I'm getting our financial house in order to consider retirement - we're somewhere between 8-14 years away.
At retirement, we will still have a large mortgage with 10-15 years still to go, but it's a fixed 2.875%. So I can't fathom that paying it off early makes sense in any scenario (unless expected returns really tank, which I can't know ahead of time), and I expect that we will continue to make mortgage payments for that first 25 to 50% of our retirement.
What I'm trying to puzzle out is the right way to think about that mortgage with respect to hitting "the number", and how to plan the investment strategy and withdrawal rate around it. Everything I've read (e.g. McClung) talks about setting an initial withdrawal rate based, in part, on essential income. Which a mortgage clearly is. But it seems silly to base my entire retirement around a large expense which will disappear after 10-15 years. If I include that as part of my essential income, I'll basically be leaving money on the table (because all the planning formulas will assume I need to sustain that essential income for 30-40 years, which I don't!). If I don't include it at all, then I'm playing with fire.
So, my thinking is modeling this as two concurrent retirements: one real one, and a second one where I miraculously know our exact date of death and have a precise, unchanging monthly budget, without even any inflation to worry about! (If only all life were so financially predictable!)
Then the question is how to invest to fund that second, mortgage-only retirement. I've thought of two options:
(1) Specifically fund the mortgage with guaranteed (nominal) income of some sort (zero-coupon treasuries, fixed-duration annuity) - I ran some basic numbers and the annuity seemed better in today's interest environment, though obviously that'll require re-analysis at retirement.
(2) Ignore it - fund that mortgage with the same overall investment and withdrawal strategy as the rest of my retirement (likely McClung, so Prime Harvesting, etc.); compute withdrawal rates for the "real" retirement subtracting off the remaining mortgage balance, and make extra withdrawals as needed to pay off the mortgage. At most, tilt the initial retirement portfolio a bit more towards bonds (say, another 5%).
I believe #1 lowers the risk; #2 is a bit simpler, and has more upside.
To give a rough scope of scale, I think funding the mortgage payments with #1 would require somewhere between 10-15% of our retirement portfolio. (And paying it off early would be significantly worse - up to an additional 3% of the portfolio, if my math was right, though obviously that number will change with future interest rates.)
I'm guessing the answer is something along the lines of: "you're overthinking things, but if it helps you sleep better at night, funding ahead of time is fine". But I'm curious if I've overlooked something basic.
At retirement, we will still have a large mortgage with 10-15 years still to go, but it's a fixed 2.875%. So I can't fathom that paying it off early makes sense in any scenario (unless expected returns really tank, which I can't know ahead of time), and I expect that we will continue to make mortgage payments for that first 25 to 50% of our retirement.
What I'm trying to puzzle out is the right way to think about that mortgage with respect to hitting "the number", and how to plan the investment strategy and withdrawal rate around it. Everything I've read (e.g. McClung) talks about setting an initial withdrawal rate based, in part, on essential income. Which a mortgage clearly is. But it seems silly to base my entire retirement around a large expense which will disappear after 10-15 years. If I include that as part of my essential income, I'll basically be leaving money on the table (because all the planning formulas will assume I need to sustain that essential income for 30-40 years, which I don't!). If I don't include it at all, then I'm playing with fire.
So, my thinking is modeling this as two concurrent retirements: one real one, and a second one where I miraculously know our exact date of death and have a precise, unchanging monthly budget, without even any inflation to worry about! (If only all life were so financially predictable!)
Then the question is how to invest to fund that second, mortgage-only retirement. I've thought of two options:
(1) Specifically fund the mortgage with guaranteed (nominal) income of some sort (zero-coupon treasuries, fixed-duration annuity) - I ran some basic numbers and the annuity seemed better in today's interest environment, though obviously that'll require re-analysis at retirement.
(2) Ignore it - fund that mortgage with the same overall investment and withdrawal strategy as the rest of my retirement (likely McClung, so Prime Harvesting, etc.); compute withdrawal rates for the "real" retirement subtracting off the remaining mortgage balance, and make extra withdrawals as needed to pay off the mortgage. At most, tilt the initial retirement portfolio a bit more towards bonds (say, another 5%).
I believe #1 lowers the risk; #2 is a bit simpler, and has more upside.
To give a rough scope of scale, I think funding the mortgage payments with #1 would require somewhere between 10-15% of our retirement portfolio. (And paying it off early would be significantly worse - up to an additional 3% of the portfolio, if my math was right, though obviously that number will change with future interest rates.)
I'm guessing the answer is something along the lines of: "you're overthinking things, but if it helps you sleep better at night, funding ahead of time is fine". But I'm curious if I've overlooked something basic.
Statistics: Posted by brightlightstonight — Tue May 21, 2024 1:44 pm — Replies 0 — Views 39