Retiring with a Mortgage

Retiring with a Mortgage

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.

Status Quo

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.

Retiring with a Mortgage

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.

Thoughts?

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

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28 Comments

  1. I’m semi-retired with a mortgage. At 3.33% interest the math simply works in my favor and I’m keeping it. I’ve heard all of the psychological arguments etc, but the bottom line is that I’m still winning on the math side and that’s what matters.

  2. My goal is to pay off the mortgage before I retire- We are on track to be mortgage free in just over 8 years. Thought, it does mean that we may be leaving money on the table by focusing so much on paying the mortgage down, rather than investing in other asset classes. I just figured that when you have your house paid off, there is no rent or mortgage payment to make every month.

    1. I think there is something to be said about having no mortgage payment and as a result a lower cost of living. It gives you some comfort that your more volatile asset classes will still be enough through the good and bad. We’ll get there ourselves eventually, but just not right when we are retiring. Thanks for sharing!

  3. Hi JW,

    Interesting to read – if it is any help, IF I am able to hit my target FI Date (2025) I will be doing so with a mortgage – and somewhat higher than yours!
    I don’t see the big issue as long as you are aware and prepared for it – yes interest rates may rocket and cause a problem, but if they do many more people will be in a lot worse position.
    The other advantage, it is factored into your spending now, so say you carry the mortgage for another 5 or 10 years in FIRE, when it has gone you will suddenly have a huge excess of cash each month.
    For me, it would take a fair few extra years to pay off the mortgage completely (I doubt I could do it now even if I allowed 12!) so I intend to carry a mortgage in…
    Cheers

    1. We’re on the same page, FiL. It’ll be a nice windfall once the mortgage payment is gone and absent from my budgeted cost of living, or at least help make room for something else (ie more travel) or provide cushion for the unexpected (ie health reasons, etc). Thanks for sharing!

      1. Hi JW,
        Thats exactly it – will make a big difference. Also, given the amount of the mortgage I wouldnt be able to generate enough income if I only ever paid off the mortgage!
        Good luck, I look forward to seeing how you get on!
        Cheers,
        FiL

        1. Yeah I hear ya, your cost of housing is in a different ballpark than me. Have you thought about how much equity you care to have in the home in general? For efficiency purposes I’ve always targeted less than 10%.

  4. Nice, concise and factual blog, thanks!

    I am going to take the contrarian view on this topic. As most people are doing we are in a similar position of trying to balance all of our financial goals: save for FIRE, build up our emergency fund further, pay off our mortgage, save for our children’s college AND have a life. 🙂

    We hope to FIRE in 4 to 6 years at age 56.5 to 58.5 (not too early darn it!) and we plan to do so mortgage free. We will be using some geoarbitrage magic to move to our mortgage free home in Florida but we are paying down our current home at an accelerated pace so as to have that extra cash on hand for expenses when we FIRE.

    I actually do buy into the psychological “comfort” of knowing that after we have stopped earning a serious income, nobody can take my home as long as we can pay the modest taxes. To me there is peace of mind in that simplification of our lives. I also see a 3.125% return that is guaranteed as not a bad counterweight to our investment portfolio which is nearly 80% invested in the stock market (we do not own bonds).

    I think see this topic as really a matter of personal choice. Each argument has it’s merits. Your path is certainly every bit as valid as ours. The important thing is that we are both saving and investing aggressively! Kudos!!!

    1. Thanks for sharing, Crusher. All viewpoints are welcome here! Our thought processes are generally in line. I like the idea of having that peace of mind too. However, I won’t have the liquidity in my taxable account to make it happen. I don’t want to carry a mortgage forever though. My circumstances just require me to preserve liquidity and pay it off over time. It’s always a balancing act!

      1. Thanks JW for being so open to various opinions. I agree that we are pretty much aligned. I also know that we plan to sell this house and the hopefully tiny remaining mortgage in 4 to 6 years when we move so at that point we will have mucho liquidity instantly. If we were staying long term then I agree that lack of liquidity could be a challenge.

        Love the column!!

        1. Nice plan! Do you know where you’ll be moving / downsizing to? We’ve often thought about where we will retire to or if we’ll stay in Charlotte.

          Thanks so much! Glad you enjoy the read :).

          1. Wow, Charlotte itself sounds like a nice place to start your encore career. We have a house in Kissimmee, FL about 3.5 miles from Mickey Mouse that we plan to start at for our next adventure. Love Mickey (even though he is hardly frugal).

  5. Great post, and very relevant to my family’s current situation. We hope to be at least semi-retired by 2023, and we’re debating whether to try to pay off the mortgage before we put the FI plans into motion. Like you, the tax law changes have made me think more seriously about eliminating the mortgage. To me, it’s not the ‘comfort’ of knowing we own the house, it’s pure math. If I no longer have a mortgage, my yearly living expenses will be considerably reduced. That’s why I want to pay off the house as part of our plan. I am going to make an experiment out of this project (using a HELOC) and I will be posting about it soon. It should be interesting!

    1. Good plan, if I had more liquidity I’d likely make the same choice. Let me know when you post it and feel free to link over to it in the comment. I’m looking forward to reading it. Thanks for sharing, Adam!

  6. A lot of behavioral economics say that most people are bad at assessing risk. A mortgage is a risk I decided I didn’t want because i’m one of those people. Keeping my overhead low means i won’t need as much from my portfolio. That said, I see that someone using a lot of leverage can enjoy a sort of inverse-sequence of returns phenomenon while accumulating a war chest.

    1. Not a bad risk to avoid in my opinion, nothing wrong with being debt averse. Plus I take plenty of risk in my investment portfolio given it is 100% in the stock market. Eventually I will get rid of my mortgage, but not a priority for me once I enter retirement. Thanks for sharing, Steve!

  7. I recently retired. Prior to retirement, I was 100% in stocks, 0% in bonds, and had a mortgage at 3.6%. I kept my mortgage because I was confident that my stock returns would be higher than the mortgage interest, especially considering the tax break I got from the mortgage.

    After retirement, I adjusted my asset allocation to 70% stocks, 30% bond funds. I then saw my mortgage as a “negative bond” now without the tax breaks I had enjoyed previously, and decided to pay it off.

    Stocks have a higher expected return than the 3.6% I was paying in mortgage interest, but bonds do not. Why invest in bond funds at 2.x% return while carrying a mortgage at 3.6%?

    1. Great point Bob, and admittedly a discussion that is absent in my analysis since I’m 100% stocks and will keep it that way in retirement. I like your thought process now that you added bonds and completely agree. Might as well wipe the mortgage debt away since it completely negates the return profile of the bonds. Thanks for your addition to the discussion and analysis!

      1. JW – admittedly off topic but if you have not done so already I think your thought process around staying 100% in equities after retirement might make an interesting blog post. We plan to stay high equities as well and we are currently shunning bonds but 100% stocks after FIRE is an interesting idea.

        1. Good idea, Crusher! I’ll put that on my list next. Certainly a loaded topic so give me a little time to get my ducks in order on it. Thanks.

  8. You have a great plan and strategy. It looks like we will be retiring with a mortgage as well. The goal is to retire in seven years, and with a $165k mortgage and probably adding a little bit more on the principal, I can see us with about $100k left if our plan materializes. We are looking to downsize to a one level home so we should be all good and just like you, our house is also our safety net. Hoping for another bull run next year. Every little thing helps.

    1. Sounds like we’re in similar boats! Lucy and I will definitely consider downsizing once the boys fly the nest (not until 2035… At the earliest) which could also be a nice boost for us. Sounds like you have a well thought out plan, Bernz. Thanks for sharing!

  9. I see value in paying off the mortgage for a person under 50 if they are already maxing out there pre-tax retirement / saving options. When they turn 50 they get another $5,000 for each working spouse. So 18,500+5,000 = 23,500 per working spouse possible pre-tax.

    I have a hard time understanding why someone would choose to keep saving after tax money when in 2018 most people the mortgage isn’t tax deductible anymore. So you are getting no deduction on the mortgage and you are getting taxed on any money you are after tax savings for dividends etc. Also not having a mortgage payment will by definition decrease your yearly expenses which then leaves that much more room for Roth conversions etc in the future.

    1. Regarding the first paragraph, great point for folks carrying a mortgage into their 50s to consider! Thanks.

      Valid argument in paragraph two, too. Admittedly that’s why I wrestled with the decision. However, in my case I need liquidity and access to after tax funds to bridge my Roth conversion ladder upon early retirement. Every bit matters for me otherwise I’d need to delay early retirement to accrue additional after tax funds if I paid off the mortgage. Granted, as you mention, my cost of living would be less but not enough in my circumstance.

      As far as another consideration to keep the mortgage, presumably the interest rate is at basically all time lows ever for mortgages so if necessary in the future to tap that home equity it likely won’t be at as low of a rate. Especially in the rising interest rate environment we’re in today. So in the long term the hope would be after tax investment returns continue to outpace the mortgage rate which isn’t unreasonable.

      Thanks for the great comment, Chris!

  10. One idea pops to mind, when you say you could get a HELOC — getting one is a lot harder when you don’t have traditional income.

    Now, this may not apply to you since you’ll have the small business you co-own with your siblings, but it might behoove you to apply for that HELOC during your last year of your current job, lock it in (as much as one can be locked in — they can be called/closed), and pay the nominal annual fee to keep it open in case you ever end up needing it.

    1. Great point, Chadnudj! I’ve thought about that and I’m not sure how easy it would be to get a HELOC in retirement. I’m not sure all the considerations consumer lenders make for them. I will probably need to get one before retiring unless I took a salary from the small biz. Or maybe I’d have enough investment income? Definitely something I’ll need to consider diligently before pulling the plug. Thanks!

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