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Here is the way it worked so far. In two years my investment returns were $60K. The mortgage principal and interest payments were $30K. I pocketed $30K. The first year I saved about $2K on taxes and the second year about $3K. So in 2 years I am $35K ahead.
If I never took the mortgage I would have none of that money. If I pay it off those excess returns will stop. Instead it is highly likely that within about 10 years I will have $300K more than if I did not have a mortgage. That is not a trivial amount for me.
Since paying off my mortgage I maxed out my 403b including the catch up and that reduced my taxable income which gave me additional $ to put into private savings and investments. Plus I sleep better knowing I am debt free. I am now able to retire earlier. I rate it a win-win.
Since paying off my mortgage I maxed out my 403b including the catch up and that reduced my taxable income which gave me additional $ to put into private savings and investments. Plus I sleep better knowing I am debt free. I am now able to retire earlier. I rate it a win-win.
Since you have paid off a mortgage, I assume you are at an age where your understanding of basic math is not going to change. I certainly don't need to try.
at some point the markets cycle and at that point one of two things happen. you either pay off the mortgage possibly selling assets at a loss to do it giving back an unknown amount of those profits or you keep the mortgage and possibly sell off assets at a loss to make the payments.
you can't say what you made until things go full cycle.
Folks thought they were well a head of the curve through the booming markets of the 1980's with the excessively high returns but crappy days were just around the corner. Long term the averages worked out to what they usually were and things migrated back to the norm.
Peter lynch proclaimed the safe withdrawal rate was 7.50% .
Well he had to retract that statement when things rolled back to normal returns
Last edited by mathjak107; 05-22-2015 at 04:17 PM..
Mathjak, I am truly impressed with your pessimism. I am sure there will be times over a 30 year mortgage when the cost of the mortgage will be higher than the return on investments. But over the course of 30 years, investment returns are likely to average around the historical which I believe is about 7.5% for a moderate, diversified portfolio. At today's rates it only takes less than 4% to pay the interest and about 5% to pay interest and prinicpal. I am pretty happy to make 2.5% on someone else's money especially when I am currently making a lot more than the 2.5% average. Short term dips in returns are only going to be a problem for someone who spends the money as fast as it comes in. Personally I am not spending any of the profits I am making. That money just continues to grow and I don't plan on spending it until the amount has grown way beyond the requirements for servicing the mortgage. That is actually happening at a rapid rate. As of today, 2.5 years into the mortgage, I have made enough to pay the mortgage up till now and to be able to pay it with no additional returns for the next 3 years.
I think you read too many articles by Pfau. Is he still predicting the perfect storm when bonds have low yields and the stock market tops out? Is he still maintaining that the perfect storm will last for many years? He came out with that prediction in 2011. Four years later it seems even less likely that he will ever be correct.
Mathjak, I am truly impressed with your pessimism. I am sure there will be times over a 30 year mortgage when the cost of the mortgage will be higher than the return on investments. But over the course of 30 years, investment returns are likely to average around the historical which I believe is about 7.5% for a moderate, diversified portfolio. At today's rates it only takes less than 4% to pay the interest and about 5% to pay interest and prinicpal. I am pretty happy to make 2.5% on someone else's money especially when I am currently making a lot more than the 2.5% average. Short term dips in returns are only going to be a problem for someone who spends the money as fast as it comes in. Personally I am not spending any of the profits I am making. That money just continues to grow and I don't plan on spending it until the amount has grown way beyond the requirements for servicing the mortgage. That is actually happening at a rapid rate. As of today, 2.5 years into the mortgage, I have made enough to pay the mortgage up till now and to be able to pay it with no additional returns for the next 3 years.
I think you read too many articles by Pfau. Is he still predicting the perfect storm when bonds have low yields and the stock market tops out? Is he still maintaining that the perfect storm will last for many years? He came out with that prediction in 2011. Four years later it seems even less likely that he will ever be correct.
actually we have been below average the last 15 years. we only retraced back to where we stood 15 years ago and we only averaged 1.78% in real return since the last time we were at these levels. retracement has been the name of the game back and forth .
forging a head and maintaining the old averages seem to be getting harder and harder.
it doesn't mean i won't stay invested in equities as it still stands the best place to try but we have stalled out for all intent and purpose for quite a long time now over the longer term..
now you may have missed that by adding new money since then but there is a pretty good chance longer term from now may be not much better and we continue to under perform over the longer term as we have been..
i hope we don't but i certainly won't count my profits yet just based on the last 5 years nor would i rule out as wrong those that feel now that we retraced back forging a head is going to be at below normal returns. .
Last edited by mathjak107; 05-22-2015 at 05:20 PM..
actually we have been below average the last 15 years. we only retraced back to where we stood 15 years ago and we only averaged 1.78% in real return since the last time we were at these levels. retracement has been the name of the game back and forth .
My investments have done really well over the past 15 years. I could not begin to estimate the average percentage since I continued to add to my portfolio until I retired 4 years ago. I suspect your 1.78% does not include rebalancing. Rebalancing makes a huge difference. Of course it does not mean trying to time the market and buy low, sell high. But rebalancing does that to some extent because stocks are sold when gains accrue and stocks are bought when the market corrects. Using some reasonable intelligence to adjust allocations based on economic cycles can also make a huge difference. I am reminded of the chart of outcomes for the average investor when compared with systematic returns. The average investor does really poorly. Using some simple strategies can make as big a difference in the positive direction.
In any case your "real return" number is based on inflation. The cost of a fixed mortgage does not change. In fact if inflation is high it becomes even easier to pay since you are paying a fixed amount with inflated money.
1.78% is the return of the s&p 500 with dividends reinvested and inflation adjusted.
bonds had a good run the last 13 years so it it made returns better but real returns on bonds were not great either.
don't confuse the fact you added new money with what the actual markets are returning. your older money if you had much invested didn't see much growth in real returns , rebalancing adds new money and while it can help at times it can hurt at others.
on the other hand we now have balanced funds coming in almost 6 months later with ytd returns of 2.50%
so far. fidelity balanced is up 2.50% , wellesly income is up 1.80% ytd.. most bond funds of all duration's are returning under 1.50 % including interest . ,.
my growth and income portfolio is up only 4.57% and the income model 2.34%. vanguard wellington is up 1.95%.
the combination of high valuations and low rates are taking their toll .
Last edited by mathjak107; 05-22-2015 at 05:56 PM..
I just checked my Fidelity accounts since the accounts are clean with no additions or subtractions for a number of years. Analysis shows 65% stock, including 7% foreign. The one year performance overall performance is at 7.9%. I don't know how to get a 6 month figure and I don't think I care. I also watch the DJIA as I have for many years. Volatility has not changed and the market can go up and down by 300 points or so with no systematic correction. Averaging for fluctuations, the DJIA increased from about 16000 to 17500 in 2004. That is pretty much the same increases we have seen for the past several years. With the same trend the DJIA should end the year around 19000. At 18300 we are perfectly on track.
As always you seem to look for an find the worst case situations. With the substantial volatility it is useless to compare a couple of data points a few months apart. I remember 2003 when a bunch of idiots claimed the stock market was doing 20%. BS. It started the year with a fluctuation on the low side and ended with a fluctuation on the high side. The true averaged out return was more like 15%
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