Hello everyone! Hope the day is treating you well so far. Today I have a follow-up post to my thoughts on the stock market and my mortgage as I’ve come to a conclusion on my strategy, I will be retiring with a mortgage…let me explain.
I’ll start by detailing my current status and the fact set.
- Today I have a mortgage of ~$210K.
- I have set my target retirement date for March 2023, just under five years from now.
- Based on my mortgage amortization schedule, my loan balance will be paid down to ~$160K by my target retirement date.
As I mentioned in the prior post linked above, I’ve been considering paying down my mortgage with all my excess cash flow (after investments made to max out my tax advantaged 401k and IRA accounts). These would be funds that are otherwise invested into my after-tax brokerage investment account. The rationale for considering this was primarily based on the benefit of mortgage interest deduction for tax purposes having been diminished entirely with the new tax reform. In other words, now my “after-tax interest rate” on my mortgage is the same as my interest rate. But additionally, this decision is in consideration of where we are in the market cycle (likely closer to a peak than a trough…).
By paying off the mortgage I’d be in essence locking in a ~4% return (via lower interest expense) whereas my expected investment return otherwise invested in stock index funds would be ~8% over the long-term. Granted, if/when the market does drop 20%+, I could strategically decide to tap my mortgage and access those funds that were used for making advanced payments to invest in the dip.
Timing the market, yes, but opportunistically. And again, in the meantime I can’t go wrong with the 4% locked in return via mortgage payments.
There is good rationale for either choice of making advanced payments to the mortgage or continuing with my strategy to use all excess cash flow to invest in my brokerage account via stock index funds.
The Deciding Factors
There are two main deciding factors that I’m ultimately relying on for my choice to continue investing in my after tax brokerage (no change from the status quo) and ultimately retiring with a mortgage.
First, I need investments for liquidity. My after tax brokerage account will be my main source of funds to cover my cost of living in the first part of my retirement. Unfortunately, I have some unique circumstances (that I’ve willingly accepted) which have resulted in lower liquidity heading into retirement. By lower liquidity I’m referring to the fact that most my funds will be in tax advantaged accounts with limitations on access. The circumstances that have led me to this position have been my choice to continue investing in my small business with my siblings.
Secondly, I’m not built to time the market. Specifically, I’m referring to the idea putting money toward the mortgage now with the idea of pulling it back out once the market takes a dip. I have thoroughly explained the risk of trying to time the market. It does say something thought that even though I’m fully cognizant of this, I still am tempted with the prospect. Hard to take emotion out of investing!
My window to execute on this would be somewhat finite anyway, as in five years I would need the liquidity for retirement. Plus, I read recently (but can’t remember the exact amount) how the majority of stock market earnings are made toward the end of the cycle (right before a downturn). So by trying to time the downturn, I’m just as likely to miss out of the run-up leading to it which offsets some of the benefit of trying to time in the first place.
Plus, who is to even say we are at the peak right now, or that we have a pending crash. After all, employment continues to improve, wages are improving, overall GDP is improving, etc etc. And these trends are largely being experienced globally. I’m not an economist, but things seem to be chugging along well, not necessarily overheating toward an impending dropoff.
True to My Strategy
In summary, I must remain true to my strategy. Ever since I began investing, my strategy has been to put all excess cash flow into the market and invest in solely stocks, albeit in a diversified manner primarily via domestic and international index funds. Although this strategy hurt like ever during the downturn, I stuck with my guns and my portfolio rebounded nicely thereafter.
I’ve never tried timing the market. As soon as I have extra cash building up in my checking account, I send it to my brokerage account.
While the opportunity cost is less now that my effective mortgage interest is higher, I’m staying true to my colors. And I will avoid the temptation of putting in a ploy to time the market. I will continue to pay my mortgage off through the normal amortization, but all excess funds will continue to go into the market.
I will note that I consider myself fairly risk averse and would love to not have a mortgage. But at this point in time and under these conditions, I would be putting too much pressure on my Roth ladder conversion or would require myself another year or so to work and build back up more liquidity.
So no change in strategy. My focus will be continuing to build up that liquidity in my after tax brokerage to support the initial phase of my retirement.
Retiring with a Mortgage
My house will still be a safety net if I need funds to bridge to age 59.5. This safety net has always been part of my early retirement plan. As I continue to pay it off as scheduled, I will be mortgage debt free by age 48 or so. As a last resort, I can pursue a home equity line and access those funds to help cover approximately 3+ years of my estimated cost of living and help bridge to age 59.5 at which point I’ll have full access to my tax advantaged accounts.
Will you be retiring with a mortgage? How will it impact your retirement liquidity and planned retirement date? Any other considerations I should be making? Let me know your thoughts in the comments below.
Thanks for taking a look!
The Green Swan