How can you be (semi) retired while still having a mortgage?

How to avoid signing your life over to a mortgage
Post Reply
pacontrak
Posts: 6
Joined: Sun Apr 23, 2017 4:07 pm

How can you be (semi) retired while still having a mortgage?

Post by pacontrak » Tue May 16, 2017 2:58 am

Hi guys and gals,

First I'll introduce myself in one line: 37-year old with a net worth of roughly 450K in my local currency.

My largest asset is a paid-for home. Having no debt at all at this age set me up for wealth. I have joined this forum to learn from others so that I can continue to do wise things with my money.

This brings me to my main question (and concern) : Quite a few people on this forum claim they are either retired or semi-retired while they are still carrying a mortgage or pay rent. My question is how can you consider yourself to be financially independent when you still have not locked in your cost of living?

This is not to offend anyone, I would just like to understand how debt and FI can go together. Thank you for your insights.

User avatar
YoungAndWise
Posts: 407
Joined: Thu Dec 30, 2010 12:04 am

Re: How can you be (semi) retired while still having a mortgage?

Post by YoungAndWise » Tue May 16, 2017 3:12 am

Essentially they have enough saved/invested to cover the cost of rent/mortgage per month. And most mortgages have a fixed monthly amount so it makes it easier to account for it than say emergency expenses.

User avatar
Sclass
Posts: 1088
Joined: Tue Jul 10, 2012 5:15 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by Sclass » Tue May 16, 2017 8:24 am

pacontrak wrote:
Tue May 16, 2017 2:58 am
how can you consider yourself to be financially independent when you still have not locked in your cost of living?
You're right. I have some disturbing news for you. A lot of real retirees haven't either.

By the time most people have some semblance of having things tied down, it's over.

Edit - I get this question a lot IRL. In all honesty it is my fault because I live like a person who has very little money. However it begs the question, "how much money do you want me to have to call me FI without a house? $1M? $10M? $100M?" Surely there must be some limit before you say "oh forget the house."

Maybe it's like the comments (or apologizing) I hear 1%er people making when they explain why they use Net Jets instead of owning a Gulfstream?" What?!? You don't own your plane?!?

Net Jets is low class. :lol:

User avatar
cmonkey
Posts: 1452
Joined: Mon Apr 21, 2014 11:56 am

Re: How can you be (semi) retired while still having a mortgage?

Post by cmonkey » Tue May 16, 2017 10:38 am

There really are different degrees of FI and I think the 1st degree is having your current investment income cover your current expenses. 2nd degree might be extending that out for X number of years, say if you expect your dividends to be safe for at least the next 3-5 years. 3rd degree would be FI for life based on historic scenarios/wisdom (i.e. 3-4% WR).

So I think having debt while also having enough investment income to cover the debt payments + all other expenses would fall under 1st order of FI at the very least. It could also be 2nd or 3rd based on the situation. While not as robust as 2nd or 3rd, its still FI.

Sometimes it makes sense to not pay off debt from a numbers standpoint if your debt is low interest and you can put your money into high interest. The higher the spread, the more logical it is. Then you have the emotional component as well and many just decide to pay it off even if it doesn't make sense from a numbers standpoint.

User avatar
Dragline
Posts: 4278
Joined: Wed Aug 24, 2011 1:50 am

Re: How can you be (semi) retired while still having a mortgage?

Post by Dragline » Tue May 16, 2017 10:50 am

Well, it's just an expense to be accounted for like everything else. Its not a magic talisman as the OP seems to imply. ("How can you call yourself a magician without a magic talisman?")

We own our home free and clear right now, but I could see a time where we would sell it and rent again to avoid the hassles of home ownership.

JL Collins has some good articles about the trade-offs here and has become a renter again in the past few years. See http://jlcollinsnh.com/?s=rent+home

oldbeyond
Posts: 127
Joined: Thu Nov 29, 2012 10:43 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by oldbeyond » Tue May 16, 2017 12:19 pm

Different approaches expose you to different risks. Some paths are more conventional, and therefore feel more natural or safer, but usually you are really choosing what type of risk to take on, not between risk and no risk. Not to say that all choices are equally sane, but there's a tendency to overlook typical risks. Like the risks in putting a large portion of your assets into a very specific slice of land and 4x4:s vs the risks of paying your rent with the dividends from your global REIT portfolio. Both have risks but the first gets a pass while the latter gets scrutinized.

Leveraging your investments with your mortgage has risks(see "correlation"), but might increase your returns over the long term and thus decrease your risk of running out of assets. OTOH, can also lead to severe drawdowns were you're forced to sell at the bottom to avoid losing your house. And proportions matter greatly of course - mortgage to house value, mortgage to investment value etc.

ThisDinosaur
Posts: 478
Joined: Fri Jul 17, 2015 9:31 am

Re: How can you be (semi) retired while still having a mortgage?

Post by ThisDinosaur » Tue May 16, 2017 1:31 pm

If your ROI is higher than the interest on your mortgage, then you should stay invested and not rush to pay off debt. Since you can never really be certain about your future ROI, its probably lower risk to be debt free. But lower risk tends to mean lower return.

pacontrak
Posts: 6
Joined: Sun Apr 23, 2017 4:07 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by pacontrak » Wed May 17, 2017 3:22 am

Dragline wrote:
Tue May 16, 2017 10:50 am
Well, it's just an expense to be accounted for like everything else. Its not a magic talisman as the OP seems to imply. ("How can you call yourself a magician without a magic talisman?")

We own our home free and clear right now, but I could see a time where we would sell it and rent again to avoid the hassles of home ownership.

JL Collins has some good articles about the trade-offs here and has become a renter again in the past few years. See http://jlcollinsnh.com/?s=rent+home
Thanks all for the replies so far. Interesting views also in the mentioned article.

I think I would say if you can pay off a home at a relatively young age, say before you hit 40, then always do so. You still have a good 20 years left to rent another place and invest in mutual funds or stocks while land-lording on your first property.

So when you're young enough you can have and-and, instead of just if-if.

SustainableHappiness
Posts: 71
Joined: Tue Jun 28, 2016 6:39 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by SustainableHappiness » Wed May 17, 2017 7:12 am

I'd argue your stance (pay off mtg before 40 and then rent out first house) has a serious Your Mileage May Vary component, just be careful if you extrapolating that advice to everyone.

- Landlording can seriously suck from a lifestyle perspective if it's not your thing (I definitely have a personal bias here)
- Why bother entering into a mtg in the first place assuming net return on a real estate investment and net return on different investment vehicle are similar or equal?
- Mobility.

We've recently went from owning and landlording to renting and trying to sell our homes. We've only owned for ~3 years, but it's been long enough to know that owning is not everything it's been cracked up to be, even though it has worked out financially (and that is both the live-in and landlord statuses).

User avatar
Dragline
Posts: 4278
Joined: Wed Aug 24, 2011 1:50 am

Re: How can you be (semi) retired while still having a mortgage?

Post by Dragline » Wed May 17, 2017 7:35 am

As I finally saw Robert Kiyosaki finally admit in a video the other day, owning/renting real estate is "management intensive" in his words. It's right for some, but not for others. YMMV.

User avatar
Sclass
Posts: 1088
Joined: Tue Jul 10, 2012 5:15 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by Sclass » Wed May 17, 2017 9:50 am

pacontrak wrote:
Wed May 17, 2017 3:22 am

I think I would say if you can pay off a home at a relatively young age, say before you hit 40, then always do so. You still have a good 20 years left to rent another place and invest in mutual funds or stocks while land-lording on your first property.

So when you're young enough you can have and-and, instead of just if-if.
I think you need to do the math on every individual investment decision. Time value of money problems can have varied results depending on their inputs. Inputs across the US vary enough to mess things up.

There's a book out of Canada. I don't think it is a hard and fast rule or for everyone but it presents an unpopular alternative to the get a job, get a mortgage and a 401k lifestyle conventional methods. Just another opinion at the end of the day. YMMV especially if you are undisciplined.

https://www.amazon.com/Wealthy-Renter-C ... 145973646X

BPA
Posts: 145
Joined: Fri Jun 24, 2011 5:02 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by BPA » Tue May 23, 2017 6:17 am

I have a mortgage and have a net worth of $475k which is greater than it was a year and a half ago when I quit working. I used to think like you do. Years ago I declared in this forum that I would be FI when I had a paid off house and $225k. Now, in the community I where I will eventually live, I have the equivalent of a paid off house plus $400k. Plus, my brother, who is my tenant, pays for almost 3/4 of my mortgage.

I am waiting for my son to finish college in our city. Then I will sell the house (or rent it out depending on which is more lucrative) and move to an area with much cheaper living costs.

It made no sense for me to stay at a job which was making me miserable in order to pay off a mortgage and retire with far more than I needed.

jacob
Site Admin
Posts: 8948
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: How can you be (semi) retired while still having a mortgage?

Post by jacob » Tue May 23, 2017 9:56 am

I'm currently in the "fully owned" situation, but I don't see anything magic in it.

Sure, it's nice not to have to write a monthly check for the rent or a mortgage. It's also nice not having to ask the landlord permission if I want to put a nail in the wall to hang up a picture, paint the wall, or dig out some of the lawn to plant tomatoes. And there's no risk of being evicted if I stop paying rent. There's also the so-called "imputed rent" though that's hard to determine in our case---in any case, there's certainly opportunity cost (or reward/risk) if not having the cost of the house invested.

However, I still have to write two annual checks to the city/county for real estate taxes. And if I stop paying taxes, the sheriff may kick me out of the house (or however that works). While I can put nails in the wall, I still have to ask the city for a building permit if I want to knock down a wall or replace a street-facing door. In terms of being "retired", ownership also comes with a lot more maintenance hassle than renting: (shoveling snow, painting, repairing/replacing mechanics when they break, separate bills for gas/electric/water, tuckpointing, cleaning gutters, clogged drains, mowing lawns, ... )

As far as I can tell, rent vs own is more a case of a difference in degree than in kind.

Owners still have to pay someone and they still have to ask someone. Home owners are just one level closer to reality.

User avatar
Tyler9000
Posts: 1256
Joined: Fri Jun 01, 2012 11:45 pm
Location: Austin, TX

Re: How can you be (semi) retired while still having a mortgage?

Post by Tyler9000 » Tue May 23, 2017 8:25 pm

Financial independence is simply about sustainably meeting necessary cash flows without work. Whether the check is signed to the mortgage company or the property tax collector really doesn't matter. Every situation is different, so there's no perfect plan for everybody. IMHO, do whatever makes most financial sense in your situation and don't get so caught up in the dogma of it.

pacontrak
Posts: 6
Joined: Sun Apr 23, 2017 4:07 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by pacontrak » Sat May 27, 2017 10:59 am

The thing is, owning property (free and clear) contributes to your net worth while renting a place does not.

My question is - Do you consider cash flow so vital for FI even when it is offset by the risk that comes with carrying debt?

User avatar
Tyler9000
Posts: 1256
Joined: Fri Jun 01, 2012 11:45 pm
Location: Austin, TX

Re: How can you be (semi) retired while still having a mortgage?

Post by Tyler9000 » Sat May 27, 2017 11:19 am

If you own your home free and clear, selling it will not change your net worth. But your investable assets will increase substantially, and the increased income will help offset the rent.

Personally I'm also a pay-it-off kinda guy and prefer renting or buying in cash to messing around with unnecessary debt. But I'm not so quick to dismiss others for thoughtfully building a sustainable plan using a different method. Every situation is different.

pacontrak
Posts: 6
Joined: Sun Apr 23, 2017 4:07 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by pacontrak » Sat May 27, 2017 11:22 am

Tyler9000 wrote:
Sat May 27, 2017 11:19 am
If you own your home free and clear, selling it will not change your net worth. But your investable assets will increase substantially, and the increased income will help offset the rent.
But it won't offset the risk of not having your house payment locked in? So which one is more vital for FI?

User avatar
Tyler9000
Posts: 1256
Joined: Fri Jun 01, 2012 11:45 pm
Location: Austin, TX

Re: How can you be (semi) retired while still having a mortgage?

Post by Tyler9000 » Sat May 27, 2017 2:05 pm

Neither. It's like asking whether growing your own food or buying it at the store is more vital for FI. Both methods are equally valid as long as you've planned for it.

As others have pointed out, owning a home with no mortgage does not lock in your expenses. For example, my property taxes are increasing way faster than inflation, insurance always goes up, and unexpected expensive repairs are a fact of life. And if you read the journals you'll quickly learn that homesteading is not the default ERE ideal for everybody. I've recently been thinking about whether renting actually makes more sense for us at this point in our lives. Rentals are far more liquid and would allow us to move around to find the best deals and generally enjoy the freedom of FI a little more.

pacontrak
Posts: 6
Joined: Sun Apr 23, 2017 4:07 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by pacontrak » Sat May 27, 2017 5:58 pm

You see, I did pretty much two things before I hit age 32; moving house (about thirty times going from from rent to rent, and from landlord to landlord, room mate to room mate) and travelling the world (backpacking, internships, holidays, partying, (r)emigration etc in/to about thirty countries around the globe) and I found two things to be true:

1) the cost of moving house, and the lifestyle expense that comes with it, is unpredictable and usually goes up over the years

2) the cost of travel is unpredictable and usually goes up over the years

I am probably an oddball in having lost the desire to travel and move much at this relatively young age, simply because I've done it all. I now actually enjoy not moving much around and just to be where I am. I experience it to be peaceful. At the end of the day I believe that Lao Tzu got it quite right when he said 'wherever you go, there you are'. Anyway, I believe that the bulk of my future nest egg will be used for other expenses than travel.

So here I am, with about twenty years left to the early retirement age. Investing 16% of household income into growth stock mutual funds. And with a paid for home in a town which I would be happy to stay in for the next twenty years.

And having all this does not limit my mobility at all, if I choose to splurge on an Air b 'n b somewhere exotically.

So I guess I am trying to say that the 'do everything early including paying off the home' makes me feel pretty FI.

jacob
Site Admin
Posts: 8948
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: How can you be (semi) retired while still having a mortgage?

Post by jacob » Sat May 27, 2017 6:10 pm

@pacontrak - I did pretty much the same thing as you did (not as much as you, but more than most). Once you eliminate the mortgage, you''ll find that

3) the cost of owning is unpredictable and usually goes up over the years too.

These choices are basically a play on yield for the financially literate.

FWIW: We've invested 75%-95% of household income for 15+ years by know, so we can pretty much pick 1, 2, or 3 according to whatever is convenient, so opinions/choices may be biased by that by now.

pacontrak
Posts: 6
Joined: Sun Apr 23, 2017 4:07 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by pacontrak » Sat May 27, 2017 6:58 pm

Thank you for stopping by Jacob, much appreciated.

fingeek
Posts: 14
Joined: Wed May 24, 2017 8:16 am
Location: South Wales

Re: How can you be (semi) retired while still having a mortgage?

Post by fingeek » Wed May 31, 2017 7:25 am

As an opposing opinion, I choose to effectively keep my home mortgaged (low rate, less than UK inflation), and leverage that equity by investing elsewhere. It's mathematically sensible when the mortgage rate is sufficiently lower than interest-earning opportunities elsewhere. I calculate/accept the risk on both sides of the arbitrage. As soon as the UK headline interest rate creeps up to ~3-4% then I will more likely pay off the mortgage.

Things might be a little different if I had a huge cash surplus, and maybe I'd pay up opportunity in exchange for laziness (I would not have waited until I had a huge cash surplus to FIRE, however).

Others did note too that there is a more general question over "rent vs own" (or more abstractly, "consume vs own"?) - We need to pay bills for gas/electric/water, or we could opt to install solar panels/microgeneration/install a personal water treatment system. We may opt to grow our own food and "lock in your cost of living" rather than be "at the mercy" of supermarkets.

May I ask, are you working? Retired? (Could you be?)

fingeek
Posts: 14
Joined: Wed May 24, 2017 8:16 am
Location: South Wales

Re: How can you be (semi) retired while still having a mortgage?

Post by fingeek » Wed May 31, 2017 7:25 am

As an opposing opinion, I choose to effectively keep my home mortgaged (low rate, less than UK inflation), and leverage that equity by investing elsewhere. It's mathematically sensible when the mortgage rate is sufficiently lower than interest-earning opportunities elsewhere. I calculate/accept the risk on both sides of the arbitrage. As soon as the UK headline interest rate creeps up to ~3-4% then I will more likely pay off the mortgage.

Things might be a little different if I had a huge cash surplus, and maybe I'd pay up opportunity in exchange for laziness (I would not have waited until I had a huge cash surplus to FIRE, however).

Others did note too that there is a more general question over "rent vs own" (or more abstractly, "consume vs own"?) - We need to pay bills for gas/electric/water, or we could opt to install solar panels/microgeneration/install a personal water treatment system. We may opt to grow our own food and "lock in your cost of living" rather than be "at the mercy" of supermarkets.

May I ask, are you working? Retired? (Could you be?)

IlliniDave
Posts: 1559
Joined: Wed Apr 02, 2014 7:46 pm

Re: How can you be (semi) retired while still having a mortgage?

Post by IlliniDave » Wed May 31, 2017 8:06 am

This one's really a matter of personal style as long as things are done thoughtfully. Having a mortgage paid off gets a lot of play in the retirement finance press because it is usually a household's largest single expense and eliminating it reduces the financial accumulation required to maintain a lifestyle (as defined by ongoing spending). But with a big enough stash a mortgage payment is just like a bigger version of the electric bill.

I have two pieces of property and no mortgages. Together they are about 27% of my net worth. Although I don't consider either to be an investment per se, I like the diversification they add to my overall financial position. If I were to spring the equity to leverage more financial investments I would feel unbalanced, so I don't, even though it's easy to find math that suggests a possibility of coming out slightly ahead over time. I'll never make myself rich owning residential/recreational property in flyover country, but having the ballast of those assets gives me a bit of a just-finished-a-hearty-bowl-of-stew-in-front-of-the-fire feeling.

That's not to say others won't find success on a different path. Logic is great so long as we don't use it in a way that makes our emotions rebel.

Post Reply