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Author: blaycat Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Investing after retirement Date: 7/10/1999 11:04 PM
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My wife and I recently retired. We have a substantial nestegg, mostly in self directed IRAs invested in stocks and stock funds. We are in the process of building a new house. Since most advisors suggest that retirees put about 40% of assets into conservative investments, what do you fools think of the idea of cashing in enough IRAs ( I'll be 59 1/2 soon) to pay cash for the house? Since mortgage rates are about 7%, thats equivalent to a good bond fund. Then we could go ahead and be aggressive with the remainder of our investments secure in the knowledge that our home is paid for. The tax bite will hurt of course but with IRAs you have to pay sooner or later. Foolish or not?
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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11908 of 74759
Subject: Re: Investing after retirement Date: 7/10/1999 11:58 PM
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Others will disagree, but I'm with you. (I'm about 10 years behind you.) I am in a volatile industry, and cash flow is always an issue.

What you probably sacrifice is net worth. Clearly, if you can mortgage at 7% and get 15% in some investment, you are better off in principle. My attitude, however, is that you can't take it with you.

By the way, welcome to the boards from a merry poster. I am sure the professional TMF'ers will greet you soon. There is lots to read, much of it fun but silly, and all opinions are welcomed.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11915 of 74759
Subject: Re: Investing after retirement Date: 7/11/1999 10:18 AM
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Greetings, Blaycat, and welcome. You wrote:

<<My wife and I recently retired. We have a substantial nestegg, mostly in self directed IRAs invested in stocks and stock funds. We are in the process of building a new house. Since most advisors suggest that retirees put about 40% of assets into conservative investments, what do you fools think of the idea of cashing in enough IRAs ( I'll be 59 1/2 soon) to pay cash for the house? Since mortgage rates are about 7%, thats equivalent to a good bond fund. Then we could go ahead and be aggressive with the remainder of our investments secure in the knowledge that our home is paid for. The tax bite will hurt of course but with IRAs you have to pay sooner or later. Foolish or not? >>

It really depends on your comfort level. For an idea of what I mean, see Step 8 of my 13 Steps to Foolish Retirement Planning at http://www.fool.com/Retirement/Retirement.htm. If paying off the mortgage makes you the most comfortable, then by all means do so. IMHO there just isn't a "right" answer here. Every alternative has its drawbacks and advantages.

Regards..Pixy

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Author: TMFJeanie Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11922 of 74759
Subject: Re: Investing after retirement Date: 7/11/1999 7:16 PM
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<<what do you
fools think of the idea of cashing in enough IRAs ( I'll be 59 1/2 soon) to pay cash for the house?>>

Hi Blaycat, let me add my "welcome", also. Although I rarely contribute to this folder, I lurk occasionally, because my husband is just two years behind you and will soon face some of the decisions you're mulling over.

Owning a home outright has always been anathema to me (a complete contradiction to what my Depression-era parents strived to accomplish). But my generation was taught to worship the mortgage deduction. Suddenly there's all kinds of good articles about why retirees might want to pay cash for their home, but your reasoning is the first that really made sense to me.

As you put it, the cost of your home becomes that safe conservative 40% or so of your portfolio that indirectly increases your income by 7% by not having to make mortgage payments. Hmm... I think I like it :-)

Please keep us posted on what you decide!

Cheers,

Jeanie



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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11923 of 74759
Subject: Re: Investing after retirement Date: 7/11/1999 7:27 PM
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I do not favor home ownership. I sincerely believe that one of the reasons my wife and I were able to retire at age 37 was the fact that we always rented and invested the difference.

One of the beauties of being retired is that you can hang your hat where it suites your fancy. When you are invested in stocks, if a stock doesn't fit your needs, you get online and sell it with minimum fuss. When your home or location doesn't fit your needs, well, that's more of a pain in the neck.

I'm about 18 years younger than you but I've got 4 years of retirement under my belt. Maybe as one gets older one favors "staying put" more. I don't know. I'd still rather rent.



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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11926 of 74759
Subject: Re: Investing after retirement Date: 7/11/1999 8:07 PM
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I do not favor home ownership. I sincerely believe that one of the reasons my wife and I were able to retire at age 37 was the fact that we always rented and invested the difference.

This is partly a lifestyle preference issue; you'd rather rent and I'd rather own. And partly this is a long term economy phenomenon. In periods of low inflation, investing the difference is a winner.

But in periods of high inflation, owning the home is a winner. Stocks don't do as well, rent goes up, and the principal and interest on your fixed rate mortgage doesn't change. After a few years of inflation, the house payment is lower than rent would be and you have a bigger "difference" to invest. (This assumes your income inflates appropriately, too.)

So to a certain extent, whether you rent or own reflects your view of future inflation over the time you expect to reside where you do.

But I think the desired lifestyle is a better reason for picking one over the other.

Patzer

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Author: methree One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11927 of 74759
Subject: Re: Investing after retirement Date: 7/11/1999 8:30 PM
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I agree with pixy. If you feel comfortable paying it off then pay it off.

We have decided to keep the $500k invested in growth stocks.



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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11938 of 74759
Subject: Re: Investing after retirement Date: 7/11/1999 11:26 PM
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galeno wrote,

I do not favor home ownership. I sincerely believe that one of the reasons my wife and I were able to retire at age 37 was the fact that we always rented and invested the difference.

One of the beauties of being retired is that you can hang your hat where it suites your fancy. When you are invested in stocks, if a stock doesn't fit your needs, you get online and sell it with minimum fuss. When your home or location doesn't fit your needs, well, that's more of a pain in the neck.


I second your comments. I believe that the fact that I don't own a home helped me to retire in 1994 at age 38. I've earned a lot more money in the stock market than I ever could made owning a home.

Also, since since cutting fee and commission expenses has been a key part of my investment strategy, you really can't follow that model and buy real estate. I could sell $1 million worth of DELL stock and pay an $8 commission. The 6% real estate commission on a $1 million home is $60,000. It's tough to make money if you're paying those kind of transaction costs.

intercst

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Author: Landmark Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11956 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 10:40 AM
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It seems to me that blaycat is looking at all of his assets in a "total portfolio" context. This is how one should think about diversification. However, after-tax return is the real issue. By viewing the total portfolio return after taxes, the decision to go with a mortgage and the mortgage deduction is easy to make.

In addition, the percentage of conservative assets blaycat mentioned needs to be considered along with the investment horizon (life expectancy). If your investment horizon is over 10 years, the allocation to fixed income should be minimal even in retirement. Not having a real return in excess of inflation is the true risk.

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Author: ECL5191 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11964 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 12:14 PM
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A reality is that retirees are living longer consequently there is good reason to place a portion of the house asset in the fool four and approach the 27 percent level.I am sure you have looked at this. Good Luck in retirement.

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Author: naic Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11965 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 12:25 PM
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We're a slightly younger couple, currently reviewing our retirement options. We would be selling our current house to build a retirement home. We were advised by a financial advisor to take the proceeds from the sale of the home, continue to invest it,moderatly aggressive 75%/25% conservatively. We could therefore take take an annual withdrawal to pay for the retirement home and continue to let our funds work for us.

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Author: bellb Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11966 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 12:54 PM
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It may be ok if you have considerably more assets than you anticipate needing and therefore are not concerned about the obvious lack of liquidity in the dwelling part of your "investments".

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Author: ermex One star, 50 posts Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11967 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 1:27 PM
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Why not take a mortgage and continue investing your IRA funds (Tax Free). You could pay your yearly mortgage bill from IRA withdrawels, make double your 7% mortgage rate (a foolishly conservative estimate) and gain the tax advantage of a mortagage deduction.
You need to do the figues for yourself figuring what your mortgage payment will be (don't inlcude taxes and insurance, you have to pay those anyway)Estimate what your return on invested capital not sunk into the house will be using a conservative rate of return say 10 to 14%. (Hopefully Foolish investments will make that much higher). I was faced with the same decision and found it came out a little better to get a mortgage which I have. As it turned out my investiments have done better than expected ( I used 12% as an estimate but have averaged about 22%)I'm glad I have the mortgage. I get a break on property taxes as well with the mortgage homestead exemption

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11970 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 2:26 PM
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intercst writes (in part):

I could sell $1 million worth of DELL stock and pay an $8 commission. The 6% real estate commission on a $1 million home is $60,000. It's tough to make money if you're paying those kind of transaction costs.

I reply:

Let me suggest another take on this. I can sell my $1 million home (I wish!) and not pay a penny in capital gains taxes. The 20% capital gains tax on $1 million worth of DELL stock is (I'd guess) $100,000. It's tough to make money . . . . ;-).

Don't get me wrong -- I'd rather have my money in the market. But the reason is liquidity and the ability to bring home some truly outrageous gains. If I thought I'd get the same returns on my house as I expect long-term in the market, I'd rather keep the money in my house. --Bob

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Author: singledout Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11972 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 3:07 PM
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I retired two years ago and paid off my mortgage because we'd have a cash flow problem otherwise. I like the thought that our home is the conservative portion of my portfolio and would have to ask this question. Should I take out a mortgage to have more money to invest in stocks? Not in this market.

Singled out.

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Author: Domestique One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11973 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 3:08 PM
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Welcome, Blaycat. I suspect that we were in about your situation just before we retired. Now, at 68, I am very glad that we paid cash for our comfortable condo and accepted a smaller retirement stash. We gain a lot of comfort knowing that the roof over our heads is unencumbered. That no doubt is the legacy passed on to me from my Dad, who struggled to pay off his mortgage and finally made it, just before he died. He always told me that money used to pay down a mortgage was the best investment one could make. And I Foolishly believed him.

Since we are fortunate to have a next egg sufficient to keep us comfortable, it seems like a no-brainer now. Accept my best wishes for an active and fruitful retirement.

Dave




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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11978 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 3:57 PM
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Bob78164 wrote,

intercst writes (in part):

I could sell $1 million worth of DELL stock and pay an $8 commission. The 6% real estate commission on a $1 million home is $60,000. It's tough to make money if you're paying those kind of transaction costs.

Bob78164 replys:

Let me suggest another take on this. I can sell my $1 million home (I wish!) and not pay a penny in capital gains taxes. The 20% capital gains tax on $1 million worth of DELL stock is (I'd guess) $100,000. It's tough to make money . . . . ;-).

intercst replies

Actually, if you have a low enough cost basis the capital gain on a $1 million DELL sale is close to $200,000. However, if you're holding the stock in an IRA account, there is no tax due on the sale. You do howver pay ordinary income taxes on any withdrawals from an IRA account.


Bob78164 writes:

Don't get me wrong -- I'd rather have my money in the market. But the reason is liquidity and the ability to bring home some truly outrageous gains. If I thought I'd get the same returns on my house as I expect long-term in the market, I'd rather keep the money in my house. --Bob

intercst replies

I'd buy a house too, if the returns on residential real estate were higher than what I could get in the stock market plus a premium to keep me whole on the transaction costs. That may have been true in the 1970's amd early 1980's when inflation was higher, but I don't see a return to an inflationary environment anytime soon.

Regards,

intercst

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Author: ebob2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11981 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 4:23 PM
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Sinking heavy cash into a non-liquid investment may turn some people's stomach, but I feel there is great peace-of-mind in owning the home free and clear. With your perspective that the house represents the conservative portion of your portfolio, I think your onto something good. I'm not ready to retire, but that's what I'm planning to do. I think you'll be sleeping soundly, which is always the measure of a good investment.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11982 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 4:41 PM
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Dallas Morning News financial columnist Scott Burns' seems to side with those that say "pay-off the mortgage." You can read his analysis at the following link.

http://www.scottburns.com/990525tu.htm

intercst

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11983 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 4:43 PM
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intercst writes (in part):

I'd buy a house too, if the returns on residential real estate were higher than what I could get in the stock market plus a premium to keep me whole on the transaction costs.

I reply:

I think we're more or less in agreement, but my point may not have been clear. I'd go without the premium if I expected gains in the half million range. Assume the cost basis for either DELL or your house is $500,000, and that you and your wife eventually sell for $1 million. Then you pay $100,000 in taxes on the DELL stock (plus $8.00 in commission), and $0 in taxes on the house (plus $60,000 in commission).

The numbers don't work very often, though, because you have to pay commission computed on the entire sale price, whereas you pay capital gains taxes only on profit. Reduce the value at sale to $600,000, and the DELL stock is a hands-down winner ($20,008 vs. $36,000). So in the real world, I agree with your opinion that a premium should be required. I don't feel comfortable with my ability to analyze the real estate market over the long haul, and I do feel comfortable with my ability to analyze the stock market over the long haul (it'll be higher in 20 years than it is today -- you heard it here first), so I'm staying in stock.



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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11986 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 4:55 PM
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Bob78164 wrote,

I think we're more or less in agreement, but my point may not have been clear. I'd go without the premium if I expected gains in the half million range. Assume the cost basis for either DELL or your house is $500,000, and that you and your wife eventually sell for $1 million. Then you pay $100,000 in taxes on the DELL stock (plus $8.00 in commission), and $0 in taxes on the house (plus $60,000 in commission).

The numbers don't work very often, though, because you have to pay commission computed on the entire sale price, whereas you pay capital gains taxes only on profit. Reduce the value at sale to $600,000, and the DELL stock is a hands-down winner ($20,008 vs. $36,000). So in the real world, I agree with your opinion that a premium should be required. I don't feel
comfortable with my ability to analyze the real estate market over the long haul, and I do feel comfortable with my ability to analyze the stock market over the long haul (it'll be higher in 20 years than it is today -- you heard it here first), so I'm staying in stock.


Bob,

Excellent analysis!

You make a very good point that because of the difference in how real estate sales commissions and capital gains taxes are calculated, the winning option depends on the size of the transaction.

Just another real life example of the need to run the numbers on any real estate investment VERY CAREFULLY.

Regards,

intercst

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11988 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 5:01 PM
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intercst writes:

Dallas Morning News financial columnist Scott Burns' seems to side with those that say "pay-off the mortgage." You can read his analysis at the following link.

Scott Burns writes (in part):

While everyone talks about appreciation, most people don't understand the "shelter services" part. In fact, the best part of debt-free ownership is that we get to enjoy what economists call "imputed income"--- benefits that are not received in cash but which have a cash value.

Because these benefits aren't received in cash they are not taxable.

How much are they worth? It depends on all kinds of factors--- but we can get an idea by using a rough rule of thumb.

One of the long standing rules in real estate is that a house should rent for about one percent of its market value per month or 12 percent a year. The same house will also have ongoing expenses--- real estate taxes, insurance, and maintenance--- that may cost about 4 percent a year, leaving 8 percent as a net return to the investor.

If you rent the house to a tenant, your 8 percent return will be taxable income. But if you live in the house, you will receive your return in shelter services--- the "imputed income" mentioned earlier.


I pontificate:

This analysis is wrong. You get the "shelter services" whether you pay the mortgage off or not, because you continue to own and live in the home. Another way to see this -- if you rent the house to a tenant, you must also reduce your profit by the rent you must pay. Burns omits this factor. The apples-to-apples comparison is to compare after-tax price appreciation of an alternative investment to the mortgage interest rate (assuming that mortgage interest is wholly deductible).

I'm not saying that the result is necessarily wrong for anyone, or even for most people. The individual effect on peace of mind is often present, but should be recognized and acknowledged as such. And in your (plural you, directed to Fooldom in general) area, real estate price appreciation might outstrip what's available in the market. I am saying that if you want to make a straight dollars-and-cents decision, Burns has provided another example of Wise financial reporting. --Bob

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Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11992 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 5:28 PM
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Well, don't forget that a house gives you something in return -- a tax deduction and a roof over your head. That's worth something.

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Author: Mysteron Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11997 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 7:01 PM
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My wife and I have been looking for a house for a long, long time.

In many areas of the country, finding one that represents good value is very difficult.

Also, somewhat chillingly, everyone we know (extended family) who has a home tends to complain about the constant maintenance and upkeep required.

Also, it doesn't really seem like there is any need to tie up a significant amount of capital in a non-liquid asset like your home, if you don't have to, at least not up front. On most mortgages, can't you simply pay down principal at a faster rate, if you so choose? There's nothing stopping a home owner from taking out a mortgage, paying for a couple of years, then deciding whether he wants/should pay it all off early.

The only real issue would be if you think the stock market's peaking and is not going to be going anywhere for an extended period. Secondarily, are home prices going to appreciate as they have over the past 30 years? The consensus seems to be, in general, that they will not.

I would tend to think that keeping liquid and preserving your flexibility with capital is a very important issue, which should not be disregarded.

Also, the fact that you buy your house off free and clear may create a dangerous illusion--that you're "wealthier" than you really are, because you don't have nearly as much monthly housing expense (just taxes/maintenance/insurance). Wouldn't there be a tendency to overspend? It seems to me a regular mortgage payment would impose a certain amount of fiscal discipline.

Just some thoughts.

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Author: catsky Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12003 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 8:04 PM
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I see a couple of problems with paying cash for the house and letting it be the conservative portion of your portfolio. First, you'll owe income tax on the withdrawal. And since it sounds like it will be a substantial withdrawal you are likely to be boosted to the top tax bracket. Withdrawing the IRA over a number of years will probably avoid the bracket boost and will certainly be less of a tax hit in one year.

Second, this "conservative investment" is so conservative you don't have easy access to the money. Of course, there's always a mortgage...just what you are trying to avoid. This may not be the major issue if you have enough other investments.

Good luck. I'll be interested to see other responses.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12008 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 9:12 PM
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intercst writes:

<<Dallas Morning News financial columnist Scott Burns' seems to side with those that say "pay-off the mortgage." You can read his analysis at the following link.>>

Scott Burns writes (in part):

"While everyone talks about appreciation, most people don't understand the "shelter services" part. In fact, the best part of debt-free ownership is that we get to enjoy what economists call "imputed income"--- benefits that are not received in cash but which have a cash value.

Because these benefits aren't received in cash they are not taxable.

How much are they worth? It depends on all kinds of factors--- but we can get an idea by using a rough rule of thumb.

One of the long standing rules in real estate is that a house should rent for about one percent of its market value per month or 12 percent a year. The same house will also have ongoing expenses--- real estate taxes, insurance, and maintenance--- that may cost about 4 percent a year, leaving 8 percent as a net return to the investor.

If you rent the house to a tenant, your 8 percent return will be taxable income. But if you live in the house, you will receive your return in shelter services--- the "imputed income" mentioned earlier."


" Bob78164 pontificates:

<<<This analysis is wrong. You get the "shelter services" whether you pay the mortgage off or not, because you continue to own and live in the home. Another way to see this -- if you rent the house to a tenant, you must also reduce your profit by the rent you must pay. Burns omits this factor. The apples-to-apples comparison is to compare after-tax price appreciation of an alternative investment to the mortgage interest rate (assuming that mortgage interest is wholly deductible).

I'm not saying that the result is necessarily wrong for anyone, or even for most people. The individual effect on peace of mind is often present, but should be recognized and acknowledged as such. And in your (plural you, directed to Fooldom in general) area, real estate price appreciation might outstrip what's available in the market. I am saying that if you want to make a straight dollars-and-cents decision, Burns has provided another example of Wise financial reporting.>>>

I respectfully disagree. In your "apples-to-apples comparison" you are counting the cost of renting an alternative abode, but you are ignoring its shelter value; thus, I do not really think that it is apples-to-apples.

Let me try an example (invented, so I can do the math easily). Two identical homes, side by side each worth 200k. Two couples, each with 200k non-sheltered cash available, each in the 33% tax bracket..

First couple rents for $2,000 per month (1% of 200k) and invests their 200k in the market, earning 15% pretax or 10% after tax (20,000).

Second couple pays 200k cash for the house (i.e. invests in the house). There is no immediate, direct return to them. They do however avoid paying $2000 per month in rent, for which they would have needed to earn $3000 per month pretax. Thus, they would seem to have an imputed 18% pretax ([12 * 3,000]/200,000) on which they owe no income taxes, so it is also 18% after tax return..

Of course, to be fair, that return would need to be reduced (i) for maintenance expenses they incurred (and which the renters did not) and (ii) for real estate taxes they paid (and which the renters also did not pay) and increased by the 1/3 of the real estate taxes they did pay because the real estate taxes are deductible for federal income tax purposes.

Of course tweaking any of the numbers can changes the result. Maybe the invest return is greater than 15%; maybe a portion is in the form of capital appreciation, which is not taxed until the investment is sold and which may also benefit from the long-term capital gains rate of 20% instead of 33% marginal income tax rate.

In addition, this simple example ignores home price appreciation, which would suggest that rent would increase over time (in order to remain constant at 1% per month) increasing the renter's expenses and also increasing the imputed income to the owning couple. Of course, there is no guarantee that RE prices will appreciate; thay might depreeciate, moving the scales in the other direction.

I believe that this is a question that is not as obvious as most people believe; I also believe that individual risk tolerance (or risk averseness) cannot be ignored, so in the end it really is as much a personal choice (as opposed to a pure economic choice) as anything.

Just my $0.02. Regards, JAFO

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12012 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 10:27 PM
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JAFO31 writes (in part):

Let me try an example (invented, so I can do the math easily). Two identical homes, side by side each worth 200k. Two couples, each with 200k non-sheltered cash available, each in the 33% tax bracket..

First couple rents for $2,000 per month (1% of 200k) and invests their 200k in the market, earning 15% pretax or 10% after tax (20,000).

Second couple pays 200k cash for the house (i.e. invests in the house). There is no immediate, direct return to them.


Climbing down from my pulpit, I reply:

Given your premises, I agree with your analysis. But I disagree with your premises. The question that Burns is attempting to analyze is whether retirees should pay off a mortgage on a principal residence that they already own. Thus, the comparison he needs to make is a comparison between your second couple ($200,000 cash for the house) and a third couple that pays $40,000 cash, takes out a $160,000 mortgage, and invests the $160,000 in the market. (In the real world, we can ignore transaction costs because we are assuming that both sets of retirees in fact already own the house and are merely deciding whether to pay off the mortgage.)

Burns credits only the second couple with the shelter value of the house, but he should credit the third couple as well. Both the second and third couples must pay property taxes, maintenance expenses, and any other incidentals of home ownership. Both stand to gain from appreciation, although the third couple is leveraged, whereas the second is not -- Burns misses this factor as well, and this factor also favors NOT paying down the mortgage. The second couple gets a tax break (probably), but that's accounted for by requiring the comparison to be between after-tax earnings in the market and the after-tax effect of interest payments.

I agree with you, though, that my proposed example probably confuses more than it clarifies because it invites precisely the comparison that you made. But other than that, I'm gonna stick to my guns. Have I convinced you? --Bob

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Author: claudmc Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12016 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 10:59 PM
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This has been a great thread - very thought provoking.

I plan to retire in January of 2007 when I turn 59 1/2. My 30-year mortgage will be paid off at about the same time.

I view the house as a sort of "emergency fund." I plan to live in it until I die, but it does give me some financial flexibility if needed. I could sell it, or get a home-equity loan on it, or rent it (or a portion of it) if circumstances dictate.

I don't know how to put a monetary value on that sort of flexibility, but it's great for my peace of mind.

claudmc

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Author: Patosh Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12017 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 11:08 PM
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Some will argue but I think you are correct and also think about Social Security as conservative and/or fixed income portion of your total. I do the same.

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Author: stanparks Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12018 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 11:22 PM
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sounds like a good idea to pay off the homestead and not to have to worry about getting kicked out except with the cost of low mortgage rates 6-8% you should be able to do better in the market. An index fund should bring in 20-23% today. Pay off the mortgage with your winnings.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12021 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 11:45 PM
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Bob: in earlier post: "This analysis is wrong. You get the "shelter services" whether you pay the mortgage off or not, because you continue to own and live in the home. Another way to see this -- if you rent the house to a tenant, you must also reduce your profit by the rent you must pay. Burns omits this factor. The apples-to-apples comparison is to compare after-tax price appreciation of an alternative investment to the mortgage interest rate (assuming that mortgage interest is wholly deductible)."

Prompting me to write (in part):

Let me try an example (invented, so I can do the math easily). Two identical homes, side by side each worth 200k. Two couples, each with 200k non-sheltered cash available, each in the 33% tax bracket..

First couple rents for $2,000 per month (1% of 200k) and invests their 200k in the market, earning 15% pretax or 10% after tax (20,000).

Second couple pays 200k cash for the house (i.e. invests in the house). There is no immediate, direct return to them.

Bob again: Replies: "Given your premises, I agree with your analysis. But I disagree with your premises."

I thought I was responding to your prior post where you said in part <<<"Another way to see this -- if you rent the house to a tenant, you must also reduce your profit by the rent you must pay.">>>

"The question that Burns is attempting to analyze is whether retirees should pay off a mortgage on a principal residence that they already own."

Upon re-reading Burns's article, I am not entirely sure that I agree, but I think my potential disagreement is irrelevant to the discussion or the analysis.

"Thus, the comparison he needs to make is a comparison between your second couple ($200,000 cash for the house) and a third couple that pays $40,000 cash, takes out a $160,000 mortgage, and invests the $160,000 in the market. (In the real world, we can ignore transaction costs because we are assuming that both sets of retirees in fact already own the house and are merely deciding whether to pay off the mortgage.)"

I agree that this third couple presents an alternative that should be considered.

"Burns credits only the second couple with the shelter value of the house, but he should credit the third couple as well."

I agree so far, but the expense of the third couple also must be deducted. Mortage interest is deductible (and for purposes of this disussion, I will concede full deductibility, i.e. enough other deductions to exceed the standard deduction), but the principal portion paid is not deductible and is paid with after tax money.

"Both the second and third couples must pay property taxes, maintenance expenses, and any other incidentals of home ownership. Both stand to gain from appreciation, although the third couple is leveraged, whereas the second is not -- Burns misses this factor as well, "

I agree.

"and this factor [leverage] also favors NOT paying down the mortgage."

Not quite sure that I follow. I understand how leverage can increase percentage return on real estate; I also understand that if the leverage is margin, then the absoulte return can increased, too.

"The second couple gets a tax break (probably),

Again, I am not quite following, but you seem to be conceding something to the second couple, so I will accept.

"but that's accounted for by requiring the comparison to be between after-tax earnings in the market and the after-tax effect of interest payments."

I think that still ignores the principal paments that are made with after tax dollars. If no principal is being paid (i.e., interest only mortgage payment), then it starts approaching the rent analogy with the initial down payment being equivalent to prepaid rent. At this time of the evening I do not even want to venture into those calculations.

"I agree with you, though, that my proposed example probably confuses more than it clarifies because it invites precisely the comparison that you made. But other than that, I'm gonna stick to my guns. Have I convinced you?" --Bob

Not entirely. I really would like to see side by side numbers (and the underlying assumptions), which it was I was trying to do in my earlier response, but I
am not going to run them tonight.

I guess that means that I am also sticking to my position that is not not so straightforward and also depends on the risk tolerance of the persons involved.

Regards, JAFO



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Author: trevorford Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12022 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 11:48 PM
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There seems to be a clear split between paying off the domestic castle and having a mortgage/renting: If you are the child of Depression era parents (like me) you want/need to pay it off; if you are the child of post WWII parents, owning a "bolthole" is not so important.

I was working in the Middle East in a situation where I could save my entire salary in 1978. I still remember the feeling my wife and I had when we got THE LETTER from the bank congratulating us and telling us we owned our home - blessed relief comes closest, and I was "only" 42 - those Depression era lessons again.

We've long since sold that house and bought two others and are currently renting; and I've just retired. But we have purchased a house that could well turn into our final home (i.e. the one before "Sunnydale Retirement Village" or some such), we paid cash and it is a wonderful feeling that we own a property where we can go if and when the crunch comes.

My kids tell me that they will never buy until they retire. But with their IRA's full of MicroSoft, Yahoo, Dell etc, they'll be millionaires anyway.

Fool On!

trevorford

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12023 of 74759
Subject: Re: Investing after retirement Date: 7/12/1999 11:49 PM
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Repost with fonts better organized; I should have proofed the first respone. Sorry

Bob: in earlier post: "This analysis is wrong. You get the "shelter services" whether you pay the mortgage off or not, because you continue to own and live in the home. Another way to see this -- if you rent the house to a tenant, you must also reduce your profit by the rent you must pay. Burns omits this factor. The apples-to-apples comparison is to compare after-tax price appreciation of an alternative investment to the mortgage interest rate (assuming that mortgage interest is wholly deductible)."

Prompting me to write (in part):

Let me try an example (invented, so I can do the math easily). Two identical homes, side by side each worth 200k. Two couples, each with 200k non-sheltered cash available, each in the 33% tax bracket..

First couple rents for $2,000 per month (1% of 200k) and invests their 200k in the market, earning 15% pretax or 10% after tax (20,000).

Second couple pays 200k cash for the house (i.e. invests in the house). There is no immediate, direct return to them.

Bob again: Replies: "Given your premises, I agree with your analysis. But I disagree with your premises."

I thought I was responding to your prior post where you said in part <<<"Another way to see this -- if you rent the house to a tenant, you must also reduce your profit by the rent you must pay.">>>

"The question that Burns is attempting to analyze is whether retirees should pay off a mortgage on a principal residence that they already own."

Upon re-reading Burns's article, I am not entirely sure that I agree, but I think my potential disagreement is irrelevant to this discussion or the analysis.

"Thus, the comparison he needs to make is a comparison between your second couple ($200,000 cash for the house) and a third couple that pays $40,000 cash, takes out a $160,000 mortgage, and invests the $160,000 in the market. (In the real world, we can ignore transaction costs because we are assuming that both sets of retirees in fact already own the house and are merely deciding whether to pay off the mortgage.)"

I agree that this third couple presents an alternative that should be considered.

"Burns credits only the second couple with the shelter value of the house, but he should credit the third couple as well."

I agree so far, but the expense of the third couple also must be deducted. Mortage interest is deductible (and for purposes of this disussion, I will concede full deductibility, i.e. enough other deductions to exceed the standard deduction), but the principal portion paid is not deductible and is paid with after tax money.

"Both the second and third couples must pay property taxes, maintenance expenses, and any other incidentals of home ownership. Both stand to gain from appreciation, although the third couple is leveraged, whereas the second is not -- Burns misses this factor as well, "

I agree.

"and this factor [leverage] also favors NOT paying down the mortgage."

Not quite sure that I follow. I understand how leverage can increase percentage return on real estate; I also understand that if the leverage is margin, then the absoulte return can increased, too.

"The second couple gets a tax break (probably),

Again, I am not quite following, but you seem to be conceding something to the second couple, so I will accept.

"but that's accounted for by requiring the comparison to be between after-tax earnings in the market and the after-tax effect of interest payments."

I think that still ignores the principal paments that are made with after tax dollars. If no principal is being paid (i.e., interest only mortgage payment), then it starts approaching the rent analogy with the initial down payment being equivalent to prepaid rent. At this time of the evening I do not even want to venture into those calculations.

"I agree with you, though, that my proposed example probably confuses more than it clarifies because it invites precisely the comparison that you made. But other than that, I'm gonna stick to my guns. Have I convinced you?" --Bob

Not entirely. I really would like to see side by side numbers (and the underlying assumptions), which it was I was trying to do in my earlier response, but I am not going to run them tonight.

I guess that means that I am also sticking to my position that is not not so straightforward and also depends on the risk tolerance of the persons involved.

Regards, JAFO



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Author: Vic29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12024 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 12:25 AM
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Dumb idea. Invest in the Foolish Four or even an S&P index fund. You can make 18% or more which is better than the 7% mortgage rate that you would pay. This would still leave you a minimum of 11% to leave invested or to spend. Besides you would be able to deduct the interest on the house which would help offset earnings from your Foolish investments.

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Author: sequin Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12035 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 9:23 AM
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Dallas Morning News financial columnist Scott Burns' seems to side with those that say "pay-off the mortgage." You can read his analysis at the following link.

http://www.scottburns.com/990525tu.htm

intercst



Scott's column in today's paper is a "sequel" to the above article. Here's the link to it:

http://www.dallasmorningnews.com/business/columnists/0713bizcolburns.htm

He has some very good points. Check it out.

sequin

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12045 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 10:28 AM
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Our friend galeno provides the best analysis I've seen so far on the subject of "paying off your mortgage" -- and he didn't even have to use any numbers. See link:

http://boards.fool.com/Message.asp?id=1380025000033001&sort=postdate

intercst

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12046 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 10:44 AM
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Intercst sez:

<<Our friend galeno provides the best analysis I've seen so far on the subject of "paying off your mortgage" -- and he didn't even have to use any numbers. See link:

http://boards.fool.com/Message.asp?id=1380025000033001&sort=postdate>>



I'll second that. I've been fascinated by the discussion. There are valid arguments on both sides of this issue, and we can all construct economic scenarios when one approach is better than the other. Still, when all is said and done and as far as I'm concerned, this isn't a decision that's really made by the "economic" man (or woman). IMHO, it is one made by the "emotional" man (or woman) based solely on comfort level, be that for shelter or "risk." We can argue this issue to death, and I doubt highly either side can say its position is the "best" or "most correct."

Regards..Pixy


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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12047 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 11:20 AM
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I think that Burns is right about the imputed income issue. Assume that you earn 50,000 and use 20,000 to pay your mortgage each year and 30,000 for all other living expenses. Then you pay off your mortgage. Now you can live at the exact same living standard as before while earning only 30,000. Burns' point is that your income tax will be far less at 30,000 than at 50,000, even though your living standard is the same. Much of the 30,000 would be untaxed because of personal exemptions and the standard deduction; the remainder would be taxed at a low rate. The fact that the 20,000 value of the house you live in is ot subject to the income tax is what her is referring to as "imputed income." Everyone talks about the tax benefit of the mortgage deduction but ignores the benefit of untaxed imputed income.






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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12049 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 11:31 AM
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Galeno makes very good arguments in favor of renting over owning a home. Burns is making a slightly different point, though. He is saying that if you have already decided to buy a home (something Galeno would not agree to do), that there are financial benefits to paying off the mortgage rather than investing it elsewhere. Personally, I agree with both Galano and Burns--a middle-ground approach might be to purchase a small home and own it clear and free of a mortgage.

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Author: x4a54 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12051 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 12:11 PM
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>>>>>>
<<Our friend galeno provides the best analysis I've seen so far on the subject of "paying off
your mortgage" -- and he didn't even have to use any numbers. See link:

http://boards.fool.com/Message.asp?id=1380025000033001&sort=postdate>>
<<<<<<<

good analysis yes, but i question one of his "facts":

"Most rents in the USA are far lower than what you would pay to a bank to own the home.
"


is not true in my neighborhood.
and even if lower, once you have the mortgage, your
rent is fixed. Otherwise your rent increases with
the "value" real estate (perhaps galeno lives under
RentControl?).

... at end, i agree with Pixy that Rent v. Mortgage
v. pay-off the Mortgage is a life-style choice,
not an economic one. (largely depending on your
interest in staying put and for how long)


jp

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12054 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 12:34 PM
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x4a54 wrote,

good analysis yes, but i question one of his "facts":

"Most rents in the USA are far lower than what you would pay to a bank to own the home."

is not true in my neighborhood.
and even if lower, once you have the mortgage, your
rent is fixed. Otherwise your rent increases with
the "value" real estate (perhaps galeno lives under
RentControl?).


I agree. If you live in San Francisco/Silicon Valley or some suburbs of New York City, maybe renting doesn't make sense.

I've lived in Houston, TX off and on for the past 20 years. An apartment that rented for $400/mo. in 1981 costs $600/mo. today. A home that sold for $200,000 in 1981 is maybe worth $250,000 today -- if you're lucky.

We all know what kind of returns were available in the stock market from 1981 to 1999.

intercst

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12058 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 12:59 PM
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TMFPixy wrote 'There are valid arguments on both sides of this issue, and we can all construct economic scenarios when one approach is better than the other. Still, when all is said and done and as far as I'm concerned, this isn't a decision that's really made by the "economic" man (or woman). IMHO, it is one made by the "emotional" man (or woman) based solely on comfort level, be that for shelter or "risk." We can argue this issue to death, and I doubt highly either side can say its position is the "best" or "most correct."'

I concur.

The keep the mortgage, invest the balance crowd, and pay the monthly mortgage from the returns, seems to me to assume monthly cash flow adequate to pay the mortgage without accessing the invested balance. If not, then any money needed within the next five years to pay the mortgage should not be the equities market (according to Foolish theory).

If the next five years of payments are in safe, conservative investments, then the total return of the invested balance will be less than a comparison that assumes it is invested all in the equities market.

It comes back to the risk tolerance issue again, but my general preference is to keep my monthly "nut" as small as possible.

A long time ago, on another board, another Fool (cfofool, if a remember correctly) said something to the effect that "if you are going to purchase a house, then you should strive to purchase (and pay for) your last house as early in life as possible."

That is not an exact quote because I have misplaced my reference and I am too lazy to really search for it, so I take responsibility if I have misattributed the thought or mispoken.

I do remember thinking then that it crystalized my thinking about owning real estate very well. I do not think that everyone is interested in owing a house, nor do I think that it is cost effective for everyone to own a house, but if you are going to own a house, then I think it contains insight worth considering.

Just my $0.02. Regards, JAFO

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Author: cfofool Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12061 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 1:25 PM
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Great thread.

FWIW, as a CPA/MBA/CFO I think Burns' imputed income calculation is unsound.

Thought my family's RE story might suggest a "third way", so here goes:

Rented for ten years in Silicon Valley (apt. then townhome and then house) invested the difference and then moved back to Chicago (at 36 yrs. old) in 1997 with more than enough net worth to buy two houses outright (thank you MSFT, CSCO, ORCL, HWP). Instead bought one (hopefully our last).

Did so by taking a margin loan for the 20% down payment needed to avoid paying PMI.

Net result, I'm debt free except for a margin loan at 7.25% and a bank loan at 6.875%. Because these are deductible, I am confident that I will outearn their after tax cost in the stock market in the long-haul.

So far this strategy has worked well. Although I'm not entirely comfortable with a margin loan, I do not have any trouble sleeping with it at 15% of my stockholdings max.

Owning RE has been much more expensive than I imagined, but putting money into the house feels like an investment in our family and lifestyle. We bought more house than we needed with the idea that it can be our last house. Transaction costs in RE can really eat into returns.

Just my .02,

Kevin

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Author: JimKrishock Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12064 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 1:51 PM
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Blaycat,
I hope your plan is Foolish - I plan to do the same Fool thing!

Having the house paid off will provide me with some "mental security" which I value. If the worst happens and the economy crumbles at least I'll still have a roof over my head!

I have a couple of thoughts to offer on this subject:

1. Don't think of the ~30% tax deduction as a loss you'll miss, think of the ~70% in interest payments you'll avoid as a loss you won't miss!

2. Don't sell stock in the entire amount of your loan on day 1 when you're 59.5. I calculated spreading it out over just one year in quarterly installments and the positive effect on my account total at age 90 was fantastic!

Live long and prosper! ... Jim

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12072 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 2:31 PM
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hocus writes:

I think that Burns is right about the imputed income issue. Assume that you earn 50,000 and use 20,000 to pay your mortgage each year and 30,000 for all other living expenses. Then you pay off your mortgage. Now you can live at the exact same living standard as before while earning only 30,000. Burns' point is that your income tax will be far less at 30,000 than at 50,000, even though your living standard is the same. Much of the 30,000 would be untaxed because of personal exemptions and the standard deduction; the remainder would be taxed at a low rate. The fact that the 20,000 value of the house you live in is ot subject to the income tax is what her is referring to as "imputed income." Everyone talks about the tax benefit of the mortgage deduction but ignores the benefit of untaxed imputed income.

I reply:

As an initial matter, I agree with TMFPixy that this decision has much more to do with emotion, philosophy, and comfort level than with economics. My problem with the first Burns article, though, is that he presents a purely economic analysis and he gets it wrong. The imputed income he describes is the income imputed from not having to pay rent, because you live in your own home. His analysis is wrong because you receive his version of imputed income even if you're still paying a mortgage, a fact he doesn't appear to realize.

He also fails to note the positive effect leverage (in the form of a mortgage) has on returns gained from price appreciation -- if my house increases in price by 4% (the number used in the Burns article) and I owe 80% of its original value, my return on my 20% down payment is 20%, and the remaining 80% of my money is free to continue to work for me. If I own the home outright, my return is only 4%.

Hocus presents a different version of imputed income. I disagree with his/her analysis as well, but for a different reason. Hocus suggests imputing income because the homeowner will no longer need to earn the income necessary to make the mortgage payments. But that version of imputed income comes at a price -- the opportunity cost of cashing in the investments necessary to pay off the mortgage. In other words, rather than maintaining the income necessary to pay off the mortgage without touching savings, simply use the savings (and their earnings) to pay down the mortgage as it becomes due. Assuming that your investments get a better after-tax return than your mortgage rate (and that you have enough socked away to weather volatility), you'll come out economically ahead.

In short, I remain convinced that on a purely economic level, Burns is wrong. In his second article, though, he moves toward issues such as stability and peace of mind, and when he rests on these grounds his logic is unassailable. But his premises may or may not be shared.

Finally, intercst presents a third option. Never buy a house at all -- simply rent and invest the difference. That option works well in a rent-controlled environment, where you can enjoy confidence that rent increases will be limited. Nevertheless, as others (I believe including JAFO31) have pointed out, rent will increase, but the mortgage will not. Thus, there is a risk that in time, there will be no difference to invest; in other words, that today's rent will be more expensive than, say, the payment on a 20-year-old mortgage. As TMFPixy says, "You pays your money and you takes your chances." --Bob

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12075 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 3:15 PM
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Bob78164 writes,

Finally, intercst presents a third option. Never buy a house at all -- simply rent and invest the difference. That option works well in a rent-controlled environment, where you can enjoy confidence that rent increases will be limited. Nevertheless, as others (I believe including JAFO31) have pointed out, rent will increase, but the mortgage will not. Thus, there is a risk that in time, there will be no difference to invest; in other words, that today's rent will be more expensive than, say, the payment on a 20-year-old mortgage.

Surprisingly, "rent controlled" towns like San Francisco and New York City have very high apartment rents while cities where the free market reigns like Houston and Phoenix have modest rental rates. I suspect that the abundance of buildable land and abscence of any real zoning laws are responsible for the "overbuilding" of apartments in Houston and the resulting low rental rates.

In the case of San Francisco and Manhattan (New York City), the fact that there are few places to build new housing stock keeps rents high.

intercst

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12098 of 74759
Subject: Re: Investing after retirement Date: 7/13/1999 9:16 PM
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<<Finally, intercst presents a third option. Never buy a house at all -- simply rent and invest the difference. That option works well in a rent-controlled environment, where you can enjoy confidence that rent increases will be limited.>>
*******************************************************

Rent controlled environments only favor long-term renters. These places are VERY expensive to the new renter in the area.

Being retired, I value my flexibility and ability to live wherever it suites my fancy. I don't want to worry about a house I own, especially if I'm not living in it most of the year.

The ability to "vote with one's feet" is the best rent control device imaginable.

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12162 of 74759
Subject: Re: Investing after retirement Date: 7/14/1999 1:47 PM
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You've already retired, so this thought is a little late.
It is easier to qualify for a mortgage while you are employed.
Suppose in 2 or 5 years you or your wife becomes ill or is in an accident and you need a substantial sum to pay for medical expenses. If you choose to have the mortgage, you have your nestegg available. If you have tied the money up in the house, now you need a bunch of cash and it occurs to you to mortgage the house to pay your bills. It can be tough to qualify at that point.
Adding this point to the fact that probably you can do better in the stock market than the 7% your mortgage will cost seems to me to make a good argument for having a long mortgage and not paying it off any faster than you must. The mortgage offers you the opportunity to maintain liquidity. I'd have voted for building the house and getting the mortgage shortly BEFORE retiring.

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12163 of 74759
Subject: Re: Investing after retirement Date: 7/14/1999 1:58 PM
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<<I'd have voted for building the house and getting the mortgage shortly BEFORE retiring.>>

Crosenfield,,,,but the above just locks you into a home and a mortgage that you may not want down the road.

The beauty of being retired at forty is the freedom it allows you. I understand that when one has a good job or owns a business that's producing some $$$, one would want to stay put--in one house or in one town.

When one is retired, one may decide to go live in Paris for a year or so. Maybe a nice part of Mexico or just hang out in Rio for 6 months or so. Owning a home with or without a mortgage will cramp this style.

I still say nay to owning a home with or without a mortgage.

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Author: Missmes Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12191 of 74759
Subject: Re: Investing after retirement Date: 7/15/1999 1:29 AM
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Hi blaycat - I'm a single retired woman aged 56. My last house when sold had enough equity to buy my new house outright. My wealthy, savy brother advised me to rent, and invest my equity in the market. He assured me that I could get a 9% or better interest and use the extra dollars to travel. I didn't listen, after all my pets needed a home and it's hard to rent with pets. I bought a lovely home in the woods near a lake with great neighbors. However, my brother was financially correct. My taxes, utilities, maintenance, etc. on the house are more than rent (and a lot more hassle). I also missed out on investing at a great time which would have doubled my money. Conservative investment, yes, but perhaps foolish. I'd advise renting, traveling and thinking about Chevron, etc. as conservative investments.

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Author: blaycat Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12232 of 74759
Subject: Re: Investing after retirement Date: 7/15/1999 7:31 PM
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Wow. Sorry I asked. I'm more confused than ever.

Seriously, I appreciate all the great responses. As many of you have noted there are lifestyle considerations that will influence my ultimate decision.

I am a dedicated homeowner. We need the room. We like to entertain. We like to keep the grandkids. I couldn't do without the pool and my back yard. We are in an area where renting (for comparable accommadations) is higher than owning and has been as long as I can remember.

Also, while we plan to do a lot of traveling, we want a base to return to that is near the kids and grandkids.

As for investment strategies, it seems many of you have never experienced a bear market. I hope this steamroller keeps barrelling along making us all look like geniuses but I have some reservations.

Our nestegg is in the $ 2.5 million range so we will have plenty to aggressively invest even if we do plop down $ 500K for the new house.

Thanks again for all the thoughtful analysis.





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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12234 of 74759
Subject: Re: Investing after retirement Date: 7/15/1999 7:40 PM
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<>

I took a big hit during the crash of 87. Granted, I'd only saved up about $60K at the time. I watched $60K turn into about $28K. It wasn't fun. I was very tempted to sell and put everything into CDs.

However, I was smart enough to leave well enough alone. By next year same time, the market recovered and my $28K was back to over $60K.

This taught me a lesson that the MF is trying to teach today, i.e. stay in the market at all times.

As far as homeownership, it's really a life-style choice and nothing more. For me, right now, owning a home would be like owning a white elephant. I may change my tune in 5 or 10 years though. One never knows.

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Author: gair Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12273 of 74759
Subject: Re: Investing after retirement Date: 7/16/1999 4:21 PM
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I am in the same position, and they way I looked at the situation is this: I paid for my house, and consider it an investment since not only do I save the 7% interest, but I also gain value over time. The gain in value is tax free, so if I see 6% per year gain, that's
equiv. to 8.5% pre tax in addition to the 7% pre tax
savings from the mortgage interest. The net is a 9%
return from a very safe investment.

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12274 of 74759
Subject: Re: Investing after retirement Date: 7/16/1999 4:44 PM
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gair writes:

I am in the same position, and they way I looked at the situation is this: I paid for my house, and consider it an investment since not only do I save the 7% interest, but I also gain value over time. The gain in value is tax free, so if I see 6% per year gain, that's equiv. to 8.5% pre tax in addition to the 7% pre tax savings from the mortgage interest. The net is a 9% return from a very safe investment.

I reply:

I don't quarrel with your decision (to pay off your mortgage rather than merely continuing the monthly payments), which is a very personal one, and which is rarely based purely on economic considerations. I do disagree, though, with your analysis if it's intended to justify the decision on economic grounds. As I see it, you get the price appreciation whether you've paid off the mortgage or not. In fact, because you've lost the effect of leverage, paying down the mortgage actually hurts this component of your returns (assuming the house continues to increase in value).

The only other economic difference I see between paying the mortgage off and not paying it off is the interest savings. Based on the S&P 500 long term average, as an economic matter, you're better off investing the money in the market rather than paying down a deductible 7% loan. --Bob

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12310 of 74759
Subject: Re: Investing after retirement Date: 7/18/1999 5:25 PM
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Ah, but our friend has already decided he wants the house. The question is how to finance it. When I was your age I lived in Brazil for a few years, Rome for awhile, Canada for awhile, but now I want to look at the lake and the deer and the geese in the back yard. They will take me out of here feet first. But I'm in no great hurry to pay off the mortgage! When I worked for the UN and lived all over, it was always rent and wouldn't consider buying. Now is different....

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Author: frankg1648 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12790 of 74759
Subject: Re: Investing after retirement Date: 8/4/1999 9:33 AM
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Yes it's a hard decision whether to keep investing or pay down a mortgage. But a big consideration is the real estate market increase. I live in the Denver metro area and we have had a 12-22% increase each year for the last 3. Not bad when you compare that to what some stocks have done during the same time period. So, unless you guys are buying a retirement home in the middle of Detriot/South Bronx, no offence to those who reside there, you will probably have a nice return on the property equal to your stock returns */-. Good Luck!

in the wind.....

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