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I'm currently 46, and have been saving reasonably aggressively since I started working in my late teens. I'm thinking I'd like to retire around 55. I currently have a mortgage, that I'm paying down quickly. I'm paying roughly double my required mortgage payment every month, which amounts to about three times the principal each month. At this rate, I should be able to pay it off by 55.

Once the mortgage is paid off, my living expenses will be significantly reduced. My current retirement savings is about 16 times my living expenses (sans mortgage). All of that is in qualified retirement accounts, 65% of which is in my current employer's 401k. I figure that with continued investments, and a hoped for 7% return (I'm fully invested in equities), I will hopefully have 25 X expenses at about the time the house is paid off when I hit 55. I was concerned that I wouldn't be able to get to my retirement savings without penalty until I became 59 1/2, since they are all in retirement accounts.

Then I stumbled upon the rule of 55. Apparently, if you leave your employer (voluntarily or otherwise) during the year that you turn 55, you can begin taking withdrawals from that employer 401k plan that year. This doesn't apply to other retirement accounts, and it seems that if you roll over the 401k plan into another account, then the deal is off. Does anyone have experience with this? Are there any pitfalls I need to watch out for?

John
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jperry1230 asks,

Then I stumbled upon the rule of 55. Apparently, if you leave your employer (voluntarily or otherwise) during the year that you turn 55, you can begin taking withdrawals from that employer 401k plan that year. This doesn't apply to other retirement accounts, and it seems that if you roll over the 401k plan into another account, then the deal is off. Does anyone have experience with this? Are there any pitfalls I need to watch out for?

</snip>


That's true. But it's easy enough to withdraw funds penalty-free from an IRA or 401k using the 72(t) SEPP exemption at any age. There's no need to limit your retirement date to the year you turn age 55.

intercst
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I'm currently 46, and have been saving reasonably aggressively since I started working in my late teens. I'm thinking I'd like to retire around 55. I currently have a mortgage, that I'm paying down quickly. I'm paying roughly double my required mortgage payment every month, which amounts to about three times the principal each month. At this rate, I should be able to pay it off by 55.

Don't bother paying off the mortgage, invest instead. At today's interest rates (4-ish%), you'll do far better in the market. Remember, mortgages are fixed-rate, long term, and tax advantaged.
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Then I stumbled upon the rule of 55. Apparently, if you leave your employer (voluntarily or otherwise) during the year that you turn 55, you can begin taking withdrawals from that employer 401k plan that year. This doesn't apply to other retirement accounts, and it seems that if you roll over the 401k plan into another account, then the deal is off. Does anyone have experience with this? Are there any pitfalls I need to watch out for?

I'm turning 56 in less than a month, and am using the rule to access my account now. I decided when I was about your age that I should be able to retire in the year I turned 55, and managed to do so, kind of - I retired from the employer where my 401(k) is held, but am now doing a consulting gig for a former boss. Because of the income from the consulting gig, I haven't really had to access the account much yet, but have taken one withdrawal.

- You don't actually need to be 55 to implement it - you just need to 'leave service' from the employer with the 401(k) plan in the year that you 'turn 55' - so you could actually be 54 and access the money
- Your plan must actually allow you to do this - not all do, but most plans that I have seen from large employers do allow this
- You need to be sure that your employer's 401(k) plan allows partial withdrawals, so you don't have to take the money out all at once
- The plan will be required to withhold a minimum of 20% of your withdrawals for Federal income taxes
- If your plan does not allow you to pick and choose the investments that you want to withdraw from (mine doesn't) and you hold any employer stock that you are planning on using the NUA treatment for, you will be diminishing the amount of employer stock that you will be able to give that treatment to

AJ
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syke6: "Don't bother paying off the mortgage, invest instead. At today's interest rates (4-ish%), you'll do far better in the market. Remember, mortgages are fixed-rate, long term, and tax advantaged."

Not all mortgages are fixed rate; and not all are necessarily long-term.

Regards, JAFO
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But it's easy enough to withdraw funds penalty-free from an IRA or 401k using the 72(t) SEPP exemption at any age. There's no need to limit your retirement date to the year you turn age 55.

Easy, but not as flexible. You must continue SEPP withdrawals for a minimum of 5 years, or until you are 59 1/2, whichever is later. And the amount that you take out each year is set by whichever rule that you decide to use, whether you don't need all the money, or need more than the withdrawal. So, if the OP was already planning on retiring between the year he turns 55 and 59 1/2 anyway, and the plan allows, I would recommend using the rule of 55, rather than SEPP.

AJ
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aj485,

You wrote, ... you just need to 'leave service' from the employer with the 401(k) plan ON or AFTER the year that you 'turn 55' ...

There, fixed it for you.

- Joel
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syke6: "Don't bother paying off the mortgage, invest instead. At today's interest rates (4-ish%), you'll do far better in the market. Remember, mortgages are fixed-rate, long term, and tax advantaged."

Not all mortgages are fixed rate; and not all are necessarily long-term.

Regards, JAFO



And under the new tax law, not all mortgages are tax advantaged anymore. I've been enjoying the mortgage interest deduction for 20+ years but I will probably not be able to itemize in 2018, despite high state and property taxes.
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Not all mortgages are fixed rate; and not all are necessarily long-term.

Noted. But the ability to borrow fixed-rate, non-callable, tax advantaged money for long terms at just above the long term rate of inflation is the deal of a lifetime.
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"But it's easy enough to withdraw funds penalty-free from an IRA or 401k using the 72(t) SEPP exemption at any age. There's no need to limit your retirement date to the year you turn age 55."

"Easy, but not as flexible. You must continue SEPP withdrawals for a minimum of 5 years, or until you are 59 1/2, whichever is later. And the amount that you take out each year is set by whichever rule that you decide to use, whether you don't need all the money, or need more than the withdrawal. So, if the OP was already planning on retiring between the year he turns 55 and 59 1/2 anyway, and the plan allows, I would recommend using the rule of 55, rather than SEPP."

Yep, I was thinking about the 72(t) exemption, but it seemed like it would be difficult to structure my withdrawals to be exactly what I wanted. Depending on how my investments do, I will probably want to take 4% of total portfolio and then increase by CPI every year. I don't think that type of flexibility exists in the SEPP.
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Noted. But the ability to borrow fixed-rate, non-callable, tax advantaged money for long terms at just above the long term rate of inflation is the deal of a lifetime.

Funny thing is, in our neighborhood of mostly retired people, the ones who tend to have a mortgage are the ones who seem to have a lot of money (as evidenced by spending & travel habits). The ones who tend to *not* have a mortgage are the ones seem to *not* have a lot of money (as evidenced by travel to places like Branson, MO. (4 hours away) and travel to Disney World in a 6 passenger minivan--driving straight through).

One of our neighbor-ladies gasped at my wife when she (my wife) let slip how much our mortgage payment was. "How can you afford that? You are retired!" Yeah, well our investments have grown 25% in the last couple of years, and we don't have a couple hundred thousand dollars locked up in dead money in a house earning 0% and paying us $0 dividends.

Retired people who are financially savvy locked in a 4% 30 year fixed rate mortgage when they had the chance.
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With substantial sums in 401k or other tax advantaged accounts, be aware of required minimum distributions (RMDs) beginning at age 70-1/2. Plan ahead to avoid the situation where the distributions must be taken when your lower tax brackets are covered by Social Security, pension, and other payments.

The best way is work down the balance in those advantaged accounts whenever you have a low tax year. Roth Conversions (or a series of partial Roth conversions) is one way if you don't need the funds. Or perhaps defer Social Security or other payments and live off of tax advantaged funds when you can.

Plan ahead for best results.
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With substantial sums in 401k or other tax advantaged accounts, be aware of required minimum distributions (RMDs) beginning at age 70-1/2. Plan ahead to avoid the situation where the distributions must be taken when your lower tax brackets are covered by Social Security, pension, and other payments.

The best way is work down the balance in those advantaged accounts whenever you have a low tax year. Roth Conversions (or a series of partial Roth conversions) is one way if you don't need the funds. Or perhaps defer Social Security or other payments and live off of tax advantaged funds when you can. Plan ahead for best results.


=====================================

Yes, I suppose you can say that's "The best way", if you never have a lot of medical expenses in your final years - but a lot of people do. Including long-term care expenses, which become much more likely the older you get to be. In which case you can have enough deductible medical expenses to offset whatever you take out of an IRA, let alone the RMD.

Bill
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syke6: "Don't bother paying off the mortgage, invest instead. At today's interest rates (4-ish%), you'll do far better in the market. Remember, mortgages are fixed-rate, long term, and tax advantaged."

I look at this like margin. I wouldn't borrow money at 4.25% against my house to invest, so I'd rather pay down the mortgage than carry the debt and invest. If this was the right move, then I should take out a HELOC for the max amount allowed and invest it in the market. This doesn't seem prudent to me. In the event of another housing crisis, or major market meltdown, I'd rather not have the debt. Is everyone else maxing out there borrowing ability to invest in the market?

JP
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I look at this like margin. I wouldn't borrow money at 4.25% against my house to invest, so I'd rather pay down the mortgage than carry the debt and invest. If this was the right move, then I should take out a HELOC for the max amount allowed and invest it in the market. This doesn't seem prudent to me. In the event of another housing crisis, or major market meltdown, I'd rather not have the debt. Is everyone else maxing out there borrowing ability to invest in the market?

We bought a house with a 30 year fixed rate mortgage last year just before retiring, even though we could have paid cash. I view it as an inflation hedge and anticipate that in the not too distant future we will be able to make the 4% back in something risk free that will earn us at least that much. I confess I didn't think a mortgage would be easy to obtain once we were retired, but we recently looked at buying an investment property and I was pleasantly surprised that it is still a tool that is available to us.

My parents didn't discuss much about finances but I remember Dad bragging about how the bank was trying to get him to pay off his 5% mortgage back in the late 70's early 80's. Mortgages were 18% at the time, my Federally guaranteed student loans were 9%. He asked the bank how much of the principal they were going to forgive to encourage him to pay it off and when they said there were no incentives he commented there was zero benefit to his paying it off, pointing out that having the money in their bank in a savings account paid him more than the money he would not have to spend on the mortgage. So it is possible with this piece of history I have a bias against paying off a mortgage early, but I like to think it is simply a tool that I don't fear using.

On the other hand I paid off those student loans as fast as I could, and never carry a credit card balance. Haven't paid interest on a credit card since my early 20's.

IP
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JP: "Is everyone else maxing out there borrowing ability to invest in the market?"

We paid off our mortgage in 2009 before I started reading this board and thinking about the alternatives. In hindsight, I could have taken that $165,000 and put it into a boring index fund like vti which would now be worth about $500,000 which is more than my entire house is worth. Plus that $500,000 could potentially be generating income in the $15-20,000 range whereas the house costs money to own. In hindsight, a smaller house plus investing the difference would have given us even more money and lower costs of living and I would be bragging about my early retirement right now.

But I probably would not have done so anyway for psychological reasons. I did not anticipate that the Fed would pile trillions of dollars into the economy and prop up the markets to this degree and I wanted to be out of debt if and when the bottom fell out (it never did).

Now that the markets are richly valued and rates are rising, I think it is a closer call now than it was in 2009. Future values appear to be muted and extra money might be a decent hedge against a severe correction. But I was wrong then and may well be wrong now.

The unknown factors are your personal investing skills and psychological disposition. If the future returns over the next ten years are lower than average because of rich market valuations at this time, and you don't have the time, energy or skills to navigate those shoals successfully, paying off the mortgage may work for you even if the alternative worked better for many of the posters here.

When I play golf with my best friend I still lay up short of the water guarding the par five, hit safely over with one of my trusty wedges and he still goes for it.

Potayto Potahto.
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In the event of another housing crisis, or major market meltdown, I'd rather not have the debt. Is everyone else maxing out there borrowing ability to invest in the market?

Maxing ? No. Market - not entirely; some real estate, too.

Having weathered some personal crises, it was much better for me to have things other than a paid off house in my financial quiver.

I use a net worth spread sheet to guide me. As long as the bottom line remains the same(I have more than enough) or increases, I'm happy.
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I look at this like margin.


That would be an incorrect comparison. A margin agreement is an open line of credit that is subject to margin calls, as well as forced liquidation of the collateral.

A fixed mortgage, as referenced in the OP, is not an open line, is not subject to forced early repayment, and as long as you make the payment, cannot force the liquidation of the collateral.

I wouldn't borrow money at 4.25% against my house to invest

If you have a mortgage, you ALREADY borrowed against your house to invest. You didn't pay cash for the house, you borrowed someone else's money so that you could use your cash flow to "invest" in retirement, living expenses, travel, etc. - basically everything you spent money on over the duration of your mortgage.

So, the only choice then becomes what is the best utilization of your current cash flow. When you took out a mortgage, you obviously valued your cash and the opportunity it provided more than being debt free. Assuming all else being equal, that decision should be the same when you have paid 15 years into a 30 year mortgage.

If this was the right move, then I should take out a HELOC for the max amount allowed and invest it in the market.

Again, not the same thing. HELOCs are variable and can be termed out (or even demanded early) by the financial institution.
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I look at this like margin.

Yes, it is margin debt. On the other hand, it's also helping keep capital liquid, rather than tying it up in an asset that can't be easily and inexpensively liquidated, and, if you got a fixed rate mortgage between 2010 and 2017, it's probably a lower rate debt than you had previously seen in your lifetime. It comes down to your personal risk-reward views as to which is the better option.

The pre-payment of principal on the mortgage debt without actually paying the debt completely off actually magnifies the illiquidity risk. It's tying even more capital up in an illiquid asset - your home. Many people don't think about this risk when they are pre-paying a mortgage, but it is a risk. If you were to need liquid capital for something, it's harder to get out of your home than it would be to get it out of the market. This risk can be mitigated by the use of a 'mortgage freedom fund' - investing the money you would use to pre-pay the mortgage.

I wouldn't borrow money at 4.25% against my house to invest, so I'd rather pay down the mortgage than carry the debt and invest. If this was the right move, then I should take out a HELOC for the max amount allowed and invest it in the market.

I disagree. Borrowing money at a fixed 4.25% (or lower) rate against your home is a completely different risk-reward proposition than maxing out a HELOC. HELOCs are variable rate, and with the prime rate currently at 5%, it's likely that most of them are already at or above 4.25% And with more rate hikes anticipated this year, by the end of the year, it's likely that even the HELOCs at a prime minus 1 rate will be above 4.25% by the end of the year.

Again, it depends on your personal risk-reward views on how to balance the illiquidity risk vs. the risk of total returns being lower than the rate you borrowed at.

In the event of another housing crisis, or major market meltdown, I'd rather not have the debt.

If the debt were completely paid off, I would agree. But even if your mortgage freedom fund account dropped by 50% and you had to cash it out at the bottom because you lost your job, you'd probably still have enough left to make mortgage payments for several months, if not several years. On the other hand, if you had put all the money into pre-paying your mortgage, and you lost your job, you couldn't draw on the money that you put into pre-payments to make mortgage payments that you still would be required to make. In order to access that equity, you'd probably have to sell the house, since trying to get a HELOC when you don't have a job is problematic, at best. And selling the house in the middle of a housing crisis is also problematic, as many found during the last housing crisis.

Is everyone else maxing out there borrowing ability to invest in the market?

No, but my taxable account, which could pay off my mortgage, throws off enough investment income to make my mortgage payment each month. So at the end, I will still have my taxable account, and a paid off mortgage.

AJ
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AJ "No, but my taxable account, which could pay off my mortgage, throws off enough investment income to make my mortgage payment each month. So at the end, I will still have my taxable account, and a paid off mortgage."

I think that your claim is accurate and I think that it was a much smarter move than I made in paying off my mortgage.

But... I have been able to save and invest the full amount of money that would have gone into my mortgage payments over the last 9 years so I do have a paid off mortgage and also a growing taxable account. It just turns out that my taxable account would be proportionately smaller than yours to the extent that I did not participate in the bull market over the last 9 years as fully as I might have (and you did).

But...if there were huge crash right now then I would have an already paid off mortgage and the ability to save and/or invest my putative future mortgage payments during that crash rather than make those payments in a crashing market.

I think.
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If this was the right move, then I should take out a HELOC for the max amount allowed and invest it in the market. This doesn't seem prudent to me. In the event of another housing crisis, or major market meltdown, I'd rather not have the debt. Is everyone else maxing out there borrowing ability to invest in the market?

HELOCs are typically not fixed rate. It wasn't that long ago mortgage rates were 21%. That might not happen again, but if it does or even gets close to double digits anyone with an adjustable rate will be sorry.
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syke6:

<<<Not all mortgages are fixed rate; and not all are necessarily long-term.>>>

"Noted. But the ability to borrow fixed-rate, non-callable, tax advantaged money for long terms at just above the long term rate of inflation is the deal of a lifetime."

As someone previously noted, the new tax law and higher standard deduction will make many mortgages not tax advantaged, especially for those MFJ.

Say $200k mortgage @ 4% on $250k house, taxes equal to 2% of value of house - 8k in interest and 5k in taxes is 13k in potential deductions, but still 11k short of standard deduction (itemizing) for a couple MFJ.

Regards, JAFO
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I look at this like margin. I wouldn't borrow money at 4.25% against my house to invest, so I'd rather pay down the mortgage than carry the debt and invest...

If you want to rationalize a decision you made to pay of your mortgage, that's fine. But this is not a good comparison. There are significant differences between holding a mortgage and borrowing on margin or getting a HELOC. If you don't understand these significant differences, you should be careful making decisions about all of them until you do.

Also, you did choose to borrow money against your house when you took the mortgage. That's exactly what that deal is. You get to live in the house because you borrowed money.

This issue of whether it is best to pay-off a mortgage prior to retirement or not comes up often. Some of the available historical simulators allow you to analyze this decision based on US financial history. What you will find, in general, is not surprising. The lower your interest rate on the mortgage, the higher the probability that keeping the mortgage will make you more wealthy and keep your investment portfolio safer. At an interest rate below about 4.5% to 5%, the odds are definitely in favor of the investor who keeps their mortgage. On the other hand, it doesn't make a huge difference for most people. Very few people would be in situation where this decision was the difference between a successful retirement and early financial failure. Those of us who have kept our low interest, fixed rate mortgages and retired during the last 20 or so years are richer for that decision.

But things could change in the next 20 years. We could experience another long running, GOP-induced Great Recession making investments worth less than a pile of money buried in the back yard. If investments aren't paying off, then they are not beating the interest rate of the mortgage. What happens to the real estate market only matters to this decision if you decide to sell the house, but if you are thinking of downsizing or moving next door to the kids when you retire, then what happens to the value of your dwelling can also impact this decision. But that can go for or against either decision.
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If this was the right move, then I should take out a HELOC for the max amount allowed and invest it in the market. This doesn't seem prudent to me.

HELOC? Nobody here is talking about a HELOC. We're talking about a long-term fixed rate mortgage.
HELOCs are short, are callable (maybe not all, but all the ones I've had or looked at) and are not fixed rate.

In the event of another housing crisis, or major market meltdown, I'd rather not have the debt.

The only risk in a FRM is not making the monthly payments. As long as you have enough assets & liquidity you don't face this risk.


Is everyone else maxing out there borrowing ability to invest in the market?

You don't have two parts of your financial situation. Your net worth is ONE thing---all your assets minus all your liabilities.

We didn't invest in the market with the money we borrowed to buy our house. We took a mortgage to buy the house AND left our investment assets invested.

So, basically, to answer your question: "Yes." Each time we refinanced at a lower rate, we made the decision to refi the mortgage instead of selling stocks to pay the old mortgage off. Financially, that's the same thing as borrowing on the house and investing that money in the market.

FWIW, we did not take cash out on the refi....because they charge higher rates and fees on a cashout refi. If they hadn't have those higher costs, we would have taken out the maximum 80% LTV.

If we had a $500,000 house and owed only $100,000 on it, we would pull the money out of the house by getting an 80% LTV cashback refi. Then a year or two later we would do a "rate & term" non-cashback refi to get the lower rate (if the rates were lower).

Because over a 30 year period, the stock/bond market is certainly going to grow more than 4% a year. Not each and every year, but over 30 years for sure.

So, hmmm, bankrate-dot-com says 4.365% rate for 30yr FRM, payment $2000/mo.
Take the $300,000 cash out, put 5 years of payments ($120,000) in a 1.5% savings account, and invest the rest in a 60/40 or 70/30 balanced portfolio. The reserved $120,000 is to tide you over a 5 year bear market, in case we ever have such a long bear market.

Don't forget that the payment is fixed and doesn't go up with inflation. After 20 or so years of inflation, your $2000 payment will be pocket change. When my Dad was at the 25 year mark of their mortgage, he said that his monthly real-estate tax was more than his P&I amount.
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I think of the paid off mortgage as similar to the 'bond' portion of my assets -- nobody expects that part of their assets to grow anywhere near the pace of the S&P yet most retirement strategies tell you to keep a large % in bonds anyway.
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I think of the paid off mortgage as similar to the 'bond' portion of my assets -- nobody expects that part of their assets to grow anywhere near the pace of the S&P yet most retirement strategies tell you to keep a large % in bonds anyway.

But bonds are liquid...and actual bonds have a specific value ...
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Then I stumbled upon the rule of 55. Apparently, if you leave your employer (voluntarily or otherwise) during the year that you turn 55, you can begin taking withdrawals from that employer 401k plan that year. This doesn't apply to other retirement accounts, and it seems that if you roll over the 401k plan into another account, then the deal is off. Does anyone have experience with this? Are there any pitfalls I need to watch out for?

You can withdraw from your 401k or IRA at any age. You pay a 10% penalty if you withdraw from an IRA prior to age 59.5, or from a 401k from a job you left before turning 55 if you aren't 59.5 yet. You avoid the 10% penalty if you take Substantially Equal Periodic Payments (SEPP aka 72t). You also avoid the 10% penalty if you withdraw from a 401k from a job you left after turning 55. That last item is the one you're talking about.

Ed Slott has a long list of downsides for a SEPP in "The Retirement Savings Bomb" in the section titled "What to do when S*** happens." (I bought that online in used condition for $6 postage included, and it may as well be new.) There's even an example of a circumstance where the 10% penalty is less bad than getting stuck taking periodic payments for the required period.

As far as pitfalls, being *able to* take out the money doesn't mean it'll be enough to sustain your withdrawals for the rest of your life...that's a separate issue. You'll also pay tax on your withdrawals, so consider that aspect. Also realize that your social security benefit is calculated on your best 140 quarters (so, like 35 years) of earnings. Depending on what age you started working and how rapidly your salary grew, you might be giving up some meaningful quarters of earnings "credited" to your SS calculation.

In response to the "keep your mortgage and invest the amount you'd have used to pay it off," I think you'll need to look at your asset allocation and expected return. Just because stocks have averaged 10% doesn't mean your portfolio will if you're at 60/40 stocks/bonds. Volatility works to improve returns when you're investing (dollar cost averaging) but is usually harmful on the withdrawal side. There are also other benefits to having a lower income that gives you the same spending money because your need is lower by the amount of your mortgage payments.
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We paid off our mortgage in 2009 before I started reading this board and thinking about the alternatives. In hindsight, I could have taken that $165,000 and put it into a boring index fund like vti which would now be worth about $500,000

1. Now evaluate the same thought (take that $165,000 and put it into a boring index fund) but in 2000, or 2006.
2. Even if you'd done that in 2009, would all $165K have been in a stock index, or do you have a different asset allocation?

Now, if you would have put it in Bitcoin, and then sold in December 2017...
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But bonds are liquid...and actual bonds have a specific value ...

And if you sell your bonds, you don't have to find another place to live.
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1. Now evaluate the same thought (take that $165,000 and put it into a boring index fund) but in 2000, or 2006.
2. Even if you'd done that in 2009, would all $165K have been in a stock index, or do you have a different asset allocation?


If you put $165,000 in to VTI in 2000 It would be worth $548,336 today (actually VTSAX, VTI didn't exist yet).

Starting in 2006, it would be worth $495,732 today.

Starting in 2009, it would be worth $645,239 today.

The analysis isn't complete, because if you paid off the house you then have more money to invest. But it doesn't change the conclusion: At today's interest rates don't pay off the house.
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Now, if you would have put it in Bitcoin, and then sold in December 2017...

Interestingly, since then the Turkish Lira has held its value better than Bitcoin.
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Now that the markets are richly valued and rates are rising, I think it is a closer call now than it was in 2009. Future values appear to be muted and extra money might be a decent hedge against a severe correction. But I was wrong then and may well be wrong now.


There is one thing you can be absolutely certain about: stock market returns between now and the next recession will be deeply negative.
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But bonds are liquid...and actual bonds have a specific value ...

And housing can have value too, even when you are still living in it. If we chose to do so we could rent out our 3 extra bedrooms at $400/month, (college town,) airbnb each room at $50/night or put the whole house on airbnb for $250-300/night, more when there's a football game or graduation. Airbnb is so popular here that the city put regulations in place restricting it to commercial zoning or primary residences only, in an attempt to keep investors from buying up housing for full time airbnbs.

IP,
living in a very affordable house, not one for the 1%
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And housing can have value too, even when you are still living in it.

Doesn't that make your tax returns much more complicated ? And doesn't that change the terms of your mortgage ?
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And doesn't that change the terms of your mortgage ?

Not if it is still your primary residence. No doubt AJ would do better than I chiming in on taxes.

Having roommates saved my financial bacon 30 years ago. Am not looking to ever have them again, but it's nice to know I could.

IP
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And housing can have value too, even when you are still living in it. If we chose to do so we could rent out our 3 extra bedrooms at $400/month, (college town,) airbnb each room at $50/night or put the whole house on airbnb for $250-300/night, more when there's a football game or graduation.

The PITI on our house is about $1600, so renting out the 3 bedrooms would pay 75% of the housing while still letting us live here. When I was first out on my own I lived in a house where the bedrooms were rented out with kitchen privaleges. It allowed the owner who was divorced with a kid to maintain a decent lifestyle. Of course with a kid she had to be careful who she rented to. Was a bit of a zoo, frankly, but I don't know how she would have managed otherwise.

IP
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Doesn't that make your tax returns much more complicated ?

Yes, assuming that you rent the property out for at least 14 nights in a year, it becomes a rental property and you have to declare the income, determine depreciation, etc. It also complicates the tax return when you sell the property, even if you stop using it as a rental property well before you sell.

If you rent the property out for fewer than 14 nights in a year, and use it yourself for more than 14 nights in a year, then it's not considered a rental property and you don't have to declare any income on your tax return. (This quirk in the tax law was brought to you by those who rent out their homes for the Masters Golf Tournament each year.)

And doesn't that change the terms of your mortgage ?

Renting out a home doesn't change the terms of the mortgage that you used to purchase the property. However, if you told the lender that you were going to be an owner occupant, then you must fulfill any occupancy requirements, or you will be committing mortgage fraud. Typical occupancy requirements are that you must use the home as your principal residence for a minimum of 12 months, beginning within 60 days after the closing.

Of course, if you are convicted of mortgage fraud, you probably won't need to worry about where you're going to be living for a few years - it will be supplied.

AJ
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The pre-payment of principal on the mortgage debt without actually paying the debt completely off actually magnifies the illiquidity risk.

Twenty some odd years ago when I was finally established in private practice and started making "real money", the first thing I did was pay off my mortgage. At the time the rate was about 8%. But it was also the time of the big run up to the tech bubble, people were "easily" making over 8% in equities. What I did was set money aside in a money market account until I accumulated enough cash to pay off the mortgage. That way I had the best of both worlds, paying off the mortgage but still had liquidity in case of an emergency.

Of course up until I wrote the final check, all those $$$ setting there was a constant temptation.

JLC
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What I did was set money aside in a money market account until I accumulated enough cash to pay off the mortgage. That way I had the best of both worlds, paying off the mortgage but still had liquidity in case of an emergency.

Exactly what was suggested a few sentences later:

This risk can be mitigated by the use of a 'mortgage freedom fund' - investing the money you would use to pre-pay the mortgage.

Of course, back then, money market funds actually paid something.

AJ
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it doesn't change the conclusion: At today's interest rates don't pay off the house.

Again, *IF* you are able to invest 100% in stocks and *IF* you hold for the long term.
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Again, *IF* you are able to invest 100% in stocks and *IF* you hold for the long term.

Strong words. Perhaps just if you have an opportunity for a better investment. Would you want to still be holding Polaroid ?
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"Would you want to still be holding Polaroid ? "

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

You had to hold onto them for a while and wave them around a little
- and in cold weather you had to hold them under your arm to get the
development chemicals active.

Howie52
Developing a sense of humor is a good thing for retirement investing.
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Again, *IF* you are able to invest 100% in stocks and *IF* you hold for the long term.

Since we're comparing paying off a 30-year mortgage with not paying off a 30-year mortgage, then we're talking about the long term by default, no?

Regardless, you brought up the scenario buying stocks at inopportune times, I just reported what the results would be. But you don't have to invest in 100% stocks.

Since 2000, an 80/20 blend would have become $694,432. A 60/40 blend would have become $597,872. Although in both scenarios you would still have a mortgage payment. On flip side, in both scenarios a 4% SWR would easily cover the mortgage payment.
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I have mentioned this before.

Back in the late 90's I had just recently found the Motley Fool. A few months later, we had the opportunity to refinance our house at a considerably lower interest rate (Thanks, Jimmy Carter, for the 14% interest rates you gave us.). I looked over the numbers and said to my wife, We can go a couple of ways---we can just refi the balance and have a lower payment, or we can take about $20K cash out and have the same payment and invest that $20K along the lines of what TMF is talking about.

Worse case, we lose the entire $20K but have no extra risk on the house, since the payment will be the same as what we are paying now---and we are having no trouble with the current payment. Best case, that $20K grows and grows and in 15 years or so it'll grow enough to pay off the house ... 15 years early.

We decided to pull out the $20K and invest it and keep track of the investment account balance and the mortgage balance, and re-assess when/if the former becomes more than the latter.

Not too many years later, that crossover happened. So I presented the figures to the wife and said, "It happened. Do we sell the stocks and pay off the house?" She said to me, "Are you nuts??!!?!"

Love that woman.

Now she just says to me, "I don't want to get involved in the investing. You just tell me if I need to stop buying stuff."
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I looked over the numbers and said to my wife, We can go a couple of ways---we can just refi the balance and have a lower payment, or we can take about $20K cash out and have the same payment and invest that $20K along the lines of what TMF is talking about.

There is an important caveat here....Under the TCJA law, interest paid on additional cash out used for investing (or a car, or a vacation or anything else other than improvements and repairs on the property) is not deductible. It used to be that interest on up to $100k in additional cash out was deductible, but that went away with the TCJA. Because of that, when taking cash out that's not used on the property, you will have to calculate the amount of deductible interest, and it will be less than what's shown on your 1098.

That said, with the higher standard deduction hurdle to overcome for any deductibility, it may not be as important any longer.

AJ
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Again, *IF* you are able to invest 100% in stocks and *IF* you hold for the long term.

Strong words. Perhaps just if you have an opportunity for a better investment. Would you want to still be holding Polaroid ?


Why the attitude? I'm just pointing out that if you have an asset allocation of 60/40 stocks/bonds, and you keep your money that would otherwise pay off the mortgage in the mix with the rest, then you're overall return on the money won't be that of a 100% stock allocation.
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Under the TCJA law, interest paid on additional cash out used for investing (or a car, or a vacation or anything else other than improvements and repairs on the property) is not deductible. It used to be that interest on up to $100k in additional cash out was deductible,

I've always seen -- going back to 1970 -- that the tax benefit of being able to deduct mortgage interest as boob bait. Real-estate agents and home buyers coming up with a BS "reason" why the house doesn't cost as much as it really does. So people would buy more house than they could really afford, and this BS reason gave them the phoney answer that they wanted.

Perfect example of confirmation bias --- you look for an answer that you want to hear and disregard the rest.
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Real-estate agents and home buyers coming up with a BS "reason" why the house doesn't cost as much as it really does. So people would buy more house than they could really afford, and this BS reason gave them the phoney answer that they wanted.


I don't understand how the mortgage interest deduction is "boob bait".

Many people choose the house ownership lifestyle and live with a mortgage for at least 2 or 3 decades. During that time they make mortgage payments and get interest deductions back. The actual amount they pay in a year combines both. If either the payments or the deduction changes, so does the annual cost of the house.

Shouldn't people be looking at that total picture when they are making that financial decision?
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I've always seen -- going back to 1970 -- that the tax benefit of being able to deduct mortgage interest as boob bait. Real-estate agents and home buyers coming up with a BS "reason" why the house doesn't cost as much as it really does. So people would buy more house than they could really afford, and this BS reason gave them the phoney answer that they wanted.

But you do take advantage of it, when you can, don't you? For those of us who don't buy more house than we can really afford, it can still be advantageous, if we have more deductions than the standard deduction.

And the fact that people may use the interest rate deduction to justify buying more house than they really should has nothing to do with interest on equity loans no longer being deductible, unless the funds are used to improve/repair the property. I was just trying to make it clear to everyone that interest on cash-out loans that are not used for the property is no longer deductible.

AJ
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It's a hobby horse of mine.

In past years (decades ago, actually) I sat through many seminars & talks by RE companies to young prospective first-time buyers.
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In past years (decades ago, actually) I sat through many seminars & talks by RE companies to young prospective first-time buyers.

Well, with the new TCJA deduction rules, it's less likely that people are going to be sold that same bill of goods. For a couple MFJ, with an 80% LTV mortgage at 5% and property taxes of 2% of the home's value, they would need to purchase at least a $500k home to even have $24k in deductible expenses the first year, and would need to purchase an even higher value property for the deduction to be overcome for more than a single year.

AJ
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Funny thing is, in our neighborhood of mostly retired people, the ones who tend to have a mortgage are the ones who seem to have a lot of money (as evidenced by spending & travel habits).


I find it odd that you assume you can tell how rich people are by how much they spend.

The wealthy didn’t get wealthy by spending a bunch.

SG (finds it funny when she’s mistaken as poor)
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The wealthy didn’t get wealthy by WASTEFULLY spending a bunch.

I slightly reworded it.



I find it odd that you assume you can tell how rich people are by how much they spend.

Don't be silly. When you've hung out with people for a long time---dinner parties, chili-cookputs, play weekly cards & board games, observed lifestyles and demeanor, heard offhand remarks, etc.
you can make a decent assessement. Not knowing a dollar amount, but good enough to put in broad categories: have plenty, comfortable, have-to-watch-pennies. "Hey, we tried to invite you for dinner but you didn't answer the phone." "Oh, Clark decided he wanted to play golf with our son in Palm Springs, so we called Delta and flew to Palm Springs for a couple of days."

(Although nowdays with cellphones instead of landlines, it's more like "Hey do you want to come over for dinner?" "Love to, but we are in Palm Springs today & tomorrow, how about next week?")

When a 70+ year old neighbor cleans houses 3 times a week, you pretty much know that they aren't rolling in dough. When somebody has a wall in their house with custom-built proportions to exhibit a matched pair of large Japanese silk tapestries, you pretty much know that she doesn't need to clean houses for money.

Seeing as how we would go on 5-6 cruises a year, I'm sure our neighbors kinda figured we had some money. Nobody puts 20 cruises on a credit card and carries the balance.

The first mentioned lady would come watch our dogs 2 times a day when we were gone, and we paid her $10 a day. (She told my wife that she liked that because it was *her* money and she didn't have to ask her husband for money when she wanted to buy something.) Anyway....once, they were going to be gone, too, so another neighbor said she'd watch the dogs instead. When we got back, we went to pay her the same rate and she said, "Sally needs the money, I don't--so I'm not going to take any money from you." (We did take them to dinner, though.)

Oddly enough, all three of us have the same assessment of the relative wealths of one another.
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We paid off our mortgage in 2009 before I started reading this board and thinking about the alternatives. In hindsight, I could have taken that $165,000 and put it into a boring index fund like vti which would now be worth about $500,000

I've looked at it in a different manner.
Assuming a mortgage of $200K.
If I have $200K Cash, I can pay it off or invest the funds.

Investing the $200K and using the 4% withdrawal rule, I've got $8K per year for payments. A $200K mortgage at 4% costs just under $11,500 per year. Based on Cash-flow, I need another $3,500 per year to retire. Again, using the 4% withdrawal rule, that requires saving an additional $87,500 before I can retire.

There are lots of ways to look at this and clearly investing the $ would put you ahead in the long run, especially over the last 8-10 years.
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SkyHigh,

You wrote, Investing the $200K and using the 4% withdrawal rule, I've got $8K per year for payments. A $200K mortgage at 4% costs just under $11,500 per year. Based on Cash-flow, I need another $3,500 per year to retire. Again, using the 4% withdrawal rule, that requires saving an additional $87,500 before I can retire.

There are lots of ways to look at this and clearly investing the $ would put you ahead in the long run, especially over the last 8-10 years.


There may be lots of ways to look at this ..., but this would not be one of them.

First, the P+I is $11,460/year. That is the only part of the mortgage you can analyze. I'm guessing the insurance and taxes are costing you the other $3,500. But those costs remain even if you paid off the mortgage so you cannot consider then when deciding whether to pay off the mortgage - you must consider them as part of your other on-going retirement expenses.

Next, the 4% SWR assumes that the annual withdrawal increases with inflation and therefore the entire principal must grow faster than inflation. But a mortgage amortization does not make that assumption. It assumes a flat rate for the entire term. So if you are going to examine the success rate of investing the principal value of a house and taking out a 30 year mortgage against paying cash, you have to change the assumptions in a tool like FireCalc to account for 0% inflation.

So I plugged in the numbers. When investing the principal using the default assumptions of 75% total market / 25% bonds, the portfolio survives 95.8% of the time. Five cycles fail. If you change to the second diversified portfolio mix you get 3 failed cycles.

This topic has been mildly interesting to me in the past so I've run these numbers before. For me anything below a 4% mortgage is a no-brainer: Don't pay it off. Above 6% you should probably be paying off the mortgage aggressively because the odds of your portfolio surviving long enough to pay off the mortgage has fallen below 2/3rds. Between 4% and 6%, you need to look at how much risk you are willing to take and make the decision that's right for you. Personally I'd probably consider holding the mortgage at least in the mid 4% range.

At least that's been my analysis in the past.

- Joel
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rayvt: "When you've hung out with people for a long time---dinner parties, chili-cookputs, play weekly cards & board games, observed lifestyles and demeanor, heard offhand remarks, etc.
you can make a decent assessement"

I am not sure about that one - at least not in my anecdotal world. We have had numerous acquaintances through the years who appeared to us to be better off financially than us but weren't in hindsight. Many of the friends and acquaintances who bought houses and cars and went on trips that we felt we could not afford then are now 'choosing' to work to 70 saying with a smile on their faces that they 'want' to work to 70 or older.

Maybe it is easier to guess who really is comfortable based upon their spending habits during retirement than it would be earlier in their lives. Retirees who do what they want and buy what they want whenever they want probably can.

But even then there are so-called 'cat food millionaires' who leave no hint that they are millionaires. I am striving to avoid fitting into that category myself given my risk averse nature and fear of falling short. I use posts on this board to inspire me to be less fearful.

One might well place jgcspouse and me in the 'needs money' category based upon our decision to continue to work, cook our own meals, etc. However, we might also be characterized as 'cat food millionaires' as measured by some of your earlier posts if we shared our personal information with our friends and family.
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Yeah, this discussion has drifted from the point I was making about broad categories of (retired) those people who carry a mortgage and those who don't.

Options. Options are good. The more options you have, the better. If you have the option of taking a mortage or not, that's better that not having an option. I dare say that most of our neighbors (and most financially independent retired people) who have a mortgage have the option of paying it off tomorrow if they felt like it.



I really got to thinking about this quite some time ago, when we were helping my mom move into a Sun City 55+ community. At the (on-site) closing, I asked the closer how many people paid cash vs. how many took a mortgage. He said it was about 50/50. And that most of the ones who took a mortgage did so on the advice of their Finanical Advisor.

My Mom's did. At the closing, she was tickled that she was getting a 30 year mortgage and she knew that she wouldn't last another 30 years.

(The closer was also their in-house mortgage broker, so he saw the financials of all the people who got a mortgage through them. So he knew how many of the ones who took a mortgage didn't actually *need* the mortgage.)
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jgc123 writes,


But even then there are so-called 'cat food millionaires' who leave no hint that they are millionaires. I am striving to avoid fitting into that category myself given my risk averse nature and fear of falling short. I use posts on this board to inspire me to be less fearful.

</snip>


My golf buddy with the $500,000 per year RMD and modest lifestyle has taken to leasing $100,000 cars.

I asked, "Why would you lease a car when you're wealthy enough to buy it out of petty cash?"

He replied, "If I buy the car, I'll likely keep it 15 years. The lease ends in 24 or 36 months and that forces me to get a new one."

intercst
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So this is the way I see it:
Planning retirement w/ $500,000 and buy a 120k house
Firecalc (0% inflation)
using costs based on .04 % of 500k=20k/year -- pulled solely from available stock market funds

Case 1: 20k down, .04% of portfolio = 20000 of which mortgage cost is 5274 leaving other available cash =14276
The lowest and highest portfolio balance at the end of your retirement was $129,211 to $8,722,708, with an average at the end of $2,828,372. FIRECalc found that 0 cycles failed,

Case 2: paid house in full, 380,000 in stock mkt, no mortgage cost leaving other costs=14276/year
The lowest and highest portfolio balance at the end of your retirement was $380,000 to $7,263,984, with an average at the end of $2,458,053. FIRECalc found that 0 cycles failed,

Not really all that different IMO. Paid off house version does have a lower high but it also has less draw down.
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Planning retirement w/ $500,000 and buy a 120k house

Wondering where you are finding this house ? ;)
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Not really all that different IMO. Paid off house version does have a lower high but it also has less draw down.

On average, you wind up with $400,000 more money by not paying off the mortgage. That's not exactly ash tray money.
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$500K is not a large sum to retire on. Locking 25% of your retirement money into an illiquid, non-return-producing asset doesn't strike me as a good idea.
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Rayvt analyzes,

$500K is not a large sum to retire on. Locking 25% of your retirement money into an illiquid, non-return-producing asset doesn't strike me as a good idea.

</snip>


Wouldn't that depend? Maybe this guy's pension and Social Security more than meet his annual living expenses, so the $500K is all gravy?

A professor (medical doctor) at the OHSU Oregon Medical School retired a couple of years ago with a $76,000/month State pension. I don't think he's worried about the size of his retirement nestegg or what it's invested in.

https://www.oregonlive.com/business/index.ssf/2018/03/the_ne...

intercst
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Me:Planning retirement w/ $500,000 and buy a 120k house

Wondering where you are finding this house ? ;)

It's true I was just going for simple BUT...
I do personally know someone in the midwest who just 2 years ago bought a very nice 3 bedroom house on 5 acres for 110k. And I have seriously considered living near them at some point, so it is within the realm of my real possibilities.
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On average, you wind up with $400,000 more money by not paying off the mortgage. That's not exactly ash tray money.

But you are ignoring the less draw down factor -- it's true that safety usually costs in upside but there's a reason people still consider it in their plans.

For example, When using the Firecalc random choice w/ 7% return and 10% variable 0% inflation--

the 'riskier' portfolio was $-309,080 to $2,653,702, with an average at the end of $827,684. And went belly up 8 cycles -- leaving me out on the street with no money and the bank owning my home.

The 'safer' portfolio was $-52,065 to $2,246,222, with an average at the end of $786,494. and belly up 2 cycles -- leaving me sitting in a house I own outright with all the options inherent in that.

...and this comparison has less than 50k difference in average value too. Essentially equivalent.

Of course, just like all choices, this one is dependent on specific circumstances, personality etc. -- but it shows IMO that it is not such a clear cut choice of mortgage over paid off. And since I have not consistently had the market equaling/beating returns that so many on this board apparently have either, I am definitely moving toward the 'safer' side at this point.
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For example, When using the Firecalc random choice w/ 7% return and 10% variable 0% inflation--

the 'riskier' portfolio was $-309,080 to $2,653,702, with an average at the end of $827,684. And went belly up 8 cycles -- leaving me out on the street with no money and the bank owning my home.


That's where things like Firecalc fall down. They present what would happen if you blindly withdraw the scheduled amount without considering the declining balance of the portfolio.

Real world, you would reduce your withdrawals when you noticed your balance declining precipitously, and thus preserve it.

I wish that Firecalc would have a withdrawal option that had one of the rule-based variable withdraws. The best it has is the "Percentage of Remaining Portfolio" with "approximate the "95% Rule" from Work Less, Live More."

So my question for you is: what do you see when you select that withdrawal model?

(FWIW, I can't get the results you said you got.)

Also: I think you are misusing the results that Firecalc shows you.
1) 8 failures out of 221 is a 96% success rate. 3.6% failure rate. At that percentage, other types of failures will predominate over portfolio failures.

2) Firecals doesn't PREDICT the future. If only tells you what happened in the past. Just because some set of parameters shows you a 100% success rate doesn't mean that that set of parameters will always have 100% success rate in the future.
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Miss Edith,
Funny you should mention Memphis. We were just daydreaming and browsing some online listings there this weekend.


I spent a lifetime there one year. ;) Of all the places the Navy stationed me other than San Diego it's the one place I'd not hesitate to live.

Miserable weather, generally unattractive terrain (IMHO), bugs, snakes, nothing to commend it really. Except wonderful people, great fellowship, great music, local theater, and did I mention the BBQ?

Memphis in May Festival... Nuff said.
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I have a love/hate relationship with Memphis. Mostly I like it, though. It’s affordable and there’s a lot of cool stuff happening here. I agree with you re the heat and bugs.

Here’s some good stuff happening in Memphis:

http://ilovememphisblog.com/2018/08/bragging-rights-20-more-...
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I've always seen -- going back to 1970 -- that the tax benefit of being able to deduct mortgage interest as boob bait. Real-estate agents and home buyers coming up with a BS "reason" why the house doesn't cost as much as it really does.

1. It seems like some people imagine that their whole payment is deductible, not just the interest...that used to be almost true at the very beginning of a 30 year high interest rate mortgage. But when I refi'd for 15 years at like 3.5%, the interest wasn't as much as I anticipated.

2. There's a certain point where the mortgage interest isn't enough to drive itemizing over the standard deduction...that depends on your other itemized deductions, like charitable contributions. Also, as we're seeing in 2018, the standard deduction can go up to where most people won't itemize, and the "deductibility" of the mortgage interest isn't useful.

3. Some people don't even get that you're paying $1 to get $0.28 (or whatever your marginal rate is). If you want that much more house, fine, but don't let the deductibility make you think it's free.
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SG (finds it funny when she’s mistaken as poor)

I *like* that certain in-laws have no reason to think that I (+ wife) might be able to "lend" them some money when they overspend on new snowmobiles or four-wheelers and can't pay bills.
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Memphis in May Festival...

... is just a few hours drive away.

You don't have to live anywhere near Memphis to go to the Festival.
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I find this discussion on paying off mortgages really interesting, as well as many other threads that I've seen on TMF over the years on this subject.

One thing that this thread and many others don't do a great job of considering is that paying off a mortgage is not just a purely financial decision. It's also a lifestyle decision. My situation is a bit different, but I paid off my house in 2010 (when I was 35) after receiving life insurance upon the death of my husband. While my portfolio isn't the size it would have been had I chosen to keep the mortgage, I absolutely do not regret choosing to pay the house and all other debt off. I still had a good chunk to invest, and the peace of mind and lifestyle flexibility this has afforded are fantastic.
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I *like* that certain in-laws have no reason to think that I (+ wife) might be able to "lend" them some money when they overspend on new snowmobiles or four-wheelers and can't pay bills.

Hah! Exactly.

My MIL, God bless her, heard that some of the family thinks we live in a trailer because we live in Alabama. She allows them to continue to think that.

8D
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