Apr 16

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.

written by Joe \\ tags: , , ,

Oct 18

fidelity chart

Many articles have been written about the savings you need to have at different ages. In 2009, I wrote my own article Retirement Savings Ratio, which included a spreadsheet to track your own situation. Fidelity recently offered a chart which the New York Times picked up and ran as a story. What’s amazing to me is the numbers are not correct. To be clear, I’m accepting the assumptions Fidelity offers. 5.5% is a pretty conservative growth number, as is a 1.5% annual raise.

Now, when you take the spreadsheet and do a bit of editing, the numbers speak for themselves.

  • Zero out savings from 20 through 24.
  • Change Annual Raise to 1.015 (this is 1.5%)
  • Change percent saved to .15, then manually change the percent to 9 for age 25 and increase 1% each year till age 30
  • The above builds in the 3% employer deposit, so all set there.
  • Annual return is 1.055 (this is 5.5%)

Sorry if this is a bit tedious, but it’s how you can see the numbers for yourself. The result is that the chart underestimates savings by nearly 50% by retirement at 67. From the spreadsheet I wrote:

Age X Salary
25 0x
30 .09x
35 .75x
40  2.91x
45  4.34x
50  6.07x
55  8.18x
60  10.73x
67  15.25x

I was tipped off that something was wrong when I saw linear growth, 1x through 6x every five years. That alone told me these numbers weren’t calculated correctly. Growth over time is exponential, not linear. Don’t believe me, pull a copy of the spreadsheet and run the numbers yourself. Most important, don’t believe everything you read. Unfortunately, I can’t get a copy of the underlying spreadsheet Fidelity used to produce their chart, but you can grab a copy of mine.

Keep in mind, rules of thumb are just that, guidelines that apply to people in the center of a range. Some people retire and find that with 40-50 hours more time each week, are spending far more than they did prior to retiring. Others were saving 20% for retirement, 20% went to the mortgage, and 20% or more to college tuition payments. These folk were living on less than half their income. This article was not about calculating your number but about my observation how one pro got it wrong. A future article will discuss your number in greater depth.

written by Joe \\ tags: , ,