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Hi Fools --

We have a difficult financial decision coming up when it comes to the former iPIG Portfolio. While the decision is my family's to make, I'm posting it here to both help clarify my thoughts and to seek your perspective if you care to share.

The decision is this: Do we empty the account that contains the former iPIG Portfolio and use the money to pay off we mortgage, or do we keep the money in the account and hope it continues to drive the solid returns it has been delivering since inception?

Here's some of the background as to why this is a tempting decision:
Funding source: The money to fund the iPIG Portfolio came from an investment account that my wife and I called our "Home Fund". Early in our marriage, she decided that she wanted to be a stay at home mom if we were to be blessed with children. In order to enable her desire, we aggressively paid off most of our non-mortgage debt while we were DINKs. We used the higher salary of having two incomes to do that, along with setting up our home for our firstborn once she found out she was expecting. In order to not get trapped by lifestyle creep, once we were done with those priorities, we put the entirety of the take home salary we were going to lose into an investment account that we called the "Home Fund". When the Fool offered me the chance to run a real-money portfolio on the site, I renamed the account the iPIG Portfolio, topped off the balance with a small transfer to get it to a round number, and made it a reality.

Purpose: Now that the iPIG Portfolio is shut down as a real-money portfolio and unlikely to be resurrected as such, the incentive to keep it invested that way is smaller than it had been. Sure, I still believe in the dividend growth, valuation, balance sheet strength, and diversification philosophy that drives the account, but we can also invest that way in our Roth IRAs, where the tax implications are lower. With modest assumptions on rate of return and assuming I'm able to stay employed throughout the year, the value of the account with the iPIG portfolio could wind up large enough by the end of the year that it can be used to pay off the mortgage. That brings a nice ending to an account that was originally funded to help us keep our costs of living in check.

Income & taxes: Based on factors not 100% in my control, I expect my income level in 2021 to be lower than it was in 2020 and (assuming I stay employed) lower than it will be in 2022. That makes 2021 a reasonable window of time to take the capital gains tax hit from selling the appreciated shares in the former iPIG Portfolio account. In addition, unless things change, I have some positions showing capital losses in the account I use to invest in options that I could close or roll early to help offset those capital gains taxes.

College costs: This fall, our oldest child becomes a junior in high school. Once he starts college, it kicks off what we are anticipating will be a 12 year stretch where we will have at least one kid, often two, in college simultaneously. We're good with money and live below our means, but there's no way we can cash flow that from salary alone. If I'm reading things correctly, converting the former iPIG Portfolio account from stock investments to home equity should make it less generally touchable in the college financial aid calculations, while simultaneously freeing up more money to cover the college costs that will come our way.

And here are some of the factors holding us back from liquidating the account:
Returns: The former iPIG portfolio has performed well since inception, easily outpacing the below 4% cost of our mortgage. Over the long haul, I believe it has the potential to continue doing so, which makes liquidating the account a potentially not-so-smart financial decision.

Timing of the money crunch: Based on the age gaps of our children and the current and projected values of the 529 college savings accounts we have for them, we expect the money crunch to really start getting bad in 2025 or 2026. That's when we expect to have two in college and a good chance that their 529 plans get tapped out. That gives us a few more years to let the money potentially grow and compound and let the mortgage balance decline from ordinary payments. That would lessen the net amount needing to be liquidated and the tax impact of doing so to pay the mortgage off.

Money location: One of the big risks we realized we had during the financial crisis was that while we have a decent invested net worth, nearly all of it was tied up in retirement accounts where tapping it early brings with it serious tax and penalty consequences, as well as the loss of compounding towards retirement. The account that holds the former iPIG Portfolio is a huge chunk of the money we've been able to squirrel away outside of those retirement accounts. Although tying it up in home equity would lower our costs of living by getting rid of the mortgage debt, it would also seriously limit our access to non-retirement savings.

I'd love your perspective...

Regards,
-Chuck
Discovery/HR Home Fool
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Hi Chuck,

Questions:

1. What is the APR of the mortgage?

2. Does it have PMI?

3. What is the average annual return of the portfolio?


If you have PMI, you should be able to have it dropped if the balance is low enough.

If the capital gains are what is concerning you:

Sell some of the stock and buy it back. You will pay the cap gains now and raise your basis for future sale, lowering taxes then.

You can piece-meal small sales anytime, as long as you don't take a loss and repurchase the same stock. If you sell a loser in your taxable , do not buy the same or similar again for at least 31 days, before or after in any account.


"Money location: One of the big risks we realized we had during the financial crisis was that while we have a decent invested net worth, nearly all of it was tied up in retirement accounts"

You also note that IPIG is a significant portion of your non-retirement money. This a BIG reason to NOT WASTE IT PAYING OFF A MORTGAGE! (Sorry for shouting. It just gets me excited ...)

Based on what I mentioned above, you can choose time to sell some stock, etc to bolster your cash cushion. Based on what I glean from this post and others, you should have 1 to 2 years of your full living expenses in cash/cash-like holdings outside of your portfolio.

The cushion feeds your checkbook. Selective sales plus interest/dividends will keep it topped off. Sell stock when prices are good.

"Disposing" of all your accessible capital is not a good idea.


Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

PS: I have a similar issue using capital. We bought some land, will move out of state, build a new house and sell the old place. I could have stripped our taxable account plus withdraw the entire amount from Roth.

Instead, I took a mortgage on the land and will pay bills as due from cash I still hold in Roth. If this place sells, I will use that cash for the remainder of the building phase. I may of may not pay-off/pay-down the mortgage with the rest.
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Pay off the mortgage. You won't believe the freedom and flexibility you will get without that on your fixed expenses every month.

You'll also avoid the imminent crash in the market (you think the GME scenario is a positive sign?).

Don't let the tax tail wag the investment dog.

It's probably not an either/or, you could perhaps pay off enough to leave only a small monthly expense.
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Thanks Gene and Neuromancer --

You've both given us good things to think about. In particular, I hadn't thought of the idea of selling and rebuying the stocks with gains in order to increase their basis price for when we do need the money later. As the year unfolds and we get a better picture of where our income really ends up, that might make a great strategy to take advantage of.

Fortunately, there's nothing forcing a decision on us today. Still, with property taxes skyrocketing thanks to the way the country reappraisal just wound up, insurance costs leaping thanks to one teenage driver and another on the way, and college costs looming, our costs of living are not trending in the right direction. In addition, if income and/or Social Security taxes go up, I doubt we'll escape the increases that actually make it through Congress...

By paying it off, the mortgage is the one big bill that could potentially be eliminated without a huge impact on our lifestyle...

Regards,
-Chuck
Discovery/HR Home Fool
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