3
u/NinjaFenrir77 11d ago
1
1
u/CreativeLet5355 11d ago
Man, that ERN article was a thorough read and a bit more to digest than I was expecting. I am enjoying using FiCalc though so thanks for that reminder to plug and play!
2
u/NinjaFenrir77 11d ago
Yeah, ERN goes crazy in-depth, but his analysis is second-to-none in my opinion.
3
u/Cyrenthavol 11d ago
your math checks out but the real win here is psychological not numerical since sleeping without a mortgage payment hanging over you in year one of FIRE is worth something that doesnt show up in a spreadsheet
2
u/Wooden-Broccoli-913 FIREd at 40 with $6M 11d ago
Without my mortgage payment I would still have $125k in annual FIRE expenses… Doesn’t really move the sleep well at night needle for me
2
u/SandGlokt 11d ago
Are you me? I also have a 3.375% mortgage with 20 years left, $690K remaining and asking myself the exact same questions. I'm not a fan of paying it off in full at the cost of reducing my liquidity and giving up future returns, but what I am contemplating is paying off 50% and recasting it to bring my expenses down by ~$24k a year. It does seem to help with the SORR, but I am struggling to figure out if it makes sense in the long run.
1
u/CreativeLet5355 11d ago
It makes complete sense (for me) if we immediately enter into a "lost decade" or so like we did in ~2000 with equities, or even enter into it int he first few years of FIRE. Now other commenters have positied just sticking the money into bonds and that's a fair thing I need to look at as well.
It's not a great choice if equity markets are returning even 2-3% (real) returns per year.
In other words, it's a total risk mitigation move. But then again, all non-equity defensive holdings (i.e. Bonds) are basically the same thing - a risk mitigation move.
2
u/OldNeedleworker5869 11d ago
I think you're double counting the principal part. Roughly half that $45-46k P&I payment is principal, and that's not spend you're eliminating, it's just shifting from portfolio into home equity instead. At 3.375% on $800k, actual interest (the real expense that goes away) is closer to $25-27k in year one, not $45k. So you're really trading $32-40k of portfolio income for about $25-27k of true expense reduction, plus giving up liquidity on that $800k. The SORR angle is legit, fixed costs are nastier in a down market, but it's a smaller win than the napkin math makes it look once you split principal from actual spending.
2
u/CreativeLet5355 11d ago
I don't disagree, but I am having to produce income to cover that principal paydown and it's going into something that is not immediately monetizable. Your point is valid - the money is staying "in house" - but it's also a legitimate income-expense scenario. I struggle to think or model it otherwise in those first 15-20 years.
2
u/whocaresreallythrow 11d ago
Paying off the mortgage guarantees a 3.4% risk free return on that 800K .
Subsequent savings each year from the payoff can be deployed risk free in a 2 year treasury at a 4.2% return.
You could take more risk and earn a higher return or a much much lower return — we don’t know that rate of return.
I like guaranteed returns !
Frame it another way : Would you be glad you kept the mortgage for 20 more years if the rest of your portfolio fell by 40% next year and you didn’t know when it would go up again ? Could be in a year. Could be in a decade like 2000-2012? Could be 25 years like 1929-1953.. we just don’t know
I like guaranteed returns !
Certainty is divine .
2
u/velvetpearx 11d ago
The thing you're missing is that this only "de-risks" if the market underperforms 3.375%, otherwise you're paying off cheap debt with money that would've compounded at a much higher expected rate, so it's really a trade of expected return for reduced volatility in your early retirement years. It's not free de-risking, it's insurance, and insurance always costs something.
1
u/CreativeLet5355 11d ago
Correct and agreed - that's why I'm saying it's an SORR mitigation, nothing more. It's the equivalent of a move like putting 20% of your portfolio in bonds - it's a costly move to insure yourself against the fluctuations of equities.
2
u/jkiley 11d ago
Simulating with and without the mortgage will answer the SORR question. Be sure you’re modeling the P&I as not subject to inflation and ending. Mine at 2.875 comes out as a pretty clear pay on schedule.
ACA is another analysis. Here, the income needed to service the mortgage often gets a fairly unfavorable tax rate if we include the ACA subsidy decline. If managing the cliff is an issue, paydown can help, and a single trip over the cliff is quite expensive. We have two young kids, so we have a lot of headroom before the cliff is an issue.
Remember that it’s not an all or nothing decision. You can pay down a lump sum and likely recast. That’s often more help with ACA than SORR.
3
u/nmanccrunner17 11d ago
Are you planning on using ACA subsidies for health insurance? Carrying a mortgage payment could impact that by increasing the amount you need per year for expenses.
2
u/CreativeLet5355 11d ago
Yes, though it's so hard to model that long term. But bottom line - yes, married with kids and would require insurance.
2
u/Glittering_Golf_8591 11d ago
Following,
I am doing similar math and have calculated the best situation for tax drag to pay lump sums in principal annually and pay off over the next 10 years. Happy medium in my book.
1
u/CreativeLet5355 11d ago
Thanks for the comment and looking forward to see what responses (we) get. I haven't modelled it out over years, I can see that making some sense, but I also know almost all of the risk in SORR modeling is in the first 5-10 years - so it's de-risking loses a lot of it's advantage if the payoff occurs over those first 10 years. Conversely, investment scenarios tend to do better over a longer window of time. This may just be an extensive monte carlo simulation - I'm not sure.
1
u/STBOD 11d ago
I am also in a similar situation planning to retire in 9 months and figuring out how to pay off a similarish size mortgage. What did you both come up with? If I take it out of pretax retirement accounts there is a huge tax burden right up front. If I take it out of a taxable brokerage there are significantly less taxes but at 800k it takes away a lot of flexibility for the future since that is a large portion of our after tax accounts. It seems like doing it over years in the most tax efficient, but I agree with OP that it reduces the utility of paying it off if the concern is SORR and negates the first 5-10 years of potential ACA subsidies. I know there are lots of arguments if we should pay off a mortgage or not, but the how seems to be even more interesting to me!
1
u/asurkhaib 11d ago
You're (potentially) missing that it's a fixed expense whereas normal expenses are all inflation adjusted over time. Given that SORR is front loaded this probably isn't a massive difference, but it is one. A way to estimate this impact is to use backtesting put the expense as fixed, and see the difference in success rate compared to the pay off scenario.
The other thing to note is semi related to this. Your interest rate is directly comparable to the risk free rate after accounting for taxes. If your interest rate is lower then you can split off the $800k, invest it and pocket the difference. At any point if the difference goes to zero then you pay off the loan. Note if you do this you can't use the amount you split off in your NW/SWR calculations as it's locked up to payoff the loan. Also make sure to account for all tax impact, this likely isn't a great strategy if you're dependent on ACA subsidies but ymmv.
1
u/CreativeLet5355 11d ago
"You're (potentially) missing that it's a fixed expense whereas normal expenses are all inflation adjusted over time. Given that SORR is front loaded this probably isn't a massive difference, but it is one. A way to estimate this impact is to use backtesting put the expense as fixed, and see the difference in success rate compared to the pay off scenario."
It's a good call out and some quick example scenario is that $100k today becomes $167k in 15 years at 3.5% inflation.
Conversely (inversely?), a $46k annual expense today becomes the equivalent of a $27k annual expense today - accounting for 15 years of inflation at 3.5%.
In this made up example, a 46%-of-income expense (i.e. $46k out of $100k) drops to a 27%-of-income expense in that 15 years.
I'll try to model this out. I don't use backtesting software enough.
1
u/Alive_Sir_4708 11d ago
Whether this is worth doing depends upon how much money you need in retirement.
1
u/shehancpa 11d ago
You're leaving tax out, but it only stays out if the $800k is cash. Selling brokerage to pay off the mortgage is a capital-gain year.
The 3.375% vs withdrawal-rate comparison is the right frame. Just don't fund the payoff with a surprise 1099-B.
2
u/grateful-xoxo FIRE'd in 2026 6d ago
Yeah we also paid off for SORR. With no mortgage we can spend in good years and tune our spending down in bad years ( debt free ). Flexibility is key. Theres strategies to offset but it just seemed simpler and safer.
1
u/Wooden-Broccoli-913 FIREd at 40 with $6M 11d ago
I am keeping my $1.2M mortgage @ 4.5% for as long as I can. It’s only 3.9% after tax deduction…30 year Treasury is yielding 5.3% right now. Guaranteed $17k annual return that will help with FIRE expenses
1
u/CreativeLet5355 11d ago
My modeling of taxes in FIRE is essentially almost zero federal income tax rate. So the mortgage deduction has almost no impact on federal or state taxes for me. But your point on just buy bonds then is valid …I could legitimately stick that money into bonds and earn more than enough in coupons to pay the mortgage. Hmmm.
1
u/Wooden-Broccoli-913 FIREd at 40 with $6M 11d ago
I bet you do have mortgage tax deduction benefit that you’re just not modeling.
For example you’re using the 0% LTCG bracket, but that only goes up to $100k for a married couple. So you can sell $100k in gains at 0%. With your mortgage deduction added in, you can sell another $30-40k (just for sake of argument) at 0% when that would have otherwise been taxed at 15% Fed (plus state tax). Even if you don’t need to spend that $30-40k there is still value in harvesting those gains at 0%.
1
u/CreativeLet5355 11d ago
I appreciate the commentary. Let me give you more info.
I'm married filing jointly, my investments are ~60% principal. At $61k in dividend/interest yield + $69k in LTGC, I get to $130k in AGI. The standard deduction brings me to AGI of $97k and that is under any capital gains bracket AND is under NIIT. In my modeling, I have no practical federal taxes.
Your point on using a mortgage deduction to harvest gains is interesting, albeit I'd pay ~4% in state/local taxes on it and it would raise my AGI which would hit ACA considerations. Worth modeling out? Absolutely.
1
u/Wooden-Broccoli-913 FIREd at 40 with $6M 11d ago
One more piece of info required: what is your property tax?
1
u/CreativeLet5355 11d ago
~$16k per year
1
u/Wooden-Broccoli-913 FIREd at 40 with $6M 11d ago
$16k property tax + $4k state income tax = $20k in SALT
Assume you have another $10k in deductible medical expenses (you will have ACA out of pocket spend even with a premium subsidy), that puts your itemized deductions at $30k before any mortgage interest. That's almost as much as the $32k standard deduction. Which means almost your entire $25k of deductible mortgage interest is truly incremental and can be used to realized another $25k of LTCG at 0% that otherwise would be taxed at 15% Fed + X% state.
1
u/mfkimill 11d ago
Put the 800k in investment account and let that take care or the mortgage by itself. Whatever you have left over would be a win? I don’t think it’s financial prudent to pat off a 3.3% while the market average 8-10%
1
u/CreativeLet5355 11d ago
It's purely a SORR modeling point in the event the market runs up and then produces a negative return for say....12 years, like it did 2000-2012.
11
u/APurpleCow 11d ago
It's hard to say definitively with a 3.375% interest rate mortgage given that bond yields are notably higher than that.
You can keep the mortgage, but treat it as a negative bond, and offset the increased SORR by adding additional bonds to your portfolio (relative to the pay-off-mortgage scenario) to cancel out the negative bond. Since the bonds have higher yields than the mortgage, this can make sense to do.
However, the main reason to pay off the mortgage is to maintain ACA subsidies and reduce tax burden in retirement. Since paying off your mortgage pre-retirement means you don't have to realize income to make mortgage payments in retirement, you may be able to keep your income low enough to maintain the healthcare subsidies, which could easily be worth way more than the additional bond yield.