Last week, I read a nice post on Chief Mom Officer on the challenges of calculating savings rates. Right around that time I was also revisiting our 2017 budget and the projections of how much we are going to save this year. This is the last full calendar year before our planned retirement in early 2018 and it’s imperative that we stay on track and keep a high savings rate on the home stretch. But how high is our savings rate? Is there even a generally accepted way of calculating a savings rate? What are some of the pitfalls? We were surprised about how easy it is to mess up a calculation as seemingly trivial as the savings rate.
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:
- The Great Bond Diversification Myth
- When bonds are riskier than stocks
- Have bonds lost their diversification potential?
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?
Leverage works only when the asset has a higher expected return than the liability!
Continue reading “Why would anyone have a mortgage and a bond portfolio?”
We are on the home stretch to early retirement and in about 18 months or so – if everything goes well – we will sell our expensive condo, pay off the mortgage and move to a less expensive location. We might rent a house there or pay for a modest home with cash. One way or another, we should be completely mortgage-free!
Or will we still have a mortgage? How about the “mortgage payments” in the form of our future living expenses in retirement? They increase by the rate of inflation every year! That’s the mother of all mortgage payments! Mortgage mayhem! How do we treat a “mortgage” like that on our balance sheet? Continue reading “We just went from millionaire to dead-broke with one simple accounting maneuver”