contemplating retirement options - looking for input

[ecotourist]

Should you pay off your mortgage, or not? It's a big question and a matter of opinion.

Financial advice has it both ways. One way you (may) have big financial gains from the invested capital (with resulting capital gains that are taxable in Canada). The other way you reduce your mandatory monthly costs (and in Canada reduce the non tax deductible interest).

Having been through a few wicked market downturns (but not the "mother of them all" in 1929) I prefer the reduced monthly cost model. And yes of course you have to pay your property taxes but they're small compared to a monthly mortgage payment. With a paid off mortgage and no car payments, we could weather a 50% market downturn that lasted 5 years. We wouldn't like it either but we could do it.

And don't even think "I'll just sell my house". For there to be buyers the market has to have some strength - would you really want to give your house away?

And by the way, one analysis I saw recently put the likely returns for the US market over the next 10 years at an average of about 1%/year. It was actually a bit less than that but let's round it up. So maybe the market's recent galloping gains won't continue.

And with those cheery words, I'll depart.

 

[GaryMX5]

I get that. I haven’t bought a car or anything else with borrowed $

The only time I take a car loan is if it's zero % interest. Better using their money and leaving mine in the bank. In one case financing was worth a customer cash incentive that I applied to the down payment.

 

[Pablo]

The only time I take a car loan is if it's zero % interest. Better using their money and leaving mine in the bank. In one case financing was worth some a customer cash incentive that I applied to the down payment.

There is a healthy argument for that, or seeing the finance guy about that loan - because sometimes dealers know that is how they make money so they will give you a good price, better than cash, say. And make money off you on the interest........but if there is no penalty for early repayment........get the loan..........

Math required.

Should you pay off your mortgage, or not? It's a big question and a matter of opinion.

Financial advice has it both ways. One way you (may) have big financial gains from the invested capital (with resulting capital gains that are taxable in Canada). The other way you reduce your mandatory monthly costs (and in Canada reduce the non tax deductible interest).

Having been through a few wicked market downturns (but not the "mother of them all" in 1929) I prefer the reduced monthly cost model. And yes of course you have to pay your property taxes but they're small compared to a monthly mortgage payment. With a paid off mortgage and no car payments, we could weather a 50% market downturn that lasted 5 years. We wouldn't like it either but we could do it.

And don't even think "I'll just sell my house". For there to be buyers the market has to have some strength - would you really want to give your house away?

And by the way, one analysis I saw recently put the likely returns for the US market over the next 10 years at an average of about 1%/year. It was actually a bit less than that but let's round it up. So maybe the market's recent galloping gains won't continue.

And with those cheery words, I'll depart.

1% year, 8% year. No one knows. But let's just say I bought bonds, tax free municipals and heck even MM's currently pay more - and if you want to get really close, the nitty gritty, in reality a person only needs to make more than the loan interest payment. If a person earns more than the monthly full mortgage payment, that's gravy. Truth be told this doesn't involve the stock market. I carry no fear, so yes opinion indeed.

 

[ecotourist]

..... a person only needs to make more than the loan interest payment. If a person earns more than the monthly full mortgage payment, that's gravy.

Good point. In Canada 50% of capital gains are taxable, and I'm at about a 40% marginal income tax rate. Mortgages are about 5% in Canada. So I'd have to average more than (doing the math) 6% per year to break even vs simply paying off my mortgage.

Yes I might do better than 6% a year (and have done in the past) but I wouldn't bet on it going forward. And then there is the risk of actually losing some part of my investment too. Paying off my mortgage is the equivalent of a risk free investment paying 6% a year.

We each do what makes the most sense to us. Paying off my mortgage makes the most sense to me. As long as we're actually aware of the math.

 

[Dave Hess]

Every person’s financial situation is different.

Good to see so many people retire in their 50’s and no longer dealing with the workplace stress.

 

[andrew_j]

My mention of paid for primary residence and consumer debt was simply starting point for next journey. It is simplest entry/baseline in new area and requires least thought. What you do beyond and how complex or simple your life is your choice.

 

[rijndael]

Good to see so many people retire in their 50’s and no longer dealing with the workplace stress.

If the current trajectory stands, I'll be out on my 50th birthday.

 

[TnT_M]

I agree with many that entering retirement debt free is key for me, and that is the plan. My current mortgage rate is 2.75% and will be paid off in ~4 years. I could pay it off early, but I am using that capital on other investments.

As some have mentioned I intend to stay busy. This will likely be with hobbies or part time work. Not necessarily for money but for socializing and keeping my mind and body active.

Thank you all for the insight! Many comments have been very helpful!

 

[SC Maintenance]

There is a healthy argument for that, or seeing the finance guy about that loan - because sometimes dealers know that is how they make money so they will give you a good price, better than cash, say. And make money off you on the interest........but if there is no penalty for early repayment........get the loan..........

Math required.


1% year, 8% year. No one knows. But let's just say I bought bonds, tax free municipals and heck even MM's currently pay more - and if you want to get really close, the nitty gritty, in reality a person only needs to make more than the loan interest payment. If a person earns more than the monthly full mortgage payment, that's gravy. Truth be told this doesn't involve the stock market. I carry no fear, so yes opinion indeed.

The majority of people don't really understand how money works - so if they want to pay off their mortgage for their own comfort thats perfectly acceptable.

If you want to discuss it in a pure financial manner, as an individual a) you will never borrow long term cheaper because its subsidized by the GSE's / federal government, b) liquidity costs money and this keeps you liquid, c) its a huge inflation hedge for almost free. If you stretch a 30 year fixed all the way out that last payment likely won't buy a decent meal at the time.

Or that is how a banker would think about it, because they understand money.

As always Caveat Emptor.

 

[MrGraybeard]

A great online forum that addresses all aspects of transition to retirement is early-retirement.org.

 

[Pablo]

My best years ever are after retirement. Period.

I forgot to mention how busy I am!! I found out how much I love mentoring teens, for example. Find out if there is a mentoring organization in the area, or other volunteer opportunity to help give back.

Good point. In Canada 50% of capital gains are taxable, and I'm at about a 40% marginal income tax rate. Mortgages are about 5% in Canada. So I'd have to average more than (doing the math) 6% per year to break even vs simply paying off my mortgage.

Yes I might do better than 6% a year (and have done in the past) but I wouldn't bet on it going forward. And then there is the risk of actually losing some part of my investment too. Paying off my mortgage is the equivalent of a risk free investment paying 6% a year.

We each do what makes the most sense to us. Paying off my mortgage makes the most sense to me. As long as we're actually aware of the math.

+1. At today's rates makes zero sense to NOT pay off a new mortgage if you can. A person would be stretching into far too much capital risk even if balanced by inverse rate risk. Not a place to be or entering in retirement. And as you point out, TAXES. Good luck finding decent muni bonds and the people burned by muni bond funds are pretty silent now.

The majority of people don't really understand how money works - so if they want to pay off their mortgage for their own comfort thats perfectly acceptable.

If you want to discuss it in a pure financial manner, as an individual a) you will never borrow long term cheaper because its subsidized by the GSE's / federal government, b) liquidity costs money and this keeps you liquid, c) its a huge inflation hedge for almost free. If you stretch a 30 year fixed all the way out that last payment likely won't buy a decent meal at the time.

Or that is how a banker would think about it, because they understand money.

As always Caveat Emptor.

I'm just a financial idiot really. My dad, my dad he was not studied in finance - but that man in his prime could focus down to the key drivers. That said people today don't seem to have time for that. They want what they want and now.

Good point on inflation - and it too comes and goes - but always lurks, always in fiat systems.

 

[zzyzzx]

Not retired but starting to think about it. Some random thoughts.

1) Health insurance is very expensive when you pay for it yourself (I have). It also doesn't cover anything when you pay yourself. Think $5000 deductible and then 30% until you hit your max out of pocket. Its been going up rapidly as well. This is by far the biggest thing you need to figure out I believe.

Yeah, that $1200/month in after tax dollars for health insurance that pays nothing towards your actual costs can be a real deal breaker.

 

[zzyzzx]

This is the best retirement tax calculator that I have found so far:
https://smartasset.com/retirement/retirement-taxes

 

[Capt W]

I suppose one of the most important considerations is to determine what drives you.

After almost 27 years in the USAF (22 active and 4+ as a civilian)...with literally over five years of deployments and TDY, it was simply time to enter the next stage. With our kids grown and on their own, I simply want to spend my remaining years with my wife, doing the things we want to do. I walked away at age 52 and it was the best decision I could have made.

I worked with far too many people whose sole identity seemed to be their jobs. I watched a lot of them retire from active duty and immediately enter the DOD civilian side, often doing the same thing. Many will work until they're 70 or older, double-dip retirement plans, and probably drop dead a few years later. No thanks.

My dad retired at 55. When I told him I'm walking away and returning to Texas, he said "You're nuts...you're far too young!" After a few minutes of conversation, he admitted the years between ages 55-85 were about the best of his life. He and my mom were inseparable. They lived into their early 90s. My dad passed in late 2022 of old age/natural causes; mom followed less than a year later, also of natural causes. And that, my friends, is exactly how I'd like to go.

 

[zzyzzx]

What's the point in retiring, unless you can do it in Caligulan splendor?

 

[ecotourist]

In Canada 50% of capital gains are taxable, and I'm at about a 40% marginal income tax rate. Mortgages are about 5% in Canada. So I'd have to average more than (doing the math) 6% per year to break even vs simply paying off my mortgage.

I've redone the math. I hadn't considered investments that pay interest.

In Canada the break even point for me compared to a current 5% mortgage is still 6%, but that's only for an investment (like stocks) that produces capital gains. That could happen, but after the big run up of the stock markets over the last decade there is a risk of under-performing the required rate or actually losing part of the capital.

In Canada interest is fully taxable. So for an interest bearing investment (like a bond) the break even point for me is actually 7%. Where do I find a risk free bond that pays 7% interest? Not in Canada.

PS There are no "income tax free" municipal bonds in Canada. And if I bought an American "income tax free" municipal bond I'd still have to pay income tax on the interest.

 

[rijndael]

I worked with far too many people whose sole identity seemed to be their jobs.

I don't know about 'sole identity' but I really enjoy the stuff I work on. I even spent a few days of my Christmas break nerding out on related tangents. When you have a talent in the field, and you really enjoy it, I can easily see extending your working years.

 

[doitmyself]

I don't know about 'sole identity' but I really enjoy the stuff I work on. I even spent a few days of my Christmas break nerding out on related tangents. When you have a talent in the field, and you really enjoy it, I can easily see extending your working years.

Yes, I am that outlier in our group here that chooses to continue work at age 70. My career is extremely unique and I am passionate about my lifestyle and what I do. My wife and I evaluate the "fence walking" between work/retirement constantly and we already do retirement type things now. My career provides healthy mental, physical, and social benefits.

I just got back from my TIAA financial advisor and he really cleared up the confusion I developed trying to self-educate via the interweb.
Managing retirement income is very unique for each individual - Roths, IRMMA, RMD's, and a host of considerations. I urge everyone to get some professional direction depending on your financial skill level. Sooner than later.

 

[SeaJay]

The boss and I sold our Northeast home when we both retired 6 years ago and then moved to Florida. Works well for the both of us. We didn't have any family left in the Northeast so there was no need to stay there to be close to anyone.

 

[GaryMX5]

The majority of people don't really understand how money works - so if they want to pay off their mortgage for their own comfort thats perfectly acceptable.

If you want to discuss it in a pure financial manner, as an individual a) you will never borrow long term cheaper because its subsidized by the GSE's / federal government, b) liquidity costs money and this keeps you liquid, c) its a huge inflation hedge for almost free. If you stretch a 30 year fixed all the way out that last payment likely won't buy a decent meal at the time.

Or that is how a banker would think about it, because they understand money.

As always Caveat Emptor.

On the other hand, it's a bankers job to keep you in debt. That's how he and his financial institute stays in business. I was clueless for years about finance. My DIL opened my eyes a little. She has a degree in finance, started at the bottom with Fidelity Investments, got her CFP and is now a VP. She has no problem with retirees being as debt free as possible. It can definitely help with regards to estate planning