Concerns regarding the ability to retire comfortably after age 65

[StatGuy2000]

Hi everyone. Due to certain unfortunate circumstances, I had taken a bit too much debt and not put in my savings. I have some concerns about whether I will be able to retire comfortably after age 65 (I am in my early 40s now).

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

 

[BWV]

The sobering fact is that a 65 year old male has a 22 year life expectancy. The max SS benefit beginning at age 66 is $34K annually. Subtract that from what you spend now and multiply by 25, that is about how much money you need in today's dollars. So if you plan to live off $70K per year, you need at least $900K in today's purchasing power when you turn 65. Most people cannot save this much therefore will either be impoverished in old age or have to work well into their 70s.

 

[Vanadium 50]

StatGuy2000 is Canadian. I don't think he gets SS.

StatGuy, the good news is you have 25 years to work at this. If you assume 5% per year growth (which is conservative), $21,000 per year savings equates to $1M at retirement age. The rule of thumb is that you can withdraw 4% of this per year. So, to a very good approximation, every dollar you save now - per month - equates to two dollars - per month - you can spend in retirement.

Can you budget for that?

 

[BWV]

Ok but 5% real - net of inflation - is not an overly conservative return assumption. Real yields are around zero in both the US and CAN

 

[Klystron]

There are general guidelines that may or may not apply to Statguy. When I moved back to this valley, mainly to help dependents, a wise old veteran cautioned me against common traps that dissipate finances faster than you realize.

1. Gambling, called 'gaming' here, including the stock market and real estate speculation.
2. Scams. This area attracts miscreants and thieves in droves, not to say the Internet.
3. Sex. Dating is an Industry here. Obtaining the objects of your desire is limited only by your funds and discretion. Even honest dating can deplete resources faster than all the above.
4. Entertainment including drugs, alcohol, legal cannabis, expensive hobbies, fast cars, etc.

What is left for the frugal? Friendship, family, work, volunteering, free libraries, exercise, affordable hobbies, and "the life of the mind"; i.e., science and math. Minimalism can be a lifestyle choice.

 

[Vanadium 50]

Ok but 5% real - net of inflation - is not an overly conservative return assumption. Real yields are around zero in both the US and CAN

There are a couple of ways I can address this. One is that inflation doesn't change the calculation I posted at all. It does, however, change the amount one needs in retirement. Maybe $1M isn't enough. Maybe you need $1.5M.

The other is to look at my own 20-year history. My assets collectively have been growing at 8.03% over the last twenty years. In that time, inflation has been 2.2%, so I have done 5.8% above inflation. And I'm no Warren Buffet. The difference between 5.0% and 5.8% over 25 years is 12%.

 

[BWV]

There are a couple of ways I can address this. One is that inflation doesn't change the calculation I posted at all. It does, however, change the amount one needs in retirement. Maybe $1M isn't enough. Maybe you need $1.5M.

The other is to look at my own 20-year history. My assets collectively have been growing at 8.03% over the last twenty years. In that time, inflation has been 2.2%, so I have done 5.8% above inflation. And I'm no Warren Buffet. The difference between 5.0% and 5.8% over 25 years is 12%.

easiest to think in real returns and constant dollars. Long Term (1900-present) real returns on US stocks are 6.5% and about 2.0% for government bonds. However current real interest rates are about zero. The annualized real S&P 500 return over the last 20 years is 3.6% (https://dqydj.com/sp-500-return-calculator/)

 

[Vanadium 50]

The annualized real S&P 500 return over the last 20 years is 3.6%

With dividends reinvested it's 5.9%. Not too far from the putative 5%. Not as good as my observed 8%, so maybe I am another Warren Buffet.

 

[BWV]

With dividends reinvested it's 5.9%. Not too far from the putative 5%. Not as good as my observed 8%, so maybe I am another Warren Buffet.

Yes, and with dividends re-invested, adjusted for inflation its 3.6%

 

[StatGuy2000]

StatGuy2000 is Canadian. I don't think he gets SS.

StatGuy, the good news is you have 25 years to work at this. If you assume 5% per year growth (which is conservative), $21,000 per year savings equates to $1M at retirement age. The rule of thumb is that you can withdraw 4% of this per year. So, to a very good approximation, every dollar you save now - per month - equates to two dollars - per month - you can spend in retirement.

Can you budget for that?

$21000 per year equates to $1750 per month savings, which is doable, although I still have some debt that I need to pay off beforehand.

Oh and for the record, we in Canada have what is called the Canada Pension Plan (CPP), which is roughly equivalent to Social Security in the US. (I am also in fact a dual Canadian/American citizen, but as I work in Canada, I don't pay into Social Security).

 

[StatGuy2000]

There are general guidelines that may or may not apply to Statguy. When I moved back to this valley, mainly to help dependents, a wise old veteran cautioned me against common traps that dissipate finances faster than you realize.

1. Gambling, called 'gaming' here, including the stock market and real estate speculation.
2. Scams. This area attracts miscreants and thieves in droves, not to say the Internet.
3. Sex. Dating is an Industry here. Obtaining the objects of your desire is limited only by your funds and discretion. Even honest dating can deplete resources faster than all the above.
4. Entertainment including drugs, alcohol, legal cannabis, expensive hobbies, fast cars, etc.

What is left for the frugal? Friendship, family, work, volunteering, free libraries, exercise, affordable hobbies, and "the life of the mind"; i.e., science and math. Minimalism can be a lifestyle choice.

1. As for me, I don't gamble, and my (past and future) investments in the stock market have been, and will continue to be, quite conservative.

2. I'm sufficiently skeptical to be wary of scams.

3. As for sex, I am single, but in a relationship. As for as I can tell, this relationship doesn't cost me too much money.

4. I don't drink or use drugs, and my hobbies are quite inexpensive (hiking/walking, reading, surfing the Internet, very much the "life of the mind" activities). And I don't own a car (not uncommon in Toronto, especially given the traffic).

 

[StatGuy2000]

The sobering fact is that a 65 year old male has a 22 year life expectancy. The max SS benefit beginning at age 66 is $34K annually. Subtract that from what you spend now and multiply by 25, that is about how much money you need in today's dollars. So if you plan to live off $70K per year, you need at least $900K in today's purchasing power when you turn 65. Most people cannot save this much therefore will either be impoverished in old age or have to work well into their 70s.

When I talk about retiring at 65, please note that I personally don't actually believe that I will actually retire at 65. I am someone that loves working, and so long as I'm healthy, I personally would be happy to keep working well into my 70s.

That being said, I want to be in a position to at least be able to retire at 65 in relative comfort if I chose. And by relative comfort, I mean not to live in extravagance, but to be able to have a roof over my head, feed myself well, and live a healthy lifestyle, not unlike how my late aunt lived.

 

[Vanadium 50]

Essentially, you have the information you need. Figure out what your cost of living will be, subtract off what CPP will give you, and escalate for inflation. Call that x. You need ~25x to retire without a risk of outliving your money. Using the 5% number that everyone hates (and I suspect that the nature of PF would be to complain about any example number), or some other number you like better, and you can work out what you need to save per month.

I suspect you will find the number doable but not very nice. Basically, you have as many years in retirement as you will have years to save for it. That means savings needs to become a significant fraction of your income. It won't be 10%.

 

[George Jones]

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

I got married when I was 43. My wife and I had our daughter (only child) when I was 46, when our combined net worth was less than $50000, and when I was on a 9-month contact and my wife was unemployed. That was quite scary.

By living frugally in the 13 years since our daughter was born, our situation has changed from "quite scary" to "somewhat scary".

When I talk about retiring at 65, please note that I personally don't actually believe that I will actually retire at 65. I am someone that loves working, and so long as I'm healthy, I personally would be happy to keep working well into my 70s.

For someone who retires now, this would make a difference to CPP (but not OAS), but it is impossible to predict the situation 20+ years from now.

From
https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html

"Taking your pension after age 65

If you take your pension late, your monthly payment amount will increase by 0.7% for each month after age 65 that you delay receiving it up to age 70 (8.4% per year).

This means that, an individual who starts receiving their retirement pension at the age of 70 will receive 42% more than if they had taken it at 65."

One can draw CPP for a smaller number of years, but at a larger rate.

 

[StatGuy2000]

To everyone:

I did a quick check of my finances.

I can most plausibly save around $1500-2000 per month. If I then save for the next 25 years, I would end up saving around $450000-$600000 (this is without factoring any interest I would be earning).

 

[gmax137]

that's 300 months. if you can get 5% annual interest your total nearly doubles.

 

[BWV]

But 5% interest does not exist these days

 

[Vanadium 50]

I can most plausibly save around $1500-2000 per month.

Pay yourself, or at least future you, first.

 

[StatGuy2000]

But 5% interest does not exist these days

So what would you suggest instead? Keep in mind that I can plausibly save $1500-2000 per month.

 

[BWV]

A broad, globally diversified low cost stock index fund is the best option for most people with a longer time horizon

 

[jtbell]

And I don't own a car (not uncommon in Toronto, especially given the traffic).

I hear the Toronto area is rather expensive (along with Vancouver and probably Montreal). You can probably reduce your cost of living considerably in retirement by moving to a smaller city or town if necessary. Here in the US, it's not unusual for people to move from California and the Northeast to cheaper parts of the country after they retire.

You'd probably need a car if you're not in a big city, but it's possible to keep the cost down. My wife and I drive small cars and keep them a long time (at least 10 years each). Our basic cost is probably about $2,500 to $3,000 per year per car, plus the cost of long road trips (gasoline and extra maintenance).

 

[Vanadium 50]

But 5% interest does not exist these days

So what would you suggest instead?

As mentioned, my pre-inflation 20-year track record is just over 8%. Twenty years ago, inflation was 2.2% and 10-year US Treasuries were 4.7% so 5% interest didn't really exist either then. And yet... here I am.

I don't think BWV's complaint should change your behavior today one iota.

You need money in the future. The way to get it is to save it today. Save it where? Wherever the right risk-reward point is for you. Note that 5% - or 8% - never factors into this. It will factor into how much you will have at retirement, but it doesn't alter where you will put it today, or how much to put in today (as much as you can).

As to where to put it, I can't provide financial advice. Many vendors sell so-called "Target date funds" which are an attempt at a one-size fits all solution. For someone looking at a 2040 retirement, most are 10-20% bonds and 90-80% stocks. There is another axis: foreign vs. domestic. In your case, I think it's more complicated, and would probably want to think of three categories: domestic, US and other international. But a 2040 Target Date Fund might be a good starting place to get ideas.

Before I bought a fund, though, I'd start by buying a book or three.

 

[StatGuy2000]

I hear the Toronto area is rather expensive (along with Vancouver and probably Montreal). You can probably reduce your cost of living considerably in retirement by moving to a smaller city or town if necessary. Here in the US, it's not unusual for people to move from California and the Northeast to cheaper parts of the country after they retire.

You'd probably need a car if you're not in a big city, but it's possible to keep the cost down. My wife and I drive small cars and keep them a long time (at least 10 years each). Our basic cost is probably about $2,500 to $3,000 per year per car, plus the cost of long road trips (gasoline and extra maintenance).

The most expensive aspect of living in the Toronto area and Vancouver involves the cost of rent (for those who rent), as well as property taxes for those who own their own homes (comparably to living in, say, New York City or San Francisco in the US).

Montreal is actually considerably cheaper to live in Canada -- I often see home prices and rents that can be anywhere from 25% to 50% less expensive than comparable homes in Toronto (the province of Quebec does have higher income taxes, although this wouldn't matter as much for retirees).

I have also thought about moving to less expensive locations elsewhere outside of Toronto when I retire as well, or even outside of North America entirely -- I have at times contemplated retiring to Malaysia or Thailand, for example.

 

[Vanadium 50]

You can probably reduce your cost of living considerably in retirement by moving to a smaller city or town if necessary.

The word "comfortably" is in the title. Regina? Too warm. How about Winnipeg? I know...Yellowknife! (and the wink is blue for a reason!)

 

[jtbell]

Or Calgary, where I was once caught in a blizzard in the middle of May.

 

[Vanadium 50]

but as I work in Canada, I don't pay into Social Security

You might discuss this with a professional. There is still time to pay in and get benefits upon retiring. Exactly how this is done depends on many things (including if and how you file US taxes), and whether it is financially advantageous is a key question. But it may not be impossible, and it may not be crazy.

 

[DaveC426913]

Hey @StatGuy2000 : fellow Canadian here. This topic has very recently become relevant to me, as my wife is retiring in a few years, and I, being younger than her, will retire few years after that.

So I have learned a new term from my Real Estate Agent: "cashing out".

Essentially, we are going to sell our investments, wipe out our debt, and buy a less expensive house in an area where housing prices are much lower.

 

[HankDorsett]

Hi everyone. Due to certain unfortunate circumstances, I had taken a bit too much debt and not put in my savings. I have some concerns about whether I will be able to retire comfortably after age 65 (I am in my early 40s now).

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

income and debt are the two biggest issues regarding retirement. You really should see a retirement advisor to help you out. that being said I do have one bit of advice. You should transfer or pay off and then stop using any debt that cost you more then your investment rate of return.

 

[BWV]

You should transfer or pay off and then stop using any debt that cost you more then your investment rate of return.

That would be all debt. No one can borrow at a cheaper rate than they can safely invest. You can borrow to invest in risky assets, but that is different. If you are retired, its stupid to own bonds and have a mortgage on your house.

 

[jtbell]

No one can borrow at a cheaper rate than they can safely invest.

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

 

[Klystron]

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

Correct. Also consider the almost-mandatory extended warranty and maintenance contract costs.

 

[Bystander]

probably

"Probably?" Emphatically.

 

[DaveC426913]

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

Which means the only difference between this and a standard interest loan is they've removed the option to pay it off early.

 

[Windadct]

Fidelity and Vanguard both have good online planning tools that allow you to set up hypothetical scenarios (risk, monthly contributions, retirement age - etc) and predict success against your retirement goals.
20 to 25 + years is a good time frame to get some good results - time is key. So do not delay, get moving.

 

[DaveC426913]

time is key. So do not delay, get moving.

Indeed.

In fact, you don't need to have a plan yet.
Start regular deposits or investments now. Even if it's 50 bucks a paycheque.

Don't wait until you know what you're going to do with it in the long run.
It'll be five years down the road and that'll be 10 grand you won't get when you retire.

 

[HankDorsett]

That would be all debt. No one can borrow at a cheaper rate than they can safely invest. You can borrow to invest in risky assets, but that is different. If you are retired, its stupid to own bonds and have a mortgage on your house.

New auto loans, mortgages and lines of Home Equity Credit often cost less than return rate for investment. A few years back you could have even used a personal loan when the Fed went a bit crazy lowering rates .25.

 

[BWV]

New auto loans, mortgages and lines of Home Equity Credit often cost less than return rate for investment. A few years back you could have even used a personal loan when the Fed went a bit crazy lowering rates .25.

Not the return on gov bonds or high rated corporates. Potential returns on risky assets, yes - but that is simply analogous to buying on margin

 

[Torbert]

I had the bad luck to get cancer in America. My health plan threw me off as soon as my costs exceeded my premium. This was legal. Medical bills took my house and all valuable possessions.
I have a 320 square foot dry cabin eight miles out of Fairbanks, Alaska. I can afford rent and food, my daughter has transportation. I will trade this internet connection for heating fuel come October.

My point is: Be prepared early for mishaps later or end up like this.

edit to add: I get social security benefits, that is the rent and food.

 

[f95toli]

Isn't part of the answer that that most people who are in their early 40s now (I'm one of them) will NOT be able to retire at 65? The official retirement age in the UK keeps going up, and is expected to be 68 when I retire.
I have a pretty good pension plan, but in terms of financial planning (for mortgages etc)I am still assuming that I will work full time until 68-69 and maybe part-time for a few years after that.

 

[Vanadium 50]

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

Everything is built into the price at some level. But in this case, that's not primarily what is going on behind the curtain. The 0% loan incentive is designed to get people in the showroom, where the vast majority of the people will be told their credit isn't good enough for the 0% loan ... "but we can get you a 4% loan with an even lower monthly payment."

Isn't part of the answer that that most people who are in their early 40s now (I'm one of them) will NOT be able to retire at 65?

Yes. People retiring in two years in the US reach "full retirement age" at 66, not 65. The "problem", if you want to call it that, with all defined benefit plans is that people are living longer. That's a problem I don't think we want to "fix". When Social Security was established, life expectancy was 61. Now it's 75. (Better numbers are that in 1935 if you made it to 65 you could expect another 13 years. Today it's closer to 20.) If "13 years to go" were held constant, retirement age today would be around 74.

 

[NTL2009]

That would be all debt. No one can borrow at a cheaper rate than they can safely invest. You can borrow to invest in risky assets, but that is different. If you are retired, its stupid to own bonds and have a mortgage on your house.

I'll provide a little different perspective on this.

While it's true one can look at paying off a mortgage as "100% safe", and therefore say it must be compared to 100% safe investments, and that those safe investments aren't likely to be higher than the mortgage rate. But...

If I'm holding a mortgage for 20-30 years, I can look at a market investment over 20-30 years, and those returns have almost always beat the low mortgage rates you might get today.

No, it's not a guarantee, but it is a really good bet, and one worth serious consideration before rejecting. If we look for guarantees on everything we do, we will do almost nothing, and probably suffer for it. I might die in a car crash going to my job, so I won't go to my job - how's that going to work out for me?

Here's one source:
https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Out of 100 20-year period samples, only 3 of them had 20 year returns less than 5%, and the lowest was 3.1% (1949, 20 years after the run-up to the Great Depression). So even the worst time in our history, you would not really be hurt much compared to a 3.5% mortgage.

Ahhh, I see they broke it down into deciles (lower right), far more useful - historically, 90% of the time the market returned more than 6.6% annualized over that 20 year period. The median was ~ 8.5%.

So if you want a guarantee, or are convinced the future will be far worse than the worst of the past 100 years, then OK, turn down this 'bet'. But I feel it is to ones advantage to take the good bets where and when we can find them. It's hard to find a better bet than 20 years in the market.

When you look for stats like this, be sure they are "Total Return" (including dividends), and not just stock/index prices.

 

[BWV]

I'll provide a little different perspective on this.

While it's true one can look at paying off a mortgage as "100% safe", and therefore say it must be compared to 100% safe investments, and that those safe investments aren't likely to be higher than the mortgage rate. But...

If I'm holding a mortgage for 20-30 years, I can look at a market investment over 20-30 years, and those returns have almost always beat the low mortgage rates you might get today.

Out of 100 20-year period samples, only 3 of them had 20 year returns less than 5%, and the lowest was 3.1% (1949, 20 years after the run-up to the Great Depression). So even the worst time in our history, you would not really be hurt much compared to a 3.5% mortgage.

Ahhh, I see they broke it down into deciles (lower right), far more useful - historically, 90% of the time the market returned more than 6.6% annualized over that 20 year period. The median was ~ 8.5%.

Well my point was holding bonds and cash relative to a mortgage - most people are not 100% stocks in their portfolio.
So, yes if you grant that over 20 year periods stocks beat mortgage interest rates, it looks like a good trade. The problem is that funds to service the mortgage have to come from the portfolio, so the path of the stock returns, not just the geometric mean matter. The annual debt service on a $200K mortgage @3% is about $13.5K - so you have to sell this amount of stocks every year (assuming any dividends are consumed by other living expenses). So you can come out worse with sufficient volatility even if the 20year annualized return beats the mortgage rate

 

[Vanadium 50]

If I'm holding a mortgage for 20-30 years, I can look at a market investment over 20-30 years, and those returns have almost always beat the low mortgage rates you might get today.

This is essentially the same as paying off your mortgage but investing on margin. (Only with less of a regulation safety net) This increases your leverage, allowing you to capture more gains. At a cost of increased risk, of course.

 

[BWV]

This is essentially the same as paying off your mortgage but investing on margin. (Only with less of a regulation safety net) This increases your leverage, allowing you to capture more gains. At a cost of increased risk, of course.

Yes, with the big difference being no margin call if the market tanks - which makes is a vastly preferable form of leverage

 

[Michael Price]

Hi everyone. Due to certain unfortunate circumstances, I had taken a bit too much debt and not put in my savings. I have some concerns about whether I will be able to retire comfortably after age 65 (I am in my early 40s now).

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

As some one who has just retired at 59, and spent a few months researching, let me share a few tips.
1) take control of your savings. If necessary take early retirement and cash out your pension plan. (You may have to pay tax on withdrawals.). Or else start saving. (That may be the difficult bit!) You can get much higher long term returns by accepting minimal short term risks,
2) don't listen to financial planners/advisors. I found out the hard way that their advice is awful.
3) invest in technology investment funds. You should be able get over 20%+ return per annum.
4) I assume you have the maths to handle compound interest, and can work out the jaw dropping implications of 3).
5) I know 20%+ sounds unbelievable, so here is a sample of some the funds I have - you can look up their historical returns over 5 , 10, 15 years. I'm a Brit so I shall give the London FTSE ticker codes.
Scottish Mortgage Investment Trust, London ticker code: SMT.L
https://uk.finance.yahoo.com/quote/SMT.Lhttps://www.ii.co.uk/investment-trusts/scottish-mortgage-ord/LSE:SMT (this is a very informative link)
And other examples (just the codes):
LTI.L
EQQQ.L
ATT.L
I could give other examples, but one of my portfolio websites is down for maintenance this weekend.

As they always say, though, do your own research!

 

[Michael Price]

A broad, globally diversified low cost stock index fund is the best option for most people with a longer time horizon

Absolutely. Don't even dream of putting savings in a bank, bonds or property. Much higher returns in equities, particularly technology stocks. Plenty of well managed technology investment funds, including trackers, are available..

 

[BWV]

Remember beating the market is a zero-sum game (and probably should not be recommending specific securities here)

SMT.L is a leveraged closed end fund, so carries higher risk than the market a whole, it has outperformed the market - in USD terms, 17.8% annualized for the past 10 years vs. 13.7% for the S&P 500 and 10.2% for the MSCI All-Country World Index (a cap weighted index of global markets, including the US). Its focused on tech stocks - with top holdings Amazon, Illumina, Tencent and Ali Baba. So, its buying FAANG (and BAT) stocks on margin) Been a great place to have been over the past several years, may or may not be going forward.

 

[NTL2009]

Well my point was holding bonds and cash relative to a mortgage - most people are not 100% stocks in their portfolio.
So, yes if you grant that over 20 year periods stocks beat mortgage interest rates, it looks like a good trade. The problem is that funds to service the mortgage have to come from the portfolio, so the path of the stock returns, not just the geometric mean matter. The annual debt service on a $200K mortgage @3% is about $13.5K - so you have to sell this amount of stocks every year (assuming any dividends are consumed by other living expenses). So you can come out worse with sufficient volatility even if the 20year annualized return beats the mortgage rate

Let's take a real look at that.

Consider a 20 year mortgage, $200K @ 3.5% ('worse' than your 3.0% example), monthly payments are $1,160. $13,920 annual.

Before I continue, I'll point out that your "(assuming any dividends are consumed by other living expenses)" is double-counting. If you didn't have the mortgage, you would not have the $200,000 invested to provide divs for other living expenses either, so cross that, in both cases those expenses need to be paid out of other sources.

https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Zooming in, I estimate year 2018 to have returned 6.67% ( 5% plus ~ 1/3rd of the next 5% line), the lowest in recent history. That conveniently puts us right on the border of the lowest 10% and 20% decile points, so that makes a pretty good 'bad-case' scenario; worse than ~ 90% of history.

We can back test this here:

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
This shortened link shows you that a 75/25 Asset Allocation (pretty typical for someone in the accumulation phase of life, and accepts your premise that most people are not 100% stocks) returned ~ 6.38% annualized (with annual re-balance), in-line with our market return estimate of 6.67%: http://bit.ly/2Zd0LNG

The tool let's you adjust for deposits/withdrawals, so here is a short link with a monthly $1,160 withdrawal (fixed, no inflation adjustment to match a fixed rate mortgage): http://bit.ly/2ZeoAVc

At the end of 20 years, the mortgage is paid off, you both have 100% equity in the house, but the mortgage holder has $100,098 additional money in their portfolio. And this is a 'bad-case' scenario. 90% of the time periods in history were better, many far, far better. And the worst ones were not so far down from that.

If I take a recent 'good-case' (but far from the best - it looks to be close to median returns), 1994-2014, the mortgage holder ends up with an astounding $460,535 additional money in their portfolio!

 

[NTL2009]

This is essentially the same as paying off your mortgage but investing on margin. (Only with less of a regulation safety net) This increases your leverage, allowing you to capture more gains. At a cost of increased risk, of course.

See my above examples - yes, there is a risk to this, but history shows that risk to be small. But if an individual has looked at that, and does not want to accept that risk, that is up to them.

I present it to try to demonstrate that the risk is small, to put it in perspective. I think many only think of the short term affect of a market crash/correction, and get scared by that, rather than looking at the long term. I think this looks even better for 30 year periods, but I'll leave that to the interested student :)

But I do have to wonder, if that 'bet' is too risky for someone, would they ever invest in equities? It seems to lead to saying that while you are in the growth/accumulation phase of life, and you have a mortgage, that all of your portfolio should be in cash/bonds, until that mortgage is paid off? That seems too conservative to me. And being too conservative is actually (historically at least) more of a threat to a retirement portfolio than being 100% stocks. History shows that at about less than 30% in stocks has more failures than a 100% stock portfolio. Inflation.

 

[BWV]

Let's take a real look at that.

Consider a 20 year mortgage, $200K @ 3.5% ('worse' than your 3.0% example), monthly payments are $1,160. $13,920 annual.

Before I continue, I'll point out that your "(assuming any dividends are consumed by other living expenses)" is double-counting. If you didn't have the mortgage, you would not have the $200,000 invested to provide divs for other living expenses either, so cross that, in both cases those expenses need to be paid out of other sources.

https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Zooming in, I estimate year 2018 to have returned 6.67% ( 5% plus ~ 1/3rd of the next 5% line), the lowest in recent history. That conveniently puts us right on the border of the lowest 10% and 20% decile points, so that makes a pretty good 'bad-case' scenario; worse than ~ 90% of history.

We can back test this here:

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
This shortened link shows you that a 75/25 Asset Allocation (pretty typical for someone in the accumulation phase of life, and accepts your premise that most people are not 100% stocks) returned ~ 6.38% annualized (with annual re-balance), in-line with our market return estimate of 6.67%: http://bit.ly/2Zd0LNG

The tool let's you adjust for deposits/withdrawals, so here is a short link with a monthly $1,160 withdrawal (fixed, no inflation adjustment to match a fixed rate mortgage): http://bit.ly/2ZeoAVc

At the end of 20 years, the mortgage is paid off, you both have 100% equity in the house, but the mortgage holder has $100,098 additional money in their portfolio. And this is a 'bad-case' scenario. 90% of the time periods in history were better, many far, far better. And the worst ones were not so far down from that.

If I take a recent 'good-case' (but far from the best - it looks to be close to median returns), 1994-2014, the mortgage holder ends up with an astounding $460,535 additional money in their portfolio!

Yes but to my earlier point, if you arent 100% stock, you could do marginally better owning more stocks and paying off the mortgage. Your 6.7% return is a mix of 75% stock returns and 25% bond returns. Assuming bond returns < mortgage interest rate. So if you had $1M plus a 200K mortgage the comparison is between 75/25 and keeping the mortgage or paying off the mortgage and investing 800K at 95/5.

Also - your analysis above mixes past higher bond returns and yields with current low mortgage rates. You could not get a 3.5% fixed rate mortgage 20 years ago. 10 year Treasury yields were around 5.8% 20 years ago