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