You can use an online calculator to see how paying your mortgage on a
bi-weekly basis would reduce the time it takes you to pay off the loan
at http://www.thriftmeister.com/tier2/calculator.htm

franksplace2[at]email.com (FranksPlace2) wrote in message news:<d6bbed5b.0411120559.9ec3dad[at]posting.google.com> ...
- quote -

Yes, but I don't know of anywhere that you can get a guaranteed return
of 8%. To get that kind of return, you have to invest in equities. And
perhaps the next year you lose 10%.

In situation 1, you lose $100,000 and your net worth decreases by
$140,000.

In situation 2, you lose $120,000 and your new worth decreases by
$168,000.

Because of your mortgage, you decrease your portfolio by an extra
$28,000.

Not to mention the $8,000 lower standard of living you are enduring by
keeping the mortgage.

It sounds like we have different goals. I want to live a comfortable
retirement and not have to worry about running out of money. My
calculations convice me that not having a mortgage meets my goals
better than having one. You want to continue trying to accumulate
wealth, even if that means assuming more risk of running out of money.
And you see having a mortgage better meets your goal.

This discussion points out that everybody has to consider his own
circumstances and goals and do what seems best.

Dave

FranksPlace2 <franksplace2[at]email.com> wrote:

- quote -


And if those bonds are paying more than the cost of the mortgage, then
this is accurate. That's arbitrage. That's not generally going to
happen unless you already have a fixed rate mortgage and interest rates
go up. I agree that if you are in the enviable position of carrying a
significantly below market mortgage, it would be silly to pay it off.

OTOH, if the only way you can earn more on average than the cost of the
mortgage is to invest in stocks, then you will be increasing the total
variance of your portfolio. Or you won't be increasing earnings at all,
but decreasing them. Your choice.


Michael

Michael,

Exactly! By keeping 20 - 25% of my portfolio in bonds and by having
enough money in my portfolio to pay the mortage balance, I have
reduced the risk associated with a mortgage to about zero.

And I enjoy the benefits of increased earnings in my portfolio.

Frank


michael[at]bcect.com (Michael Sullivan) wrote in message news:<1gn32bd.s2vvpt1ckdxorN%michael[at]bcect.com> ...
- quote -

Dave,

In situation 1, I earn 8% on $1m or $80k. My net worth increases by
$80-$40 = $40k.

In situation 2, I earn 8% on $1.2m or $96k. My net worth increases by
$96-48 = $48k.

Because of my mortage I increase my portfolio by an extra $8k per
year.

Frank

dave_and_darla[at]Juno.com (Dave Dodson) wrote in message news:<80526350.0411111145.76f8abbc[at]posting.google.com> ...
- quote -

- quote -

I think this may be part of a retirees problem. Rents are not fixed, but
increase with the pace of inflation (at least where I live, where there are
no rent controls). But a person with a paid for house can, in fact, tap that
equity if additional income is needed. It's called a reverse mortgage. I
don't know too much about them, hope I never need to, but they're there for
exactly this purpose.

Elizabeth Richardson

There are a significant number of people who rent rather than own. Why can't a
retired person simply figure that a mortgage payment is the same as a rent?
This difference being that now the rental is pretty much fixed.

Yes, I know that what ever equity they have in the house is "locked up," and
hence not available for additional income. Still, if the retirement income can
afford the "rent," than what's the problem?

franksplace2[at]email.com (FranksPlace2) wrote in message news:<d6bbed5b.0411100653.373aedc1[at]posting.google.com> ...
- quote -

In situation 1, I have a $1,000,000 portfolio, from which I am taking
a 4% distribution, or $40,000. That shows up on the income line.

In situation 2, I have a $1,200,000 portfolio, from which I again am
taking a 4% distribution, or $48,000.

That's where the incremental earnings associated with the extra
$200,000 shows up.

Dave

FranksPlace2 <franksplace2[at]email.com> wrote:
- quote -

The equity in your house is part of your portfolio. The variance of
that equity is fairly low if there is no mortgage, but fairly high if
the mortgage covers 80%+ of the value.

The mortgage debt is not part of your portfolio, it's part of the
*bank's* portfolio. For you, it's a debt and an expense, so the fact
that it is zero variance doesn't help you.

- quote -

But wait. You're retired. You're living off your assets and the income
or capital gains they generate. What would cause you do fail to make
your mortgage payment? A few really bad years for your assets in a row,
that's what. So now you're going to sell a whole bunch of them at the
bottom to cover your mortgage? Well if you could afford to do that, you
could afford to have made your mortgage payments, no?


Michael

michael[at]bcect.com (Michael Sullivan) wrote in message news:<1gmu491.1kfomm7dn1hqmN%michael[at]bcect.com> ...

- quote -

portfolio of $1.2m with 75% stocks and 25% bonds, the variance is the
same. And the variance on my mortgage debt is zero. So the variance
on my total portfolio is not higher.

There is increased risk with debt. I would lose my home if I fail to
make the mortgage payments. However since I have enough assets in my
portfolio to pay off the loan, that risk is very small.

There is also risk of running out of money because you fail to invest
wisely for a 30 year retirement.

Frank

Dave,

I don't see where you are accounting for the incremental earnings
associated with an extra $200k in your portfolio.

Here is my take on it. Consider your case 2

- quote -

To support the 4% withdrawal rate, I would have 5 years or 20% of my
portfolio in bonds and the rest in stocks (.8* 1.2 = 960k in stocks).
This is $160k more in stocks (and $40k in bonds) than your situation
1: I would expect to earn, on average, 8% on that $160k or $12.8k per
year. The whole purpose of keeping the mortage is so I can invest the
proceeds. My 5 year/20% cushion protects the withdrawals from the
vagaries of the market whether or not I have the mortage.


dave_and_darla[at]Juno.com (Dave Dodson) wrote in message news:<80526350.0411091123.494736cd[at]posting.google.com> ...

- quote -

franksplace2[at]email.com (FranksPlace2) wrote in message news:<d6bbed5b.0411090624.60217f1a[at]posting.google.com> ...
- quote -

As you can see from my scenarios, the extra $200,000 indeed is
invested, and hopefully it is earning not just 8%, but 20% or even 50%
or 100% per year. If we _knew_ that our portfolio would earn 8% per
year, keeping a 6% mortgage would be a slam dunk. But realistically,
some years it will earn 20%, some years 8%, and some years it will
lose 10%. That variation is why even if the average is 8%, we can't
withdraw 8%. Historically, a withdrawal rate of 4% has been low enough
to guarantee that a portfolio consisting of 75% stocks and 25% bonds
will survive indefinitely, while even 5% has been too high for that
guarantee.

I've shown that having a mortgage can result in either a lower
standard of living or a greater probability of running out of money.
Why would you choose to suffer either one?

Dave

Rather than think in terms of 50-50 or 75-25, I prefer to think in
terms of years of bonds. I think market history shows than the
probability of a 5 year bear market is very small. Therefore my
target is 5 years of bonds. for a 4% withdrawal rate, that would be
20% bonds and 80% stocks.

Frank


mes[at]panix.com (Michael Sullivan) wrote in message news:<1gmwcu3.1emp1n3971231N%mes[at]panix.com> ...
- quote -

Interesting calculation, Dave. You need to look at your balnce sheet
too. The extra $200k in your portfolio is hopefully earning 8% per
year or $16k.

Frank

dave_and_darla[at]Juno.com (Dave Dodson) wrote in message news:<80526350.0411050907.26bf063d[at]posting.google.com> ...
retirement.


- quote -

Dave Dodson <dave_and_darla[at]Juno.com> wrote:

- quote -

That's a lower % than I've normally seen recommended for post retirement
(I was thinking 30-40% fixed income), but it doesn't seem unreasonable,
especially for a healthy person near the beginning of what could be a
30-40 year period. It wouldn't even surprise me if the sweet spot for
an indefinite retirement portfolio was actually closer to 75/25. By
sweet spot, I mean that %that allows the largest withdrawal for a given
risk of ruin.

Allocations of 80-20, 90-10 or even almost 100% to various kind of
equities are not uncommon during the accumulation phase. I doubt these
are optimal for someone who is regularly withdrawing.


Michael

--
"Every gun that is made, every warship launched, every rocket fired,
signifies in the final sense a theft from those who hunger and are not
fed, those who are cold and are not clothed. -- Dwight Eisenhower
"In Christ there is no killing" -- St. Patrick

michael[at]bcect.com (Michael Sullivan) wrote in message news:<1gmu491.1kfomm7dn1hqmN%michael[at]bcect.com> ...
- quote -

It is interesting that a recent article in the Journal of Financial
Planning encourages an asset allocation of 75% stocks and 25% bonds
during retirement: http://www.fpanet.org/journal/articl...p0304-art8.cfm

Michael, would you say that 25% is "a fair percentage"?

Dave

FranksPlace2 <franksplace2[at]email.com> wrote:
- quote -

But the variance of your total portfolio is higher with the mortgage and
more stock assets than with the house paid for. Even if your expected
return is slightly higher, increasing the variance has a dramatic effect
on your risk of ruin when you are withdrawing money.

This is the reason that after retirement, you generally want to move a
fair percentage of money out of high variance, high return investments
(like stocks) and into low-variance, low-return ivestments (cash,
bonds). Once you are withdrawing regularly, minimising variance can be
just as important as maximising return.

Paying off the mortgage reduces your variance significantly, so it's
often going to be a good plan, even considering the tax deduction.


Michael

franksplace2[at]email.com (FranksPlace2) wrote in message news:<d6bbed5b.0411030651.5ee32833[at]posting.google.com> ...
- quote -

I spent an hour with Turbotax to run a couple of scenarios that
approximate the disposable income in two situations.

Situation 1: Age 67, $1,000,000 portfolio, withdrawal rate 4%, $24,000
annual Social Security benefit, no mortgage, $3,000 real estate taxes,
$1,000 charitable contributions.

Income: $40,000 + $24,000 = $64,000
- Federal Income Tax, Married filing jointly: $4,600
= Disposable Income: $59,400

Situation 2: Age 67, $1,200,000 portfolio, withdrawal rate 4%, $24,000
annual Social Security benefit, $200,000 mortgage at 6%, $1,200
monthly mortgage payment, $3,000 real estate taxes, $1,000 charitable
contributions.

Income: $48,000 + $24,000 = $72,000
- Federal Income Tax, Married filing jointly: $6,200
- Mortgage Payments: $14,400
= Disposable Income: $51,400

The disposable income is $8,000 less in Situation 2. To maintain the
same standard of living as in Situation 1, the person would have to
withdraw $57,500 from the portfolio, a withdrawal rate of about 4.8%.
This reduces the probability of portfolio survival significantly. The
calculations:

Income: $57,500+ $24,000 = $81,500
- Federal Income Tax, Married filing jointly: $7,700
- Mortgage Payments: $14,400
= Disposable Income: $59,400

Although the results are dependent upon the various assumptions made,
I think this clearly shows that paying off the mortgage before
retirement can reduce the risk of running out of money. Anyone
contemplating retirement with a mortgage should carry out similar
calculations to analyze his own situation, rather than relying on
generalities that might not apply.

Dave

franksplace2[at]email.com (FranksPlace2) wrote in message news:<d6bbed5b.0411030651.5ee32833[at]posting.google.com> ...
- quote -

Scott would agree. The question is whether your standard of living
will be higher if you have, e.g., a $1,000,000 portfolio and no
mortgage and take 4 or 5% from your portfolio, or if you have a
$1,200,000 portfolio, a $200,000 mortgage, take the same percentage
from your portfolio, and make the mortgage payments.

- quote -

Mortgage _interest_, not mortgage debt, is deductible only to the
extent that it and your other itemizable deductions exceed the
standard deduction. If you have been paying on your mortgage for a
while, a significant amount of your monthly payment will not be
deductible interest. So you might be paying a $1000 per month mortgage
payment but be paying only $600 per month of deductible interest. It
then could be possible that none of your interest would be deductible.

Dave

dave_and_darla[at]Juno.com (Dave Dodson) wrote in message news:<80526350.0411020553.5bb6d9b6[at]posting.google.com> ...
- quote -

making the money last, typically 4 or 5%, not whether you have a
mortage. Secondly the mortgage debt is offset by an equity investment
which presumably provides more return than the mortage debt.

- quote -

But because mortage debt is deductable, there is a $1000 deduction
which offsets the possible SS taxes.
Frank