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Retired, With Mortgage

I’d always thought, and advised others, that to retire, one should have their mortgage paid in full. And that was always my own plan. But, anyone who knows finance knows that you can’t plan on an exact stock market return, you can’t plan on your own health being excellent, nor your marriage outlasting your mortgage. In our case, these things actually all are going pretty well, thank-you. What changed was our income which I posted about a few months back. While we were working, we saved, over 20% per year on average. We topped off the 401(k)s and IRAs, and put aside money for our daughter’s college tuition. In hindsight, we could have saved a bit less, and aggressively paid off the mortgage, and I know there are people who are in the Dave Ramsey “debt is evil” camp who will agree, but I have no regrets. I’m a numbers guy and as rates fell, I was a serial refinancer. We entered our retirement phase with a fresh 15 year 3.5% mortgage.

When we lost our jobs, the balance was $265K, and I did the math to see what it would have taken to have no loan on that day. Our average interest rate was 6.0% over the prior 15 years. An extra $935 per month for that time and we’d have no loan. Keep in mind, the market was interesting during that 15 year stretch from 1998-2012. A 3 year slo-mo crash with a cumulative 38% market loss. A 2008 loss of 37%. The compound growth during this stretch was 4.4%. But didn’t I just say my average loan rate was 6%? Yes. The difference was going into our retirement accounts. Not the matched portion, although that would certain tip the numbers in my favor. Just the regular pretax savings. And even with that disparity between my mortgage rate and the low market return, the 401(k) had $349K extra vs our $265K mortgage. What’s interesting to note here is that the money went into our retirement account at a marginal 28% tax bracket most years. But now, the withdrawals are at 15%. At a current rate of 3.5%, the mortgage payment is $1966, and if you do the math, it takes $2313 from the 401(k) to make this payment.

Two years have since passed, and the market in 2013 and 14 was very rewarding. A gain of over 50%. We ended 2014 with the mortgage at $233K and the calculated 401(k) extra funds at $453K. The interest deduction wasn’t part of my math, although it helps my numbers a bit. Instead of the whole payment being subject to the 15%, the first $8,000 is interest and, with some good planning, keeps us from hitting the 25% bracket.. No one should keep a mortgage “for the deduction” of course, paying a dollar to save 25 cents makes no sense. From where I sit, it simply means my 3.5% mortgage is actually 2.6%.

The fact that we hit our number while taking the mortgage payment into account, and not counting on social security which is still quite a few years away, is what lets me really sleep at night. Right now, I can’t say whether the mortgage will be paid off before we decide to move. Either way is fine by me. Paid off, our number drops, freeing up our savings for other endeavors.  A move would drop our cost of living, as we’re currently in one of the higher expense parts of the country.

The bottom line? 2 crashes over a 15 year span and the results are still in my favor. The key thing was that the difference was put into savings, not just absorbed into the spending portion of our budget. No regrets.

  • J. Money April 29, 2015, 12:53 pm

    Love it man. Life/thoughts/markets – it all changes over time. You HAVE to adapt and tweak or else you’ll get some nasty surprises later! So good for you for going with the flow as it makes the most sense. now if only we can get you to blog more and share these nuggets of yours 😉

  • JohFx July 31, 2015, 2:34 pm

    Small typo in this article “Two years have since past,” should be ‘Two years have since passed”

  • Joe July 31, 2015, 4:23 pm

    Just fixed it. Thanks, John. You know, I’m a numbers guy, only a 590 on my English SATs. It’s a wonder I can write at all.

  • Honolulu Aunty August 9, 2015, 7:08 pm

    Aloha Joe! It has been awhile – used to comment as SallieMae about the rip-off MMA.
    I have a request for advice. I just recently refinanced our home mortgage with a sweet 3.5% 30 year on $400k. I love paying the lower monthly, but still, I look at how much interest I am paying vs. getting nothing in the bank for our regular savings account.
    I believe there is a “sweet spot” in mortgages, usually after 20 years (?) of payments when the ball rolls in our favor. I have been playing with your excellent MMA spreadsheet but I feel like I am only guessing at the best case for me.
    What would be the sweet spot for me?
    Mahalo in advance, am catching up with your website and loving it.

  • Joe August 11, 2015, 8:13 am

    Aunty! Yes, it’s been a long time.
    For most, if not all of our lives, anything under even 6% would have seemed impossible. Consider, my first mortgage was a 15 year, 13-5/8% rate, in 1985. Rates were falling fast, my wife got a 9% 30 year in 1987. By 1996, we were married, and bought a house at 7-5/8%.
    I remember that passbook savings were fixed at 5.25%.

    In your case, you have a personal decision. I can offer a few things to think about. Both rates, interest we earn, and inflation are at record lows. And we expect both to go up soon. In 3-5 years you may very well find that inflation is back to a normal 2.5-3% and your mortgage is being devalued at that rate.

    The other aspect to look at is whether you are comfortable investing the difference. As my article showed, even over an awful time period, I still feel far ahead by having the mortgage. We went 15yr, and in hindsight, I wish it were a 30 year, had the 3.5% rate been available. I can’t promise what the market will do over time, but getting a return over 4% over the next 3 decades seems a safe bet. Great to see you here.

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