mark0young[at]aol.com (Mark0Young) wrote in message news:<20030710182613.14458.00000983[at]mb-m02.aol.com> ...
- quote -

An excellent and thoughtful post! However, I disagree with the
details of the above paragraph. As you say, the 4% withdrawal rate is
likely to last 30 years with regular withdrawals that increase with
inflation. However, since the mortgage payment will not increase with
inflation, a rather higher withdrawal rate will be tolerated.

In article <0FePa.48057$0v4.3271598[at]bgtnsc04-news.ops.worldnet.att.net> ,
"Elizabeth Richardson" <erichktn[at]worldnet.att.net> writes:

- quote -

Elizabeth, your questions for the general population do open a whole lot more
room for considerations, far more important than whether or not one thinks one
would do better investing and whether or not one can tolerate the downside.

In my case, I have what looks like a decent job, having worked for the same
employer, a community college, for the past 23 years and will probably continue
working for the same employer for the next 9 years--the college administration
doesn't want to lose any of the skilled computer professionals in IT so, at
least at this time, my position looks good. The pension plan is pretty good.
So, based on the payout projections that the pension plan has given and
assuming my expenses are fairly much the same (remove 403(b) contributions, add
medical insurance premiums), it looks like at least early in my retirement I
will be able to make the mortgage payments without any reliance on my own
investments. As the pension is currently set up, once it starts paying, there
is a 2% annual cap on COLA, so it isn't expected to keep up with inflation, but
at least early in retirement when I expect to still have a mortgage payment, it
looks like it would be enough. Eliminating the mortgage payments about 5 years
into retirement will help cash flow, but it wouldn't surprise me at all if
about 10 years into retirement I will have to start making withdrawals from my
investments because of the effects of inflation.

Now if I had to use my investments to make the mortgage payments, I would be
doing even more number crunching. The problem is that the "safe withdrawal
rate" for a 75% equities / 25% fixed income portfolio is only around 4% for the
first year if adjusting amount withdrawn from the portfolio for inflation each
year for the portfolio to last 30 years (Trinity Study and follow-up studies, a
50/50 portfolio has an even lower safe withdrawal rate). Shorter periods have
larger safe withdrawal rates, but at some point, to keep the risk of running
out of money small, it makes more sense to just pay off the mortgage than it
does to keep investments with the intent on paying the mortgage from those
investments. Of course, the worst case is a 30-year fixed rate mortgage taken
out on the day one retires and one is living exclusively off of one's
investments--the annual amount one pays for the mortgage would require 25 times
that annual amount in investments to provide a safe withdrawal rate if one
picks the peak stock/bond mix in one's portfolio, larger if one is off optimum.

In my case, my expected pension mitigates this risk, as long as I can handle
the mortgage payments between now and when I start collecting from the pension.


One cannot really predict the future, which is why I continue to invest even
though some of the web retirement calculators claim I should be spending from
my investments instead of adding to them. Also, I have never overcome a certain
distrust of financial institutions, so one of my goals has been to have assets
spread out to two or three financial institutions so that I could do ok even
with the complete loss of one of the financial institutions, but the past
couple of years I have doubted that I would be able to build up my non-PERS
investments high enough to replace what will have been over three decades of
emplyment with an Oregon PERS-participating employer as a Tier-1 participant.

I am essentially a "late bloomer" when it comes to investments--I had good
training from my mother to save, but it wasn't until about 7 years ago that I
actually started investing, and that was with an expensive 403(b). It wasn't
until about 4 years ago I learned enough to switch to a low-cost 403(b)
provider (TIAA-CREF, Vanguard isn't available to us), but starting 7 years ago
I have been contributing my legal maximum. Whether or not I can continue
increasing my contributions to the 403(b) and Roth IRA each year as the limits
increase remains to be seen.

So, yes, I have given thought on how to handle the mortgage payments in
retirement. If it weren't for medical insurance premiums, I could probably
retire in 4 years, live off of my taxable investments for 5, and then start
collecting full pension benefits, all without missing any mortgage payments.
It's those pesky medical insurance premiums that keep me from entertaining such
thoughs!--at least not yet. 8) The medical insurance coverage provided by my
employer is very hard to beat!

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Some of the numbers I have seen are quite appalling:

"A national survey found that the median net worth (assets) of 'pre-retirees'
or those between 55 and 65 in 1996 was $124,000, with home equity representing
52% of this total. Married couples had much higher assets than single people,
and single men in general had 50% more assets than single women.

"In the same survey, those 72 years of age or over had median household assets
of $62,000.

"In 2018, experts predict that slightly over 50% of elderly households will
have less than $10,000 in net financial assets (in 1988 dollars)."
(Ref:
http://www.dhs.state.mn.us/Agingint/...emo.pp6-10.ppt)


61% of all workers between ages 24 and 64 haven't got a retirement savings
account: No IRA. No 401(k). No Keogh plan. No Roth IRA. No 403(b).
(Ref: http://moneycentral.msn.com/articles...asics/7164.asp)


Only 25% of my employer's employees who qualify to participate in the 403(b) do
so (that's about 100 participants out of 400 employees who qualify), and the
employee can chose among about a dozen providers, including TIAA-CREF (only 8
participants as of the time I asked). (Source: my employer's Payroll
Department.) Worse, whenever we have an inservice session on retirement
investments or retirement planning, it seems like the same 25 of us go to such
sessions, so we aren't getting the word out to the rest of the employees.

The above exerpts indicate the vast majority of Americans are not preparing for
retirement or, if they are, they are doing a very inadequate job at planning or
investing for it, and that includes the vast majority of my coworkers. My
supervisors do encourage participation in the 403(b) but they can't force it.
Of the three that retired in the past three years, all three contracted back to
the college for additional income and two of them have jobs off campus to help
ends meet. There are three of us in our department who are planning on retiring
in the next 10 years, and I am the only one of the three who can do that
comfortably--the other two are talking of working beyond the earliest date they
can retire and receive full pension benefits because both realize they have
inadequate savings and one of those two has too abundant debt obligations, and
both have thought about their retirement cash needs and decided that their
pension wouldn't be quite adequate (one would be living hand to mouth but his
mortgage is now paid off, the other hasn't worked long enough for an Oregon
PERS-participating employer long enough to build up his "member balance" to get
a decent payout and lately he has been working towards a possible second source
of income).

I also have a good example next door of what not to do. Her husband purchased a
10-year immediate annuity because he figured they would both be dead in 10
years. His prediction was true for him but not her, leaving her with half of
his pension payments (even though when he passed away the expenses did not go
down by half) and the immediate annuity has since passed the 10-year mark. She
is too old and fragile to work, so to make up for the shortfall (half her
husband's pension, no more payments from the immediate annuity due to the term
running out), her kids send her money every month, and even then she has to
save up for several months to buy a new dress, and she will run her air
conditioner only two days out of the year because of the expense. (Most years
there are only a week or two of really hot weather. I don't even have an air
conditioner but I am much younger than she is.)

And when it comes to investing, that is also a big area of ignorance, too. Some
in our department call stock-based investments "gambling", some are saving in
too conservative investments (bonds, GICs or equivalent), one does actively
invest to the point of buying and selling, but I got him to confess that his
"buy and hold" investments are doing about the same as all the market timing he
does with his taxable investments. The majority aren't even saving for
retirement. And studies done for mutual fund families aren't all that
comforting, either: even those investing in good funds under-perform those
funds by trying to time the market or by allowing themselves to be swept up by
the exuberance and fear from the swings in the stock market. So, while I say
that my investment strategy might not be the best, I am confident in stating
that it is a reasonable approach for me: Asset Allocation with Periodic
Rebalancing gets its blessing from studies on the differences in returns from
big pension funds (something like 92% of the differences in multi-decade
returns from pension funds can be accounted for by strict adherance to their
asset allocation plan, 6% from the specific investment picking, and the rest by
other considerations), and is also the strategy that studies like the Trinity
Study on Save Withdrawal Rates backtested.

So, while I am no personal finance expert nor a financial planner, nor even
what I would call an expert investor, I have given serious thought about what
is likely to be my retirement cash flow and the impact the mortgage will have
on it. I have found several of my limitations (e.g., I am a terrible saver,
worse market timer) and ways around them (I have Payroll take the 403(b)
contributions out of my paychecks, I directed my taxable investments fund
family to direct-debit money from my checking account for those investments and
my credit union for short-term savings, and I am following my Asset Allocation
plan even when the feelings sceam just the opposite).

One of the easily forgotten aspects of the misc.invest.financial-plan newsgroup
and financial sites like Fool.com or Morningstar.com is that the participants
are a self-selecting sample, acutely skewed towards those who at least have an
interest in finances and more likely than not to have far more knowledge about
the area than an average person. Start speaking to one's neighbors and
coworkers, and one finds out very quickly that there is a lot of ignorance and
wishful thinking when it comes to retirement.

Mark A. Young

"Mark0Young" <mark0young[at]aol.com> wrote in message
news:20030709190053.01814.00000307[at]mb-m10.aol.com...
- quote -

Aha -- at least I can see that someone has actually run the numbers, and,
for them, the invest side is better. For the general population I ask the
following: Does that mean that you would always have a mortgage? How does
that work when you're living off the investments? Are you working so that
your income during retirement will go towards that mortgage? What rate of
return do you have to generate to make that work? If you won't have a
mortgage, what are you doing now to ensure it is paid up when you want to
retire? I ask these questions because I think a lot of people think they
will always have a mortgage and they don't realize how that affects their
needing to cover that expense when retired.

Elizabeth Richardson

In article <cqfOa.43763$3o3.2913486[at]bgtnsc05-news.ops.worldnet.att.net> ,
"Elizabeth Richardson" <erichktn[at]worldnet.att.net> writes:

- quote -

I did a number of projections of having a mortgage and investing, vs. no
mortgage and investing the monthly mortgage payments. In response to your
message, I tried the math several additional ways. In my situation, I was
itemizing before I had property taxes or mortgage interest because of my high
state income tax and charitable contributions, so all of my mortgage interest
is tax deductible. Likewise, all of my investments being considered are taxable
because I am already contributing my legal maximum to my 403(b) and Roth IRA.
So, even comparing paying regular income taxes on investments every year, if my
annualized rate of return is 6% I come out ahead investing instead of paying
off my 5.25% mortgage. That's with paying income taxes on the gains every year
at ordinary income tax rates. It turns out even better if I pay long-term
capital gains rates on part of the growth, especially if part of that growth is
deferred (e.g., appreciated stock values and not selling for many years).

Projections is one thing. Reality is something else. Usually, to come out ahead
keeping the mortgage and investing the principal, one has to take on some risk.
Stock market returns, for example, tend to vary from year to year, some years
even being negative (e.g., 200-2002), so there is no guarantee that the stock
market will return better than an annualized 5.25% for the next 15 years (what
I am paying on my mortgage). On the other hand, the stock market could end up
returning far better gains than 5.25%.

Another wrinkle is that the majority of investors do not do as well as what
they invest in, usually by jumping in and out of an investment at the wrong
times, such as trying to chase performance or letting one's exuberance and fear
drive one's investment decisions. If one is going to have a mortgage and also
invest extra funds, one really ought to have a long-term investment plan that
one can stick with.

On the other hand, one does have liquidity because one can sell part of one's
investments if one needs cash, no credit check, no inspections, no checking
current salary. But if one had tied most of one's assets in one's home equity,
the only ways to get that equity out would be to sell (which leaves one with
trying to get another living location, and landlords want to verify one has an
income stream) or refinance (so it is the lendor who wants to verify the income
stream as well as the quality of the collateral).

Mark A. Young

Elizabeth Richardson wrote:
- quote -

It forces you to think in terms of "after-tax returns," with an
allowance for some money going to Uncle Sam & your state (well..not YOUR
state!). But there is a bit of symmetry to it...if your income tax rate
will be high, then the benefit of the mortgage deduction will be high as
well. It's not quite a wash though.

How much to shave from the mortgage cost & expected returns depends on
your bracket and choice of investments. But really this can't be a
precise calculation. Nobody knows what the tax brackets will be even two
years from now, so doing something elaborate doesn't seem worth the
effort - it implies a precision that isn't really there. You might just
eyeball the mortgage rates and say "I can beat 5.5%" - or not. If your
tax bracket is low then it's an easier proposition.

And of course it depends on the individual. In my "spend 5 more years in
the house" scenario the tax rate might be zero, and there might not be a
benefit to the mortgage deduction (Assumedly if someone is tapping into
their home equity for living expenses there isn't much income coming
in). So you don't need to spend too much time worrying about the tax
issues there, it will have a tenths-of-percent impact on the whole thing.

-Tad

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> writes:

- quote -

My own thinking is that it roughly balances out the benefit of getting
a tax deduction on mortgage interest. However, there are a few
"gotchas"....

(1) The extra income from the invested money may push you into a
higher tax bracket or over the limit for phasing out itemized
deductions.

(2) You may not be able to deduct your mortgage interest at all on
your state income tax return, but you'll still have to pay state taxes
on your earnings from the invested money.

(3) In the long term (say, 10 or 20 years), your mortgage interest
deduction will shrink while your income from your other investments
becomes larger due to accumulation.

Of course, muni bonds are a way of getting round these problems, but do
you really want to have that much of your capital invested in muni bonds?

Personally, I'm of the opinion that the best thing to do is to divide
one's available cash between paying off the mortgage and other kinds
of investments. I would certainly make sure I had a good-sized emergency
fund before sinking a lot of cash into a mortgage, in particular, since
it's hard to draw the money back out of a mortgage again.

-Sandra

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote in message news:<fjoOa.43513$0v4.2991257[at]bgtnsc04-news.ops.worldnet.att.net> ...
- quote -

With the new tax laws, an equity income fund might be quite attractive
in this context. As I understand it, only a 15% tax rate on dividend
income.

My own feeling on this is that while in the long run, markets will
perform better than property, and there are tremendous tax advantages
to paying interest via your home mortgage, there is much to be said
for living debt free.

Probably I would split the difference: pay down the mortgage with half
the money and invest the rest in the stock market.

One thing. In the UK we have what is called a flexible (or One
Account) mortgage (Australian invention, AFAIK). Basically, you can
put your money on deposit and reduce your principal on your mortgage
by that amount, so your interest payment is lower. But you can draw
down that money you have credited as well ie like a bank account. The
effective result is that on a, say 5% mortgage (most UK mortgages are
variable rate), you are getting a 5% after tax return on your savings,
which is equivalent to a c. 8% pre tax return (at the top marginal
rate of 40%, which kicks in at about USD $55k of income). 8% risk
free return is pretty attractive.

Does the US have similar arrangements?

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:3F09E7D3.6000206[at]pacbell.net...
- quote -

I guess this is what makes markets -- different motivations, risk
tolerances, goals, etc. One other thing I've thought of in this discussion
(and thank you) is that you have to pay taxes on the earnings you're making
on these invested dollars. How does that affect the thinking?

Elizabeth Richardson

Elizabeth Richardson wrote:
- quote -

For some there isn't enough cash flow. That would be the point of the
mortgage/invest route - a means of spending a portion of the home
equity, without selling the house (especially if there aren't any heirs!).

It doesn't need to be an all-or-none proposition either. Let's say
someone wants another five years in a home but is low on cash and rich
in home equity - say, a $300k home. If they mortgage $100k at 5.5%/30
yr, payments are about $570/month. $34k goes to the mortgage payments
over the 5 years, the other $66k plus earnings can be spent. When they
sell the home, they pay off the mortgage, but in the meantime they've
had access to cash at a cost of 5.5% (less really, factoring in taxes &
whatever earnings there were on the money). In that case it's not meant
as a horse race of your investments vs. the mortgage, rather it's just a
cheap way to borrow money...and the investment earnings lower the cost.

-Tad

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:3F09CA3A.5030707[at]pacbell.net...
- quote -

Hmm. And how much extra cash flow would you have if you weren't paying a
mortgage? And how much life insurance does that fully owned home represent
to your heirs?

Elizabeth Richardson

Elizabeth Richardson wrote:
- quote -

That's correct, if you want to net 5%, then you'd need to earn 5% over
your 5% mortgage cost, or 10% total (all of these numbers, after taxes).
Holding a mortgage so that you can invest extra cash is investing on
margin, really. Viewed on an annualized basis, you want to win the horse
race against the cost of your mortgage, so if the mortgage costs you 5%,
you need to do better than that. Not that this is an easy calculation,
factoring in taxes (0%? 50%?), the changing standard deduction, the
declining interest component to the monthly payment, future income, etc etc.

But remember the numbers are very large so a couple percentage points
could pay off. If you can earn a marginal 2% on an average San Francisco
home, and you're heavily leveraged, that's enough for a "free" new car
every couple years. And if the rate is fixed and you have a big comfort
level with the monthly payments, it's not as risky as your typical
margin investing.

Also, putting money into a home in effect traps it until you sell or
borrow again. Because it's such a big balance-sheet item for most
people, there's an argument for putting cash elsewhere, simply for
diversification & access. And looking at the end-game, dying with a
fully-owned home means "underconsuming" during your lifetime. Nothing
wrong with that of course, but the mortgage/invest route provides a
source of cash without selling the home.

-Tad

Elizabeth Richardson wrote:

- quote -

Well, you have to earn more than 5%--but after that, you are using
leverage. So if you earn 6% then you are actually making quite a bit
off of the "net invested" amount--since you essentially have nothing
invested

You put $10,000 in the investment and effectively borrowed $10,000 to
make that investment. So, ignoring all other assets, your balance sheet
would show zero. However, by earning 6% on $10,000 and then paying back
5% on $10,000, you have the difference to put in your pocket without
having any of your own money in the equation--or, once you do the
division, an infinite return on your investment.

Of course, leverage works both ways, and if you don't earn above the
cost then you have an infinite loss on the amount invested <grin> . This
magnification of the returns is the risk component of leverage.

Now, since most of us would have assets besides the borrowed funds
<grin> , we don't see infinity but rather a magnification effect. And,
as noted, it works both ways.

- quote -

It's extremely important to this calculation to truly calculate the
after tax costs and returns.

- quote -

The math is pretty straightforward--however, what the proponents almost
always overlook is the effect of leverage on the downside.

It reminds me of a story that John Madden told about trying to get Kenny
Stabler to run a naked bootleg at the goal line. In the play, all of
the rest of Kenny's team would go one direction while Kenny (the
quarterback) would run in exactly the opposite direction.

Kenny objected that, in that case, he had no one to block for him and
that all of the players on the defense could unload on him. Considering
that the really had no desire to pick up that many broken bones at one
time, he thought this play wasn't a real good idea.

John said not to worry, with the rest of his team going the opposite
direction, all of the players on the defense would certainly follow
them. Kenny would then be able to walk into the end zone since all the
defenders would be running full speed in the opposite direction.

Kenny then asked one question: "And what if they don't?"

John indicated he then shelved the play <grin> .

Leverage works much the same way. Despite the fact that you "know" you
can beat the return, you still need to consider what happens if you don't.

--
Ed Zollars, CPA
Phoenix, Arizona

I've heard this question for years. From previous posts, most of you know
I'm in the pay-off mortgage camp. Many in the invest camp look to the
interest rate on the mortgage and gauge whether or not they can make more by
investing the money. Perhaps some can explain it to me again. It seems to me
that if you are paying 5% in interest, in order to make 5% by investing, you
must really make 10% (5% is just breaking even). Tax deductions on that 5%
interest may play into it only for the portion above the standard
deduction,since those of us without a mortgage get that anyway. Call me a
doubter, but just how do you make the math work?

Elizabeth Richardson