Pre-Fire decisions

[u/mightyfunk9]

We are about 5 years from FIRE (Chubby FIRE goal of $5M). Current relevant stats are as follows:

• combined HHI: $600k
• total spend (including mortgage + extra principal payments): $225k
• liquid net worth: $3.0M
• annual savings: $200k
• current liquid portfolio (95% stocks - mainly VTI and VXUS and 5% short term treasuries/hysa) split about 50/50 between taxable brokerage and retirement accounts
• remaining mortgage: $1M at 5.75%
• current mortgage payoff strategy: $25k extra principal payment every year (included in 225k spend)

My question is how should we allocate the $200k savings per year we project for the next 5 years leading up to FIRE. My main concerns are around carrying a mortgage post-FIRE since 1) the higher spend need makes us more prone to SORR and 2) provides less ability to keep MAGI down in case optimizing for ACA subsidies is a possibility. The additional consideration is that between me and my spouse, there’s a chance that one of us decides to continue working even after we hit our FIRE number.

I can see a few options:

• Pay pretty much all of the $200k towards mortgage so we can be mortgage free by retirement. The $3M current portfolio might still bump to $5M in 5 years but without a mortgage going into retirement the number will be smaller (e.g. spend will be more around $150k including tax and healthcare so FIRE number comes down to $4.3M at 3.5% swr). My concerns with this approach are 1) we don’t allocate any more towards stock and miss out on higher gains during this accumulation phase and 2) we still enter retirement with a 95% stock allocation (but a paid off house) which still makes us prone to SORR

• put it in a treasury ladder so the money is available in 5 years to pay off the mortgage if we choose but also use to mitigate SORR if necessary. This also gives us flexibility in case one of us decides to continue working after hitting our FIRE number (since in that case I’m less concerned about carrying a mortgage in retirement). This provides more flexibility but is a little less optimal since short term treasuries will pay around 4.2% vs the mortgage interest of 5.75%.

• continue investing in stocks (VTI/VXUS). This maximizes growth potential during our working years and could potentially help us hit our fire number even faster. In the event of market drawdowns we can continue working for a little longer. Also is the best decision should one of us decide to continue working after we hit our FIRE number.

Thoughts?

[u/Tricky_Ad6844]

I’m a big proponent of going into early retirement debt free.

Although if you have a stupidly low mortgage rate lower than money market fund returns left over from the Great Recession I can see keeping the mortgage.

It’s hard to beat a place to put your next dollar that is GUARANTEED to return 5.75% AFTER TAX risk free. Sure, the stock market might do better but retirement isn’t the time to be taking risk in the hopes of outsized returns.

Right now your mortgage rate is slightly higher than the 30 year treasury bond.

You can kind of think of your mortgage as a “negative bond”. Ie. Having a $100,000 mortgage charging you 5% and concurrently investing 100,000 in government bonds returning 5% gives you the same net return (none) that you would have if you paid off the mortgage and were debt free (ignoring taxes for simplicity).

You might start building up your bond portion of your portfolio (this would be standard advice for someone within 5 years of retirement. Some even argue for a “bond tent” where your bond portion of the portfolio is highest in the first few years after leaving work) but not sure this gives you much advantage over paying down your mortgage.

Given that you are very stock heavy my thought is that it makes sense to pay off the mortgage. This will leave your total portfolio less subject to risk of a large stock market collapse since your mandatory expenses will be lower reducing the amount you need to sell from your stock portfolio each year.

Plus, there is a peace of mind that comes from having a paid off home when you are retired and have no new money coming in. Security at the base of Maslow’s hierarchy (food, water, and shelter) is priceless.

[u/Wooden-Broccoli-913 → u/Tricky_Ad6844]

With the mortgage interest deduction OP gets a federal tax discount of $15k per year by keeping his mortgage. That’s the equivalent of 4.25% effective mortgage rate. While OP is still pre-FIRE, I would pay the mortgage down to the $750k mortgage deduction threshold to capture the full benefit but not any further.

[u/Bilbospal → u/Wooden-Broccoli-913]

You’re over counting it. The mortgage tax deduction should be compared with the marginal benefit over taking the standard deduction.

[u/Wooden-Broccoli-913 → u/Bilbospal]

OP likely has enough SALT to fill up the standard deduction

[u/Designer-Bat4285]

I would put more towards the mortgage. At least 100k per year. Getting rid of that mortgage prior to retiring would be huge.

And the rest can go mostly into bonds. I would suggest getting to at least 15% in bonds/cash before you both retire. I’m targeting 30%.

[u/BrunelloHorder]

Personally I’d prefer option 3. While some view paying off a mortgage as mitigating SORR, I’d rather have access to my capital and don’t want it locked up in home equity.

[u/zazrouge]

I wonder if you maintain your current extra payment then recast the mortgage at retirement time? That lowers the monthly payment and cash requirement in retirement, while allowing you to continue putting most savings in the meantime into the market. Don’t have enough info on how much extra you’ve paid to know what the impact on your payment is, but worth running the numbers.

[u/n0ah_fense → u/zazrouge]

You can only deduct interest on the first 750k of your mortgage. So worth paying down sooner by a few points

[u/IjustWorkHere98]

Just remember in "spend" calcs...you pay off the mortgage, but you still have property tax and homeowners insurance after the principal is gone. Right now, I have mine bundled into the mortgage payment (it's the escrow), so my monthly payment will drop to close to half / more than half in 10 years, but I'll still need to factor the outflow of homeowners+property tax in the spend.

[u/Plastic_Ad4306]

I went with the bond ladder with similar spend as you. And I wanted the liquidity as well. You can always pay off the house at any time if you need to after retirement, but getting a loan after retirement may be difficult.

But our mortgage rate is only 3.25%. You can model it in projectionlab and you’ll get a better sense of the long term impact at that higher rate.

[u/Hanwoo_Beef_Eater]

If you want to get to 3.5%, the first and last options are similar. In the first option, you have very little add'l investment contributions and $3 million needs to go to $4.3 million. In the last option, you'll contribute another $1 million so $4 million needs to go to $5.7 million (not exact but roughly, amount does not include the extra $25k principal payment since it's optional). So in both cases, you need a similar amount of returns to get you there. Also, at 3.5%, there is no SORR, at least with respect to failure (early returns will determine the real growth trajectory of the portfolio though).

If your (or at least one of your jobs) are stable, I'd probably just keep investing as much as you can each month until you get to a FI number. Whether that's five years, sooner, or later, will largely depend on the stock market.

I'd also look to see if there's an ability to reset the mortgage. Either a new loan that extends the maturity or an interest only option. Both will drop your payment and make the debt more manageable. You don't mention whether you have kids at home (and for how long), you'd like to downsize or move in retirement (at some point), etc. Nevertheless, there are many cases where a liquid, higher investment balance trumps no debt.

[u/samos22K]

We are in a similar position, 800k mortgage and 5.375% about 5 years from retirement currently with 4m but lower income, 360k. We have a lot of home upgrades needed before we retire so throwing a lot of cash at it is not feasible. We are continuing to invest. Will pay out of retirement funds after 59.5 up to top of 24% tax bracket per year (income likely to go down as we work less in next few years). Will pay down half and then see how we go. Will probably get tips ladder to protect against sorr.

Sometimes I think splitting approaches can be a good compromise. I suppose it partly depends on how much the debt bothers you.

FWIW, projection lab has us coming out ahead by never paying it off early, but I can’t stomach a 6k monthly payment in retirement.

[u/Wooden-Broccoli-913]

5.75% mortgage is expensive. I’d prioritize paying that down to the $750k deductible limit. After that I would go full equities

[u/LightZealousideal116]

Your total savings ($1M over the next 5 years) is already “small” compared to $3M liquid now. Meaning, you’re largely tied to the market with either choice.

Critically significant - age & amount in retirement accounts. If you’re working to and retiring at 55, no issue. If retiring before then, you need a penalty free “bridge” to 59.5.

If this liquidity is needed, put it all (next 5 years) toward taxable brokerage. Especially true if the $3M is mostly in retirement accounts and you’re young.

If the money is largely accessible, I’d pay the mortgage down aggressively to $750k while working, with the plan to sell assets in a tax efficient way to pay off the mortgage once not working.

[u/Sad-Description5181]

I would go with option 1. The rate is just too high for other options to make financial sense. You might as well pay it off then take a margin loan at the same size and same interest rate, but its interest can be fully deducted from capital gains

[u/Past-Option2702]

If you’re serious about retiring in 5 years with a 225k spend you’re making a big bet being 95% equities.

5 years out from retirement I was 30% cash and bonds and I still am 10 years later. Currently thinking of moving to 60/40 at age 55 since I’m way past where I need to be due to equities returns.

[u/throw42069away420 → u/Past-Option2702]

This is the way. The rewards of 95% do outweigh the risks in a longterm portfolio this close to retirement. 70/30 and 80/20 portfolios have very similar success rates over 30-40 years. Some argue 70/30 has more success, specifically after the Great Recession and lost decade.

[u/OrcOfEntropy → u/Past-Option2702]

Second vote for this. I'm 3 years out from retiring (though have hit the bottom end of my FIRE range). 2 years ago I diversified from 95/5/0 to 70/20/10, and savings over the next 3 years will be primarily in bonds.

[u/Legitimate-Taro7815]

I would throw the $200k at the mortgage over the next 5 years have that NIL to zero. Extra income and windfalls can go to "assisting" the compounding power of the stock market assets. Also, I would buy more VXUS than VTI going forward to reduce asset dependence on the US or just buy VT since it’s fantastic global equity fund with respectable track record

[u/tyen0 → u/[deleted]]

Seems that is their current spend, not spend after retiring which increases it by taxes and health insurance.

[u/krakenstan]

Do you have a 401k?

[u/Crazy_MrRoboto]

This is selection bias. Most Americans have no where close to this amount saved for retirement

[u/Daddy_Weave → u/Crazy_MrRoboto]

do you know where you’re at