Your "Retirement Number" is lower than you think!

[tomsang]

Decent slideshow on the mistakes people make when calculating their number.

http://www.fool.com/retirement/general/2014/04/26/dont-panic-your-retirement-number-is-lower-than-yo.aspx

[TomTX]

Motley Fool slowly became a vehicle to funnel people into paying thousands of dollars a year for investment advising, et cetera.

This is why I left years ago.

[The Happy Philosopher]

Good points made. The big one is housing, no mortgage makes a big difference in retirement needs although doesn't apply to renters. Transportation costs can be sizable, especially if there are two cars and lengthy commutes. Life insurance is so cheap I'm not sure this makes much of a difference.

[arebelspy]

The article makes some fine, if obvious, points.

The big one is housing, no mortgage makes a big difference in retirement needs although doesn't apply to renters.

So many people I know (family members and older friends) refi'd in the 2000s, either for cash out or for lower rates.  They won't have paid off houses by the time they hit retirement age.

It used to be a thing to steadily pay off your mortgage for 30 years (and then a burn your mortgage party).  With all the refinancing going on, that's much less common nowadays.  And that's IF you didn't move at all in the previous 30 years, from age [edit: 35]-65.  Heh, sure.

It does happen, of course.  Some people get 15 year mortgages.  Some people pay extra principal.  But it's more rare than common, I'd think, and assuming a paid off mortgage in retirement is a big stretch, IMO.

[The Happy Philosopher]

The article makes some fine, if obvious, points.

The big one is housing, no mortgage makes a big difference in retirement needs although doesn't apply to renters.

So many people I know (family members and older friends) refi'd in the 2000s, either for cash out or for lower rates.  They won't have paid off houses by the time they hit retirement age.

It used to be a thing to steadily pay off your mortgage for 30 years (and then a burn your mortgage party).  With all the refinancing going on, that's much less common nowadays.  And that's IF you didn't move at all in the previous 30 years, from age 30-65.  Heh, sure.

It does happen, of course.  Some people get 15 year mortgages.  Some people pay extra principal.  But it's more rare than common, I'd think, and assuming a paid off mortgage in retirement is a big stretch, IMO.

Good point. When people move oftentimes it is to "upgrade" and they reset the 30 year clock. I've done this once already so guilty!

[DoubleDown]

It used to be a thing to steadily pay off your mortgage for 30 years (and then a burn your mortgage party).  With all the refinancing going on, that's much less common nowadays.  And that's IF you didn't move at all in the previous 30 years, from age 30-65.  Heh, sure.

Yeah, and around here (and I'm sure many other parts of the country), people more often than not have used refinancing as a giant cash-dispensing ATM so they can buy some more stuff, rather than as a means to lower their payments or pay off the mortgage quicker.

[SwordGuy]

It does happen, of course.  Some people get 15 year mortgages.  Some people pay extra principal.  But it's more rare than common, I'd think, and assuming a paid off mortgage in retirement is a big stretch, IMO.

We did a 15 yr mortgage and paid extra.  When I called the bank to get our payoff amount, the person at the bank was very confused because we weren't refinancing, just paying it off.

[arebelspy]

It does happen, of course.  Some people get 15 year mortgages.  Some people pay extra principal.  But it's more rare than common, I'd think, and assuming a paid off mortgage in retirement is a big stretch, IMO.

We did a 15 yr mortgage and paid extra.  When I called the bank to get our payoff amount, the person at the bank was very confused because we weren't refinancing, just paying it off.

Of course.

But it's more rare than common, I'd think

[Nords]

The article makes some fine, if obvious, points.

The big one is housing, no mortgage makes a big difference in retirement needs although doesn't apply to renters.

So many people I know (family members and older friends) refi'd in the 2000s, either for cash out or for lower rates.  They won't have paid off houses by the time they hit retirement age.

It used to be a thing to steadily pay off your mortgage for 30 years (and then a burn your mortgage party).  With all the refinancing going on, that's much less common nowadays.  And that's IF you didn't move at all in the previous 30 years, from age 30-65.  Heh, sure.

It does happen, of course.  Some people get 15 year mortgages.  Some people pay extra principal.  But it's more rare than common, I'd think, and assuming a paid off mortgage in retirement is a big stretch, IMO.

Good point. When people move oftentimes it is to "upgrade" and they reset the 30 year clock. I've done this once already so guilty!

We're serial offenders too.  Our last mortgage payment will come around my 80th birthday... unless we manage to get a lower interest rate than 3.625% and restart the clock.

I think the 30-year fixed-rate no-balloon mortgage is a relatively recent financial invention-- 1950s?  1960s?  Back then people still remembered the foreclosures of the Great Depression, so nobody wanted to be in debt.  By the 1970s inflation made debt a bad idea, and it's only been in the last decade that low-interest fixed-rate long-term debt has been widely available.  In 10-15 years we'll all look back on this financial era with wistful nostalgia...

[Purple Economist]

By the 1970s inflation made debt a bad idea, and it's only been in the last decade that low-interest fixed-rate long-term debt has been widely available.  In 10-15 years we'll all look back on this financial era with wistful nostalgia...

Can you explain how 1970s inflation made debt a bad idea?

[BlueMR2]

We did a 15 yr mortgage and paid extra.  When I called the bank to get our payoff amount, the person at the bank was very confused because we weren't refinancing, just paying it off.

I did a 30 year despite planning on paying it off MUCH earlier than that.  I figured it'd be a safety cushion in case I lost my ability to make large extra payments.  Paid it off right on my plan, much earlier than 30 years and the banker wasn't surprised at all, said it was fairly common.  Maybe just something weird about my particular part of the world.

[Nords]

By the 1970s inflation made debt a bad idea, and it's only been in the last decade that low-interest fixed-rate long-term debt has been widely available.  In 10-15 years we'll all look back on this financial era with wistful nostalgia...

Can you explain how 1970s inflation made debt a bad idea?

Yeah, I know, borrow long and pay it back with inflation-eroded dollars.  On the other hand the lenders used much stricter guidelines back then and they also built their gloomy inflation forecasts into their interest rates. 

My point is not rational Keynesian economics but rather the emotional reaction that people had to inflation and its effect on their ability to buy a home with a long-term mortgage.

[deborah]

By the 1970s inflation made debt a bad idea, and it's only been in the last decade that low-interest fixed-rate long-term debt has been widely available.  In 10-15 years we'll all look back on this financial era with wistful nostalgia...

I thought it was 1980's inflation - my house was 18.7% interest - many people lost their houses here during that time. It really encouraged me to pay the mortgage off very quickly!

[biscuitwhomper]

The whole 'you need 80% of your income for retirement' is the biggest steaming pile of doo doo ever created by the mutual fund industry.   A younger, dumber version of me actually believed this in the not-so-distant past, and if were not for this blog, I probably still would.

[arebelspy]

The whole 'you need 80% of your income for retirement' is the biggest steaming pile of doo doo ever created by the mutual fund industry.   A younger, dumber version of me actually believed this in the not-so-distant past, and if were not for this blog, I probably still would.

Agreed.  They likely need 100% of their income.

See, since most people live paycheck to paycheck (and often are going further into debt), they're spending 100% (or more) of their income.  Since they actually need to replace expenses, but their expenses = their income, they need to replace 100% of their net income.

Of course, those that are saving a lot won't need to replace their income.  But the rule of thumb came about because it's applicable to most people.  Yes, it may bother you, as someone who is different than the average and wants more specifics than a rule of thumb.  But I'd still argue it's not terrible for most people, even if it's not optimal.

[Nords]

The whole 'you need 80% of your income for retirement' is the biggest steaming pile of doo doo ever created by the mutual fund industry.   A younger, dumber version of me actually believed this in the not-so-distant past, and if were not for this blog, I probably still would.

It's based on a 1980s study with real data, and their conclusion was that working & commuting expenses were about 20% of a budget.  Hence the "80% in retirement".  Good info, wrong conclusion.

I had the link years ago but the site went dark.  At the time I didn't appreciate its historical significance, or the persistence of the cliché conclusion, so now I wish I'd printed it out and filed it.

[dude]

The article makes some fine, if obvious, points.

The big one is housing, no mortgage makes a big difference in retirement needs although doesn't apply to renters.

So many people I know (family members and older friends) refi'd in the 2000s, either for cash out or for lower rates.  They won't have paid off houses by the time they hit retirement age.

It used to be a thing to steadily pay off your mortgage for 30 years (and then a burn your mortgage party).  With all the refinancing going on, that's much less common nowadays.  And that's IF you didn't move at all in the previous 30 years, from age 30-65.  Heh, sure.

It does happen, of course.  Some people get 15 year mortgages.  Some people pay extra principal.  But it's more rare than common, I'd think, and assuming a paid off mortgage in retirement is a big stretch, IMO.

Good point. When people move oftentimes it is to "upgrade" and they reset the 30 year clock. I've done this once already so guilty!

We're serial offenders too.  Our last mortgage payment will come around my 80th birthday... unless we manage to get a lower interest rate than 3.625% and restart the clock.

I think the 30-year fixed-rate no-balloon mortgage is a relatively recent financial invention-- 1950s?  1960s?  Back then people still remembered the foreclosures of the Great Depression, so nobody wanted to be in debt.  By the 1970s inflation made debt a bad idea, and it's only been in the last decade that low-interest fixed-rate long-term debt has been widely available.  In 10-15 years we'll all look back on this financial era with wistful nostalgia...

But it's not necessarily a terrible thing -- assuming your income (whether from passive investments, pension, Social Security) keeps up with inflation (as, for example, a 4% SWR does), that fixed-rate mortgage payment just keeps going down, down, down every year (while equity simultaneously goes up).  For renters, the opposite is true, as rents will rise with inflation.  I'm not particularly worried about having a mortgage in ER, and when it does finally get paid off, it's a nice increase in one's standard of living (as mortgage payments get re-purposed).

[arebelspy]

But it's not necessarily a terrible thing -- assuming your income (whether from passive investments, pension, Social Security) keeps up with inflation (as, for example, a 4% SWR does), that fixed-rate mortgage payment just keeps going down, down, down every year (while equity simultaneously goes up).  For renters, the opposite is true, as rents will rise with inflation.  I'm not particularly worried about having a mortgage in ER, and when it does finally get paid off, it's a nice increase in one's standard of living (as mortgage payments get re-purposed).

Oh, I completely agree, and I'm a big advocate of investing and paying the minimum on your mortgage at today's rates.  It's a great inflation hedge.

I'm just saying you can't assume, like the article did, that the mortgage will be paid off in retirement, because that won't necessarily be the case due to people moving, refinancing, etc.

[iris lily]

...So many people I know (family members and older friends) refi'd in the 2000s, either for cash out or for lower rates.  They won't have paid off houses by the time they hit retirement age.

It used to be a thing to steadily pay off your mortgage for 30 years (and then a burn your mortgage party).  With all the refinancing going on, that's much less common nowadays. ...

My friend in her sixties has been in her house for 27+ years. She remarked the other day in kind of a rueful way "If I hadn't refinanced, my house probably would have been paid for my now."

We winced each time she pulled the equity out of it over the past 15 years.

[iris lily]

The whole 'you need 80% of your income for retirement' is the biggest steaming pile of doo doo ever created by the mutual fund industry.   A younger, dumber version of me actually believed this in the not-so-distant past, and if were not for this blog, I probably still would.

It's based on a 1980s study with real data, and their conclusion was that working & commuting expenses were about 20% of a budget.  Hence the "80% in retirement".  Good info, wrong conclusion.

I had the link years ago but the site went dark.  At the time I didn't appreciate its historical significance, or the persistence of the cliché conclusion, so now I wish I'd printed it out and filed it.

That's brilliant! Interesting to know the source data for this canard.

[nereo]

We're serial offenders too.  Our last mortgage payment will come around my 80th birthday... unless we manage to get a lower interest rate than 3.625% and restart the clock.

I think the 30-year fixed-rate no-balloon mortgage is a relatively recent financial invention-- 1950s?  1960s?  Back then people still remembered the foreclosures of the Great Depression, so nobody wanted to be in debt.  By the 1970s inflation made debt a bad idea, and it's only been in the last decade that low-interest fixed-rate long-term debt has been widely available.  In 10-15 years we'll all look back on this financial era with wistful nostalgia...

Not sure how common this is, but my parents have actually refinanced three times since the 1980s, and now "owe" more than they paid for the house in the 1979, have a longer mortgage (28 years left vs the original 15) but have an interest rate at 3.2%.  Before you blast them for living beyond their means, they've kept a dedicated account where they've put all this extra cash from refinancing.  now the account's far larger than the mortgage.  They're basically betting that the account will earn more than 3% over time.

Actually getting a 3.04% rate was the driving factor for getting my place.  I checked off all the other boxes (staying for 6+ years, stable job, 20+% down payment, more economical than renting, walkable location) but I tend to think that in another decade we'll look at our current mortgage rates and just shake our heads in wonder. Planning on paying off this place over the next decade and then only paying cash for future homes, should we decide to move.

[iris lily]

Not sure how common this is, but my parents have actually refinanced three times since the 1980s, and now "owe" more than they paid for the house in the 1979, have a longer mortgage (28 years left vs the original 15) but have an interest rate at 3.2%.  Before you blast them for living beyond their means, they've kept a dedicated account where they've put all this extra cash from refinancing.  now the account's far larger than the mortgage.  They're basically betting that the account will earn more than 3% over time.

...

That is so cool, and  VERY unusual. My hat's off to them! I like the emotional security of having a house that is paid for and likely wouldn't have the stomach to borrow on it in order to invest that stash. But then, we didn't really have a choice.  No mortgage company would lend on our house--it was a gut rehab finished bit by bit over 2 decades.

[MrFancypants]

We did a 15 yr mortgage and paid extra.  When I called the bank to get our payoff amount, the person at the bank was very confused because we weren't refinancing, just paying it off.

I did a 30 year despite planning on paying it off MUCH earlier than that.  I figured it'd be a safety cushion in case I lost my ability to make large extra payments.  Paid it off right on my plan, much earlier than 30 years and the banker wasn't surprised at all, said it was fairly common.  Maybe just something weird about my particular part of the world.

We did the same thing.  Prior to purchasing our current house I was dead set on a 15 year mortgage.  Then after some discussion and further thought, I decided that we were disciplined enough financially that building in a safety cushion could be beneficial later on (hopefully not, but...).  In the end it'll cost us a few extra thousand dollars over the course of the mortgage, but we valued the flexibility enough that it's worth it.

I guess the key is to not use the 15 vs. 30 decision to fool yourself into leaving extra cash on the table to be spent frivolously, like so many people do.  If you have the financial willpower to stick to the plan it could be a worthwhile strategic decision if there is any possibility that there could be a break or reduction in your income.

[dcheesi]

I did that when I refi'd last year. In that case there was no difference in rates between the shorter term and the full 30yr reset, so it was kind of a no-brainer. Technically I may have a mortgage in (early) retirement, but I'll have more than enough to pay it off before then. It'll just be a better deal to keep paying peanuts on the loan while earning higher returns in the markets (or even the bank, once interest rates rebound).

[Nords]

Before you blast them for living beyond their means, they've kept a dedicated account where they've put all this extra cash from refinancing.  now the account's far larger than the mortgage.  They're basically betting that the account will earn more than 3% over time.

I've been tracking one of our refinances for nearly 10 years against the fund where we invested the money, and we're well ahead of the game.  It looked pretty gloomy in 2009 but at this point we're winning before halftime and just running up the score.

http://forum.mrmoneymustache.com/real-estate-and-landlording/getting-a-mortgage-after-fire/msg172257/?topicseen#msg172257