Correct. Also consider the almost-mandatory extended warranty and maintenance contract costs.jtbell said: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.
"jtbell said:probably
Which means the only difference between this and a standard interest loan is they've removed the option to pay it off early.jtbell said: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.
Indeed.Windadct said:time is key. So do not delay, get moving.
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 said: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.
Not the return on gov bonds or high rated corporates. Potential returns on risky assets, yes - but that is simply analogous to buying on marginHankDorsett said: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.
jtbell said: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.
f95toli said: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?
BWV said: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.
Well my point was holding bonds and cash relative to a mortgage - most people are not 100% stocks in their portfolio.NTL2009 said: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%.
NTL2009 said: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.
Yes, with the big difference being no margin call if the market tanks - which makes is a vastly preferable form of leverageVanadium 50 said: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.
As some one who has just retired at 59, and spent a few months researching, let me share a few tips.StatGuy2000 said: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!
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 said:A broad, globally diversified low cost stock index fund is the best option for most people with a longer time horizon
BWV said: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 said: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 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.NTL2009 said: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!
BWV said: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. ...
BWV said:... 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
Why does the smaller portfolio have a lower weight in stocks? It should beNTL2009 said:Yes, but does that materially change anything about this?
I re-ran the numbers. putting all $200K to stocks takes you to 79.16% equiteies, I rounded to 80%:
$1M, 75/25 no mortgage 1998-2018 - $1,000,000 $3,668,174
$1.2M 80/20 mortgage payments 1998-2018 $1,200,000 $3,798,340
delta $130,166.00
Very true - and I would not recommend this in times of high mortgage rates. But for some time, we have had historically low rates. Is it possible the market does poorly in the 20 years following low interest rate opportunities? I suppose. But this 'works' for over 90% of 20 year period returns, so it sure does not seem 'cherry picked' in that sense. That would be interesting to evaluate. I would lean towards there being little correlation, but I really don't know. May look into it later, or hopefully someone else here beats me to it!
But just to make that clear after that added text - a low rate mortgage would not be available in all those time periods, those are just used to show what we might expect when we can get a low rate loan.
BWV said:Why does the smaller portfolio have a lower weight in stocks? It should be
$1.2M 75/25 (keep mortgage)
$1.0M 90/10 (less $200K mortgage payoff)
Also 20 year mortgage rates 20 years ago were about 7.5%. So instead of $14K in debt service, it is about $20K (and the 7.5% mortgage rate is higher than the overall portfolio return). Of course you could have refinanced at some point, mortgage debt has that advantage, but to my earlier point, Mortgage rates are NEVER below government bond yields of comparable duration.
NTL2009 said:I thought you were looking to model the case where you have an extra $200K to invest, because you took out the mortgage, so you put it all in stocks (beacuse you anticipate lower bond rates on the income side)? Am I misunderstanding?
As I said, I wouldn't be calling this a great opportunity with 7.5% mortgage rates. But bonds do more than just provide a modest return for you. Some need them as a bit of an emotional cushion, to 'smooth the ride'. And they *might* provide some smoothing or even gain with the annual re-balance (some buy low, sell high activity, but this is usually modest and sometimes even negative, selling too soon).
My point is that if you are 70/30 or 100/0, the historical 20 year market returns, even with a 3.5% mortgage drawdown, will almost always provide a positive outcome.
A quick search, I only found mortgage rates back to 1971, will check later if no one else does.
BWV said:Yes, with the big difference being no margin call if the market tanks - which makes is a vastly preferable form of leverage
Michael Price said: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.
BWV said: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.
A 5 year return counter example:Vanadium 50 said:You do see the irony of providing investment advice yourself after point (2)?
20% return per year over 20 years is a factor of 38. Are you really telling Statguy2000 that if he wants to retire with a million dollars 20 years from now, he can do this for $2100/month for one year and then he can stop?
20% return per year over 20 years is a factor of 38. This is a factor of 16 better than the S&P 500 did historically.
If you look at Morningstar's Technology Funds, of the 172 funds listed, the number that have hit 20% per year for 3 months is 58. The number that have hit 20% over the last year is zero. Over the last three years, it's zero and over five years, yet again zero.
Finally, your investment advice is predicated on the notion that technology stocks are systematically undervalued relative to the rest of the market, and will continue to be so for the next 20 years. I think we can all agree that that's quite a statement.
I don't have to convince anybody. Just saying what works for me. I have spread myself amongst about 7 or 8 investment funds, with a similar performance to Allianz Tech'. And the first example I gave (SMT.L 19.5% p.a. over 5 years) has been around for over a century.Vanadium 50 said:Yes, but a) ATT:LSE hasn't been around for 20 years, and b) the fact you can pick one fund after the fact that did well is a whole different kettle of fish from being able to pick one beforehand that will go up a factor of 38. This is painfully close to the advice, "Buy a stock and when it goes up, sell it. If it don't go up, don't buy it."