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My mother recently passed away, leaving a multiple of enough money to pay off our relatively small mortgage, around $65,000. A financial adviser I talked to advised not doing this since having no outstanding debt would lower my credit score, which now stands in the 700's.
He might be correct not to pay off but his reason is very very bad. At least he did not try and sell you an annuity. I think you might want to reevaluate his advise and consider a new planner.
If you are young, good mortgage interest rate, can afford the monthly payment, have an emergency fund etc. I would look at stock ETF'S.
You could start a new thread and ask for opinions on the plans you have.
We live in a high cost of living area. Would love to buy a home cash for 120k definitely not possible here.
With that said, we purchased our second home keeping in mind that it will be our forever home (that is the plan). So we will be trying to pay it off before we hit 40. We are only in our late 20s/early 30s since we don't have other debts.
No, except for tax considerations. The impact that selling assets has on your net worth is exactly the same (again, barring tax effects) as forgoing the purchase of the assets.
What it does do is make one better able to have a higher risk tolerance by improving the equity/debt ratio.
not quite the situation. .
that may be true in the accumulation stage but we are talking retirement and the decumulation stage . selling assets at a loss is a different ball game while spending down to pay bills.
if someone has a pension and can pay the expenses without selling for all purposes the pay check never stopped and they can ride out the down turn. technically they never left the accumulation stage .
but if retired and spending down more assets then you should for the same income level because markets are down, is killing the goose that lays the golden eggs off prematurely.
having to sell more assets in to a down market then you would have with no mortgage is a big negative . that excessive spending has that capital gone forever .
so yes , having a mortgage needlessly can eat up more capital if you are spending down in to down markets to pay that mortgage . it is the reverse of when you were reaping the spread when markets went up but it only effects those in the spending down stage.
Last edited by mathjak107; 05-25-2015 at 12:01 PM..
but if retired and spending down ,spending down more assets then you should have had to because they are at a loss is killing the goose that lays the golden eggs off prematurely.
having to sell more assets in to a down market then you would with no mortgage is a big negative . that excessive spending has that capital gone forever .
Don't ignore that since you took a large chunk of investment money out of play and it is no longer making money for you. You may never get a Golden Goose. Maybe more likely you'll only have a duck. Also the mortgage is ONLY collected 1/360th every month. Any one not converting living expenses to cash at least a year out is asking for trouble. AND mortgage payments are not the only reason to need cash. If some emergency comes up and you have a large portion of your net worth tied up in your house in a down market..well you just got ducked.
sequence risk will take back the gains permanently and why nicoles statement is not 100% correct for those in the decumulation stage .. after all we are discussung this in regards to retirement and anything that causes more spending then need be burns up cash forever in downturns . this is not a problem in the accumulation stage as when the downturn ends every thing recovers, whether you realize gains and losses or not your net worth is the same . but when spending down in retirement the effects of being down is far more than just a net worth drop.
you are killing that goose.
while many retirees living off their portfolio's usually keep enough cash for a year or two anything longer will require asset sales. we hold about a year and 1/2 with the other 1/2 for the following year coming in from this years dividends ,distributions and interest.
Last edited by mathjak107; 05-25-2015 at 12:33 PM..
The idea of accumulation phases and spending phases does not work until you are very late into retirement. If you plan on living 30 years or so in retirement, then you need to have decent returns on your portfolio. It is easiest to see this with a 4% SWA calculator chart. You will notice that the chart will show increases in your portfolio during the first few years of retirement. Historically inflation has averaged 3-4% annually. To safely withdraw 4% you will then need investment returns of 5-6% and you better develop a cushion early on. With or without a mortgage you need to earn that amount or you will be drawing down your portfolio at a rate that cannot be sustained. If your mortgage is high in relation to your total portfolio that could be risky. In fact if you paid off a mortgage on an overly expensive house, you may also be in a risky situation. You have bumped up you standard of living and you do not have the money you spent on the house to invest and sustain your expenses. There are a lot of people trying reverse mortgages but that is a costly way of getting by.
Keeping or taking out a new low cost mortgage late in life can give you significant returns, BUT
As with the rest of your portfolio, you need a cash cushion to get you past the bad times.
You cannot spend the apparent profits as fast as they come in for the same reason; you need a cushion to sustain your expenses in the bad times.
You cannot use this tool if you are unable or unwilling to invest and generate returns well beyond the costs of the mortgage.
You should not use a mortgage to buy a house that is beyond your means. Young people do that regularly if they are in careers with potential. Older people, especially retirees, need to be more cautious.
Taking out a mortgage late in life should never be viewed as a get rich quick scheme.
Sequence risk and the spending down stage takes it's toll heaviest in the first 5 years of spending down and by the 15th year 100% of the 30 year outcome has been decided.
In 146 years there have been no 30 year time frames that had poor outcomes the first 15 years and were salvaged in the next 15.
So i am not sure what you mean by late in retirement for the difference between the 2 stages to occur.
The greatest difference is in the first 15 years with the first 5 determining much of the 15 most of the time.
Years 16-30 have had zero effect no matter what as far as outcomes to date.
how much can poor sequence of returns alter things compared to the best . according to moishe milevsky a span of 15 years difference in how long the money lasted using the exact same average return taking the same withdrawal.
Last edited by mathjak107; 05-25-2015 at 02:15 PM..
what is interesting is the absolute worst time frame in history , the one the 4% safe withdrawal rate is based on as a worst case scenario was 1966 . the hypothetical retiree that year had the worst retirement outcome in history over their next 30 years.
but what is very interesting is for the 30 year period starting in 1966 the average returns were actually not to shabby.
stocks returned 10.23% bonds 7.85% and if you re-balanced 9.28% with a 50/50 mix, inflation was 5.28% .
that would actually be considered a pretty good 30 year period.
but lets look at the first 15 years
stocks returned minus .13%
bonds 1.08%
the re-balanced portfolio .64%
inflation 5.38%
so you can see that no matter how good the later years were they couldn't make hay out of nothing so the first 15 years did them in.
the 2nd worst group was in 1929
their 30 year average was:
stocks 8.19%
bonds 1.74%
re-balanced portfolio 6.28%
inflation 1.89%
again not to bad
so lets see their first 15 years.
stocks 1.07%
bonds 1.79%
re-balanced portfolio 2.29%
inflation 1.89%
once again the first 15 years killed off the entire 30.
the results are the same for 1907 and 1937 the next group of worst case scenario's in history. pretty good 30 year averages but killed off the first 15 years.
those 4 time frames are what historical retirement calculators and the 4% (rule) are based around as they all strive to maintain at least a 90% success rate of getting through those 4 time frames which usually require at least 40% equities and no more than 4% inflation adjusted each year to do...
if we eliminated those 4 time frames the average safe withdrawal rate would have been 6.50%.
Last edited by mathjak107; 05-25-2015 at 02:23 PM..
if we eliminated those 4 time frames the average safe withdrawal rate would have been 6.50%.
Which also means that except for 4 time frames investing the amount of a low cost mortgage will also work. At a minimum the income will pay off the mortgage and generate a couple of percent annual returns that can be spent. Personally I like to be more conservative and not spend the 2% for at least a few years to be absolutely sure that returns early on will carry through. I also understand that the 4% or even the 6.5% withdrawals are conservative. Changes are very good that I will earn substantially more money from the investment of my mortgage amount.
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