The trip was also a great opportunity to check off one item on my personal bucket list: Hike through the Grand Canyon from the North to South Rim. In one single day. Since I didn’t bring anybody else along for the hike (Mrs. ERN and little Ms. ERN took the rental car to the South Rim) I thought I will bring all of you ERN blog readers along for a digital ride. Not that any camera can really do the Grand Canyon justice, but I’ll try my best. Continue reading “Grand Canyon Rim to Rim Hike”→
No designated post about personal finance today! But in the spirit of Thanksgiving, we thank all of you for coming over to check out our little blog. Thanks for all your comments and feedback. Especially our most prolific commenters:
Scott Alan Turner did a podcast on our emergency fund article. Totally criticizing us! What? But there’s no such thing as bad publicity in the blogging world, so our gratitude extends to our friend Scott as well!
My interactions with medical doctors normally involve the question “on a scale from 0 to 10, how much pain do you feel?” So, I was relieved when my blogging friend Physician of FIRE invited me over to answer questions about blogging, personal finance, and life in general as part of his “Christopher Guest Post” series. But given Dr. PoF’s strange fascination with “spinal taps” and the number 11, I was a bit nervous at first:
One of the idiosyncrasies of the ERN family early retirement plan is that it involves a relocation. It’s not that we don’t like our current location. But even with our nest egg solidly in the seven figures we likely couldn’t afford to retire here comfortably because of the insanely high housing costs. The state income tax rates are also unpleasantly high. So, if everything goes well we will relocate to another state with low or no income tax and lower housing costs.
The options we consider:
Own a house, mortgage-free
Own a house, plus mortgage. But what term: 30-years or 15-years?
Rent a house or apartment, long-term
Nomadic lifestyle: have no fixed residence, move from place to place with light luggage
Ok, I have to admit, I threw in that last option just for fun. Some people can pull it off (GoCurryCracker), but I doubt that the nomadic lifestyle is for us. I like to have a home base! The way I can tell is that as much as we love to travel, it’s always nice to come back home to sleep in our own bed. Even if I know I have to head back to the office the next day. Seriously!
Quantifying the tradeoffs
We can write as much as we want about the pros and cons of renting vs. owning, but in the end, it all boils down to the numerical assumptions, especially the rental yield (annual rent divided by purchase price):
If we can rent a house for only 5% p.a. of the purchase price or less it’s likely a no-brainer to rent. The opportunity cost of our money tied up in a house plus the depreciation and taxes would be too large. Unless, of course, we factor in huge property appreciation. But our baseline assumption is that property values appreciate with the rate of inflation. The last time folks were budgeting outsized returns in housing it didn’t end so well, remember 2008/9? So, renting can be much smarter than owning, see some examples at 10!Rocks and Millenial Revolution.
If the annual rent is 10% or more of the purchase price, it’s almost a slam dunk to buy.
The other day, my wife asked me to take out the trash. My response: “Yeah, I’ll do that when I’m retired!” We both got a pretty good laugh out of that one. After I took out the trash (pre-retirement, obviously), we realized that our planned retirement date, hopefully in early 2018, creates all sorts of inefficiencies; I catch us procrastinating already! YIDTWIR=”Yeah, I’ll do that when I’m retired!” Are they the seven most dangerous words for the approaching-FIRE crowd?
Procrastination is as old as humanity and if there weren’t enough temptations to postpone stuff already, a retirement date in the near future is the mother of all reasons: Procrastination-palooza! Think about how much procrastination an absolutely arbitrary date like January 1 creates: “I’ll quit smoking/go to the gym/work less/work more/etc. in the New Year!” The main reason for New Year’s resolutions is that they give you cover – a guilt-free, chain-smoking, TV-binge-watching couch potato existence between late October and December 31. There is absolutely nothing magical about January 1 but it still creates New Year’s resolutions. And, of course, resolutions are never broken but just postponed to January 1 of the next-next year.
We are homeowners with a pretty sizeable mortgage but we also accumulated a nice retirement nest egg, which is actually many times larger than our mortgage. Even our taxable investments are several times larger than the mortgage. Still, we don’t pay off the mortgage because we like the benefit of leverage. We have a liability with a low-interest rate and assets with a much higher expected rate of return, so our overall expected rate of return is higher than without a mortgage. Our friend FinanciaLibre (now a defunct site) did some nice number crunching on this topic recently and we agree wholeheartedly.
Moreover, if you follow our blog you’ll also remember that we take a pretty dim view on bonds:
So, personally, we skip the bond allocation altogether. Others have written about this, too, check Physician on Fire’s 2-part guest post here and here. In light of all of this, here’s one question that occurred to us:
Why would anybody have a 30-year mortgage at about 3.50% and a bond portfolio currently paying around 1.8 to maybe 2.5% interest for safe government bonds?