you. Not everyone out there has exactly the same goals and life expectations.
Do you know there are members on this board making well over $250k/yr. I bet there are some members here making over $500k/yr. These same people plan on retiring on well over $24k/yr and a massive downturn on lost wages will not be easily replaced with a $7.50/hr Walmart job.
Please share the math behind paying down debt or 100% equities, but don't fool others into thinking there is no risk in their own lives. You may actually be harming as opposed to helping them.
-
I plan on retiring on well over 24k. You obviously haven't read in detail any post on the plans I've made. You don't have to replace your full income. Being flexible with 10% either by earning that or reducing your spend historically is all that is needed. And if you're not barebones. A 10% reduction is probably quite easy. If you're bare bones on 100k for whatever reason you need to come up with 10k a year in the worst case scenario. Which a Walmart job at 7.50 an hour replaces easily. Odds are you can do better than that and or reduce lifestyle on a 100k per year fire at least in the event of worst case. Which is highly unlikely.
-
I plan on retiring on well over 24k. You obviously haven't read in detail any post on the plans I've made. You don't have to replace your full income. Being flexible with 10% either by earning that or reducing your spend historically is all that is needed. And if you're not barebones. A 10% reduction is probably quite easy. If you're bare bones on 100k for whatever reason you need to come up with 10k a year in the worst case scenario. Which a Walmart job at 7.50 an hour replaces easily. Odds are you can do better than that and or reduce lifestyle on a 100k per year fire at least in the event of worst case. Which is highly unlikely.
Your missing the point boarder. People who are used to make high incomes won't come running to work at Walmart or McDonalds. When times are tough people lose their jobs and available jobs dwindle therefor you may not be able to find minimum wage employment. Also, not all corrections last 1-3 years. Some last longer. Lastly, I keep saying it, but I think you underestimate risk for other people. I think we need to agree to disagree on what risk really is. I think we will just need to reconvene after our next recession and see how everyone thinks at that point. Can we agree on that?
-
As long as you're still in earning/accumulation phase, why does it bother anyone what the market does? I see it the same way I see my house value - whether it's up or down is really not material until I sell it.
It may or may not. It all depend also on how secure your job is. The market going down should not matter to much in the long run if it rebounds. The market going down and losing your job may force you to start selling equities at a depressed value so that you can afford your mortgage and food. I would assume this risk is much lower for mustachians who already live well below their means and can likely survive on the other spouses salary and just not make retirement contributions until the unemployed becomes employed again. But if the family is a single earner the risk becomes more real.
The other risk is actually emotional. I know, emotions should not matter, but picture a world where all the markets are down. Everyone around you talks about collapsing economies, homes are foreclosing everywhere you look, and there seams to be no way to find gainful employment. For most people, psychologically, the world becomes very scary and it starts to make sense that pulling out of the market is the right decision. Right now we all know that historically staying the course is the right decision, but that decision really becomes much more difficult in that scenario. This is exactly what happened in 2001 and 2009 for most investors. I have not experienced other recessions but bet similar sentiment happened then as well. Let me put it a different way. If you have 5x your expenses saved and lost 2.5x the world is not too bad. But picture you were at 20x and now your stache is 10x in the world I just described. Size actually matters when it comes to how you react.
Lastly, history does not have to repeat itself exactly.
Luckily we have forums such as this and bogleheads that may help you stay the course in rough times.
I did live through the 2009 crash, and I do have job instability. I did have investments, but I also pre-paid my mortgage, a lot. The situation I found myself in was no job, not enough in savings/investments, and a mortgage that I had not been able to pay off before SHTF. So, for me, paying down the mortgage only makes sense if you can do it very quickly and have it done fast. Otherwise, it's better to invest. Even selling off some stocks (or bonds) at lower prices is better than having it in the mortgage. When the next payment was due, I couldn't say "hey, give me a 6 month break, I prepaid!"
For me, I ended up coming to the conclusion that I need more liquidity. So I am aggressively saving. I almost have more in savings than I have on the balance of my mortgage. Once I get significantly more in savings/investments than the mortgage balance, I'll make the decision to pay it off (or not). But I will definitely have it paid off before FIRE. I can't imagine going into FIRE with a big expense like a mortgage payment every month.
I agree with this. I think it is pointless to throw more than the required payment at the mortgage, unless you can pay it in full. The mortgage payment is due whether or not you have prepaid part of it and if you get into a cash flow problem, you can still lose the house. IMO, it is best to keep those funds liquid and when you have enough to pay the mortgage in full, then decide if it is the best thing to do in your personal situation.
-
Thanks for the thoughtful response EnjoyIt.
Not to rain on the parade, but some of my career experiences would curl Boarder42's hair i bet. When you dig deep into modern corporate capitalism, and our governance institutions, one finds some scary ass skeletons.
deleted your personal part in case you decide to
your personal experiences are anecdotal. you have to look at the whole history of everything IMO. which has proven to be very risk free but volatile. if you plan for the volatility you mitigage most of the risk there. i understand there are many ways to plan for volatility and if absolutely never making another dollar is the goal one way to do that is to hold more bonds and pay off your house. but some of the cases you guys throw around are extreme and highly unlikely and in most cases will kill even the best laid over saved FIRE plans.
These situations are not merely "anecdotal" or "extreme" and I think you do people a disservice when you dismiss situations that differ from yours. If the goal is to educate people, then you should make sure that they have all the information available to them in order to make an informed decision in their particular situation.
-
"The Great Depression: A Diary" by Benjamin Roth is a good read to show how a prolonged financial crisis affects investors. Roth was an educated professional man and he was barely making it... year after year. Every day he would read the news or look at stock prices, see notices of foreclosures or liquidations, hear about bankruptcies, and every day he would write the same thing: "If only I had a little money!"
But he didn't. Nobody he knew had any money. Landlords lost their properties because their tenants couldn't pay rent. Investors had to sell stock just to pay daily expenses, stock which would have made them rich if only they could've held on for a little while longer - and they knew if they could only hold out, the price would recover. Agonizing, to have to sell under those conditions.
It was enlightening to see how all aspects of people's lives were affected by the depression: brilliant kids who were in college had to leave, women advertised themselves in the newspaper for marriage. Really. Talk about risk.
The next crisis won't look like 1929, and it won't look like 2008, because it's true the financial world is on guard against what has already happened. So it will look different. It will still come though, don't you think? Human nature and all.
-
"The Great Depression: A Diary" by Benjamin Roth is a good read to show how a prolonged financial crisis affects investors. Roth was an educated professional man and he was barely making it... year after year. Every day he would read the news or look at stock prices, see notices of foreclosures or liquidations, hear about bankruptcies, and every day he would write the same thing: "If only I had a little money!"
But he didn't. Nobody he knew had any money. Landlords lost their properties because their tenants couldn't pay rent. Investors had to sell stock just to pay daily expenses, stock which would have made them rich if only they could've held on for a little while longer - and they knew if they could only hold out, the price would recover. Agonizing, to have to sell under those conditions.
It was enlightening to see how all aspects of people's lives were affected by the depression: brilliant kids who were in college had to leave, women advertised themselves in the newspaper for marriage. Really. Talk about risk.
The next crisis won't look like 1929, and it won't look like 2008, because it's true the financial world is on guard against what has already happened. So it will look different. It will still come though, don't you think? Human nature and all.
the great depression was a perfect storm of things which many rules and regulations have been put into place to prevent from every happening again. 2008 is another example of a somewhat perfect storm... though it really wasnt that bad b/c of the speed of the recovery. <--- some of that is likely contributed to previous rule/regulation changes .... then more rules and regulations were put in place to prevent 2008. as we continue as a capitalist society we put in new rules and regulations to make sure money keeps growing b/c thats what runs the economy. something will change and some crisis MAY happen again. it MAY not. the overwhelming likelihood though is we'll all be just fine if we stay invested.
dont bet the short odds out of fear ... understand the whole picture and then if you want to protect against worst case you'd better be doing something like pizza steve and working til you get a 2% SWR b/c you know we dont know the future.
and the catastrophies talked about here arent protected by owning a home and holding 30% bonds.
-
"The Great Depression: A Diary" by Benjamin Roth is a good read to show how a prolonged financial crisis affects investors. Roth was an educated professional man and he was barely making it... year after year. Every day he would read the news or look at stock prices, see notices of foreclosures or liquidations, hear about bankruptcies, and every day he would write the same thing: "If only I had a little money!"
But he didn't. Nobody he knew had any money. Landlords lost their properties because their tenants couldn't pay rent. Investors had to sell stock just to pay daily expenses, stock which would have made them rich if only they could've held on for a little while longer - and they knew if they could only hold out, the price would recover. Agonizing, to have to sell under those conditions.
It was enlightening to see how all aspects of people's lives were affected by the depression: brilliant kids who were in college had to leave, women advertised themselves in the newspaper for marriage. Really. Talk about risk.
The next crisis won't look like 1929, and it won't look like 2008, because it's true the financial world is on guard against what has already happened. So it will look different. It will still come though, don't you think? Human nature and all.
the great depression was a perfect storm of things which many rules and regulations have been put into place to prevent from every happening again. 2008 is another example of a somewhat perfect storm... though it really wasnt that bad b/c of the speed of the recovery. <--- some of that is likely contributed to previous rule/regulation changes .... then more rules and regulations were put in place to prevent 2008. as we continue as a capitalist society we put in new rules and regulations to make sure money keeps growing b/c thats what runs the economy. something will change and some crisis MAY happen again. it MAY not. the overwhelming likelihood though is we'll all be just fine if we stay invested.
dont bet the short odds out of fear ... understand the whole picture and then if you want to protect against worst case you'd better be doing something like pizza steve and working til you get a 2% SWR b/c you know we dont know the future.
and the catastrophies talked about here arent protected by owning a home and holding 30% bonds.
Actually there were winners in the Great Depression. Not people who worked for a living though. Not ordinary investors with ordinary capitalization. Winners were: government employees; holders of government bonds; owners of blue-chip stocks who could hold off selling until they recovered; people who held onto their cash money until the Depression had gone on for years... and then bought distressed properties. People who scooped up bargains too early lost their shirts.
I suppose it's natural to picture risk as how it would affect oneself, so I won't apologize for being haunted by the reality that women advertised themselves in the newspaper for marriage. Imagine an upper middle class woman, used to living comfortably, all her friends are like herself, all her expectations are little pleasures, having babies and running a household someday, maybe she is in college - and within the year she is advertising herself and even a drunken swamper in a speakeasy has to be considered as a potential mate, just because he has a job and she is out of choices. Advertising in her local newspaper. For everyone she knows to read.
For a woman over 50 it would be so much worse. I'm 52. Yeah... risk.
-
"The Great Depression: A Diary" by Benjamin Roth is a good read to show how a prolonged financial crisis affects investors. Roth was an educated professional man and he was barely making it... year after year. Every day he would read the news or look at stock prices, see notices of foreclosures or liquidations, hear about bankruptcies, and every day he would write the same thing: "If only I had a little money!"
But he didn't. Nobody he knew had any money. Landlords lost their properties because their tenants couldn't pay rent. Investors had to sell stock just to pay daily expenses, stock which would have made them rich if only they could've held on for a little while longer - and they knew if they could only hold out, the price would recover. Agonizing, to have to sell under those conditions.
It was enlightening to see how all aspects of people's lives were affected by the depression: brilliant kids who were in college had to leave, women advertised themselves in the newspaper for marriage. Really. Talk about risk.
The next crisis won't look like 1929, and it won't look like 2008, because it's true the financial world is on guard against what has already happened. So it will look different. It will still come though, don't you think? Human nature and all.
the great depression was a perfect storm of things which many rules and regulations have been put into place to prevent from every happening again. 2008 is another example of a somewhat perfect storm... though it really wasnt that bad b/c of the speed of the recovery. <--- some of that is likely contributed to previous rule/regulation changes .... then more rules and regulations were put in place to prevent 2008. as we continue as a capitalist society we put in new rules and regulations to make sure money keeps growing b/c thats what runs the economy. something will change and some crisis MAY happen again. it MAY not. the overwhelming likelihood though is we'll all be just fine if we stay invested.
dont bet the short odds out of fear ... understand the whole picture and then if you want to protect against worst case you'd better be doing something like pizza steve and working til you get a 2% SWR b/c you know we dont know the future.
and the catastrophies talked about here arent protected by owning a home and holding 30% bonds.
Actually there were winners in the Great Depression. Not people who worked for a living though. Not ordinary investors with ordinary capitalization. Winners were: government employees; holders of government bonds; owners of blue-chip stocks who could hold off selling until they recovered; people who held onto their cash money until the Depression had gone on for years... and then bought distressed properties. People who scooped up bargains too early lost their shirts.
I suppose it's natural to picture risk as how it would affect oneself, so I won't apologize for being haunted by the reality that women advertised themselves in the newspaper for marriage. Imagine an upper middle class woman, used to living comfortably, all her friends are like herself, all her expectations are little pleasures, having babies and running a household someday, maybe she is in college - and within the year she is advertising herself and even a drunken swamper in a speakeasy has to be considered as a potential mate, just because he has a job and she is out of choices. Advertising in her local newspaper. For everyone she knows to read.
For a woman over 50 it would be so much worse. I'm 52. Yeah... risk.
what risk... you throw around the word like it has meaning but you have defined what risk is. there are many ways to mitigate the "risk" that comes with market volitiliy and many of them greatly curtail your FIRE date but many help your FIRE date and allow for greatly incrased spending as you age. if your concern is risk from volitily it would be wise to throw out the old ideas around holding more bonds etc. b/c those increase the chances you'll work longer and/or run out of money if you live longer than your expectation.
mitigating volatility risk with flexibiliy in spend/earning and a mortgage decreases risk of working longer and decreases risk of running out of money late in life the flexible spending/earning actually decreases risk of running out of money early in FIRE. A paid off home all but guarantees working longer than necessary, and increases risk of money running out late in life. it does decrease risk of running out of money earlier in FIRE.
the way i see it you have 3 major risks to FIRE that should be mitigated in some way
1. Staying employed longer than necessary
2. running out of money early in FIRE
3. Running out of money late in FIRE
whats your plan to mitigate each of these risks?
-
Boarder42, I have no plan to FIRE because it is unlikely I will, realistically.
Specifically mitigating risk: I am delaying retirement until age 70 when Social Security reaches its maximum benefit. I am saving 30% of my income and investing it, in a balanced 60/40 allocation fund of stocks/bonds (Vanguard Wellington) as the main holding, and also growth holdings in REITs and global stocks.
I need the aggressive investments for growth because I may live a long time, I know I need to take risk. A savings account or CD is not going to do me any good.
Apropos of this thread's title, I've chosen not to pay off a mortgage or even get one. I'd rather have the money, and the value of that money compounded.
It's not safe to presume too much that everything will go well. The presumption could make a person less resilient to the shock of misfortune, like the upper middle class lady in my nightmare, who one day thought prudence was alarmist and unnecessary because "I'll marry a good husband and he'll take care of me."
Interestingly, holders of insurance policies also did remarkably well during the Great Depression. There was no cash, so insurance policies were valued and traded. Burial policies too.
-
"The Great Depression: A Diary" by Benjamin Roth is a good read to show how a prolonged financial crisis affects investors. Roth was an educated professional man and he was barely making it... year after year. Every day he would read the news or look at stock prices, see notices of foreclosures or liquidations, hear about bankruptcies, and every day he would write the same thing: "If only I had a little money!"
But he didn't. Nobody he knew had any money. Landlords lost their properties because their tenants couldn't pay rent. Investors had to sell stock just to pay daily expenses, stock which would have made them rich if only they could've held on for a little while longer - and they knew if they could only hold out, the price would recover. Agonizing, to have to sell under those conditions.
It was enlightening to see how all aspects of people's lives were affected by the depression: brilliant kids who were in college had to leave, women advertised themselves in the newspaper for marriage. Really. Talk about risk.
The next crisis won't look like 1929, and it won't look like 2008, because it's true the financial world is on guard against what has already happened. So it will look different. It will still come though, don't you think? Human nature and all.
the great depression was a perfect storm of things which many rules and regulations have been put into place to prevent from every happening again. 2008 is another example of a somewhat perfect storm... though it really wasnt that bad b/c of the speed of the recovery. <--- some of that is likely contributed to previous rule/regulation changes .... then more rules and regulations were put in place to prevent 2008. as we continue as a capitalist society we put in new rules and regulations to make sure money keeps growing b/c thats what runs the economy. something will change and some crisis MAY happen again. it MAY not. the overwhelming likelihood though is we'll all be just fine if we stay invested.
dont bet the short odds out of fear ... understand the whole picture and then if you want to protect against worst case you'd better be doing something like pizza steve and working til you get a 2% SWR b/c you know we dont know the future.
and the catastrophies talked about here arent protected by owning a home and holding 30% bonds.
Actually there were winners in the Great Depression. Not people who worked for a living though. Not ordinary investors with ordinary capitalization. Winners were: government employees; holders of government bonds; owners of blue-chip stocks who could hold off selling until they recovered; people who held onto their cash money until the Depression had gone on for years... and then bought distressed properties. People who scooped up bargains too early lost their shirts.
I suppose it's natural to picture risk as how it would affect oneself, so I won't apologize for being haunted by the reality that women advertised themselves in the newspaper for marriage. Imagine an upper middle class woman, used to living comfortably, all her friends are like herself, all her expectations are little pleasures, having babies and running a household someday, maybe she is in college - and within the year she is advertising herself and even a drunken swamper in a speakeasy has to be considered as a potential mate, just because he has a job and she is out of choices. Advertising in her local newspaper. For everyone she knows to read.
For a woman over 50 it would be so much worse. I'm 52. Yeah... risk.
what risk... you throw around the word like it has meaning but you have defined what risk is. ?
B42, you have stopped the debate and you are pure argument now. Conversation stops When participants are unwilling to hear other perspectives.
-
I hope we don't stop talking about this. The subject is risk, and what does risk look like, and how can risks be mitigated. It's especially worthwhile to have a conversation like this now because the risk I personally see needing to be prepared against is about 5 years off. It's the perfect time to trim the course to meet it.
I see about 5 years of expanding growth and economic good times. Risky because people will forget (they are already forgetting) how necessary it is to be prudent. Now is the time to "skate where the puck is going to be," as they say in hockey.
Mitigating that risk means managing one's own expectations and reading, reading, reading to be educated in human nature and how it interacts with money. The past is relevant. Thematically, all financial crises are alike. We can learn to recognize them. Mr. Math probably can't help us much with that though.
-
Way to just snip what I said. After I further defined what risks were out there blue house.
-
mitigating volatility risk with flexibiliy in spend/earning and a mortgage decreases risk of working longer and decreases risk of running out of money late in life the flexible spending/earning actually decreases risk of running out of money early in FIRE. A paid off home all but guarantees working longer than necessary, and increases risk of money running out late in life. it does decrease risk of running out of money earlier in FIRE.
the way i see it you have 3 major risks to FIRE that should be mitigated in some way
1. Staying employed longer than necessary
2. running out of money early in FIRE
3. Running out of money late in FIRE
whats your plan to mitigate each of these risks?
These 'grey' discussions are what keeps the discussion alive. I think we agree that the ways to mitigate risk all involve flexibility. But to most, 'retirement' is an inflexible idea because they already have good, stable income and benefits, and don't want to replace even half of that if it involves work or depending on 100% equities for too much longer. Also, from what I'm gathering anecdotally, online income is nosediving, so following in most blogger / YouTuber's footsteps is already a thing of the past. So it really is, in the long term planning terms, a matter of accepting Wal-mart and McDonald entry level pay and work if you plan to supplement your income in 5-10 years.
So yeah, if it turns out that you feel like you are running under-plan early or late in ER, it may start with tightening the belt, but I'd predict that you're going back to a crap low-paying job sooner or later. But at least you didn't work too long in that earlier, good pay and benefits job too long, right?
-
This is getting interesting, this discussion regarding risk is very tough because everyone defines risk differently.
If you are an emotionless robot, then maybe boarder's 3 risks are accurate. I would also add #4 into that list of risks losing your job and being forced to live off of depressed assets for a prolonged period of time.
Me personally I would rather work 1 extra year now for example at my inflated wages then have to work at McDonalds after retiring. I am very comfortable mitigating that risk with an extra year of work. Especially since my work is not unbearable.
Then there are other risks which are much more difficult to quantify. For example the risk of stress and being able to not sleep well causing you health issues because the market becomes too volatile. This is a real risk us non robots have to deal with. In all honesty health is one of my biggest priorities. If I can use money to purchase better health with very little effort, then I think this is a well placed purchase. So how much could health cost me? Is it that same 1 extra year of work I described above? If so, then again, that is money very well placed and I am thrilled to lose a few percent off my returns to be able to fund my health.
You can't really understand your own emotions until you have experienced a significant downturn when all the news and the people you meet are spreading doom and gloom. Especially when your own portfolio drops by several hundreds of thousands. You may be aware that at some point in the future the markets will rise, at the same time the lose is staring you in your face. Every month you are selling stocks that have lost a large chunk of their value and your wealth continues to decline. That is some scary shit, and I am confident that my health will be affected if I am not properly prepared. BTW, working at McDonalds will not decrease my stress. It may diminish it a little, but after a month or two flipping burgers I think real doubt would start setting in. Instead what I choose to do is make sure I have the right asset allocation. I mitigate my risk by making sure I have enough bonds or CDs in my portfolio to survive several years without touching my equities. Maybe even selling some bonds to balance back into those equities to make some significant profit.
When that next recession comes, and it will come, I don't want to struggle, I don't want to worry, I just want to keep on trucking and enjoying my life. I sure as hell don't want to be stuck in a $7.50 and hour job when instead I can have a pleasant vacation in Tuscany. I am very happy to spend an extra year working to secure that retirement with an appropriate asset allocation that meets my willingness, ability, and need to take risk.
-
This is getting interesting, this discussion regarding risk is very tough because everyone defines risk differently.
If you are an emotionless robot, then maybe boarder's 3 risks are accurate. I would also add #4 into that list of risks losing your job and being forced to live off of depressed assets for a prolonged period of time.
Me personally I would rather work 1 extra year now for example at my inflated wages then have to work at McDonalds after retiring. I am very comfortable mitigating that risk with an extra year of work. Especially since my work is not unbearable.
Then there are other risks which are much more difficult to quantify. For example the risk of stress and being able to not sleep well causing you health issues because the market becomes too volatile. This is a real risk us non robots have to deal with. In all honesty health is one of my biggest priorities. If I can use money to purchase better health with very little effort, then I think this is a well placed purchase. So how much could health cost me? Is it that same 1 extra year of work I described above? If so, then again, that is money very well placed and I am thrilled to lose a few percent off my returns to be able to fund my health.
You can't really understand your own emotions until you have experienced a significant downturn when all the news and the people you meet are spreading doom and gloom. Especially when your own portfolio drops by several hundreds of thousands. You may be aware that at some point in the future the markets will rise, at the same time the lose is staring you in your face. Every month you are selling stocks that have lost a large chunk of their value and your wealth continues to decline. That is some scary shit, and I am confident that my health will be affected if I am not properly prepared. BTW, working at McDonalds will not decrease my stress. It may diminish it a little, but after a month or two flipping burgers I think real doubt would start setting in. Instead what I choose to do is make sure I have the right asset allocation. I mitigate my risk by making sure I have enough bonds or CDs in my portfolio to survive several years without touching my equities. Maybe even selling some bonds to balance back into those equities to make some significant profit.
When that next recession comes, and it will come, I don't want to struggle, I don't want to worry, I just want to keep on trucking and enjoying my life. I sure as hell don't want to be stuck in a $7.50 and hour job when instead I can have a pleasant vacation in Tuscany. I am very happy to spend an extra year working to secure that retirement with an appropriate asset allocation that meets my willingness, ability, and need to take risk.
i'd say that risk 4 would be risk of earning another dollar in FIRE. which is inline with you rather working another year to get a buffer than have to work at mcdonalds. I think there are about a billion other ways to make a dollar before going minimum wage at mcdonalds but if you're dead set on that it counteracts number 1 on the list ... but is a risk i'm ok with taking on b/c probability says i wont have to make another dollar or cut spending.
-
Way to just snip what I said. After I further defined what risks were out there blue house.
B42, this is a bit off topic, but I feel like we're just sniping now. I don't generally have a problem with what you say, but I often am at odds with how you say it. You tend to use absolutes and make comments that one way is the only way, or "do the math", implying that there is only one answer.
Here's a recent quote from Maizeman. See how nothing is ever "always" or "the only way" or "the right way"? It acknowledges that people are different and have different needs. If you could couch some of your statements with an understanding that your way is not the only way, without condescending by saying "if you want to be [emotional, stupid, wrong] then you can do xyz", I think many of our disagreements may go away.
With MMMers the default assumption is often that we'll be living off significantly less annual income in FIRE than our annual income during the accumulation phase. This means we'd likely pay lower taxes in FIRE than our marginal rate today. That's the textbook definition of when traditional IRA/401k contributions are a better choice than Roth contributions.
The above is not a hard and fast rule that will work in every person's individual situation, but I think it does explain the general trend you are seeing.
-
Yes, risk is a very tricky topic because many people define or look at risk differently. One of the main reasons I decided on 100% equities is because the risk of FIRE failure increases for my timeline if I were to add bonds to my portfolio. This is simply because the lower returns that bonds given out over historical time periods. This is one of the reasons I see bonds as a "drag" to my portfolio more than anything.
Many times we argue asset allocation when only looking at a 30 year time frame because shit, that's what the trinity study was based on. Fortunately, many of us early retires are looking at being retired for 50-65 years. Go us! Because my retirement will most likely be for 50-65 years, I can not afford the long term "drag" that bonds will put on my portfolio. Below is a couple cFIREsim simulations based on different asset allocations with .05% fees over a 50 year retirement timeline with a 4% withdrawal rate.
Equity/Bonds
100/0 91.84% success rate
85/15 88.78% success rate
75/25 85.71% success rate
This is the point when I realized that by holding bonds I was trading the risk of a FIRE failure for less portfolio volatility. With my timeline, I do not see how bonds would help me at all with reaching FIRE sooner or staying FIRE'd longer. Risk is a fun subject to discuss though, and if done correctly, the discussion gives others additional scenarios to consider.
-
Yes, risk is a very tricky topic because many people define or look at risk differently. One of the main reasons I decided on 100% equities is because the risk of FIRE failure increases for my timeline if I were to add bonds to my portfolio. This is simply because the lower returns that bonds given out over historical time periods. This is one of the reasons I see bonds as a "drag" to my portfolio more than anything.
Many times we argue asset allocation when only looking at a 30 year time frame because shit, that's what the trinity study was based on. Fortunately, many of us early retires are looking at being retired for 50-65 years. Go us! Because my retirement will most likely be for 50-65 years, I can not afford the long term "drag" that bonds will put on my portfolio. Below is a couple cFIREsim simulations based on different asset allocations with .05% fees over a 50 year retirement timeline with a 4% withdrawal rate.
Equity/Bonds
100/0 91.84% success rate
85/15 88.78% success rate
75/25 85.71% success rate
This is the point when I realized that by holding bonds I was trading the risk of a FIRE failure for less portfolio volatility. With my timeline, I do not see how bonds would help me at all with reaching FIRE sooner or staying FIRE'd longer. Risk is a fun subject to discuss though, and if done correctly, the discussion gives others additional scenarios to consider.
so then you add a mortgage to it and it further increases those numbers ... add in the variable spending of say 10% and those numbers get really good.... here is a look at someone who retires with 1.2MM and a 200k mortgage at 4% with 10% variable spending on the downside and no upward limit. meaining they would have to decrease their non mortgage spending by 4k or find a way to earn 4k in down to bad market years. if they can go down 15% and earn just an extra 6k a few years or spend that little less it becomes 100% AA 100/0. this is run over 40 years to not miss the down years. if you dont want the variable spending you would just save 25x whatever that rate is at 10% its 100k extra at 15% its 150k extra savings in this scenario. <- thats not one for one the extra savings will likely end up turning out slightly better than variable spending. but variable spending also gives upside potential <- i wish you could fix the upside and say i wont spend over my initial for 10 years or 5 years etc. on cfiresim and see what happens but that feature isnt there.
10% - 98.13%
15% - 100%
-
Yes, risk is a very tricky topic because many people define or look at risk differently. One of the main reasons I decided on 100% equities is because the risk of FIRE failure increases for my timeline if I were to add bonds to my portfolio. This is simply because the lower returns that bonds given out over historical time periods. This is one of the reasons I see bonds as a "drag" to my portfolio more than anything.
Many times we argue asset allocation when only looking at a 30 year time frame because shit, that's what the trinity study was based on. Fortunately, many of us early retires are looking at being retired for 50-65 years. Go us! Because my retirement will most likely be for 50-65 years, I can not afford the long term "drag" that bonds will put on my portfolio. Below is a couple cFIREsim simulations based on different asset allocations with .05% fees over a 50 year retirement timeline with a 4% withdrawal rate.
Equity/Bonds
100/0 91.84% success rate
85/15 88.78% success rate
75/25 85.71% success rate
This is the point when I realized that by holding bonds I was trading the risk of a FIRE failure for less portfolio volatility. With my timeline, I do not see how bonds would help me at all with reaching FIRE sooner or staying FIRE'd longer. Risk is a fun subject to discuss though, and if done correctly, the discussion gives others additional scenarios to consider.
but variable spending also gives upside potential <- i wish you could fix the upside and say i wont spend over my initial for 10 years or 5 years etc. on cfiresim and see what happens but that feature isnt there.
10% - 98.13%
15% - 100%
Yep, one of the main reasons I plan on having a variable withdrawal strategy in FIRE is to diminish the risk of a failure, but most importantly, increase my potential spending if my portfolio grows out of control.
Currently I'm leaning towards a 4% yearly portfolio withdrawal with no ceiling limit and a floor limit of 3.5% of the initial portfolio amount. Seems to be the best of both worlds from the research I have done. A little flexibility goes a long way in FIRE. I also have some business ideas that I may pursue which could really help my withdrawal strategy.
-
There seems to be some individuals that are very worried about working to long. I got thinking about his and concluded people tend to talk past each other because situations are so different. I think most people view this question and related risk like Bob or Bill's scenario.
Example Bob:
$150,000 Income
$24,000 annual expense
Once Bob has reached a SWR of 4% it will only take 1 additional year to reach 3.1% and 3 additional year to reach 2.0%.
Example Bill:
$45,000 Income
$24,000 annual expense
Once Bill has reached a SWR of 4% it will take 2 additional years to reach 3.1% and 6 additional years to reach 2.0%.
If Bob likes his job why not work a little longer for a better safety margin, increased spending, increased giving, and leaving a larger legacy when he dies. $150,000 per year would be very difficult to replicate. He can't do is big corporate job part time.
If Bill hates his job why would he work longer when he could retire now? Besides he works in the trades and may start up a tile laying business in his spare time if he needs a little extra income.
so IF you're going to work that extra year to reach a 3.1% SWR why not keep with optimization and keep the mortgage too b/c you're already safe and now you can give MORE away and LEAVE a LARGER LEGACY.
During no time has 3.1% failed with a mortgage or without but with the mortgage you'll be able to leave magnitudes more money if thats your goal.
my wife and i fit something similar to case 1 ... and maybe we'll just work longer to live ultra luxurious lives .... its only one more year and one more year.... but thats kinda why this site is here to help you pull the plug. each extra year we work cuts or SWR for our basic needs already ultra luxurious life by .5% ... or just let lifestyle creep. have a FatFIRE... thats a new thing over at reddit now i hear.
i currently feel pulling the plug may be extremely hard for me with my golden handcuffs. but we'll see if i can do it when the time comes. .
man based on my math i could buy a new kitchen every single year if i worked an extra 3 years(20k). but what would i do with all those kitchens? /sarcasm
-
There seems to be some individuals that are very worried about working to long. I got thinking about his and concluded people tend to talk past each other because situations are so different. I think most people view this question and related risk like Bob or Bill's scenario.
Example Bob:
$150,000 Income
$24,000 annual expense
Once Bob has reached a SWR of 4% it will only take 1 additional year to reach 3.1% and 3 additional year to reach 2.0%.
Example Bill:
$45,000 Income
$24,000 annual expense
Once Bill has reached a SWR of 4% it will take 2 additional years to reach 3.1% and 6 additional years to reach 2.0%.
If Bob likes his job why not work a little longer for a better safety margin, increased spending, increased giving, and leaving a larger legacy when he dies. $150,000 per year would be very difficult to replicate. He can't do is big corporate job part time.
If Bill hates his job why would he work longer when he could retire now? Besides he works in the trades and may start up a tile laying business in his spare time if he needs a little extra income.
so IF you're going to work that extra year to reach a 3.1% SWR why not keep with optimization and keep the mortgage too b/c you're already safe and now you can give MORE away and LEAVE a LARGER LEGACY.
During no time has 3.1% failed with a mortgage or without but with the mortgage you'll be able to leave magnitudes more money if thats your goal.
my wife and i fit something similar to case 1 ... and maybe we'll just work longer to live ultra luxurious lives .... its only one more year and one more year.... but thats kinda why this site is here to help you pull the plug. each extra year we work cuts or SWR for our basic needs already ultra luxurious life by .5% ... or just let lifestyle creep. have a FatFIRE... thats a new thing over at reddit now i hear.
i currently feel pulling the plug may be extremely hard for me with my golden handcuffs. but we'll see if i can do it when the time comes. .
man based on my math i could buy a new kitchen every single year if i worked an extra 3 years(20k). but what would i do with all those kitchens? /sarcasm
We are similar to option #1 with a higher income and also higher spending. When I let my license laps that type of income is gone forever which indeed makes it very very hard to give up. Although we can technically retire now, it is not the lifestyle I want to retire to and I am completely okay with adding in another 1.75 years to make it happen. I am also completely comfortable having a paid of house when we actually do retire. I can afford to make those choices because of the higher income and the low cost of my home compared to my income. I don't have the need or willingness to take on the extra risk of having a mortgage in retirement.
-
What do you do?
I started my career near scenario 1 with a loathsome job but within a few years was near scenario 2. The short time in-between I think gives me a difference perspective on this issue.
I started my career working 60-100 hours a week getting paid $45k for the year with no additional pay for overtime. That was residency.
I am a physician. I started my post residency career very late with a mortgage sized school loan.
-
i'm an engineer. always been paid well ... but for the first 6 years of my career i spent 30-60% of the year on the road doing something i really enjoyed but got burnt out on travel. Now i've transitioned to a job i like but with less travel. So had to trade what i loved for something i like ... to increase my home time and family life. Currently if it was 7 years from now and this last month with this client had happened i'd be asking to be put on another project and a new PM brought in to take over or i'd be walking out the door. But i've really only got 4-5 more months of this and then its back to the client i enjoy doing work for.
I really think FIRE is a game for me more than anything else. I enjoy thinking outside the box and outside societal norms, but i've basically been on railroad tracks and will be til i pull the FIRE trigger, I do plan to use the birth of a child to hopefully cut my work days down to 4 day weeks - thats quite abnormal for a male in my field to do. Probably going to have to evaluate when i get there and i will end up prolonging my career and locking in one of the biggest risks (IMO) to fire. working longer than necessary. i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
it is a system. organized govt. taxes ... savings ... spending ... our lives are inside of a large system ... even with out organized govt its still a system. calling it Life is just naming the system. and there are ways to game all systems.
-
i'm an engineer. always been paid well ... but for the first 6 years of my career i spent 30-60% of the year on the road doing something i really enjoyed but got burnt out on travel. Now i've transitioned to a job i like but with less travel. So had to trade what i loved for something i like ... to increase my home time and family life. Currently if it was 7 years from now and this last month with this client had happened i'd be asking to be put on another project and a new PM brought in to take over or i'd be walking out the door. But i've really only got 4-5 more months of this and then its back to the client i enjoy doing work for.
I really think FIRE is a game for me more than anything else. I enjoy thinking outside the box and outside societal norms, but i've basically been on railroad tracks and will be til i pull the FIRE trigger, I do plan to use the birth of a child to hopefully cut my work days down to 4 day weeks - thats quite abnormal for a male in my field to do. Probably going to have to evaluate when i get there and i will end up prolonging my career and locking in one of the biggest risks (IMO) to fire. working longer than necessary. i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
:) I had a feeling you may be an engineer with your very analytical approach to risk. We share one critical difference, I don't mind working 1 extra years part time before FIRE. In reality my plan is not to FIRE but to work part time and hopefully for many many years to come. Which may also explain why I simply do not need to take on more risk. I am looking to still work 6-8 shifts a month giving me a ridiculous amount of free time. The reason why I choose to work is that practicing medicine is fun. Talking to patients, explaining them their disease process is enjoyable. Saving someone's life is a ridiculous rush. Unfortunately there is a ton of waste and bureaucracy in medicine today which also makes the job frustrating and makes me want to throw in the towel and never come back. But, I find when I have a few days off the BS doesn't seam to bother me as much. Considering the continued creep in waste as well as regulations that add no value to the patient I am highly concerned that I may get fed up much sooner than later which does bother me some. All I know is that if markets don't go crazy on me I shall be able to semi-FIRE in 1.75 years. Then I can FIRE 2-3 year after that. Since all I need is 1.75 years to get me where I want, I simply don't want to take the short term risk of a large drop in my equities and be forced into full time work for an additional year.
Another reason why I plan on semi-FIRE is because we don't have kids yet. Although I estimate what they may cost us, I am not positive and want to make sure we are prepared for that as well. I know kids can cost as little as a few thousand a year to an infinite amount of money. I have a doctor friend with 2 kids and they seam to be spending over $60k a year on child care, private school, extracurricular activities and so forth.
-
yeah my field doesnt really allow me to work a few days a week.
I plan to leverage where i'm at by likely taking a 6 month sabatical as a trial FIRE the year we hit our number. and maybe it leads to me being part time but i doubt it b/c its not normal in my industry.
but the simple fact that you are going to work part time after FI ... i would say would make me do the exact opposite of your plan and take on the added volitily b/c you have your risk mitigation stratgey in place.
we're kids less currently but leveraging kid 1 into partial part time 4 day weeks. may try to leverage kid 2 into 3 day weeks but we'll see how the first one goes.
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
it is a system. organized govt. taxes ... savings ... spending ... our lives are inside of a large system ... even with out organized govt its still a system. calling it Life is just naming the system. and there are ways to game all systems.
When you figure out a way to game being born and getting old, please let me know. ;)
"Greatness does not approach him who is forever looking down, while he who is looking up is growing poor." Is this a true statement in your conception of the system called life, or a false one?
You realize you are forever looking down in order to get richer. Will greatness approach you?
There is a real cost to the grinding process of getting rich. Do you recognize and accept this cost? I just think your system needs to be bigger, as a human being you are so much bigger than it is. Shakespeare says the Law is an idiot, but sometimes I think Mr. Math is.
-
System - a set of connected things or parts forming a complex whole, in particular.
your body is a system
our bodies belong to the system of this planet both natural and man made.
Science has been gaming the life cycle system you speak of thru advanced medicine for years look at the avg age expectancy now vs 1900.
but the life cycle is a system with a beginning and an end of which the beginning we have little control over but the end to some extent is within a humans control.
on this site we are gaming the monetary system in order to stop trading our time for money and get our time back to do with as we please.
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
it is a system. organized govt. taxes ... savings ... spending ... our lives are inside of a large system ... even with out organized govt its still a system. calling it Life is just naming the system. and there are ways to game all systems.
When you figure out a way to game being born and getting old, please let me know. ;)
"Greatness does not approach him who is forever looking down, while he who is looking up is growing poor." Is this a true statement in your conception of the system called life, or a false one?
You realize you are forever looking down in order to get richer. Will greatness approach you?
There is a real cost to the grinding process of getting rich. Do you recognize and accept this cost? I just think your system needs to be bigger, as a human being you are so much bigger than it is. Shakespeare says the Law is an idiot, but sometimes I think Mr. Math is.
I don't think you understand. For engineering types, the constant optimization is fun. I love it! Maxing out the right accounts, figuring out how to structure assets for the best tax advantages, finding ways to optimize our house for efficiency, they're all games that also benefit us and our families. There's no extra 'human cost' involved. We live our lives just like you, we just have different types of hobbies and interests.
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
it is a system. organized govt. taxes ... savings ... spending ... our lives are inside of a large system ... even with out organized govt its still a system. calling it Life is just naming the system. and there are ways to game all systems.
When you figure out a way to game being born and getting old, please let me know. ;)
"Greatness does not approach him who is forever looking down, while he who is looking up is growing poor." Is this a true statement in your conception of the system called life, or a false one?
You realize you are forever looking down in order to get richer. Will greatness approach you?
There is a real cost to the grinding process of getting rich. Do you recognize and accept this cost? I just think your system needs to be bigger, as a human being you are so much bigger than it is. Shakespeare says the Law is an idiot, but sometimes I think Mr. Math is.
I don't think you understand. For engineering types, the constant optimization is fun. I love it! Maxing out the right accounts, figuring out how to structure assets for the best tax advantages, finding ways to optimize our house for efficiency, they're all games that also benefit us and our families. There's no extra 'human cost' involved. We live our lives just like you, we just have different types of hobbies and interests.
Gaming the system and optimizing is fine as long as it doesn't become more important than everything else.
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
it is a system. organized govt. taxes ... savings ... spending ... our lives are inside of a large system ... even with out organized govt its still a system. calling it Life is just naming the system. and there are ways to game all systems.
When you figure out a way to game being born and getting old, please let me know. ;)
"Greatness does not approach him who is forever looking down, while he who is looking up is growing poor." Is this a true statement in your conception of the system called life, or a false one?
You realize you are forever looking down in order to get richer. Will greatness approach you?
There is a real cost to the grinding process of getting rich. Do you recognize and accept this cost? I just think your system needs to be bigger, as a human being you are so much bigger than it is. Shakespeare says the Law is an idiot, but sometimes I think Mr. Math is.
I don't think you understand. For engineering types, the constant optimization is fun. I love it! Maxing out the right accounts, figuring out how to structure assets for the best tax advantages, finding ways to optimize our house for efficiency, they're all games that also benefit us and our families. There's no extra 'human cost' involved. We live our lives just like you, we just have different types of hobbies and interests.
Gaming the system and optimizing is fine as long as it doesn't become more important than everything else.
wouldnt this be a matter of personal satisfaction. yes there is balance between other parts of life... and in reality with indexing and everything else once you learn it and have a plan there isnt much to do but watch it grow. the i just stick around here and maybe learn some nuances i didnt know and maybe things change but optimization is what we are programmed to do and as Scortius said we enjoy doing. Not saying everyone here should enjoy, but the point of my beating the invest horse to death around here is to get thru to some people, i dont really care how many. but if 1 or 2 people a month learn see and understand how its more optimal in most back tests. makes me happy that more people are optimizing.
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
it is a system. organized govt. taxes ... savings ... spending ... our lives are inside of a large system ... even with out organized govt its still a system. calling it Life is just naming the system. and there are ways to game all systems.
When you figure out a way to game being born and getting old, please let me know. ;)
"Greatness does not approach him who is forever looking down, while he who is looking up is growing poor." Is this a true statement in your conception of the system called life, or a false one?
You realize you are forever looking down in order to get richer. Will greatness approach you?
There is a real cost to the grinding process of getting rich. Do you recognize and accept this cost? I just think your system needs to be bigger, as a human being you are so much bigger than it is. Shakespeare says the Law is an idiot, but sometimes I think Mr. Math is.
I don't think you understand. For engineering types, the constant optimization is fun. I love it! Maxing out the right accounts, figuring out how to structure assets for the best tax advantages, finding ways to optimize our house for efficiency, they're all games that also benefit us and our families. There's no extra 'human cost' involved. We live our lives just like you, we just have different types of hobbies and interests.
Gaming the system and optimizing is fine as long as it doesn't become more important than everything else.
wouldnt this be a matter of personal satisfaction. yes there is balance between other parts of life... and in reality with indexing and everything else once you learn it and have a plan there isnt much to do but watch it grow. the i just stick around here and maybe learn some nuances i didnt know and maybe things change but optimization is what we are programmed to do and as Scortius said we enjoy doing. Not saying everyone here should enjoy, but the point of my beating the invest horse to death around here is to get thru to some people, i dont really care how many. but if 1 or 2 people a month learn see and understand how its more optimal in most back tests. makes me happy that more people are optimizing.
I'm not talking about your quest to convince people that you are right. I am talking about when a sole focus on optimization and refusal to consider other points of view becomes a detriment to personal relationships. A refusal to bend and consider other options can have the affect of alienating those who care about you.
-
I just mean that the essence of a game requires tunnel vision. You can't play a game without excluding all other things.
The game of accumulating wealth can be played too long and too intensively. The focus of your inward eye can permanently change. That change means a loss of something really important.
-
I just mean that the essence of a game requires tunnel vision. You can't play a game without excluding all other things.
The game of accumulating wealth can be played too long and too intensively. The focus of your inward eye can permanently change. That change means a loss of something really important.
Ok, to me it seems like you're saying that by running some models, doing the math, and determining that holding a mortgage for the full 30 years is a better monetary investment than paying it off early, we are risking losing out on life's greater pleasures?
-
i just enjoy figuring out how to beat the system thats in place and leverage it to my full advantage.
It's not a system though, is it? It's a life.
There is another thread somewhere currently about "Mustachianism's fatal flaw," and if I were going to pick a flaw the MMM method has (though it's not fatal), it seems to me it would be playing life as though it were a game. In a game the factors are all understood and the fun is in playing within the factors so as to beat other players who are also playing within them. That's not what life is. Life is mysterious and mystical, and so are you.
You won't understand this "system" without the humanities: history, art, literature, drama. So what you do without understanding will always have a flaw in it.
I say "you" but I'm not meaning just specifically you, boarder42; it's only your words made me think some things.
it is a system. organized govt. taxes ... savings ... spending ... our lives are inside of a large system ... even with out organized govt its still a system. calling it Life is just naming the system. and there are ways to game all systems.
When you figure out a way to game being born and getting old, please let me know. ;)
"Greatness does not approach him who is forever looking down, while he who is looking up is growing poor." Is this a true statement in your conception of the system called life, or a false one?
You realize you are forever looking down in order to get richer. Will greatness approach you?
There is a real cost to the grinding process of getting rich. Do you recognize and accept this cost? I just think your system needs to be bigger, as a human being you are so much bigger than it is. Shakespeare says the Law is an idiot, but sometimes I think Mr. Math is.
I don't think you understand. For engineering types, the constant optimization is fun. I love it! Maxing out the right accounts, figuring out how to structure assets for the best tax advantages, finding ways to optimize our house for efficiency, they're all games that also benefit us and our families. There's no extra 'human cost' involved. We live our lives just like you, we just have different types of hobbies and interests.
Gaming the system and optimizing is fine as long as it doesn't become more important than everything else.
wouldnt this be a matter of personal satisfaction. yes there is balance between other parts of life... and in reality with indexing and everything else once you learn it and have a plan there isnt much to do but watch it grow. the i just stick around here and maybe learn some nuances i didnt know and maybe things change but optimization is what we are programmed to do and as Scortius said we enjoy doing. Not saying everyone here should enjoy, but the point of my beating the invest horse to death around here is to get thru to some people, i dont really care how many. but if 1 or 2 people a month learn see and understand how its more optimal in most back tests. makes me happy that more people are optimizing.
I'm not talking about your quest to convince people that you are right. I am talking about when a sole focus on optimization and refusal to consider other points of view becomes a detriment to personal relationships. A refusal to bend and consider other options can have the affect of alienating those who care about you.
i dont have a refusal to bend. i used to be on the other side of this mortgage debate i didnt bend i broke and saw the light.
-
I just mean that the essence of a game requires tunnel vision. You can't play a game without excluding all other things.
The game of accumulating wealth can be played too long and too intensively. The focus of your inward eye can permanently change. That change means a loss of something really important.
Ok, to me it seems like you're saying that by running some models, doing the math, and determining that holding a mortgage for the full 30 years is a better monetary investment than paying it off early, we are risking losing out on life's greater pleasures?
this is all philosophical statements with no meaning behind them. i mean you've said it you're working til youre normal retirement age already. cool. is this philosophical stuff how you're wrapping your head around that being the best thing? i'm really confused
-
I just mean that the essence of a game requires tunnel vision. You can't play a game without excluding all other things.
The game of accumulating wealth can be played too long and too intensively. The focus of your inward eye can permanently change. That change means a loss of something really important.
Ok, to me it seems like you're saying that by running some models, doing the math, and determining that holding a mortgage for the full 30 years is a better monetary investment than paying it off early, we are risking losing out on life's greater pleasures?
"Pleasure" is not what I am interested in. And I think the discussion, while still tethered to Mortgage vs. Math, has moved on and become more universal.
Are you familiar with the play "Peer Gynt"? The main character is kind of a jerk, he likes to game the system. There's this scene where he comes to the cave of this mountain witch who is incredibly ugly and evil. The evil part doesn't bother our guy, he's kinda amoral himself, but the ugly really takes some effort for him to deal with. This witch wants to marry him to her even uglier more evil daughter. First Peer says no way; then the witch tells him how rich she is and how her daughter will inherit everything, so Peer thinks maybe he could do that. He likes money.
The witch tells him there is one condition: she must scratch his eyeball just a little. After she does that, the daughter will look beautiful, because he will no longer be able to tell beautiful from ugly. He'll be happy ever after and rich. Just one little scratch...
Peer forgets the game and runs for his life.
What meant so much to him?
-
are you familiar with the movie Harry potter and the order of the phoenix.
witches and wizards play games and try to defeat a dark over lord from taking over.
people die..
Why did they die.
well they didnt b/c it was a movie.
except albus that guy died in real life.
-
boarder42, you remember how stories work. Pay attention.
Why was Peer Gynt terrified of being permanently changed, even though he could achieve everything he said he wanted, just by accepting this one little loss?
-
boarder42, you remember how stories work. Pay attention.
Why was Peer Gynt terrified of being permanently changed, even though he could achieve everything he said he wanted, just by accepting this one little loss?
I'm sorry, to me it feels like you're coming across as extremely preachy and condescending at this point. You don't need to resort to cute fables to get your point across. We've tried to point out to you that for many people, optimization does not come at the cost of 'life' or 'at the exclusion of all else'. Rather, by making sure we're on a beneficial financial path early in our careers we hope to increase the amount time we can devote to experiencing life at its fullest. Not paying your mortgage off is very simple and involves a very low number of scratched eyeballs.
-
boarder42, you remember how stories work. Pay attention.
Why was Peer Gynt terrified of being permanently changed, even though he could achieve everything he said he wanted, just by accepting this one little loss?
I'm sorry, to me it feels like you're coming across as extremely preachy and condescending at this point. You don't need to resort to cute fables to get your point across. We've tried to point out to you that for many people, optimization does not come at the cost of 'life' or 'at the exclusion of all else'. Rather, by making sure we're on a beneficial financial path early in our careers we hope to increase the amount time we can devote to experiencing life at its fullest. Not paying your mortgage off is very simple and involves a very low number of scratched eyeballs.
favorite*
-
Scortius, I find Mr. Math to be the most preachy and condescending S.O.B. on the planet.
Mr. Math has no use for stories either.
-
are you familiar with the movie Harry potter and the order of the phoenix.
witches and wizards play games and try to defeat a dark over lord from taking over.
people die..
Why did they die.
well they didnt b/c it was a movie.
except albus that guy died in real life.
I have to admit this response made me laugh. Sorry Wise Virgin, no offense intended to you, but it does come off as preachy.
-
It's okay to laugh, I'm not sensitive.
-
Scortius, I find Mr. Math to be the most preachy and condescending S.O.B. on the planet.
Mr. Math has no use for stories either.
Mr. Math is what the basis of this theory of FIRE is based on.
-
Scortius, I find Mr. Math to be the most preachy and condescending S.O.B. on the planet.
Mr. Math has no use for stories either.
Mr. Math is what the basis of this theory of FIRE is based on.
Yes it is.
-
and i've said this many times but i think it gets overlooked i'm fine with those like blue house who choose to pay down their mortgage understanding everything. The problem i have is that in a general sense mortgage paydown should be in the same bucket as hiring a lawn mower. Sure once you understand what your lawn mower costs you go ahead hire one ... but the default answer for 90% of cases here should be dont pay it down.
hell even Dicey one of the large supporters of invest vs paydown owns her house. but it was a choice they made understanding everything. I own a boat and i dont tell others hey you should go get one too its the best way to enjoy your life on the way to and in FIRE - nothing feels better spending a sunny day on the lake boarding a surfing. I tell most new comers the exact opposite. sell the boat.
-
boarder42, you remember how stories work. Pay attention.
Why was Peer Gynt terrified of being permanently changed, even though he could achieve everything he said he wanted, just by accepting this one little loss?
I'm sorry, to me it feels like you're coming across as extremely preachy and condescending at this point. You don't need to resort to cute fables to get your point across. We've tried to point out to you that for many people, optimization does not come at the cost of 'life' or 'at the exclusion of all else'. Rather, by making sure we're on a beneficial financial path early in our careers we hope to increase the amount time we can devote to experiencing life at its fullest. Not paying your mortgage off is very simple and involves a very low number of scratched eyeballs.
+2. Different people will find joy in different pursuits. What brings the community together on this forum isn't our agreement on what we want to spend our lives doing, just our agreement that having no choice but to work a job through most of our adult life is a significant constraint on doing the things that do bring us joy.
maizeman i like your charts any chance you can graph a ratio of scratched eye balls to mortgage paydown ratio.
-
and i've said this many times but i think it gets overlooked i'm fine with those like blue house who choose to pay down their mortgage understanding everything. The problem i have is that in a general sense mortgage paydown should be in the same bucket as hiring a lawn mower. Sure once you understand what your lawn mower costs you go ahead hire one ... but the default answer for 90% of cases here should be dont pay it down.
hell even Dicey one of the large supporters of invest vs paydown owns her house. but it was a choice they made understanding everything. I own a boat and i dont tell others hey you should go get one too its the best way to enjoy your life on the way to and in FIRE - nothing feels better spending a sunny day on the lake boarding a surfing. I tell most new comers the exact opposite. sell the boat.
The problem that I have is that this advice is offered to "90% of the cases here" without a detailed explanation of the actual risks that are involved. It is not fair to give the advice to people to invest with leveraged money without also pointing out that there is some risk in the event of a downturn. When you summarily dismiss the points that others repeatedly try to make, you lose credibility.
It's not that people care whether or not "you are fine with people like blue house who choose to pay down their house", it is that you refuse to acknowledge that risks or other considerations exist. You state that you are okay with people making the decision to pay down their house if they "understand everything." However, you do not seem to want people to "understand everything" in making the decision to invest rather than pay off a mortgage.
I think your advice is sound in principle, however, other people's concerns or situations are not "extreme" or "unlikely" or "anecdotal". If your goal is to educate people, then they need to be able to consider all aspects of their decision.
-
and i've said this many times but i think it gets overlooked i'm fine with those like blue house who choose to pay down their mortgage understanding everything. The problem i have is that in a general sense mortgage paydown should be in the same bucket as hiring a lawn mower. Sure once you understand what your lawn mower costs you go ahead hire one ... but the default answer for 90% of cases here should be dont pay it down.
hell even Dicey one of the large supporters of invest vs paydown owns her house. but it was a choice they made understanding everything. I own a boat and i dont tell others hey you should go get one too its the best way to enjoy your life on the way to and in FIRE - nothing feels better spending a sunny day on the lake boarding a surfing. I tell most new comers the exact opposite. sell the boat.
The problem that I have is that this advice is offered to "90% of the cases here" without a detailed explanation of the actual risks that are involved. It is not fair to give the advice to people to invest with leveraged money without also pointing out that there is some risk in the event of a downturn. When you summarily dismiss the points that others repeatedly try to make, you lose credibility.
It's not that people care whether or not "you are fine with people like blue house who choose to pay down their house", it is that you refuse to acknowledge that risks or other considerations exist. You state that you are okay with people making the decision to pay down their house if they "understand everything." However, you do not seem to want people to "understand everything" in making the decision to invest rather than pay off a mortgage.
I think your advice is sound in principle, however, other people's concerns or situations are not "extreme" or "unlikely" or "anecdotal". If your goal is to educate people, then they need to be able to consider all aspects of their decision.
most of them are extreme and unlikely based on history if you want to what if you can what if yourself into never quitting.
show me a case that includes variables all of which have a higher probability of happening than not that point to what would not make them unlikely or extreme.
-
and i've said this many times but i think it gets overlooked i'm fine with those like blue house who choose to pay down their mortgage understanding everything. The problem i have is that in a general sense mortgage paydown should be in the same bucket as hiring a lawn mower. Sure once you understand what your lawn mower costs you go ahead hire one ... but the default answer for 90% of cases here should be dont pay it down.
hell even Dicey one of the large supporters of invest vs paydown owns her house. but it was a choice they made understanding everything. I own a boat and i dont tell others hey you should go get one too its the best way to enjoy your life on the way to and in FIRE - nothing feels better spending a sunny day on the lake boarding a surfing. I tell most new comers the exact opposite. sell the boat.
The problem that I have is that this advice is offered to "90% of the cases here" without a detailed explanation of the actual risks that are involved. It is not fair to give the advice to people to invest with leveraged money without also pointing out that there is some risk in the event of a downturn. When you summarily dismiss the points that others repeatedly try to make, you lose credibility.
It's not that people care whether or not "you are fine with people like blue house who choose to pay down their house", it is that you refuse to acknowledge that risks or other considerations exist. You state that you are okay with people making the decision to pay down their house if they "understand everything." However, you do not seem to want people to "understand everything" in making the decision to invest rather than pay off a mortgage.
I think your advice is sound in principle, however, other people's concerns or situations are not "extreme" or "unlikely" or "anecdotal". If your goal is to educate people, then they need to be able to consider all aspects of their decision.
most of them are extreme and unlikely based on history if you want to what if you can what if yourself into never quitting.
Why do you not want the people to whom you are giving advice to not consider other variables? Not everyone has the same goals as you do, the same safety nets as you or are the same age as you.
Personally, my house is paid for and I do not plan to work forever and will likely retire within the next 4 years. But I guess I am just an outlier.
Edited to fix my double negative
-
and i've said this many times but i think it gets overlooked i'm fine with those like blue house who choose to pay down their mortgage understanding everything. The problem i have is that in a general sense mortgage paydown should be in the same bucket as hiring a lawn mower. Sure once you understand what your lawn mower costs you go ahead hire one ... but the default answer for 90% of cases here should be dont pay it down.
hell even Dicey one of the large supporters of invest vs paydown owns her house. but it was a choice they made understanding everything. I own a boat and i dont tell others hey you should go get one too its the best way to enjoy your life on the way to and in FIRE - nothing feels better spending a sunny day on the lake boarding a surfing. I tell most new comers the exact opposite. sell the boat.
The problem that I have is that this advice is offered to "90% of the cases here" without a detailed explanation of the actual risks that are involved. It is not fair to give the advice to people to invest with leveraged money without also pointing out that there is some risk in the event of a downturn. When you summarily dismiss the points that others repeatedly try to make, you lose credibility.
It's not that people care whether or not "you are fine with people like blue house who choose to pay down their house", it is that you refuse to acknowledge that risks or other considerations exist. You state that you are okay with people making the decision to pay down their house if they "understand everything." However, you do not seem to want people to "understand everything" in making the decision to invest rather than pay off a mortgage.
I think your advice is sound in principle, however, other people's concerns or situations are not "extreme" or "unlikely" or "anecdotal". If your goal is to educate people, then they need to be able to consider all aspects of their decision.
most of them are extreme and unlikely based on history if you want to what if you can what if yourself into never quitting.
Why do you not want the people to whom you are giving advice to not consider other variables? Not everyone has the same goals as you do, the same safety nets as you or are the same age as you.
Personally, my house is paid for and I do not plan to work forever and will likely retire within the next 4 years. But I guess I am just an outlier.
Edited to fix my double negative
should we discuss higher risk of getting hit by a car and dieing before telling someone they should bike to work. should we discuss lack of knowledge in a kitchen and gettins some bad form of food poisoning and dieing every time we tell someone to cook from home.
probability of these is around the same probability of risk historically when compared to paying down vs investing.
i dont have an issue with the correct opposing down side risks being brought up but they are extremely overplayed as to their likelihood and couple that with the people who simply make incorrect math statements and you may have just convinced someone of something they likely wont benefit as much from
Common held belief in the general population is that paying down a mortgage is better. but in most circumstances its not when compared with investing. so when people come out and already have a preconceived notion that its better and outlier cases of hard luck times for a few people with friends from 2008. or when the probability based on history is presented such that the risk is equivalent to the benefit of not paying it down ... and then the people who just respond with factually incorrect information its hard to weed thru everything ...
If you look at any of these "debates" you have equal people on both sides of something when it should be a majority of the people on one side.
-
For gosh sakes, stop trying to argue. There is no side to debate.
Paying off debt has lower expected returns, but greater certainty and reduced volatility.
Investing has higher volatility of possible outcomes and also higher expected returns.
Insisting that someone knows the ideal asset allocation for the future for everyone is preposterous.
-
For gosh sakes, stop trying to argue. There is no side to debate.
Paying off debt has lower expected returns, but greater certainty and reduced volatility.
Investing has higher volatility of possible outcomes and also higher expected returns.
Insisting that someone knows the ideal asset allocation for the future for everyone is preposterous.
you have every right to not read what i post if it aggravates you so much. i will continue to post my opinions on here on this subject it has helped quite a few people see the light.
-
I think we need a few eyeball puns to lighten things up.
-
I think we need a few eyeball puns to lighten things up.
i like to consider myself an eyeball descratcher.
-
For gosh sakes, stop trying to argue. There is no side to debate.
Paying off debt has lower expected returns, but greater certainty and reduced volatility.
Investing has higher volatility of possible outcomes and also higher expected returns.
Insisting that someone knows the ideal asset allocation for the future for everyone is preposterous.
Trying to be diplomatic here. I think one of the reasons we've spun our wheels so much on this part of the debate is that people are defining risk differently. Higher volatility does increase risk some, but higher returns decreases risk (if we're talking risk of ruin at least). Thus, investing in a more volatile but higher expectation product can actually reduce risk in some circumstances. This is true for me as I'm still early in the process and working on accumulation. This would not be true for people like you, Blue House, or EnjoyIt who are at the end of your accumulation stage and are close to having 'enough'. For me, paying off the mortgage early would be incredibly risky, and what I see is that a lot posters come in who are also early in the accumulation stage and plan on or are told to kill off their mortgage as fast as possible, when generally they should be doing the opposite, both for higher returns and for lower risk.
-
and i've said this many times but i think it gets overlooked i'm fine with those like blue house who choose to pay down their mortgage understanding everything. The problem i have is that in a general sense mortgage paydown should be in the same bucket as hiring a lawn mower. Sure once you understand what your lawn mower costs you go ahead hire one ... but the default answer for 90% of cases here should be dont pay it down.
hell even Dicey one of the large supporters of invest vs paydown owns her house. but it was a choice they made understanding everything. I own a boat and i dont tell others hey you should go get one too its the best way to enjoy your life on the way to and in FIRE - nothing feels better spending a sunny day on the lake boarding a surfing. I tell most new comers the exact opposite. sell the boat.
The problem that I have is that this advice is offered to "90% of the cases here" without a detailed explanation of the actual risks that are involved. It is not fair to give the advice to people to invest with leveraged money without also pointing out that there is some risk in the event of a downturn. When you summarily dismiss the points that others repeatedly try to make, you lose credibility.
It's not that people care whether or not "you are fine with people like blue house who choose to pay down their house", it is that you refuse to acknowledge that risks or other considerations exist. You state that you are okay with people making the decision to pay down their house if they "understand everything." However, you do not seem to want people to "understand everything" in making the decision to invest rather than pay off a mortgage.
I think your advice is sound in principle, however, other people's concerns or situations are not "extreme" or "unlikely" or "anecdotal". If your goal is to educate people, then they need to be able to consider all aspects of their decision.
most of them are extreme and unlikely based on history if you want to what if you can what if yourself into never quitting.
Extreme and unlikely?
In Franks situation, using nominal returns (your preferred metric), and assuming only half of his gains are ever taxed, after 3 years; in 34 out of 116 cycles Frank would have a lower net worth if he invested instead of paid extra on the mortgage. That's 30%! If Vanguard is accurate in their projection that the next 10 years will be worse than the market average, then going forward his odds of under performance over the next 3 years is over 30%.
If we run the simulation with 10-year bonds, his net worth was lower in 58% of the cycles.
If we're looking at 3 year or 10 year horizons, you should definitely be diversifying beyond pure equities. Most discussions here are dealing with 30 year horizons or longer. Even if you're 5 years from early retirement, you're still looking at 30, 40, or 50 years where you're depending on those gains, so your horizon is still quite long.