UnThreaded | Threaded | Whole Thread (36) | Ignore Thread Prev | Next
Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 56829  
Subject: Re: Buy vs. Rent in retirement Date: 2/5/2007 1:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
It always requires a certain amount of risk for ones investments to earn an expected rate of return. After you retire and are living off of your investments, it makes sense to pay off your mortgage because it lowers your withdrawal amount. 0% is the ultimate SWR....

With sincere apologies, I don't think this is sound reasoning. Paying off your mortgage lowers your withdrawal, but it also reduces your income. That, in turn, can lead to increased risk.

I can't give you a reasonable mortgage example, because in the real world mortgage interest almost always more than your SWR. But rent is sometimes less, and it increases your withdrawal the same way a mortgage does.

Let's say you have $20,000 / year expenses beyond housing and $650,000 to retire. You could retire in an apartment at $500 / month, $6000 / year, or you can buy an equivalent condo for $200,000 plus $100 / month in property taxes and maintenance. Purchasing it reduces your withdrawals by $4800 / year, but it also cuts your total funds to $450,000. $26,000 / year from $650,000 was 4%, but $21,200 / year from $450,000 is 4.7%. Your withdrawal rate has gone up and so has your risk.

That's a pretty ridiculous price for a condo that would rent for $500 / month, but housing prices have climbed in some parts of the country without a corresponding hike in rents.

You can of course argue that you should saving more than $650,000 in this scenario is safer, but that's true whether you purchase or rent. You can always do things that will make you more comfortable, but the point of SWR discussions is to figure out the minimum amount needed to retire safely.

- Gus
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (36) | Ignore Thread Prev | Next

Announcements

2013 Feste Award Voting Begins!
Who will win the 2013 Feste Award? Vote now for the Fool that most exemplifies the Fool Community mission of Learning Together!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Tax Strategies

TMFPMarti-Feeling Good
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement