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Subject:  Re: Ordinary People...Extraordinary Wealth Date:  3/2/2001  1:58 PM
Author:  jtmitch Number:  37 of 220

I recognize some of the names in this thread from the Retire Early Home Page but not others. Here is one slant on the mortgage thing that has been discussed there from time to time. It is an argument for paying the mortgage off sooner rather than later.

When you retire you are presumably withdrawing money from your portfolio for living expenses. (The conventional wisdom seems to say 4% per year is a "safe" withdawal rate.) Let's say you have a need for $40,000 in pre-tax income with housing expenses included. Let's also say your house payment is $1000 per month with $750 being P+I. Let's say the mortgage balance is currently $90K. So you would need a nest egg of $1,000,000 to sustain you in retirement. But if you pay off your house, you no longer have to pay the $750 per month (or $9,000 per year) P+I. At the 4% withdrawal rate, it takes $225,000 in your portfolio to generate $9,000 per year. So, if you pay the house off early, you have eliminated the need for that $225,000 to sustain your lifestyle, thereby reducing your required nest egg to $775,000. (And it has only cost you $90,000 to eliminate that need.) At 4%, you are generating $31,000 per year in income which should allow you to live exactly the same as you did on $40,000 with a mortgage. For people who are trying to accelerate their retirement by a few years, paying off the house early can be a very good strategy.


Disclosure: I have not paid my house off early. I was regularly paying additional principal each month for while but I am now earmarking $X per month (the amount I was previously applying toward principal) for a "mortgage prepay fund". I use a fairly conservative balanced mutual fund and keep the money separate from any other part of my portfolio. When the time comes to retire, I will redeem that fund and use the proceeds to pay off the mortgage. I will not go into retirement with a mortgage, but I feel the stategy I am following gives me a little more flexibility prior to retirement.
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