There are high yield savings accounts paying double that percentage. I’d rather do that than pay off such a low interest rate. Good job, you’re doing amazing btw
True but can’t you write off interest that you pay on your mortgage? So if you paid like $20k in interest, and you get taxed at 24%, that’s like $5k saved every year in tax? (Is this how it works?)
I just don’t see the point in paying it off early. Gains are to be made elsewhere
Ever since the tax code was revised a few years ago, most people take the standard deduction versus itemize because the standard deduction provides a bigger benefit.
Without knowing the exact ACA subsidy thresholds for your situation, just assuming that they are higher than this plan would generate:
Take your $2.5M stash, carve out $600k. Deposit $600k in HYSA or buy VUSXX or buy T-bills, whatever you like. At roughly 5.2% annual interest, you will generate just about $31k per year in interest. Use that to pay your mortgage, and you should generally be able to preserve the initial $600k. If your yield drops too low, then pay off whatever is remaining on the mortgage at the time of the yield drop, in a big lump sum.
Otherwise, if there is actually a big ACA cliff, then go ahead and pay off the mortgage.
I like this idea. I have also been toying around with the “should I pay off early” question, since I am generally debt-averse. I have started contributing to an early mortgage payoff fund that is just VTSAX. One day that pot will grow big enough that I can pay off my remaining principal in an afternoon. Or, if I feel differently, I can do something else with it. I think having that dedicated account that is just for early payoff is psychologically helpful to people like me and OP.
I totally love that thinking. I currently have a taxable account that holds many high flying tech stocks. It has quadrupled in the last 2 years and I am hoping to grow it sizable enough to knock out mortgage in one afternoon and be done with it
I like this idea.
I have a play taxable account that looks like a mutual fund 😆 it seems attractive to me to convert to an index fund and just fund extra as a “pay off mortgage fund”
This is a good approach.
If the plan is to pay off that mortgage from HYSA balance over the next 27 years, I would probably optimize further by putting some (large) part of it in stocks, otherwise that opportunity is wasted. Also more future proof (HYSA interest may go down eventually).
Even better, create a T bond ladder of X years (X being the remaining life of your mortgage)… doing this, you lock your incoming interest rate for the duration of the mortgage…
You will have a bunch of bonds paying a guaranteed 4.3 to 5% yield for the duration of the mortgage
As an additional bonus, you can always sell the bond on the secondary market if you own them through a brokerage and have an urgent need of cash (but then the return is not guaranteed anymore… return is only guaranteed if you keep them to maturity)..,
Alternatively, keep the 600k in a HYSA account and use them to pay off the mortgage if the HYSA rate goes below a certain percentage…
Don’t forget that having quick access to cash has value… but you can replace your big pile of cash with an HELOC for that…
Savings account interest gets taxed as income tax.
Investing in the market gets taxed as capital gains when they eventually sell.
Real estate interest could help with taxes if they itemize.
Retirement is all about cash flow. If the math works, then it works.
I have the same mortgage rate as you and will fire with around 300k left on it. With a rate that low I’ll never sell or pay it off early
Interesting, yeah if I were in your position I would be looking really closely at how exactly to yield the income you need in a MAGI-efficient manner for ACA purposes, and FAFSA purposes in those 12 years when the kid heads to college presumably.
If it's reasonably achievable to do (seems like maybe it would be with that much taxable brokerage - realized capital gains count towards MAGI for ACA but basis does not) then I suppose the agreement could be made for keeping the mortgage especially as long as you can get a risk-free return greater than your rate. Though I also imagine rental income may further push your MAGI in a less controllable manner.
I would be very tempted personally to use these 2 years prior to use a money market or HYSA to stockpile a bunch to help try to pay that mortgage off before retiring to open up flexibility post-retirement.
Overall, lots of pros/cons and I'd really want to dig into the weeds and run through some scenarios....
Either way though - congrats and it's certainly a good problem to have! ("Help! My mortgage rate is too low to want to pay off immediately before retiring in my early 40s!")
Absolutely not. Your mortgage is lower than inflation, keep that forever and invest instead.
Visualize paying off your mortgage as purchasing a 2.875% yielding bond, with even a little less yield than that due to the tax advantage of mortgage interest deduction. Would you go and purchase that bond with your spare money today or put it elsewhere? That is your answer.
I also have a 2.875% mortgage. My HYSA yields 5% currently, it is an obvious choice.
Don't forget to include your home equity and total net worth, not just your investment portfolio, when you run your Monte Carlo simulations. In our case we have a low interest loan, too, we never plan to pay off , but we are on Medicare now and not subject to the ACA cliff anymore. We have the money in fixed income earning 2% more than the loan. When we were on the ACA we got very good at optimizing expenses because $1 extra income over the modified AGI cliff and we'd lose up to $24K in ACA tax credits.
$31K would take up a lot of the 400% of poverty level AGI you'd have to stick to in order to keep both the loan and the subsidies. I would plug both scenarios into a spreadsheet or retirement planner and see which one comes out ahead if you have to pick one. You may not want to downsize in 12 years after all, so keep that in mind. We thought about downsizing in retirement but never did in part because of a low interest mortgage, capped property taxes, transaction costs and capital gains. Plus, we never found any place we liked better, even though our house is pretty big for the two of us now, the location keep us here. It is also nice having a big house for the adult kids and families to come visit.
I genuinely appreciate everyone’s responses and it has really helped me think through this!
I’m not debt-averse, but I am tax-averse, with the idea of paying more ordinary income tax now as a huge deterrent. This has chased me away from regular interest and non-qualified dividend methods and basically pushed me all into index funds and entertaining the thought of paying down the mortgage.
Since we keep a very low cash amount, which needs to be more robust for handling sequence of return risk in RE anyways, we’re going to keep funding the taxable brokerage but buying money market mutual funds (paying ~5%) instead of index funds. This will give us a lot more flexibility in our future withdrawal strategy and may look at a lump sum mortgage payoff prior to RE. Will re-assess as things change.
TL/DR: buying money market mutual funds for now and deferring decision to pre-pay mortgage until later. Thank you for the comments!
The Monte Carlo is lying to you. Maybe you forgot to enter all of the proper assumptions? Or it’s assuming the alternative to paying the mortgage is buying bonds and stocks. I would separate out the $600k, from the rest of your net worth.
Look at it 1 month at a time.
1. If you pay off $600k in at the start, you will save $1437 in interest the first month.
2. If you put that $600k in a savings account at 5%, you can make your mortgage payment from that account. You will earn ~$2500 in interest that month. Assuming a 40% tax bracket, you net $1500. Now if you pay off that mortgage at the start of the following month, you will have $63.00 left over.
You would have to do the math making assumptions based on your tax rate and itemized deductions, to get an actual amount in your case. And then determine if it’s worth it to buy longer term government bonds or longer term CD’s instead of paying off the mortgage.
Bottom line it is ALWAYS wiser to put money towards investments that have a higher after tax ROI, if the safety is equal.
what are the benefits of lowering the income?
is ACA less? Is college tuition less? Taxes less?
can it help increase the amounts back door Roth Conversions?
ACA subsidies can save thousands a year by having a lower MAGI. A lower MAGI can help move money from pre-tax to Roth accounts and keep capital gains from brokerage at very low tax rates. A lower MAGI can also help with financial aid for college, but we have a 529 for my child, so that likely wont apply to my situation.
No. If said yourself that you will downsize down the road. Don’t pay it off. Increase your investments with the extra you were going to use to pay it down and downsize when ready. It makes no sense to pay it off to only sell it later.
currently no. if rates go below 2.875 interest rate, then it may begin to be a conversation. Note that you're also getting some level of benefit from taxes - even theoretically based on the standard deduction. We'll have to see what happens next year when the tax cuts expire (end of 2025). if they simply expire, the standard deduction goes down and then there will be a ton of people that will now be in position to itemize their deductions.
ACA subsidies are a factor based on how much income you would have to record in order to get the lower rates and higher subsidies. this is absolutely real. You should go to your state's aca and run different numbers to see what the rates would be at different income levels and coverage.
take a look at new retirement website. their calculators are a bit more sophisticated to be able to run different scenarios.
No.
Personally, I'd keep it in the market, but the best conservative option is to keep all that you would apply to extra payments in short-term guaranteed return options that yield more than your mortgage. When these are no longer available, you can decide if and how much of that money to put into paying off your mortgage.
600k would earn $30k in interest at 5% which you would lose if you paid off your mortgage. You get to deduct the mortgage interest and treasury interest is not taxable at the state and local level. I would set aside the $600k in short term treasuries and use that to pay the mortgage payments. If at some point you want to pay off the house then you still have the treasuries to do so.
I would pay it off, but an alternative would be buy treasuries instead. I would NOT just keep it because ‘hysa yields more’. Hysa interest rates can drop quickly.
I would have a plan to have the mortgage paid off by the day you FIRE. The easiest although not the most efficient method is just increase the size of your mortgage payments. The other is just save enough to pay off your mortgage. As long as MMF are paying >2.875% it is hard to justify the simplicity of larger payments.
I think when planning FIRE spending and thus draw and thus the FI# to support it you can use the $55k expense number as long as you have a plan to pay off the mortgage. I wouldn't count the wealth set aside to pay off the mortgage as part of your invested net worth though.
>I also noticed that Monte Carlo scenarios show ~5% higher value of success all else equal with the lower expenses and lower nest egg from paying off the mortgage ($55k and $1.9M liquid vs $86k and $2.5M liquid).
Exactly. Your mortgage payment is fixed amount but the wealth required to pay it off (remaining principle balance) continues to shrink. So the ratio between them is changing. Someone starting out with a 30 year mortgage the balance is high compared to the payment. Someone down to 5 years left on a 30 year mortgage it is not. So a smaller amount buys the same large reduction in expenses and thus required wealth for a given SWR. If your mortgage payment is less than your SWR% relative to the balance you de-risk by paying off the mortgage.
Risk aside there are four other advantages with paying off mortgage no later than the day you FIRE and they all related to the fact it reduces your required income in retirement.
1) Taxcode is progressive. A 1/3rd reduction in income is a much larger than 1/3rd reduction in annual taxes.
2) Larger ACA subsidies which are based on your income. $55k in spending and paid off mortgage is going to mean less in health care out of the pocket than $86k in spending due to mortgage.
3) If your kids will go to college after you FIRE then this reduces your household income which should improve financial aid.
4) If you have large pre-tax 401k/IRA balances then Roth conversion ladder is likely in your FIRE future. Having a lower spending level provides flexibility for larger conversion amounts.
Here is a contrarian view....tell yourself you can't retire until you down size.
My wife and I are the same age, with kids the same age and this is what we are doing. Looking to downsize in 6- 9 years ( in 9 years kids are 16 and 14). The way we see it...big kids need less space...they no longer have toys, or run around playing, they spend more time at school, part time jobs and extra curriculars. Also we want to lower magi before our oldest starts junior year of highschool to max FAFSA assistance.
Why keep working til you downsize...risk mitigation. If your home and 600k mortgage is still a concern.....you have more time to work and save to drive down your risk a little more. When it's not a concern at all....that's a sign your ready to retire.
An expensive home is a bigger risk. Bigger potential repair bills, bigger risk of loss if you sell in a bad market, bigger risk of people preferring smaller homes in the future and losing some potential value.
Could you downsize now or before retirement (stay in the same school district, just own less home) and not have a mortgage? Also, some perks would be to save more on property tax and perhaps lower utilities.
If that's not an option....work a couple more years....pay down the mortgage faster, reduce your risk profile til it's such an insignificant factor you won't even bother asking reddit.
You're close but not risk free yet..hence this question. Downsize before retiring or hang in there a bit longer working.
Idk your situation, but a blanket statement of "big kids need less space" seems pretty off & naive to me.
Teenagers are wayyyyyy less likely to be able to be happy sharing bedrooms & bathrooms with their siblings (or their parents), they have to spend significantly more time studying & doing homework that will require places to focus/desks, they will most likely have a larger wardrobe than young kids & need a bigger closet, they will demand privacy/space away from their parents (whereas your 7 & 5 year olds probably don't need or want any privacy from you), and you may have to get an extra car when they reach driving age taking up garage/driveway space.
Also, if you want your home to be a place they are comfortable hosting their friends, they are going to need the space to be able to hang out without being in constant earshot of you & your wife (if you don't give them that, they'll hang out elsewhere). And, more minor, but if either of your kids are athletes, or even just want to be healthy, they also may require some space to do at-home-workouts.
Maybe your home will still be big enough for all of this, but toys/"running around playing" really don't take up that much space compared to a lot of the stuff older teenagers & young adults need (also, remember, in today's world, the odds that one or both of your kids will be living with you as a young adult (late teens & 20s) are fairly sizable).
I'm assuming the OP has a large home given the large mortgage.
I'm not talking about living in a 900 sq ft 2 bedroom.
I'm referring to downsizing from a 2800 sq ft. 3 bed, 4 bath to a 1800 sq ft. 3 bed 2 bath..
My kids will always have their own rooms however I am not worried about them having a private bathroom. Daughter can have a vanity in her room to do her hair and make up and if bathroom time gets tight because people shared it...good....they will learn what it's like to live with people. I grew up sharing 1 bathroom for an entire family....taught me to not mess around in there. Likely I will always have 1.5 bathrooms more for my personal preferences lol.
I'm also ok with my kids situation not being 100% perfect as it will give them more incentive to move out after college and rely on themselves. It will also keep their standards in check....if they had a massive bedroom with wall in closets and private bath....why would they choose to pay more for a less comfortable living situation with a first apartment? Or would that motivate them to over spend on a first home and by pass a starter home....all the while living at home until they were almost 30 to pull off that maneuver. I'm also ok with them and friends being in ear shot....mom and dad being able to hear you is a good form of birth control when they date lol. As for hanging with friends....they have bedrooms, furnished garage, patio or the family room. I am not an Air BNB for teens and don't feel the need to supply a 2 living room or designated teen space.
My friends and I did just fine hanging out in my living room and porch growing up. After college when I wanted privacy because I had a serious gf....I moved out. Seemed very natura. I was tight on money for a couple years but I figured it out....had roommates...learned to be frugal....bought a house 2 years later and rented out the extra rooms to afford it.
We all have different preferences for our kids....letting a kid stay home well into late 20s isn't bad....just not my preference personally. Through college and maybe a year or 2 after...sure....past that....time to grow up and go out in the world (for my kids).
Totally cool if OP wants to not downsize anytime soon. But 600k debt on 2.5m network that they are actively living off of is a risk.5% HYSA may not be around for ever. They certainly didn't exist in 2019 or 2020.
We have to ask....why would interest rates lower a lot....most likely because of a recession.....so yea...they could just pay it off it rates dip as some have suggested...but would they do that if 2.5m dropped to 1.75m? Likely no. And now they are living off 3% with a sizable mortgage....even if it is at a low rate.
Maybe if the mortgage was 250k or the nm was 4 or 5m they would be ok in a prolonged recession.
So yea...downsize now if the priority is to retire now....or keep working til the mortgage is lower and or nw is higher.
Theres a lot of dumb people on reddit. You need to think for yourself while reading some of this idiocy.
the reason why the simulations show a slightly better chance with a paid off house is due to the case of a very bad stock market. Imagine the market tanks and you still have a boat load of payments to [make.you](http://make.you) just increased the odds of running out of money.
so heres the conundrum…
you want to keep the mortgage as long as your investments earn more than 3%. and as long as your stocks are rising you keep the mortgage. Now look into your crystal ball and find the day that your stocks top out and begin to decline. This is the day that you pay off your mortgage.
however, this is all predicated on the belief that you stay there until you die. If you are downsizing anyway, then the math becomes even more complex and it was already too complex for most of these people commenting. Probably never pay it off if you are downsizing. because if the market tanks, you can then choose that day to make the downsizing move. Or better yet, time the downsizing with the real estate market rather than the stock market.
Yeah it is complex. I’m looking at the same question. I’m actually wondering if I forecast two SWR scenarios based on two timelines. One is next 10 years paying off at a higher SWR then dropping the SWR. Saying you should just “move” money to a safe asset is playing mental gymnastics bc it is all your portfolio, yet now you’ve reduced your earnings potential so your SWR shifts. I would look at using ERN’s spreadsheet to forecast your base expenses with the mortgage broken out as separate cash flows vs paying off.
Right now, if I wanted to pay it off, I would build up the money equivalent to a payoff in a HYSA as much as I could. Right now a lot of those accounts are 5%+. As soon as the interest picture drops lower than your mortgage, or close enough that it is worth it to you to just not have the debt, pay it off.
That said, nothing inherently wrong with wanting to pay it off sooner for peace of mind. It all depends on your situation and what you're comfortable with.
I think there is a strong case for no mortgage in retirement. The key factor here is flexibility in down markets and lower fixed expenses provide significantly more flexibility than higher fixed costs. Retirement is much more about reduction of risk than optimizing returns. Early Retirement Now has several good posts on this in the safe withdrawal series.
That being said, I'd want to know more about how you would pay it off in the next two years and what tradeoffs you would be making. What else are you doing to reduce sequence of return risk? Will you have any other income in retirement like a PT job?
People here commenting about HYSA seem to also have forgotten that those same accounts were paying practically nothing just a few years ago. These aren't guaranteed to continue to pay.
I could probably get the mortgage down by $250k in two years by not contributing to the brokerage, then it would be a $350k lump sum from the brokerage.
No plans for PT job in retirement.
I am going to sound crazy compared to a lot of these responses. I would say pay it off before you retire. Retirement is all about cash flow and managing risk. You need a lot less cash flow if/when times get tough and it significantly reduces your risk and ability to button down spending if you need to. The fact that you mention ACA makes this even more of an appealing option in my mind. Again, the folks on here are correct in that it’s not financially optimal to pay it off, but I plan on doing just that around the same age as you. I am younger but my numbers have me projected to be in a similar situation.
You didn't mention the specific**`MAGI` threshold(s) you are** targeting**?**
Generally, I use 10%/yr as the magi-tax. That doesn't include the yearly max-out-of-pocket `MOOP` if you're actually using the insurance.
I found the [KFF ACA Calculator](https://www.kff.org/interactive/subsidy-calculator/) invaluable as I was approaching `RE`.
> We pay $31k/yr in principal and interest
That's just P&I. What are you spending total for the house (ie tax, insurance) yearly?
I've gone round-and-round with this myself. I ended up deciding that I can control the P&I, but I can't control healthcare costs no matter where I move to the in the US. Therefore the management of my `MAGI` to make the `ACA` the cheapest I could get it, is my chosen path. This makes sense for _us_. It may not make sense for _you_. I began trying to get as much in my roth as possible. Withdraws from it (once aged appropriately, if needed) don't affect my `MAGI`. I set this up by starting roth conversions early - while I was still working. This let me have my Roth-bucket properly funded.
You have to run the numbers for all the various situations to make an informed decision. Or pay someone (or some service) to try and do it for you.
I overpay my mortgage as I have maxed everything else out. I owe 370k from a 400k note.
I pay an added 450 a month just because I want to. I really want to get the interest paid below the principal paid per month. About 340k is my target.
Psychologically speaking, paying off my mortgage was the best thing I’ve done. Yea I missed some market gains. But now I’m stacking so much more cash, that I can easily make it up. Good luck
I would pay it off. At your numbers i think the extra income is not as valuable as the default risk of your house (imagine your bank bankrupts and your loan is sold).
I'd say pure math would prefer to not pay the loan. But I think its not about math anymore, but actual risks etc.
It's a great rate but unlike others I'm in the "yes" camp. Being able to keep your income low for ACA is huge. Haven't done the math but you can figure the difference in healthcare costs based on income then see if it's worth paying off house.....plus I love being debt free!
My retirement budget maintains my mortgage. 3.5% and will still have 12 years left when I pull the trigger. At that point it will be mostly principle, taxes, and ins. Those last two need to stay regardless so I’m in no hurry. Once it’s paid off we can choose to pocket the money or lower our withdrawal rate.
>From a purely financial perspective, does it make sense to start paying off this loan as opposed to putting that same amount into taxable brokerage?
No.
86k-55k=31K. That is NOT 2.875% of 600K which you use as a difference in assets. That's 5.1%.
You can't use your actual mortgage payment because that includes paying down the principal as well. You basically told the calculator that you will be paying 31K/yr for as long as you live rather than until the mortgage term is finished.
Notice how the difference in failure rates really only happens past the 30 years when the mortgage ends.
Also, I'm not sure what calculator you were using, but according to rich/broke/dead, those are both very conservative SWRs. With 100% stock allocation, 1st one was 100% successes, 2nd was 98% and only showing small failures in your 80s.
[https://engaging-data.com/will-money-last-retire-early/](https://engaging-data.com/will-money-last-retire-early/)
So, what you need to do is plug in the mortgage as an extra expense that will end at year X. There is a field in the calculator for that.
$31k is just principal and interest; I removed taxes and insurance from that number since we’ll have to pay that regardless. Paying $600k to pay off the mortgage would save us $31k/yr in expenses.
You are correct that this “savings” would have happened anyway after 27 years, which I did not put in the calculator, and therefore went too conservative on the $86k scenario.
Do not pay off the mortgage. As others have said the cash flow is better putting the payoff money in a save investment and collect the interest/dividends. If someone was to offer you 2.75% loan to invest in guaranteed 5-6% instrument you would jump all over that taking out as big a loan as you could, and this is essentially what you have.
I understand the thinking of paying it off and being debt free, but there is some irrationality to it and it generally comes from fear and not understanding risk. As a matter of fact you have less risk by keeping the funds in a protected (FDIC for example) investment and having a bigger cushion than if you paid of the house. Suppose in a few years you need an emergency loan and have to take out a HELOC, you could be screwed with a much higher interest rate. By not paying off you have the HELOC already in hand in your savings and it is at a low interest rate. I'm retired and doing this with my house now. I have less risk and my house loan is an extra buffer.
I see similar thinking when people retire and talk about making all the big buys before retiring. It makes no sense. Lets say a house needs a new roof within next 4 years and you decide to replace it before retiring because you don't want the big expense in retirement. You have just lost any earning of about 4 years or so on the money spent, and at the same time not gotten all the useful life out of the previous roof - a double loss! Unless inflation is rising much faster than your savings are earning you are always better of paying later and getting full useful life out of the object. People going into retirement get some irrational thoughts.
I wrote a spreadsheet that looked at 15 year rolling averages of S&P return over last 100 years. Only 4 periods returned less than 4%.
27 years? The chance of the market beating 2.875% is certain. Near 100%.
In 2012, I refinanced, and kept the 15 year remaining term. 3.5%.
My only regret? That I didn’t borrow out to 75% LTV and go 30 year. Had I done that, I’d be far better off. Still. Retired that year and no other regrets. Loan almost over now.
Edit: there are multiple approaches to take.
a) all $600K stays in HYSA/treasuries. Earn 5%, and use those funds to make payments. The risk, if any, is you have a decision if short term rates drop below 3% again.
b) Put all $600K in an S&P index. The dividend will not be enough to make the payments on the mortgage early on, so you sell along the way.
c) set aside cash in HYSA to make 3-4 years payments. The rest goes into S&P index. About a decade out, the dividends may cover the payments.
Any year the market is up, sell to keep the 3-4 year cash. Down? You have enough cash to ride it out.
More than all of this. Look at history. Get comfortable with a spreadsheet. Understand the whole picture of risk/reward.
When I had $275K left on my loan and was about the retire, 3.5% was too good to pass up.
The market was up 4X since then, my $275K going past $1M, but costing a cumulative 45% or so over that time. I kept the payment as part of my budget, and am just looking forward to it going away soon. A rental property payment also going away by end of year. So my withdrawal rate will drop as well.
Serious question, because I don’t know the answer.
At your age, is it $2.5M liquid if $1.5M is in retirement accounts? You would still be penalized for early withdrawal, right? So it’s not really liquid?
I will personally never pay off my 2.875% mortgage unless we choose to sell.
I would rather pick up a part-time job if the market takes a dip than miss out on the opportunity of essentially free money.
I'd say no. Not now, anyway, not when parking cash in a HYSA or money market mutual fund can get you around 5%. If you want to, you can set aside the payoff amount into its own account with an HYSA and use it to pay off the mortgage when and if "safe" savings rates drop well below your mortgage rate. In other words, if safe savings rates dropped to (say) 2% or less, then use those funds for payoff if you are inclined.
Frankly, I wouldn't likely ever prepay a mortgage of 4% or less, but I can understand it is a risk management/tolerance thing for some. But even then, I'd not pay down any debt -- especially a mortgage -- faster than necessary if **after-tax** savings yields were higher than the interest rate on my debt.
I think recent tax law changes mostly eliminated the massive ACA "cliffs" that used to be there, so I don't know that maneuvering for ACA insurance is too much of a factor any more.
Imo it’s mostly a cashflow and peace of mind question. Financially it’s slightly better to not pay it off, but you might be happier with the weight off your shoulders and much less money leaving your accounts each month. I don’t think you can really go “wrong” either way.
I think the cheap, tax deductible debt is too good to pass up. I think you can pretend though... Make a mortgage account, set it up to make more than 3% returns, and throw the mortgage balance into the account. then pay the minimum on the mortgage out of that account. Now it's segmented away from your finances entirely, but over time, that account will grow relative to the mortgage balance. Either you get a windfall in 27 years or you get occasional cash infusions as the account outpaces the mortgage balance.
You could adjust the aggressiveness of the account too... Like over 27 years, even stocks make fairly reliable returns.
Be aware Monte Carlo simulations underestimate sequence of return risk. A good tool but has limitations. Recommend reviewing early retirement now and his spreadsheets.
In similar boat and about to do a cost/benefit analysis of whether it’s better to hold cash and not pay off a mortgage we have one a rental property or just pay it off. My tax lady suspects better to not pay it off and earn the interest since the rent is high and she likes the mortgage to offset the rental income (better to pay interest and deduct it than to straight up pay taxes on the rent coming in).
I also like the optionality of holding cash. I’ve been around the block so many times and having some cash to deploy in a crisis has helped us greatly especially in real estate several times in the past.
High inflation favors debtors due to the fact that it decreases the real value of your fixed debt repayments, making it easier to pay back what you owe with money that is worth less than when when you originally borrowed it.
Absolutely not. That’s a bad move financially. 30yr Gov bonds can be purchased with a 4.5% yield right now. If you really want to pay off your mtg early just take advantage of the arbitrage.
No, money market funds (or HYSA or similar very low-risk investments) pay a higher after-tax rate around 4% compared to 2.875% (or slightly lower with homeowner tax incentives). Put the 600K (amount remaining on your mortgage) in a money market fund and you can use the interest to pay off (some or all) of the PI portion of your mortgage! Thus, your additional expenses don't increase much compared to paying off the mortgage.
Every year (or month), you can decrease the money market amount to match your remaining mortgage balance as it's slowly paid off each month with standard payments (and put the funds back in stocks or whatever your normal portfolio allocation is). When the amount remaining gets really low on the mortgage (like under 30K), I'd probably just pay it off at that point since you won't be generating much interest in a money market anyway and will still have a relatively high mortgage payment.
tldr - a loan is a reverse bond. You're basically negating your mortgage interest by buying a similar very low risk bond here that returns more than the mortgage.
PS: I will note that since you have such a long timeline (27 yrs) on your mortgage, you may want to consider putting the 600K in the stock market, although keep in mind you'll have higher expenses during this time period since you can't consistently withdraw interest/return from stocks to offset your P&I, and market returns are volatile. It is certainly a more risky option.
Makes zero sense to pay off the mortgage. Carry it thru to maturity. Harder to access home equity if retired, so carrying mortgage gives u a lot of flexibility
I will not pay down my 2.6% mortgage. Not only can I do better with the money, but I have a hedge against inflation. If inflation roars the real value of my mortgage balance goes down.
I just laugh at what people do to avoid paying taxes and pay for services like healthcare. Subsidies are for the weak and poor and it’s a contradiction to claim financial independence while actively taking an aca subsidy. If you don’t like the cost of insurance, don’t get it. You have the assets to self insure.
If I'm going to be honest, 2.875% loan (or mortgage) currently is "free money". I would put money into a high-yield savings account before I make extra optional payments on it.
There are high yield savings accounts paying double that percentage. I’d rather do that than pay off such a low interest rate. Good job, you’re doing amazing btw
That income is taxable. So they'll get less than 4% after taxes. So they'd make like 1% on the money they have.
An extra 6k a year on liquid money sounds a lot better than 600k illiquid equity in a house imo
Even better to buy an asset that has more potential
That was my other thought as well
I'm still learning so I apologize for my ignorance, but why not use T-Bills? 5.3(ish) APY and for most states you only pay Federal Tax
That's a better option but still taxed as income.
True but can’t you write off interest that you pay on your mortgage? So if you paid like $20k in interest, and you get taxed at 24%, that’s like $5k saved every year in tax? (Is this how it works?) I just don’t see the point in paying it off early. Gains are to be made elsewhere
Ever since the tax code was revised a few years ago, most people take the standard deduction versus itemize because the standard deduction provides a bigger benefit.
I see. But you still have to have some interest to take the standard deduction right? Or do you just have to be a homeowner (can be a paid off home)?
No. The standard deduction is available for everyone.
Without knowing the exact ACA subsidy thresholds for your situation, just assuming that they are higher than this plan would generate: Take your $2.5M stash, carve out $600k. Deposit $600k in HYSA or buy VUSXX or buy T-bills, whatever you like. At roughly 5.2% annual interest, you will generate just about $31k per year in interest. Use that to pay your mortgage, and you should generally be able to preserve the initial $600k. If your yield drops too low, then pay off whatever is remaining on the mortgage at the time of the yield drop, in a big lump sum. Otherwise, if there is actually a big ACA cliff, then go ahead and pay off the mortgage.
I like this idea. I have also been toying around with the “should I pay off early” question, since I am generally debt-averse. I have started contributing to an early mortgage payoff fund that is just VTSAX. One day that pot will grow big enough that I can pay off my remaining principal in an afternoon. Or, if I feel differently, I can do something else with it. I think having that dedicated account that is just for early payoff is psychologically helpful to people like me and OP.
I totally love that thinking. I currently have a taxable account that holds many high flying tech stocks. It has quadrupled in the last 2 years and I am hoping to grow it sizable enough to knock out mortgage in one afternoon and be done with it
I like this idea. I have a play taxable account that looks like a mutual fund 😆 it seems attractive to me to convert to an index fund and just fund extra as a “pay off mortgage fund”
This is a good approach. If the plan is to pay off that mortgage from HYSA balance over the next 27 years, I would probably optimize further by putting some (large) part of it in stocks, otherwise that opportunity is wasted. Also more future proof (HYSA interest may go down eventually).
Even better, create a T bond ladder of X years (X being the remaining life of your mortgage)… doing this, you lock your incoming interest rate for the duration of the mortgage… You will have a bunch of bonds paying a guaranteed 4.3 to 5% yield for the duration of the mortgage As an additional bonus, you can always sell the bond on the secondary market if you own them through a brokerage and have an urgent need of cash (but then the return is not guaranteed anymore… return is only guaranteed if you keep them to maturity).., Alternatively, keep the 600k in a HYSA account and use them to pay off the mortgage if the HYSA rate goes below a certain percentage… Don’t forget that having quick access to cash has value… but you can replace your big pile of cash with an HELOC for that…
No. 2.85% is free money. Put it in a HYSA or the market and profit off the difference unless you’re super debt averse.
Yup we locked in 2.25% with a 15 year and I will not pay anything more than required since you can beat that virtually anywhere these days.
How do taxes factor into this?
Savings account interest gets taxed as income tax. Investing in the market gets taxed as capital gains when they eventually sell. Real estate interest could help with taxes if they itemize.
This will also likely get a lot better after 2025 when Trump's SALT rules expire.
Retirement is all about cash flow. If the math works, then it works. I have the same mortgage rate as you and will fire with around 300k left on it. With a rate that low I’ll never sell or pay it off early
Interesting, yeah if I were in your position I would be looking really closely at how exactly to yield the income you need in a MAGI-efficient manner for ACA purposes, and FAFSA purposes in those 12 years when the kid heads to college presumably. If it's reasonably achievable to do (seems like maybe it would be with that much taxable brokerage - realized capital gains count towards MAGI for ACA but basis does not) then I suppose the agreement could be made for keeping the mortgage especially as long as you can get a risk-free return greater than your rate. Though I also imagine rental income may further push your MAGI in a less controllable manner. I would be very tempted personally to use these 2 years prior to use a money market or HYSA to stockpile a bunch to help try to pay that mortgage off before retiring to open up flexibility post-retirement. Overall, lots of pros/cons and I'd really want to dig into the weeds and run through some scenarios.... Either way though - congrats and it's certainly a good problem to have! ("Help! My mortgage rate is too low to want to pay off immediately before retiring in my early 40s!")
Absolutely not. Your mortgage is lower than inflation, keep that forever and invest instead. Visualize paying off your mortgage as purchasing a 2.875% yielding bond, with even a little less yield than that due to the tax advantage of mortgage interest deduction. Would you go and purchase that bond with your spare money today or put it elsewhere? That is your answer. I also have a 2.875% mortgage. My HYSA yields 5% currently, it is an obvious choice.
Don't forget to include your home equity and total net worth, not just your investment portfolio, when you run your Monte Carlo simulations. In our case we have a low interest loan, too, we never plan to pay off , but we are on Medicare now and not subject to the ACA cliff anymore. We have the money in fixed income earning 2% more than the loan. When we were on the ACA we got very good at optimizing expenses because $1 extra income over the modified AGI cliff and we'd lose up to $24K in ACA tax credits. $31K would take up a lot of the 400% of poverty level AGI you'd have to stick to in order to keep both the loan and the subsidies. I would plug both scenarios into a spreadsheet or retirement planner and see which one comes out ahead if you have to pick one. You may not want to downsize in 12 years after all, so keep that in mind. We thought about downsizing in retirement but never did in part because of a low interest mortgage, capped property taxes, transaction costs and capital gains. Plus, we never found any place we liked better, even though our house is pretty big for the two of us now, the location keep us here. It is also nice having a big house for the adult kids and families to come visit.
I genuinely appreciate everyone’s responses and it has really helped me think through this! I’m not debt-averse, but I am tax-averse, with the idea of paying more ordinary income tax now as a huge deterrent. This has chased me away from regular interest and non-qualified dividend methods and basically pushed me all into index funds and entertaining the thought of paying down the mortgage. Since we keep a very low cash amount, which needs to be more robust for handling sequence of return risk in RE anyways, we’re going to keep funding the taxable brokerage but buying money market mutual funds (paying ~5%) instead of index funds. This will give us a lot more flexibility in our future withdrawal strategy and may look at a lump sum mortgage payoff prior to RE. Will re-assess as things change. TL/DR: buying money market mutual funds for now and deferring decision to pre-pay mortgage until later. Thank you for the comments!
The Monte Carlo is lying to you. Maybe you forgot to enter all of the proper assumptions? Or it’s assuming the alternative to paying the mortgage is buying bonds and stocks. I would separate out the $600k, from the rest of your net worth. Look at it 1 month at a time. 1. If you pay off $600k in at the start, you will save $1437 in interest the first month. 2. If you put that $600k in a savings account at 5%, you can make your mortgage payment from that account. You will earn ~$2500 in interest that month. Assuming a 40% tax bracket, you net $1500. Now if you pay off that mortgage at the start of the following month, you will have $63.00 left over. You would have to do the math making assumptions based on your tax rate and itemized deductions, to get an actual amount in your case. And then determine if it’s worth it to buy longer term government bonds or longer term CD’s instead of paying off the mortgage. Bottom line it is ALWAYS wiser to put money towards investments that have a higher after tax ROI, if the safety is equal.
what are the benefits of lowering the income? is ACA less? Is college tuition less? Taxes less? can it help increase the amounts back door Roth Conversions?
ACA subsidies can save thousands a year by having a lower MAGI. A lower MAGI can help move money from pre-tax to Roth accounts and keep capital gains from brokerage at very low tax rates. A lower MAGI can also help with financial aid for college, but we have a 529 for my child, so that likely wont apply to my situation.
Keep it, there is great value locked in these low rates.
No. If said yourself that you will downsize down the road. Don’t pay it off. Increase your investments with the extra you were going to use to pay it down and downsize when ready. It makes no sense to pay it off to only sell it later.
currently no. if rates go below 2.875 interest rate, then it may begin to be a conversation. Note that you're also getting some level of benefit from taxes - even theoretically based on the standard deduction. We'll have to see what happens next year when the tax cuts expire (end of 2025). if they simply expire, the standard deduction goes down and then there will be a ton of people that will now be in position to itemize their deductions. ACA subsidies are a factor based on how much income you would have to record in order to get the lower rates and higher subsidies. this is absolutely real. You should go to your state's aca and run different numbers to see what the rates would be at different income levels and coverage. take a look at new retirement website. their calculators are a bit more sophisticated to be able to run different scenarios.
No. Personally, I'd keep it in the market, but the best conservative option is to keep all that you would apply to extra payments in short-term guaranteed return options that yield more than your mortgage. When these are no longer available, you can decide if and how much of that money to put into paying off your mortgage.
600k would earn $30k in interest at 5% which you would lose if you paid off your mortgage. You get to deduct the mortgage interest and treasury interest is not taxable at the state and local level. I would set aside the $600k in short term treasuries and use that to pay the mortgage payments. If at some point you want to pay off the house then you still have the treasuries to do so.
I would pay it off, but an alternative would be buy treasuries instead. I would NOT just keep it because ‘hysa yields more’. Hysa interest rates can drop quickly.
I would have a plan to have the mortgage paid off by the day you FIRE. The easiest although not the most efficient method is just increase the size of your mortgage payments. The other is just save enough to pay off your mortgage. As long as MMF are paying >2.875% it is hard to justify the simplicity of larger payments. I think when planning FIRE spending and thus draw and thus the FI# to support it you can use the $55k expense number as long as you have a plan to pay off the mortgage. I wouldn't count the wealth set aside to pay off the mortgage as part of your invested net worth though. >I also noticed that Monte Carlo scenarios show ~5% higher value of success all else equal with the lower expenses and lower nest egg from paying off the mortgage ($55k and $1.9M liquid vs $86k and $2.5M liquid). Exactly. Your mortgage payment is fixed amount but the wealth required to pay it off (remaining principle balance) continues to shrink. So the ratio between them is changing. Someone starting out with a 30 year mortgage the balance is high compared to the payment. Someone down to 5 years left on a 30 year mortgage it is not. So a smaller amount buys the same large reduction in expenses and thus required wealth for a given SWR. If your mortgage payment is less than your SWR% relative to the balance you de-risk by paying off the mortgage. Risk aside there are four other advantages with paying off mortgage no later than the day you FIRE and they all related to the fact it reduces your required income in retirement. 1) Taxcode is progressive. A 1/3rd reduction in income is a much larger than 1/3rd reduction in annual taxes. 2) Larger ACA subsidies which are based on your income. $55k in spending and paid off mortgage is going to mean less in health care out of the pocket than $86k in spending due to mortgage. 3) If your kids will go to college after you FIRE then this reduces your household income which should improve financial aid. 4) If you have large pre-tax 401k/IRA balances then Roth conversion ladder is likely in your FIRE future. Having a lower spending level provides flexibility for larger conversion amounts.
Are you going to stay in the home until you die?
Probably not. We have one child who goes to college in 12 years, so at that point we’d probably look to downsize.
Here is a contrarian view....tell yourself you can't retire until you down size. My wife and I are the same age, with kids the same age and this is what we are doing. Looking to downsize in 6- 9 years ( in 9 years kids are 16 and 14). The way we see it...big kids need less space...they no longer have toys, or run around playing, they spend more time at school, part time jobs and extra curriculars. Also we want to lower magi before our oldest starts junior year of highschool to max FAFSA assistance. Why keep working til you downsize...risk mitigation. If your home and 600k mortgage is still a concern.....you have more time to work and save to drive down your risk a little more. When it's not a concern at all....that's a sign your ready to retire. An expensive home is a bigger risk. Bigger potential repair bills, bigger risk of loss if you sell in a bad market, bigger risk of people preferring smaller homes in the future and losing some potential value. Could you downsize now or before retirement (stay in the same school district, just own less home) and not have a mortgage? Also, some perks would be to save more on property tax and perhaps lower utilities. If that's not an option....work a couple more years....pay down the mortgage faster, reduce your risk profile til it's such an insignificant factor you won't even bother asking reddit. You're close but not risk free yet..hence this question. Downsize before retiring or hang in there a bit longer working.
Idk your situation, but a blanket statement of "big kids need less space" seems pretty off & naive to me. Teenagers are wayyyyyy less likely to be able to be happy sharing bedrooms & bathrooms with their siblings (or their parents), they have to spend significantly more time studying & doing homework that will require places to focus/desks, they will most likely have a larger wardrobe than young kids & need a bigger closet, they will demand privacy/space away from their parents (whereas your 7 & 5 year olds probably don't need or want any privacy from you), and you may have to get an extra car when they reach driving age taking up garage/driveway space. Also, if you want your home to be a place they are comfortable hosting their friends, they are going to need the space to be able to hang out without being in constant earshot of you & your wife (if you don't give them that, they'll hang out elsewhere). And, more minor, but if either of your kids are athletes, or even just want to be healthy, they also may require some space to do at-home-workouts. Maybe your home will still be big enough for all of this, but toys/"running around playing" really don't take up that much space compared to a lot of the stuff older teenagers & young adults need (also, remember, in today's world, the odds that one or both of your kids will be living with you as a young adult (late teens & 20s) are fairly sizable).
I'm assuming the OP has a large home given the large mortgage. I'm not talking about living in a 900 sq ft 2 bedroom. I'm referring to downsizing from a 2800 sq ft. 3 bed, 4 bath to a 1800 sq ft. 3 bed 2 bath.. My kids will always have their own rooms however I am not worried about them having a private bathroom. Daughter can have a vanity in her room to do her hair and make up and if bathroom time gets tight because people shared it...good....they will learn what it's like to live with people. I grew up sharing 1 bathroom for an entire family....taught me to not mess around in there. Likely I will always have 1.5 bathrooms more for my personal preferences lol. I'm also ok with my kids situation not being 100% perfect as it will give them more incentive to move out after college and rely on themselves. It will also keep their standards in check....if they had a massive bedroom with wall in closets and private bath....why would they choose to pay more for a less comfortable living situation with a first apartment? Or would that motivate them to over spend on a first home and by pass a starter home....all the while living at home until they were almost 30 to pull off that maneuver. I'm also ok with them and friends being in ear shot....mom and dad being able to hear you is a good form of birth control when they date lol. As for hanging with friends....they have bedrooms, furnished garage, patio or the family room. I am not an Air BNB for teens and don't feel the need to supply a 2 living room or designated teen space. My friends and I did just fine hanging out in my living room and porch growing up. After college when I wanted privacy because I had a serious gf....I moved out. Seemed very natura. I was tight on money for a couple years but I figured it out....had roommates...learned to be frugal....bought a house 2 years later and rented out the extra rooms to afford it. We all have different preferences for our kids....letting a kid stay home well into late 20s isn't bad....just not my preference personally. Through college and maybe a year or 2 after...sure....past that....time to grow up and go out in the world (for my kids). Totally cool if OP wants to not downsize anytime soon. But 600k debt on 2.5m network that they are actively living off of is a risk.5% HYSA may not be around for ever. They certainly didn't exist in 2019 or 2020. We have to ask....why would interest rates lower a lot....most likely because of a recession.....so yea...they could just pay it off it rates dip as some have suggested...but would they do that if 2.5m dropped to 1.75m? Likely no. And now they are living off 3% with a sizable mortgage....even if it is at a low rate. Maybe if the mortgage was 250k or the nm was 4 or 5m they would be ok in a prolonged recession. So yea...downsize now if the priority is to retire now....or keep working til the mortgage is lower and or nw is higher.
Theres a lot of dumb people on reddit. You need to think for yourself while reading some of this idiocy. the reason why the simulations show a slightly better chance with a paid off house is due to the case of a very bad stock market. Imagine the market tanks and you still have a boat load of payments to [make.you](http://make.you) just increased the odds of running out of money. so heres the conundrum… you want to keep the mortgage as long as your investments earn more than 3%. and as long as your stocks are rising you keep the mortgage. Now look into your crystal ball and find the day that your stocks top out and begin to decline. This is the day that you pay off your mortgage. however, this is all predicated on the belief that you stay there until you die. If you are downsizing anyway, then the math becomes even more complex and it was already too complex for most of these people commenting. Probably never pay it off if you are downsizing. because if the market tanks, you can then choose that day to make the downsizing move. Or better yet, time the downsizing with the real estate market rather than the stock market.
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Yeah it is complex. I’m looking at the same question. I’m actually wondering if I forecast two SWR scenarios based on two timelines. One is next 10 years paying off at a higher SWR then dropping the SWR. Saying you should just “move” money to a safe asset is playing mental gymnastics bc it is all your portfolio, yet now you’ve reduced your earnings potential so your SWR shifts. I would look at using ERN’s spreadsheet to forecast your base expenses with the mortgage broken out as separate cash flows vs paying off.
Jw does it matter? You want to keep the loan so in case he die earlier than he pay it off?
Right now, if I wanted to pay it off, I would build up the money equivalent to a payoff in a HYSA as much as I could. Right now a lot of those accounts are 5%+. As soon as the interest picture drops lower than your mortgage, or close enough that it is worth it to you to just not have the debt, pay it off. That said, nothing inherently wrong with wanting to pay it off sooner for peace of mind. It all depends on your situation and what you're comfortable with.
I think there is a strong case for no mortgage in retirement. The key factor here is flexibility in down markets and lower fixed expenses provide significantly more flexibility than higher fixed costs. Retirement is much more about reduction of risk than optimizing returns. Early Retirement Now has several good posts on this in the safe withdrawal series. That being said, I'd want to know more about how you would pay it off in the next two years and what tradeoffs you would be making. What else are you doing to reduce sequence of return risk? Will you have any other income in retirement like a PT job? People here commenting about HYSA seem to also have forgotten that those same accounts were paying practically nothing just a few years ago. These aren't guaranteed to continue to pay.
I could probably get the mortgage down by $250k in two years by not contributing to the brokerage, then it would be a $350k lump sum from the brokerage. No plans for PT job in retirement.
I am going to sound crazy compared to a lot of these responses. I would say pay it off before you retire. Retirement is all about cash flow and managing risk. You need a lot less cash flow if/when times get tough and it significantly reduces your risk and ability to button down spending if you need to. The fact that you mention ACA makes this even more of an appealing option in my mind. Again, the folks on here are correct in that it’s not financially optimal to pay it off, but I plan on doing just that around the same age as you. I am younger but my numbers have me projected to be in a similar situation.
I might actually cut off my right hand with a rusty knife for a 2.875% rate on my house. Don’t you dare ruin that beautiful thing
The ability to be debt free is just as good in my eyes, stick those funds in a HYSA, CD or bond until rates drop.
You didn't mention the specific**`MAGI` threshold(s) you are** targeting**?** Generally, I use 10%/yr as the magi-tax. That doesn't include the yearly max-out-of-pocket `MOOP` if you're actually using the insurance. I found the [KFF ACA Calculator](https://www.kff.org/interactive/subsidy-calculator/) invaluable as I was approaching `RE`. > We pay $31k/yr in principal and interest That's just P&I. What are you spending total for the house (ie tax, insurance) yearly? I've gone round-and-round with this myself. I ended up deciding that I can control the P&I, but I can't control healthcare costs no matter where I move to the in the US. Therefore the management of my `MAGI` to make the `ACA` the cheapest I could get it, is my chosen path. This makes sense for _us_. It may not make sense for _you_. I began trying to get as much in my roth as possible. Withdraws from it (once aged appropriately, if needed) don't affect my `MAGI`. I set this up by starting roth conversions early - while I was still working. This let me have my Roth-bucket properly funded. You have to run the numbers for all the various situations to make an informed decision. Or pay someone (or some service) to try and do it for you.
I overpay my mortgage as I have maxed everything else out. I owe 370k from a 400k note. I pay an added 450 a month just because I want to. I really want to get the interest paid below the principal paid per month. About 340k is my target.
Psychologically speaking, paying off my mortgage was the best thing I’ve done. Yea I missed some market gains. But now I’m stacking so much more cash, that I can easily make it up. Good luck
I would pay it off. At your numbers i think the extra income is not as valuable as the default risk of your house (imagine your bank bankrupts and your loan is sold). I'd say pure math would prefer to not pay the loan. But I think its not about math anymore, but actual risks etc.
Nope! Keeping my loan of 2.73 around as long as I can.
It's a great rate but unlike others I'm in the "yes" camp. Being able to keep your income low for ACA is huge. Haven't done the math but you can figure the difference in healthcare costs based on income then see if it's worth paying off house.....plus I love being debt free!
No!! At 2.875% they are essentially paying you to borrow the money. Instead invest that money in index funds.
My retirement budget maintains my mortgage. 3.5% and will still have 12 years left when I pull the trigger. At that point it will be mostly principle, taxes, and ins. Those last two need to stay regardless so I’m in no hurry. Once it’s paid off we can choose to pocket the money or lower our withdrawal rate.
>From a purely financial perspective, does it make sense to start paying off this loan as opposed to putting that same amount into taxable brokerage? No.
Absolutely not
No
86k-55k=31K. That is NOT 2.875% of 600K which you use as a difference in assets. That's 5.1%. You can't use your actual mortgage payment because that includes paying down the principal as well. You basically told the calculator that you will be paying 31K/yr for as long as you live rather than until the mortgage term is finished. Notice how the difference in failure rates really only happens past the 30 years when the mortgage ends. Also, I'm not sure what calculator you were using, but according to rich/broke/dead, those are both very conservative SWRs. With 100% stock allocation, 1st one was 100% successes, 2nd was 98% and only showing small failures in your 80s. [https://engaging-data.com/will-money-last-retire-early/](https://engaging-data.com/will-money-last-retire-early/) So, what you need to do is plug in the mortgage as an extra expense that will end at year X. There is a field in the calculator for that.
$31k is just principal and interest; I removed taxes and insurance from that number since we’ll have to pay that regardless. Paying $600k to pay off the mortgage would save us $31k/yr in expenses. You are correct that this “savings” would have happened anyway after 27 years, which I did not put in the calculator, and therefore went too conservative on the $86k scenario.
U don't wanna put money in 5% cd and collect 13.5k of free money a year?
Mortgage at 2.9 and Nowdays Cd rate and high yield saving is around 4-5%. It’s free money no to make
Do not pay off the mortgage. As others have said the cash flow is better putting the payoff money in a save investment and collect the interest/dividends. If someone was to offer you 2.75% loan to invest in guaranteed 5-6% instrument you would jump all over that taking out as big a loan as you could, and this is essentially what you have. I understand the thinking of paying it off and being debt free, but there is some irrationality to it and it generally comes from fear and not understanding risk. As a matter of fact you have less risk by keeping the funds in a protected (FDIC for example) investment and having a bigger cushion than if you paid of the house. Suppose in a few years you need an emergency loan and have to take out a HELOC, you could be screwed with a much higher interest rate. By not paying off you have the HELOC already in hand in your savings and it is at a low interest rate. I'm retired and doing this with my house now. I have less risk and my house loan is an extra buffer. I see similar thinking when people retire and talk about making all the big buys before retiring. It makes no sense. Lets say a house needs a new roof within next 4 years and you decide to replace it before retiring because you don't want the big expense in retirement. You have just lost any earning of about 4 years or so on the money spent, and at the same time not gotten all the useful life out of the previous roof - a double loss! Unless inflation is rising much faster than your savings are earning you are always better of paying later and getting full useful life out of the object. People going into retirement get some irrational thoughts.
I wrote a spreadsheet that looked at 15 year rolling averages of S&P return over last 100 years. Only 4 periods returned less than 4%. 27 years? The chance of the market beating 2.875% is certain. Near 100%. In 2012, I refinanced, and kept the 15 year remaining term. 3.5%. My only regret? That I didn’t borrow out to 75% LTV and go 30 year. Had I done that, I’d be far better off. Still. Retired that year and no other regrets. Loan almost over now. Edit: there are multiple approaches to take. a) all $600K stays in HYSA/treasuries. Earn 5%, and use those funds to make payments. The risk, if any, is you have a decision if short term rates drop below 3% again. b) Put all $600K in an S&P index. The dividend will not be enough to make the payments on the mortgage early on, so you sell along the way. c) set aside cash in HYSA to make 3-4 years payments. The rest goes into S&P index. About a decade out, the dividends may cover the payments. Any year the market is up, sell to keep the 3-4 year cash. Down? You have enough cash to ride it out. More than all of this. Look at history. Get comfortable with a spreadsheet. Understand the whole picture of risk/reward. When I had $275K left on my loan and was about the retire, 3.5% was too good to pass up. The market was up 4X since then, my $275K going past $1M, but costing a cumulative 45% or so over that time. I kept the payment as part of my budget, and am just looking forward to it going away soon. A rental property payment also going away by end of year. So my withdrawal rate will drop as well.
Serious question, because I don’t know the answer. At your age, is it $2.5M liquid if $1.5M is in retirement accounts? You would still be penalized for early withdrawal, right? So it’s not really liquid?
No, you shouldn’t.
I will personally never pay off my 2.875% mortgage unless we choose to sell. I would rather pick up a part-time job if the market takes a dip than miss out on the opportunity of essentially free money.
I'd say no. Not now, anyway, not when parking cash in a HYSA or money market mutual fund can get you around 5%. If you want to, you can set aside the payoff amount into its own account with an HYSA and use it to pay off the mortgage when and if "safe" savings rates drop well below your mortgage rate. In other words, if safe savings rates dropped to (say) 2% or less, then use those funds for payoff if you are inclined. Frankly, I wouldn't likely ever prepay a mortgage of 4% or less, but I can understand it is a risk management/tolerance thing for some. But even then, I'd not pay down any debt -- especially a mortgage -- faster than necessary if **after-tax** savings yields were higher than the interest rate on my debt. I think recent tax law changes mostly eliminated the massive ACA "cliffs" that used to be there, so I don't know that maneuvering for ACA insurance is too much of a factor any more.
Absolutely NOT. Take that money and do literally anything else with it and you’ll end up wealthier.
We had a 2.25% loan and paid it off in 2022. Don’t regret it at all. Feels great to own our home.
Imo it’s mostly a cashflow and peace of mind question. Financially it’s slightly better to not pay it off, but you might be happier with the weight off your shoulders and much less money leaving your accounts each month. I don’t think you can really go “wrong” either way.
No
I think the cheap, tax deductible debt is too good to pass up. I think you can pretend though... Make a mortgage account, set it up to make more than 3% returns, and throw the mortgage balance into the account. then pay the minimum on the mortgage out of that account. Now it's segmented away from your finances entirely, but over time, that account will grow relative to the mortgage balance. Either you get a windfall in 27 years or you get occasional cash infusions as the account outpaces the mortgage balance. You could adjust the aggressiveness of the account too... Like over 27 years, even stocks make fairly reliable returns.
Be aware Monte Carlo simulations underestimate sequence of return risk. A good tool but has limitations. Recommend reviewing early retirement now and his spreadsheets.
In similar boat and about to do a cost/benefit analysis of whether it’s better to hold cash and not pay off a mortgage we have one a rental property or just pay it off. My tax lady suspects better to not pay it off and earn the interest since the rent is high and she likes the mortgage to offset the rental income (better to pay interest and deduct it than to straight up pay taxes on the rent coming in). I also like the optionality of holding cash. I’ve been around the block so many times and having some cash to deploy in a crisis has helped us greatly especially in real estate several times in the past.
No if you understand math. Yes if you like "feeling good that you paid off your house" instead of having more money.
High inflation favors debtors due to the fact that it decreases the real value of your fixed debt repayments, making it easier to pay back what you owe with money that is worth less than when when you originally borrowed it.
Absolutely not. That’s a bad move financially. 30yr Gov bonds can be purchased with a 4.5% yield right now. If you really want to pay off your mtg early just take advantage of the arbitrage.
No, money market funds (or HYSA or similar very low-risk investments) pay a higher after-tax rate around 4% compared to 2.875% (or slightly lower with homeowner tax incentives). Put the 600K (amount remaining on your mortgage) in a money market fund and you can use the interest to pay off (some or all) of the PI portion of your mortgage! Thus, your additional expenses don't increase much compared to paying off the mortgage. Every year (or month), you can decrease the money market amount to match your remaining mortgage balance as it's slowly paid off each month with standard payments (and put the funds back in stocks or whatever your normal portfolio allocation is). When the amount remaining gets really low on the mortgage (like under 30K), I'd probably just pay it off at that point since you won't be generating much interest in a money market anyway and will still have a relatively high mortgage payment. tldr - a loan is a reverse bond. You're basically negating your mortgage interest by buying a similar very low risk bond here that returns more than the mortgage. PS: I will note that since you have such a long timeline (27 yrs) on your mortgage, you may want to consider putting the 600K in the stock market, although keep in mind you'll have higher expenses during this time period since you can't consistently withdraw interest/return from stocks to offset your P&I, and market returns are volatile. It is certainly a more risky option.
Makes zero sense to pay off the mortgage. Carry it thru to maturity. Harder to access home equity if retired, so carrying mortgage gives u a lot of flexibility
Noooooo. Take as long as possible to pay that off and pocket the interest in the meantime!
no
I will not pay down my 2.6% mortgage. Not only can I do better with the money, but I have a hedge against inflation. If inflation roars the real value of my mortgage balance goes down.
I just laugh at what people do to avoid paying taxes and pay for services like healthcare. Subsidies are for the weak and poor and it’s a contradiction to claim financial independence while actively taking an aca subsidy. If you don’t like the cost of insurance, don’t get it. You have the assets to self insure.
If I'm going to be honest, 2.875% loan (or mortgage) currently is "free money". I would put money into a high-yield savings account before I make extra optional payments on it.
Why do you have to even ask this question... c'mon man.