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my view and the view of some retirement researchers is if you are retired and have toned down your investing aggressiveness then it likely will not be a good idea to take a mortgage , however you don’t want to leave your self cash poor either so a partial mortgage may be the best way.
why is a mortgage not a great idea in retirement?
because when we invest and take on risk and we are investing our own money , any return over the interest rate you are paying is a win .
it can be 1% more and you still win .
but when you take a mortgage so you can keep your money invested , in effect you are borrowing money to invest .
that is a whole different ball game because now most of us want a risk premium over what we would expect with our own money .
if safe treasuries with no risk are paying 4-5% , well i would normally expect with my own money a few percent over that .
now the we are taking on the risk of using borrowed money i would want another 1-2% as a risk premium over my own money .
if one is 90-100% equities , there could be enough delta there to go for the mortgage .
but now in retirement many of us use a balanced portfolio…there is not enough risk premium there over just using my own money to warrant using borrowed money .
famous researcher michael kitces has brought this point to light .
you may not want to have that balanced portfolio and a mortgage in retirement..
a down year and thousands in interest on top of it can really hurt sequence risk
investing your own cash or leaving it invested and taking the mortgage , providing you are investing aggressively as one should be in their accumulation stage can be even better .
actually spending that huge amount of cash up front then trying to save it back up again has one huge disadvantage..LOSS OF TIME
time is your biggest friend when dealing with investments and the more time you give the maximum amount of money the less dependent you are on a shorter time frame being a good one .
so by the time you replace all that cash that was spent to the point you have those same dollars or close to it you lost time.
that puts a lot of pressure on a shorter time frame to have to be a good one.
many shoot themselves in the foot by taking all extra cash and throwing extra payments to the mortgage , then waiting to pay off the mortgage to first commit a substantial more in dollars .
they lose time and that can be a big loss if that shorter time frame is not so good.
in the mean time they have the same appreciation on the house locked in whether they paid cash or a mortgage or paid off a mortgage sooner .
the longer the time you have , the less risk that you are going to be hurt by another lost decade for stocks , or two decades like the we had in the 1960’s or lower interest rates effecting your growth in fixed income.
there are a lot of parameters that have to be considered when comparing as well as time frame , retired and spending down as well as aggressiveness of your investments and risk premium.
most people over look the things they are unaware of since the human brain can only evaluate what it knows of and it can not incorporate what it doesn’t realize.
so despite chas863 snoring, these are all critical points to think about
Last edited by mathjak107; 08-29-2023 at 08:00 AM..
I have cash and and I have a low interest (2.5%) mortgage that will continue into my retirement. In my opinion, it would be foolish to pay off the mortgage when I am taking that cash and investing it even conservatively to make double the interest on the mortgage.
If I paid off the mortgage I would have more disposable income, but that money is now invested in a house, which ties it up for the most part and limits me to gains when the house sells, ideally at a profit.
I have cash and and I have a low interest (2.5%) mortgage that will continue into my retirement. In my opinion, it would be foolish to pay off the mortgage when I am taking that cash and investing it even conservatively to make double the interest on the mortgage.
That's right. In your case, it would be foolish to pay off a 2.5% mortgage when you can make 5% or better just on risk free CDs. Maybe better on other investments.
I have cash and and I have a low interest (2.5%) mortgage that will continue into my retirement. In my opinion, it would be foolish to pay off the mortgage when I am taking that cash and investing it even conservatively to make double the interest on the mortgage.
If I paid off the mortgage I would have more disposable income, but that money is now invested in a house, which ties it up for the most part and limits me to gains when the house sells, ideally at a profit.
Cash is king. Period.
RM
for most of history cash is trash …..it is needed for spending but it has not produced positive real returns after inflation and taxes in cash instruments more often then doing so .
so it needs to be invested elsewhere for growth .
on the other hand any better producing liquid assets can be instantly liquidated and converted to cash for spending .
i just did it to buy a new car .
so cash is generally going to be trash as they say over the longer term as an investment
That's right. In your case, it would be foolish to pay off a 2.5% mortgage when you can make 5% or better just on risk free CDs. Maybe better on other investments.
Don't forget the banking institution is going to "1009-INT" you, so that may chip away at your realized total.
That 5% could very easily become 4%, after taxes....
But, still, there's virtually no risk (as long as you stay under the FDIC max.)
There ARE ways around that "Max" but that's for another thread.
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