Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…
Welcome to a new installment of our “Ask Big Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Does she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis! Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI””
Update 12/4/2020: I’ve been getting a lot of inquiries lately: Has my assessment changed in light of the record-low interest rates? My answer: Not really. Mortgage rates are low but so are my equity expected returns and bond yields. Right now I see 2.375% for the 15y and 2.75% for the 30y mortgage, so we’re about 1.0% lower on the mortgage rate. But with the CAPE>30 we also have a 1% lower equity expected return. It’s almost a wash. So, the gist of the article is still intact: Ask yourself, are you comfortable with a mortgage and 100% equities? I would not. If you do have bonds and a mortgage, is the bond yield lower than the mortgage rate? (Currently, it is: <1% for the 10y bond used in my simulations.) So, you’re better off paying off the mortgage with the bond portfolio.
Welcome back to the newest installment in our Safe Withdrawal Rate Series! If you are new to our site please go back to Part 1 to start from the beginning. Or check out the designated landing page for the SWR Series here.
But back to the topic at hand. It’s been on my mind for a long time. It’s relevant to our own situation and it’s come up in discussions on other blogs, in our case study series and in numerous questions and comments here on the ERN blog:
Should we have a mortgage in Early Retirement?
The case for having a mortgage is pretty simple: You can get a 30-year mortgage for about 4% right now. Probably even slightly below 4% when you shop around. Equities will certainly beat that nominal rate of return over the next 30 years. Open and shut case! End of the discussion, right? Well, not so fast! As we have seen in our posts on Sequence of Return Risk (Part 14 and Part 15), the average return is less relevant than the sequence of returns. Having a mortgage in retirement will exacerbate your sequence of return risk because you are frontloading your withdrawals early on during retirement to pay for the mortgage; not just interest but also principal payments. In other words, if we are unlucky and experience low returns early during our retirement (the definition of sequence risk) we’d withdraw more shares when equity prices are down. The definition of sequence risk!
How badly will a mortgage mess with sequence risk and safe withdrawal rates? That’s the topic for today’s post… Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 21: Why we will not have a mortgage in early retirement”
Welcome back to the Early Retirement Now blog! I hope everybody had a safe and relaxing Fourth of July holiday. And if you don’t live in the U.S. and had to go to work yesterday we hope you had a nice Fourth of July, too! We are currently on vacation in Paris and I am sure even here I smelled some barbecue in the air yesterday, so folks seem to celebrate worldwide!
In any case, as we detailed last week, we plan to rent during early retirement, at least in the beginning. But even if and when we buy a house we’d likely pay cash and forego the mortgage deduction. Won’t we miss the deduction? Probably not! We found a few reasons to really appreciate this tax deduction but also two very bad reasons. Let’s start with the bad reasons! Continue reading “Good and Bad Reasons to Love the Mortgage Interest Deduction”
We hope you had a great holiday weekend and a very Merry Christmas! If you are looking for the fourth installment of the Safe Withdrawal Rate series (see part 1, part 2, part 3), please come back next week. Who is in the mood for heavy-duty number-crunching when we’re still digesting the heavy meals and scores of eggnog from last weekend? Yup, every year around this time we reconfirm the concept known as “too much of a good thing.” Only those of you free of the sin of overconsumption can throw the first
meatball, uhm, stone. I’m waiting… Still waiting… Nobody? See, we’ve all experienced overconsumption between Thanksgiving and Christmas. But is the opposite true as well?
Can there be too little of a bad thing?
The bad thing I’m talking about is debt. To many of us in the FIRE community, debt is a four-letter word – figuratively! An entire niche of the Personal Finance blogging world is dedicated to getting out of debt and that’s a really good cause especially for those with a low or negative net worth. Paying off credit card debt at 18-20% or student loan debt with high single-digit percent interest rates should be priority number one. But that doesn’t mean that all debt is bad. For us in the ERN household, we’re blessed to never have had any sizable debt, except for a 30-year mortgage that we plan to pay off not a day earlier than we have to. We enjoy the ultra-low interest rate (3.25%), the tax-deductibility and putting our money to work with higher expected returns elsewhere. We love Leverage! Continue reading “Seven reasons in defense of debt and leverage: Yes, you CAN have too little of a bad thing!”
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.
Somewhere in between has to be the sweet spot. Let’s check where’s that crossover point in the rental yield! Continue reading “Housing Choices in Early Retirement: Rent vs. Own “
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?”