Money in the bank vs paying down/off the mortgage (federal, relative)
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We're so dumb we hung onto our restricted stock units instead of selling them like everybody else in DH's work group. They bought expensive toys. I could have had the iPhone SE, iPhone 7, iPhone 8, iPhone X, iPhone 11, and iPhone 12 by now instead of my stupid iPhone 6S Plus. Man! I could just kick myself.
That must be an impressive stock option to be able to buy all those fancy iPhones
Quote:
We bought another house even though we both had one already. We had no idea what we were doing. 23 years later we repeated the same mistake. Again we fell for "bigger" and "prettier". God, we're shallow and disgusting. As homage to Gaia, I pinky-swear our next home will be an Earthship. I've already started hoarding worn-out tires and cardboard.
So that's the sad story of how we came to this pass. Don't do what we did. Everyone else is so much smarter.
One thing is clear, we continue to learn even during retirement. It's a struggle between desires, emotions, and a clearer head. But it beats the alternative. Consider it as a life-long "Kai-Zen", a continuous improvement of our lives.
OP, this is to illustrate my thought processes on paying off the mortgage over time. For others, this is not intended as a "humble brag" I am fortunate to be where we are, and that I have 1st world financial problems and decisions...
Background: I have 2 pensions and early SS that give me $115,000 per year inflation adjusted income. Wife gets a little over 1/2 of the largest pension and my SS if I predecease her, and can carry all of our obligations with that income cut (down to ~$62,000). I chose to draw at 62, with a plan to pay off my mortgage at 68-69. Mortgage rate is 2.37% fixed rate. I have no consumer debt, and no investments other than some land owned outright (worth ~$45,000), vehicles (paid off), home equity of ~$150,000, and about $12,000 cash on hand. We got pretty nearly wiped out financially in 2008 between real estate and stock, and a required sale at perhaps the worst time to sell in US history, so we are extremely fortunate to still be where we are financially.
Thought process:
I can invest between $2800-$3200 per month in retirement without impacting budget and lifestyle (includes some travel, etc.), and intended on paying off the mortgage. Cost avoidance after the mortgage is paid off pushes me out to 89-94 for break even for SS draws at 62, 65, FRA, and 70 depending on which option, and assuming I use the same strategy at each SS draw point (pay off mortgage asap using SS).
Ensuring my wife will be financial taken care of if I predecease her is an important priority for me. Kids inheriting something? Not so much - they are all educated professionals and doing fine.
Risks:
1. Health, specifically long term care for one or both of us (I have a VA offset, but there will still be expenses). This is something I had not properly considered in my planning.
2. Predecease my wife BEFORE mortgage is paid off and she has the mortgage and little to no cash on hand - this entails some lifestyle changes for her, but not a sell everything emergency. She could sell the land we have and get a sizable chunk of cash, or an additional income stream depending on how she does it.
Options that have occurred to me over the last year or so (since reading this forum):
1. Continue with my original plan. Assuming I live to 70 (highly likely) financially we are golden for the rest of our lives, but are very illiquid. Financially, if I pass AFTER the mortgage is paid off, she has about $2,000 per month excess spending money (after the bills and other household expenses are paid). this was my originally plan.
2. Invest the $2,800+ in a fortune 100 mutual fund. This monetizes my SS, so that at 67, I can draw in perpetuity the difference between SS draw @ 62, and SS draw at FRA, and have a between $90,000-$120,000 in investments. Because of my pension situation, I can be far more aggressive in investing than recommended for my age, so I am using 8% and 10% for projection assumptions. If my wife needs long term care, I have the investments I can turn into cash, plus my wife would inherit the investments if I predecease her. She still has the mortgage as a long term financial obligation.
3. Invest $2,000+ in a fortune 100 mutual fund, and use the balance of excess income to buy down the mortgage with a pay off date around my 74th birthday.
All three options are good options and work. Each has different levels and to some extent different types of risk that needs mitigation, each has benefits that make sense. I think I am now leaning towards starting investing and following option 3 as the best way for me and my wife (in our situation) to mitigate health risk issues, and still meet my original objectives of being mortgage free early, and ensuring my wife is financially stable if I pass.
Hope this gives you some added insight and helps your thinking and decision making on the subject of mortgage pay off.
Last edited by Tuck's Dad; 06-17-2021 at 10:49 AM..
Everyone makes decisions using different processes. When it comes to money and investing, I like to throw out emotions and try to make decisions based on analysis. We can start with the very basics. A current mortgage will cost us less than 4%, closer to 3%, interest. Overtime money invested in the the stock market will yield up to about 10%. A 60:40 allocation will yield about 7-8% with much less volatility.
That is a pretty crude analysis. As Mathjak points out constantly, we need to worry about sequence of returns, volatility in the markets and other factors that can result in short term risk for investing. Fortunately we have a really powerful tool to help analyze these factors: Firecalc. This is the same tool that helps predict outcomes for withdrawals from our portfolio. In essence this is what we are doing with money invested from a mortgage. We know that for the long term a roughly 60:40 portfolio will easily cover the 4% cost of today's mortgages. Sure there is some short term risk. Firecalc can even show us that risk in detail with graphical analysis. The risk of falling behind decreases very substantially for investing over a minimum of 5 or 10 years. Even a loss does not mean some sort of major catastrophe. It just means that investing did a bit worse than putting that money towards paying off the mortgage. I highly recommend using Firecalc with factors that pertain to your individual situation.
Mathjak seems to enjoy mudding the waters. This issue is really not that difficult. For the vast majority of situations investing instead of paying off a mortgage makes a lot of sense. It is almost impossible to lose and the yield can be very considerable. If Mathjak ever decides to buy a house or condo instead of renting, it will be interesting to see what his analysis yields. My guess is he will take a low interest rate mortgage over paying cash.
All of this!
I started my current mortgage paying extra every month. Then I realized I didn't need to do that, and the extra money could be used for investing and growth. And that's what I've done since. And grow it has, far more than the mortgage interest amount. If I wanted to pay off the mortgage in one payment, I could. But I'm not going to. The amount gained each month is not worth it when compared to using that money to invest. And +1 for Firecalc. It is a tool I use quite a bit.
We're so dumb we hung onto our restricted stock units instead of selling them like everybody else in DH's work group. They bought expensive toys. I could have had the iPhone SE, iPhone 7, iPhone 8, iPhone X, iPhone 11, and iPhone 12 by now instead of my stupid iPhone 6S Plus. Man! I could just kick myself.
So, what is that worth in todays currency, plywood and 2x4's?
Fortunately, in a previous incarnation of this conversation on this forum, I received some good basic advice on getting started, and I've begun educating myself. I have a base savings account, and when I receive my one-eighth of my late mother's estate (basically proceeds from the sale of her house) I will invest it.
Thanks to those who took the time to point me in some good directions. This post is for the others out there who, like me, may also be clueless.
Glad you are taking steps to learn about investing, MQ
For someone who supposedly leaves emotions out of investing you certainly ran for the hills last year when you sold out to much lower levels of equities needlessly as emotions had you worry about what could be
I am surprised you think I made a mistake cutting my stock allocation due to Covid. I am several years older than you and had a high stock allocation, about twice your level. It seemed time to back off on the risk. When I sold some of my stock funds, the market had already dropped quite a bit but it was still easy to back off without serious losses. I converted some of my TIAA stock and allocated funds to a short term bond fund that had also taken quite a dump in value. So I sold low but bought low. The short term bond fund recovered nicely. Now it is back to flat but I have no plans to return to a high stock allocation. I have not done an analysis but I think I am roughly 50-60% allocated in stocks. At age 75 it is time to keep the volatility down.
I'm trying to figure out what the best course of action is for us on this topic right now. We have a primary home where we have about 50% equity and we have some land that we bought that we were planning on building a weekend getaway home on, where we have about 70% equity in.
This last year, my finances took a huge hit, to the point that we can't afford a mortgage on both the house and land. So now we're thinking about selling the land and using the proceeds to pay off the house. On the one hand I think it could be better to invest those funds, but on the other hand, I tell myself we already made a killing on our investment in the land itself, so paying off the mortgage is the prudent thing to do, especially in light of my reduced income.
Either way, we have to wait until next year to sell, as selling this year would put us in the highest tax bracket, and with a gain of several hundred thousand, 5% is a good chunk of extra change that I don't want to pay to the government.
Another small detail is that you can't take it with you and people don't appreciate money they did not earn and so leaving too much to heirs will likely be money thrown to the wind.
Focus on real life instead of numbers on a piece of paper.
.......people don't appreciate money they did not earn.......
I do. The relatively small amount of money I inherited made a huge difference over time because I invested it.
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