City-Data Forum Did you pay off a mortgage at a reasonably young age and live mortgage free? How did that impact retirement? (long-term, single)
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05-27-2015, 02:19 AM
 Location: Myrtle Creek, Oregon 12,284 posts, read 12,520,484 times Reputation: 19476

Quote:
 Originally Posted by mathjak107 playing around with some simple calculators i ran a best case scenario for taking a mortgage. in a perfect world there would never be any down years . your average return is constant year after year never selling anything at a loss. but the real world is not like that and sequence risk is the biggest factor . that can make or break any average return and cause as much as a 15 year difference in how long an amount will last between the best out come and the worst outcome. the more you need to withdraw the more painful the difference becomes so the worse the sequence the worse having a mortgage will be. so ruling out any sequence risk , best possible scenario for taking a mortgage here is what i got person A has 2 million dollars invested. they buy a 400k home and have 50k in yearly expenses plus the cost of a 400k mortgage which at 3.75% is 23k a year. we are assuming no down payment even needed in our perfect world . so person A has yearly expenses of 73k while the 2 million compounds at 8% invested . person b also has 2 million but they pay cash for the house . they have 1.6 million invested and 50k in expenses since they have no mortgage to pay. at the end of 30 years in our perfect world person A has 5,933,000 left and a 400k house plus 30 years of appreciation. person B HAS 5,450,000 left and a 400k house with 30 years appreciation. person A would have had a tax deduction for some of that mortgage interest for a good part of the mortgage which would improve that difference. so in the perfect world the mortgage wins nicely. but once you figure in the fact markets are down 1/3 of the time and look at the range of best to worst case scenarios that sequence risk causes that difference shrinks more and more until in the worst case scenario person B did better than person A . so actual real world results will be somewhere in between the best and worst. you may find when you run your actual numbers 30 years later based on your own sequence risk and returns there really was not a whole lot of difference in the end but each case will be different. the higher market valuation and the lower interest rates the greater the chance returns will be lower . the lower valuations are the better returns are likely to be. so you have to evaluate where we are now and what the likely out look is since if things go wrong up front before you catch an up cycle the damage may be hard to recover from shelling out so much more for the mortgage up front early on. you need to see where you are in your own retirement cycle as this is important criteria too. if you had 5 years of strong gains your first few years you are golden and can pretty much do anything with out repercussions.
Pretty good, but I would add the estimated tax liability of \$160,000/year vs. \$112,000 on the investment income. That's tricky, because part of it would be capital gains and part of it would be dividends and interest, with differing tax rates. In example A above, the cost of the mortgage would actually be
\$23k/(1-T), where T is the effective tax rate. If we guess 25% (28% minus deductions) for T, the actual annual cost of the mortgage is \$30.7k. It brings the numbers closer together. At some point you have to evaluate if the risk is worth it. Or you could sock the whole \$2 million into farm ground. Over the last 30 years, farm ground prices have outperformed the S&P 500 by 5.5%. At the end of 30 years you would have the annual income off of the land and \$34 million.

05-27-2015, 02:31 AM
 71,735 posts, read 71,829,507 times Reputation: 49288
i couldn't really deal with the tax aspect in any calculations even in fire calc because of the vast amount of possibilities. .

most americans can't even clear the standard deduction if a couple since only the higher income brackets are able to itemize at all according to irs records and those incomes are all above the median incomes.

then you have the interest being less and less deductible each year for those who can take it as well as folks taking it at different tax brackets ..

no doubt you will get better returns with the deduction. so you really have to run your own numbers.

don't forget we didn't include any down payment either from the 2 million , points , application fees , appraisals ,etc..

but i think everyone gets the point that sequence risk will play a huge part in the outcome and the downside risk of a mortgage may mean more than the upside potential in retirement.

there just may not be enough upside to effect anything in your life but the downside to it certainly can effect things more , just something to keep in mind in the 2nd 1/2 of the game that isn't an issue in the first 1/2 when accumulating assets when we want every dollar in gain we can get and rightfully so..

Last edited by mathjak107; 05-27-2015 at 02:44 AM..

05-27-2015, 02:36 AM
 71,735 posts, read 71,829,507 times Reputation: 49288
Quote:
 Originally Posted by Larry Caldwell Pretty good, but I would add the estimated tax liability of \$160,000/year vs. \$112,000 on the investment income. That's tricky, because part of it would be capital gains and part of it would be dividends and interest, with differing tax rates. In example A above, the cost of the mortgage would actually be \$23k/(1-T), where T is the effective tax rate. If we guess 25% (28% minus deductions) for T, the actual annual cost of the mortgage is \$30.7k. It brings the numbers closer together. At some point you have to evaluate if the risk is worth it. Or you could sock the whole \$2 million into farm ground. Over the last 30 years, farm ground prices have outperformed the S&P 500 by 5.5%. At the end of 30 years you would have the annual income off of the land and \$34 million.
in my own case i sold my house , rented the last 13 years , invested the money that would have been in the house and made multiple 7 figures buying nyc co-op apartments with rent stabilized tenants over looking central park and buying out their leases and selling the apartments in partnership with one of the countries biggest real estate moguls bernard spitzer..

today i can buy multiple houses like i had even after subtracting out all the rent we paid and taxes .

so it isn't even going to be whether you even buy that home , it is only about what you invest in if you don't.

05-27-2015, 03:09 AM
 71,735 posts, read 71,829,507 times Reputation: 49288
Quote:
 Originally Posted by mathjak107 there is a check box on the spending page to have it inflation adjust or not
what i meant to say is there are two spending pages . in the one marked other income /spending there is that check box for inflation adjusting or not ..

05-27-2015, 03:40 AM
 71,735 posts, read 71,829,507 times Reputation: 49288
Quote:
 Originally Posted by jrkliny No. I just tried it again and have the same results. I went to the spending models to set inflation to 0 but that does not work. Tried 0.1% and got the same results. Tried 5% inflation and also got the same results. I must be doing something wrong but I cannot find the error.
bingo! you got me thinking that firecalc may not be handling the mortgage correctly the way i tried to do it as well .

i think i figured out how to account for zero inflation adjustments on the mortgage while adjusting other expenses and assuming i did it correctly the results are much better for taking a mortgage with much better downside.

i am not 100% certain it is doing what we want but i will leave it to you to check.

on the start page put in the 2,000,000 . in the spending box but 50000 since we want to subtract out the mortgage so it is not inflation adjusted with the other expenses
.

then go to other income/spending . enter off chart expense of 23k for the mortgage for 2015 and un check the inflation adjust box.

i now get a worst case of 922,912 and best case 11,340,000.

that would make the mortgage worth it but i am not 100% sure fire calc is handling this the way we want . i think it is , but you tell me.

that would put the mortgage a head of the pay cash scenario with better downside in the worst case.

it looks to high to me but who knows , these calculations are way to complex to ball park.

Last edited by mathjak107; 05-27-2015 at 03:52 AM..

05-27-2015, 05:32 AM
 6,305 posts, read 4,746,934 times Reputation: 12909
I am not sure what I did wrong, but firecalc now seems to work. I tried a scenario with a \$300K mortgage and \$15K annual payments. After setting the inflation to zero, the success rate was 98.3%. Results were all over the place when it comes to the final portfolio amount but average seemed to be about \$1.5M. So a mil in profit which is about what I guessed at for my case.

Also firecalc calculations are based on historical scenarios started at 1871. I don't know about you but going back that far seems ridiculous and only likely to give improbable results. I set the date at 1946, my DOB. Wow, 100% success and an average final portfolio of around \$2-3M. Since I have started off with a good sequence of returns, it is becoming more likely that I will pocket several million in returns.

The other factor is the overall risk. If your overall portfolio falls to zero well before you die, that could be an extremely unpleasant outcome. If all the cards fall wrong for the mortgage, the risk is still very minor. Absolute worst case, you could run out of money before the end of the 30 years and you would have to pay the remainder out of your main portfolio or other income. At that point there would be little left to pay and inflation would have made that payment trivial. The risk of failure is very minimal. The consequences of failure are minimal. The potential returns on a \$300K mortgage are likely to be well over \$1M, and most likely \$2-3M. Seems worth it to me, but I then I am not expecting the sky to fall.

Last edited by jrkliny; 05-27-2015 at 06:02 AM..

05-27-2015, 06:41 AM
 71,735 posts, read 71,829,507 times Reputation: 49288
but when you set inflation at zero did you allow for other expenses inflation adjusted ?

anyone paying other expenses with withdrawals would have to keep the mortgage not inflation adjusted and inflation adjust the rest.

in the hypothetical case I ran above I had 50k in living expenses and a 23k mortgage each year.

going back to 1871 just adds more likely outcomes. all you are interested in is the different combinations of actual RETURNS, INTEREST RATES AND INFLATION and trying to identify the worst time frames . remember everything is based on worst case conditions in history once you have them you can discard most of the other data. . events that caused it don't matter .

as modern numbers crunching shows those failure time frames were analyzed as to why they failed and all failed because the real return fell below 2% as an average for the first 15 years.

going back to 1871 only searches for more failures , if there were none then the time frame has no bearing really.

ultimately it was found a portfolio of at least 40% equities made it through 90% of the worst time frames ever.

you could actually run as many as 10,000 combinations using monte carlo simulations. I think fidelity uses 250 monte carlo simulations.

the difference in fidelity rip vs firecalc is firecalc uses actual data as the default while fidelity pulls the results each year out of sequence with other years so one time frame does not effect another.

results on fidelity tend to run a bit lower than firecalc because historically time frames that over lap effect each other.

as an example 1987 to 2003 saw the markets return almost 14% on average for 17 years so any other 30 year periods that crossed were influenced by it.

monte carlo simulations would unlink them and just run them unlinked as well as linked like fire calc would use them.

you could do monte carlo in firecalc , there is an option but I am not sure how many scenarios they run.

Last edited by mathjak107; 05-27-2015 at 07:30 AM..

05-27-2015, 07:00 AM
 6,305 posts, read 4,746,934 times Reputation: 12909
I did not throw my whole portfolio into the mix. I just looked specifically at the outcome of investing mortgage money and paying off the mortgage. I am not trying to spend the mortgage returns on an annual basis but looking at those returns as a way of building my portfolio for use at a later date. At this point I could safely spend in the range of \$3-6K annual but I would rather let it ride.

That may change. I just bought ink for my big photo printer. (Just joking.)

05-27-2015, 07:02 AM
 Location: P.C.F 1,973 posts, read 1,645,166 times Reputation: 1607
with todays iffy job market and low interest rates
Quote:
 Originally Posted by mathjak107 i agree with all except the don't take a 30 year mortgage part. that can be a mistake . you can pay a 30 year off in 15 or 20 years years but if money gets tight you cannot pay a 15 or 20 year off in 30. take a 30 and pay it off earlier , at least you have that choice .

05-27-2015, 07:04 AM
 71,735 posts, read 71,829,507 times Reputation: 49288
I am on my original set now for two years and just about ready to change some . I have another 500 buck set I got free from Epson in the closet. I printed a few hundred 8x10's already.

so I am confused are you drawing money out at all ? why not run the whole picture if you are
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