Payoff my mortgage to FI sooner?????

[EchoStache]

OK, so I understand the concept of investing rather than paying down a low interest mortgage, but the 4% rule tells me I can FI sooner by paying off the mortgage rather than investing or keeping money invested and carrying my mortgage into retirement. 

Example.

Let's assume that my retirement living expenses will be $48,000/year.  I need $1,200,000 for FI with 4% withdrawal.  This $48,000 includes a $300,000 mortgage @4.375% with principal and interest payment of $1600/month or $19,200/year.

Now lets assume that I have $1,020,000 saved/invested, with at least $300,000 in after tax brokerage. Not enough to FI while carrying a mortgage.  I pay off my $300,000 mortgage, leaving me with $720,000 saved/invested.  The 4% withdrawal now pays my drastically reduced living expenses of $29,000 year.

I'm currently expending a lot of my mental energy with figuring out the best way to either pay off my mortgage by the time I plan to retire/FI, or have the *ability* to pay off my mortgage at FI.

[MisterTwoForty]

Not having a mortgage reduces your monthly draw and reduces risk as well.  Without a mortgage, you require less to live on because your fixed expenses are lower.  I think any retirement plan (early or traditional age) should included a paid for living arrangement.  If you were to need or want to re-enter the workforce, you can do so at a level of your choosing since your monthly expenditures are much lower vs. having a mortgage. 

I would look at cash flowing the mortgage pay off and leaving the brokerage alone.  When the mortgage is paid for - you can FIRE. 

[EchoStache]

I see a lot of very strong opinions that, based on math, facts, and finances, one should almost *never* payoff their mortgage.  I.e., if you *want* to payoff the mortgage because it will make you feel better, its ok but know that is is not a financially optimal decision.

Based on the example above, it seems to me that paying off the mortgage is factually, financially, mathematically superior to not paying off the mortgage.

Unless I'm looking at this wrong(which I 100% admit is possible!), I need to figure out the best way to pay off my mortgage:

1)Send extra payments every month until paid off.
Pros: 100% guaranteed 4.375% yield.  No chance that the money ends up being spent elsewhere i.e. the mortgage balance is 100% gauranteed to go down.  No chance of losing money in the market due to unexpected market conditions, or yielding less than the mortgage rate.  It's happened before.
Cons: Lack of liquidity i.e. saving/investing in CD's/bonds/Treasuries until payoff is saved gives the same yield but full liquidity until mortgage balance goes to 0.  Opportunity cost of not investing in the market for potential higher returns.
2) Send extra payments to cash equivalent with matching or superior yields.
Pros: liquidity while mortgage payoff is being built up.
Cons: taxes will reduce yield.  Potential to *not* payoff the mortgage.  OOH a shiny new Tesla.  Ooh a motorhome.  Ooh a European vacation home.  Ooh etc etc.
3) Invest according to AA i.e heavy into equities.
Pros: potential highest return
Cons: risk.  Same spend risk as in 2 above.  Risk that yield is lower than mortgage rate.(due to 6-7 year time frame)

Honestly, I can't easily say which way I'm currently leaning.

[EchoStache]

Another data point, based on the assumption that I do not itemize deductions.

The highest safe yield I see today is about 4.85% on a 5 year CD.  The interest on this is subject to taxes.  A total tax rate of only 10% lowers the yield below 4.375(my mortgage rate).

[MisterTwoForty]

Also keep in mind that if you plan to invest and use those funds to pay off the mortgage at a pre-determined time that you will be subject to capital gains taxes.  In a short horizon (3-5 years) that calculations have shown me that cash flowing the mortgage is the best way to go.  There is also no guarantee on the rate of return - entirely dependent on the market.

[EchoStache]

Also keep in mind that if you plan to invest and use those funds to pay off the mortgage at a pre-determined time that you will be subject to capital gains taxes.  In a short horizon (3-5 years) that calculations have shown me that cash flowing the mortgage is the best way to go.  There is also no guarantee on the rate of return - entirely dependent on the market.

Capital gains apply if I were to sell equities in order to pay off the mortgage?  Whereas bonds/cd's will simply be taxed as normal income while accumulating?

Investing in equities would have to return ~5.3% to *match* the mortgage rate(15% + PA state tax).  It's likely return would be higher, possibly much higher, but with the risk of underperforming.  It seems as though I could almost consider paying off the mortgage as the bond portion of my AA until it is paid off.........

[rpr]

@UltraStache  -- I recommend looking at the investment order sticky.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

The guidance for paying off this debt is in Step 7 and the explanation. I assume that you have followed all of Steps 1 to 6.

[iluvzbeach]

I’m a huge fan of paying off a mortgage before retirement, precisely for the reason you outlined. That said, I’ve followed your journal pretty closely and I’d have to seriously question whether you could live on $30K per year. How far are you & DW from being able to draw SS? IIRC, it’s 10-15 years away. With SS & $30K, you’d probably be okay. Please just don’t underestimate your expenses & desired budget for extras.

[EchoStache]

I’m a huge fan of paying off a mortgage before retirement, precisely for the reason you outlined. That said, I’ve followed your journal pretty closely and I’d have to seriously question whether you could live on $30K per year. How far are you & DW from being able to draw SS? IIRC, it’s 10-15 years away. With SS & $30K, you’d probably be okay. Please just don’t underestimate your expenses & desired budget for extras.

Ya the $30k/year is basic living expenses with only a small cushion for lifestyle.  There's a few thousand built into that for eating out and buying stuff but no travel budget.  This assumes zero debt.  My retirement plan is to have solar and EV's so my energy costs will be extremely low.  Expenses are higher now with 3 adult children in the house, a car payment, lots of driving for work etc etc.  Many recent expenses are in the process of being eliminated i.e. cell phone down to 2 from 5, health insurance will drop $6,000 next year, grocery cost will drop to $400/month vs $1,000 for 5 people, etc.

If I only need ~$1M to FIRE(assumes using 300k to pay off mortgage, we are 5-7 years out.  This puts me at 56-58 and her 55-57 so a good ways out from SS.  Once we hit Lean FIRE, we have a lot of flexibility to reduce our work load.  We can work 13 weeks/year and make far more, roughly double, what we need to live off, for example.  So if we are debt free we can Lean Fire with ~$720k, and earn ~$60k with one 13 week contract/year if we want to fund travel and build up investments more.

[EchoStache]

@UltraStache  -- I recommend looking at the investment order sticky.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

The guidance for paying off this debt is in Step 7 and the explanation. I assume that you have followed all of Steps 1 to 6.

Thanks you for the suggestion, I'll revisit this.  I have a tendency to laser focus on whatever step I am currently on.
0. Establish an emergency fund to your satisfaction-Done       
1. Contribute to your 401k (traditional or Roth - see "Why #4" below) up to any company match Done           
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield. Done          
3. Max Health Savings Account (HSA) if eligible. N/A
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   Done         
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - you earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)    Done      
6. Fund a mega backdoor Roth if applicable.    N/A
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.   Done; Mort $330k@4.375, auto $39k@0.9%--->payoff currently mostly held in Ibonds
8. Invest in a taxable account and/or fund a 529 with any extra. Done ~$50k/year+     

[sisto]

I’m a huge fan of paying off a mortgage before retirement, precisely for the reason you outlined. That said, I’ve followed your journal pretty closely and I’d have to seriously question whether you could live on $30K per year. How far are you & DW from being able to draw SS? IIRC, it’s 10-15 years away. With SS & $30K, you’d probably be okay. Please just don’t underestimate your expenses & desired budget for extras.

Ya the $30k/year is basic living expenses with only a small cushion for lifestyle.  There's a few thousand built into that for eating out and buying stuff but no travel budget.  This assumes zero debt.  My retirement plan is to have solar and EV's so my energy costs will be extremely low.  Expenses are higher now with 3 adult children in the house, a car payment, lots of driving for work etc etc.  Many recent expenses are in the process of being eliminated i.e. cell phone down to 2 from 5, health insurance will drop $6,000 next year, grocery cost will drop to $400/month vs $1,000 for 5 people, etc.

If I only need ~$1M to FIRE(assumes using 300k to pay off mortgage, we are 5-7 years out.  This puts me at 56-58 and her 55-57 so a good ways out from SS.  Once we hit Lean FIRE, we have a lot of flexibility to reduce our work load.  We can work 13 weeks/year and make far more, roughly double, what we need to live off, for example.  So if we are debt free we can Lean Fire with ~$720k, and earn ~$60k with one 13 week contract/year if we want to fund travel and build up investments more.

Have you run the calculations for how much Social Security you will both receive? I suspect you will be much better off investing and not paying off the mortgage. You should consider a higher withdrawal rate before Social Security kicks in and then tapering it down. I suggest using Cfiresim or Firecalc to run multiple scenarios and come up with a withdrawal strategy.

[iluvzbeach]

I’m a huge fan of paying off a mortgage before retirement, precisely for the reason you outlined. That said, I’ve followed your journal pretty closely and I’d have to seriously question whether you could live on $30K per year. How far are you & DW from being able to draw SS? IIRC, it’s 10-15 years away. With SS & $30K, you’d probably be okay. Please just don’t underestimate your expenses & desired budget for extras.

Ya the $30k/year is basic living expenses with only a small cushion for lifestyle.  There's a few thousand built into that for eating out and buying stuff but no travel budget.  This assumes zero debt.  My retirement plan is to have solar and EV's so my energy costs will be extremely low.  Expenses are higher now with 3 adult children in the house, a car payment, lots of driving for work etc etc.  Many recent expenses are in the process of being eliminated i.e. cell phone down to 2 from 5, health insurance will drop $6,000 next year, grocery cost will drop to $400/month vs $1,000 for 5 people, etc.

If I only need ~$1M to FIRE(assumes using 300k to pay off mortgage, we are 5-7 years out.  This puts me at 56-58 and her 55-57 so a good ways out from SS.  Once we hit Lean FIRE, we have a lot of flexibility to reduce our work load.  We can work 13 weeks/year and make far more, roughly double, what we need to live off, for example.  So if we are debt free we can Lean Fire with ~$720k, and earn ~$60k with one 13 week contract/year if we want to fund travel and build up investments more.

This reduced schedule is an idea I really like. By working only one contract per year, you’d essentially be coast FIRE - allowing investments to continue to grow, covering expenses + extras, and having lots of free time. I’m early 50s and just FIREd, but did an element of coast FIRE over the past few years.

[rpr]

7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.   Done; Mort $330k@4.375, auto $39k@0.9%--->payoff currently mostly held in Ibonds
8. Invest in a taxable account and/or fund a 529 with any extra. Done ~$50k/year+     

Are both you and your wife working and eligible for 401Ks? The max in this case is $75K for next year for a couple including over 50 catchup contributions.

In addition you have taxable savings of $50K/year.

If you are are maxing out all of the your tax advantaged accounts and the money to pre pay the mortgage comes from additional savings that would have gone into taxable, it is fine to payoff the mortgage sooner in your case.

It is likely to be somewhat financially sub-optimal but probably does not matter too much.

[nick663]

OK, so I understand the concept of investing rather than paying down a low interest mortgage, but the 4% rule tells me I can FI sooner by paying off the mortgage rather than investing or keeping money invested and carrying my mortgage into retirement. 

Example.

Let's assume that my retirement living expenses will be $48,000/year.  I need $1,200,000 for FI with 4% withdrawal.  This $48,000 includes a $300,000 mortgage @4.375% with principal and interest payment of $1600/month or $19,200/year.

Now lets assume that I have $1,020,000 saved/invested, with at least $300,000 in after tax brokerage. Not enough to FI while carrying a mortgage.  I pay off my $300,000 mortgage, leaving me with $720,000 saved/invested.  The 4% withdrawal now pays my drastically reduced living expenses of $29,000 year.

I'm currently expending a lot of my mental energy with figuring out the best way to either pay off my mortgage by the time I plan to retire/FI, or have the *ability* to pay off my mortgage at FI.

4% rule assumes it's a permanent expense while a mortgage has an end date.  I like to separate the mortgage from the assumed retirement budget for that reason.

If you owe 300k on the house, have that much invest in a separate bucket from FI funds, and the market returns on that amount outpace the mortgage interest after taxes, you are ahead.  Yes there is risk with that and your individual interest rate also comes into play (much easier to outpace a 3% mortgage than the 6% we are seeing today) so every situation is a bit different.

The only argument I've seen for paying off your mortgage at retirement is if you are trying to get under an income threshold for certain subsidies.  Someone who only has to show a 30k income may qualify for health insurance subsides under the ACA that they wouldn't at 48k. 

[EchoStache]

Off to a play but will be back to engage more in the discussion later today.  Thanks to everyone so far!!!

Will probably post more details in my journal.

[iluvzbeach]

7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.   Done; Mort $330k@4.375, auto $39k@0.9%--->payoff currently mostly held in Ibonds
8. Invest in a taxable account and/or fund a 529 with any extra. Done ~$50k/year+     

Are both you and your wife working and eligible for 401Ks? The max in this case is $75K for next year for a couple including over 50 catchup contributions.

In addition you have taxable savings of $50K/year.

If you are are maxing out all of the your tax advantaged accounts and the money to pre pay the mortgage comes from additional savings that would have gone into taxable, it is fine to payoff the mortgage sooner in your case.

It is likely to be somewhat financially sub-optimal but probably does not matter too much.

Where are you getting 75K combined for the couple in terms of 401K contributions, including catch-up? According to what I see, it’s 30K each for a combined total of 60K - assuming both are 50+ and we’re talking pre-tax. I’m also not accounting for employer match.

[rpr]

7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.   Done; Mort $330k@4.375, auto $39k@0.9%--->payoff currently mostly held in Ibonds
8. Invest in a taxable account and/or fund a 529 with any extra. Done ~$50k/year+     

Are both you and your wife working and eligible for 401Ks? The max in this case is $75K for next year for a couple including over 50 catchup contributions.

In addition you have taxable savings of $50K/year.

If you are are maxing out all of the your tax advantaged accounts and the money to pre pay the mortgage comes from additional savings that would have gone into taxable, it is fine to payoff the mortgage sooner in your case.

It is likely to be somewhat financially sub-optimal but probably does not matter too much.

Where are you getting 75K combined for the couple in terms of 401K contributions, including catch-up? According to what I see, it’s 30K each for a combined total of 60K - assuming both are 50+ and we’re talking pre-tax. I’m also not accounting for employer match.

My fault. I meant to include IRAs as well.

[MDM]

4% rule assumes it's a permanent expense while a mortgage has an end date.  I like to separate the mortgage from the assumed retirement budget for that reason.

+1

Also the mortgage payment does not increase with inflation, so that's another reason it doesn't fit the "4% rule" assumptions.

[Catbert]

One potential advantage to having a paid off house is that since you'll need lower income in retirement you could be eligible for more government subsidies:  ACA, cheap internet, more college grants, etc.  I don't follow your journal so I'm now sure how many of these might apply to you. 

If you want a paid off house, I'd pick a target retirement date and add extra every month so it's paid off on that date.  Definitely don't sell assets and owe capital gains now so you have a paid off house in the future.

[ProxyRetired]

We paid our mortgage off despite having a super low (3%) interest rate. Could we have made money in stocks or even bonds (Hello I-Bonds!)? Probably. But we have a peace of mind that we don't have to cut a check every month for $1300 to the bank. It's a cash flow thing for us. We're investing most of that $1300 now, so certainly we've lost some financial gains, but we certainly are a lot more comfortable and it's hard to put a price on that.

[EchoStache]

Just did a quick check in regards to ACA subsidies.  The additional $20k/year of income I'd have to draw to cover my mortgage would cost me about $200/month in ACA subsidies.  Leaving the $300,000 mortgage balance invested, I'd have to draw down that 300k by 7.4%/year to make the mortgage payment. 

If I invest enough to have the $300,000 needed to cover the mortgage balance in 5 years, I would need an absolute guaranteed 5.4% return to match  the 100% guaranteed return of paying the mortgage down.  I'm curious how many 5 year investing periods have a lower return than that?  The hope, or course, is that the return is much higher. 

[geekette]

Just did a quick check in regards to ACA subsidies.  The additional $20k/year of income I'd have to draw to cover my mortgage would cost me about $200/month in ACA subsidies. 

Subsidies are but one part of the ACA benefits.  If your MAGI is between 100% and 250% of the Federal Poverty level and you pick a silver plan, you get significantly better benefits (lower deductible and lower copays).  Depending on your state, you may also qualify for Medicaid.

[EchoStache]

Just did a quick check in regards to ACA subsidies.  The additional $20k/year of income I'd have to draw to cover my mortgage would cost me about $200/month in ACA subsidies. 

Subsidies are but one part of the ACA benefits.  If your MAGI is between 100% and 250% of the Federal Poverty level and you pick a silver plan, you get significantly better benefits (lower deductible and lower copays).  Depending on your state, you may also qualify for Medicaid.

Thank you.  Another important consideration.  Wife is likely to have somewhat significant medical care needs.

Also to be clear, I am taking all advice into consideration, including those advising to definitely *not* pay off the mortgage.  I'm not convinced it's that cut and dry, but I'm considering all sides of the equation to make sure I make a wise decision for my circumstances.

[JupiterGreen]

There are the strict numbers people and there are the peace of mind people. We fall into the latter category and paid off our mortgage even though it didn't make total financial sense. We don't regret it, but you've got to figure out what makes sense for you. If the numbers say it's better to pay off the mortgage, by all means go for it. But there is nothing wrong with being a peace of mind person either.

I'm impressed with how restrained some people are. But then again, as far as our last mortgage goes, there was a time after the 2008 crash that our mortgage was sold and nobody seemed to know who owned it, so we transferred our mortgage to a local credit union. Everything was fine until our credit union made an error and started deducted the monthly mortgage weekly (luckily I caught it, though it took some time to remedy). I probably just got sick of all that mental juggling, so that might account for our choice to get rid of the mortgage.

[MisterTwoForty]

The math is the math.  If the market out performs your interest rate, then you are better off to invest.  But that does not take into account reducing your risk and your monthly draw to not have a mortgage.  If your desire is to maximize your wealth, you are likely better off to keep investing.  If you plan to have the lowest monthly draw you can and reduce your risk to debt - then you should pay off the mortgage.

Where I struggle is the liquidity risk - especially during periods of potential job losses.  If you have the mortgage partially paid, but lose your income, you still owe the payment.  It's no issue after the home is paid for, but during the process you run that risk. 

If I were in your situation, I would leave the money invested and cash flow the mortgage pay off.  Once its paid for, re-assess and determine if you can or want to FIRE.  You can also choose to keep working and use the extra mortgage payment to increase your investing after its paid for. 

[EchoStache]

The math is the math.  If the market out performs your interest rate, then you are better off to invest.  But that does not take into account reducing your risk and your monthly draw to not have a mortgage.  If your desire is to maximize your wealth, you are likely better off to keep investing.  If you plan to have the lowest monthly draw you can and reduce your risk to debt - then you should pay off the mortgage.

Where I struggle is the liquidity risk - especially during periods of potential job losses.  If you have the mortgage partially paid, but lose your income, you still owe the payment.  It's no issue after the home is paid for, but during the process you run that risk. 

If I were in your situation, I would leave the money invested and cash flow the mortgage pay off.  Once its paid for, re-assess and determine if you can or want to FIRE.  You can also choose to keep working and use the extra mortgage payment to increase your investing after its paid for.

Let me clarify my position a bit more: I do not currently have the money to pay off the house.  Not even close:
Cash: $45k
Ibonds: $30k
Brokerage: $14k
Retirement: $120k

Will be maxing 401k/tIRA moving forward @ $75k/year.  The remainder of my investable income will either go to brokerage or mortgage reduction or some combination of the two.

I can:
A) invest all extra money into brokerage, arrive at FI with around $1M and a $300,000 mortgage balance, ~$30k/year living expenses+$20,000/year mortgage.
B)Pay ~$4500/month extra to my 4.375% mortgage, arrive at FI with around $700k and no mortgage, therefore $20k/year lower living expenses.

I do concede and agree with your point about liquidity.  More info:  we are both in healthcare.  Barring disability, I can't foresee any circumstance in which we would be without work unless just by choice.   We are travelers and can work literally anywhere in the country.

[rpr]

It's up to you but given your current portfolio balance due to the late start, you are better off building as large a stash as possible. Your current incomes provide a nice big shovel. Take advantage of that. I'd wait to FIRE until I have saved 25 x (non mortgage expenses) + mortgage balance.  That will also give you a slightly larger cushion.

[bacchi]

Just did a quick check in regards to ACA subsidies.  The additional $20k/year of income I'd have to draw to cover my mortgage would cost me about $200/month in ACA subsidies.

If this is during your ER years, and your $300k is in a brokerage account, only the dividends and cap gains would affect your ACA subsidies.

It increases your MAGI but much less than $20k.

[Must_ache]

Where I struggle is the liquidity risk - especially during periods of potential job losses.  If you have the mortgage partially paid, but lose your income, you still owe the payment.  It's no issue after the home is paid for, but during the process you run that risk. 

But, by not having paid down the mortgage prematurely, you retain a lot of extra cash to retain flexibility during a job loss.  If all that money is tied up in your house, you don't have a mortgage but you also have less liquidity to handle all the other expenses.

There are the strict numbers people and there are the peace of mind people. We fall into the latter category and paid off our mortgage even though it didn't make total financial sense. We don't regret it, but you've got to figure out what makes sense for you. If the numbers say it's better to pay off the mortgage, by all means go for it. But there is nothing wrong with being a peace of mind person either.

In my 30's I was pretty adamant about not paying down the mortgage and getting a better return.  Now that I'm 51 the risk and return I want from the stock market is more conservative.
My mortgage rate is 2.625% so I simply have no reason to pay that off.
If my mortgage rate were 4.5% I would be willing to pay some of that off now, but in my youth I still wouldn't have paid any of it off, I would bet on a better long-term return.
If my mortgage rate were north of 6% I would be much more willing to pay it down a bit more aggressively.  My first mortgage in 1998 was at 6.75% and I didn't pay it down because I was younger and had other things to concern myself.

So it does depend on your risk tolerance.  A 30-yr should probably not be paying anything down (bond return) and a 50-something should probably not be 100% equities...

[Laura33]

But, by not having paid down the mortgage prematurely, you retain a lot of extra cash to retain flexibility during a job loss.  If all that money is tied up in your house, you don't have a mortgage but you also have less liquidity to handle all the other expenses.

This.  I am very much a fan of going into retirement with a paid-off mortgage.  But I am also a huge fan of maintaining liquidity up until that time (ask me how I know -- nothing like carrying two homes in the middle of the first tech crash).  Paying down your mortgage does not do you one whit of good until that very last payment.

Also agree with the notations about how a mortgage doesn't really fit in the 4% rule, as most folks usually only have a mortgage for 5-10 yrs after retiring (and thus it's even less appropriate for those who want to FIRE, as you're younger and thus far less likely to die before the payments finish).  Better off to do a more sophisticated analysis that addresses changes in income and expenses over time. 

[Must_ache]

Let me clarify my position a bit more: I do not currently have the money to pay off the house.  Not even close:
Cash: $45k
Ibonds: $30k
Brokerage: $14k
Retirement: $120k

Will be maxing 401k/tIRA moving forward @ $75k/year.  The remainder of my investable income will either go to brokerage or mortgage reduction or some combination of the two.

So you've got $200K now and you want to get to $1.3M, although along the way you could choose to pay down some of the mortgage to reduce your stash requirement.
If you're putting in 6,250/mo you should hit $1.3M in:

161 months at a 1% return
137 months at a 3% return
120 months at a 5% return
107 months at a 7% return
97  months at a 9% return
89 months at an 11% return

You would like to retire in 5-7 years, but that's at the mercy of the stock market really since you have so little invested.  According to these numbers I think it is a stretch for you to retire in 5-7 years unless you contribute more than $75K, and from that point of view you definitely do not want to pay down the house - that's the 120-month plan.

I'm ignoring the fact that your house will get paid down some during this time period with my super-simple calculations, so my quick back-of-the-napkin estimates are probably overstated a bit. 

Not to brag, but I'm at about $1.1M of my goal of $1.5M+ and staring at $50K left on my mortgage.  With only $400K to go and lots of money accumulating, I can afford a 5% return and hit my goal in about 5 years, so I take less risk.  $1.5M is my minimum where I start to think about working part time for a couple of years, not necessarily my early retirement moment.  Since you are trying to catch up, you want your money to compound and should take on more risk.  If the stock market stumbles you will have to wait longer, but if it comes back after this recession maybe you will hit your goal.

[EchoStache]

Its seems as though the extra $20k/year I would need in retirement due to not having a paid off mortgage would not necessarily, or rather almost certainly, not increase MAGI by $20,000 due to the way drawdowns are handled i.e. only taxed on gains, etc etc.  So it seems I can eliminate some or most of that concern.

There also seems to be a fairly large consensus that it would be better to "save up" a mortgage payoff with funds that would match or exceed the mortgage rate, rather than paying it down as I go, in large part for liquidity reasons.  In today's market, it would seem that I can just about break even with bonds/cd's.  This gives me some food for thought, thanks for everyones input.

[nereo]

Its seems as though the extra $20k/year I would need in retirement due to not having a paid off mortgage would not necessarily, or rather almost certainly, not increase MAGI by $20,000 due to the way drawdowns are handled i.e. only taxed on gains, etc etc.  So it seems I can eliminate some or most of that concern.

There also seems to be a fairly large consensus that it would be better to "save up" a mortgage payoff with funds that would match or exceed the mortgage rate, rather than paying it down as I go, in large part for liquidity reasons.  In today's market, it would seem that I can just about break even with bonds/cd's.  This gives me some food for thought, thanks for everyones input.

Ok, despite this being discussed several times here and in your journal you still seem fixated on the notion that your PI mortgage payments in FIRE will be $20k/year (technically true) but that your other expenses will be $30k when you retire in what will almost certainly be > 6 years from now (a more conservative estimate is 8-10 years away). That’s almost certainly not going to be the case. What you are doing is using todays dollars for the mortgage payments (which is fixed) but not adjusting your future spending. This is even more important during high inflationary environments like we are currently living under.

Simplified example; let’s assume inflation this year at 6%, dropping to 5% the following year, then 4%, 3% and then we hold steady at the Fed’s magical 2.5% target. Pretty much a Goldilocks outcome from where we are. The amount you will need in a decade excluding the mortgage isn’t $30k (your today’s-dollars number) but $41,450. Yet your mortgage PI will remain at $20k. It may seem like that $41k number moves your retirement much further away, but remember the long-term average market returns are in real terms (adjusted for inflation).

Regardless, as you have said its best to save up until you can pay off your mortgage in one lump sum if you decide to take that route, and that is something which you yourself have said is a long way off. So you are spending a lot of mental energy thinking about a scenario you cannot execute for several years.

[index]

OK, so I understand the concept of investing rather than paying down a low interest mortgage, but the 4% rule tells me I can FI sooner by paying off the mortgage rather than investing or keeping money invested and carrying my mortgage into retirement. 

Example.

Let's assume that my retirement living expenses will be $48,000/year.  I need $1,200,000 for FI with 4% withdrawal.  This $48,000 includes a $300,000 mortgage @4.375% with principal and interest payment of $1600/month or $19,200/year.

Now lets assume that I have $1,020,000 saved/invested, with at least $300,000 in after tax brokerage. Not enough to FI while carrying a mortgage.  I pay off my $300,000 mortgage, leaving me with $720,000 saved/invested.  The 4% withdrawal now pays my drastically reduced living expenses of $29,000 year.

I'm currently expending a lot of my mental energy with figuring out the best way to either pay off my mortgage by the time I plan to retire/FI, or have the *ability* to pay off my mortgage at FI.

The 4% rule assumes you need $16,00/mo. - $19,200/yr in perpetuity. In reality, you need a sinking fund that ends at $0 after the term of your mortgage.  You can use the annuity calculator here:

https://www.omnicalculator.com/finance/annuity

Subject of interest - Initial Deposit (Stache needed)
Payment Direction - Withdraw

Assuming a 7% return on the invested amount, you need $241K in your stache to provide you with $1600/month which will be depleted to $0 at the end of 30 years.  Say you retire in 7 years, there will only be 23 years left on the mortgage and you only need a $220k sinking fund.

[ChpBstrd]

The purchasing power of your 4.375% mortgage is currently shrinking at the 7.8% rate of the Consumer Price Index. In other words, the institution that loaned you money has lost about 3.425% in purchasing power on the loan this year. On a $300k balance, that's $10,275 in purchasing power that essentially transferred from them to you. Your mortgage is evaporating at a faster rate than your interest costs.

That regretful lending institution would love it if you'd pay off the loan, because then they'd stop bleeding purchasing power and it would free up their cash to invest in 6.5% or higher new mortgages. You, meanwhile, might never get another chance in your lifetime to borrow six figures at 4.375%.

I would not recommend investing sub-optimally in order to pursue a hack for a rule of thumb. That's putting the cart (rule of thumb) before the horse (wealth).

[Acastus]

Look at it from an opportunity cost perspective. What is the best investment for $300k?

1. Invest in your mortgage, 4.375% guaranteed return, possibly after tax. Paying principal is just shuffling money from one pocket to another (portfolio to house).
2. Invest in stock market, likely 8-10% return with risk.

A simple way to think of it is to imagine paying off in, say, 5 years. Your $300k grows to $440k. Pay off your reduced $265k mortgage and have $175k left. That more than pays for the $96k in payments.

The question  is, do you want the guaranteed return with a bonus of peace of mind in not having a mortgage? Or do you want to take some risk for a monetary reward?

[big_owl]

I'm FI and sort of RE.  Paying off our mortgage was one of the best things we ever did.  We have zero debt, no financial commitments outside of basic monthly expenses.  Theres so much power knowing you don't owe money to anybody.  I recommend paying it off with the fire of a thousand suns.