Retired from Medicine at 43: Why, How, and What Now?

[Guillemot]

I think it depends on the doc. I know what you mean, but I really like to think it's more personality than anything else. A hard worker, who stays up to date and avoids stagnation into his/her 60's was probably the same way (or a bit less) in his/her 30/40's. The slackers, the same.

I definitely see slow down with docs in their 60's but it doesn't need to be compromising clinically or even production wise if managed well.

I'll admit that I often want to say "OK BOOMER" to my older colleagues. I fear becoming entitled & clueless as some of them have become.

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[dpmd]

How any of u guys are getting into the multi millions sounds like such magic to me. I just started my career and feel so behind both my MD and non-MD peers. Multi-million savings/investments is but a dream to me...

Pay yourself first. Make your budget based off after savings (tax deferred and taxable)numbers. Try not to get a taste for super expensive crap. Save money where it doesn't hurt (store brand stuff usually tastes as good as the more expensive stuff, buying in bulk can save money over time if you have the space for it, off season travel is often more fun since there aren't crowds). It will add up over time.

 

[Mman]

How any of u guys are getting into the multi millions sounds like such magic to me. I just started my career and feel so behind both my MD and non-MD peers. Multi-million savings/investments is but a dream to me...

the single most important step is your savings rate (how much actual dollars you put away per month/year). The 2 steps to getting that as high as possible are earning more and spending less. Obvious but needs to be said. The actual mechanisms behind where you put the money are less important than saving as much as possible.

And like they say, the first million is the hardest. The bigger your savings gets, the more you let compound interest work it's magic. Took me 6 years as an attending to hit a net worth of $1M. Another 3 years to hit $2M and another 2 years to hit $3M.

 

[vector2]

the single most important step is your savings rate (how much actual dollars you put away per month/year). The 2 steps to getting that as high as possible are earning more and spending less. Obvious but needs to be said. The actual mechanisms behind where you put the money are less important than saving as much as possible.

And like they say, the first million is the hardest. The bigger your savings gets, the more you let compound interest work it's magic. Took me 6 years as an attending to hit a net worth of $1M. Another 3 years to hit $2M and another 2 years to hit $3M.

Now if only my 10-11 year cycle could've started in 2008 instead of 2018.

 

[pgg]

Can't really ignore the role the 2009-present stock market has played for the current generation. Real estate has been great since then too.

The 1998-2008 period looked a little different.

Go digging for some 2008 posts and you'll find more than one anesthesiologist here lamenting not being a millionaire any more. Obviously those who stayed the course ended up doing fine, but no one knows if tomorrow we'll enter a decade+ Japan-style stagnant period.

Rates of spending, saving, and divorce are most important. That's where to look for controllable financial success.

 

[Mman]

Now if only my 10-11 year cycle could've started in 2008 instead of 2018.

You definitely don't want a massive bull run at the start of your career because that is when you will have the least amount of money invested. Much better for your long term financial health for it to happen 20 years into your career. Anesthesiologists retiring right now are the ones that hit the real jackpot.

 

[deleted126335]

You definitely don't want a massive bull run at the start of your career because that is when you will have the least amount of money invested. Much better for your long term financial health for it to happen 20 years into your career. Anesthesiologists retiring right now are the ones that hit the real jackpot.

If they take some of their chips off the table. I knew more than one doc who came out of retirement or out of part time after 2000-2002 and 2008-2009


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[Mikkel]

Slow and steady my friend. 5.5 years in and this is what I’ve done (no new advice here):
-maximize all pretax options (401k/profit sharing plan for you and spouse, HSA, Cash Balance Plan if your group offers it)
-if your state offers a tax deduction, at least contribute enough in the 529 to max that out
-Backdoor Roth IRAs for you and your spouse
-all extra $ decide between: paying off student loans/mortgage, extra investments in brokerage account, additional money in 529 other than above OR some combination of the above.

Try not to grow your lifestyle too much (it will obviously grow some as your income grows, especially if you have a spouse and kids). Have sufficient disability and life insurance.

I’m a big believer in tracking net worth on a spreadsheet. I find it very affirming to update this monthly. It allows you to visibly see progress from paying all of this money towards student loans when it otherwise feels almost insurmountable.

Good luck.

And people should remember that a mortgage is a negative wealth value. Pay that off first before you go taxable investment accounts.

 

[Mman]

If they take some of their chips off the table. I knew more than one doc who came out of retirement or out of part time after 2000-2002 and 2008-2009


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clearly if they are not good at managing investments it does not necessarily benefit them. Anybody with a very high (say 75-80% or more) allocation to stocks when they retire is asking for trouble.

 

[Mman]

And people should remember that a mortgage is a negative wealth value. Pay that off first before you go taxable investment accounts.

whaaat?

A fixed rate mortgage at something like 4% or less is guaranteed to provide less return on your money than the same money invested in equities for 30 years. A mortgage is also a hedge against inflation because your monthly payment stays the same in dollars no matter how those dollars decrease in value.

A mortgage is simple interest, an investment in compound interest. It is a key difference and never mind the fact that interest is tax deductible.

Now I'm not saying don't pay off a mortgage. People need to invest and pay down debt in whatever way helps them "stay the course", but simple calculators can show how bad of an idea that can be long term.

 

[Mikkel]

whaaat?

A fixed rate mortgage at something like 4% or less is guaranteed to provide less return on your money than the same money invested in equities for 30 years. A mortgage is also a hedge against inflation because your monthly payment stays the same in dollars no matter how those dollars decrease in value.

A mortgage is simple interest, an investment in compound interest. It is a key difference and never mind the fact that interest is tax deductible.

Now I'm not saying don't pay off a mortgage. People need to invest and pay down debt in whatever way helps them "stay the course", but simple calculators can show how bad of an idea that can be long term.

You're losing 4%+ in mortgage interest every year. It's a cost that is forever lost.

Investments in equities are subject to risk and taxation, both on growth and on dividends.

Paying $20-$40k in interest every year for so many years goes against any potential unrealized gains.

 

[Mman]

You're losing 4%+ in mortgage interest every year. It's a cost that is forever lost.

Investments in equities are subject to risk and taxation, both on growth and on dividends.

Paying $20-$40k in interest every year for so many years goes against any potential unrealized gains.

unless you want to argue equities will return <1% per year over 30 years, not much argument in favor of the mortgage. The mortgage is simple interest, the amount of interest paid each month is less than the previous. Investment earnings are compound interest. The amount of interest (on average) goes up every month.

Simple example, pay an extra $1000 on your mortgage this month and you save maybe $40 in interest this year or at most $1200 over the life of the mortgage. If on the other hand you invested that $1000 and it grew at a CAGR of 3% (less than the mortgage rate), you'd end up with $1400 in gains after 30 years. Even if it grew at only 1% CAGR, you'd still end up with about $350 in gains. If it grew at 5% CAGR, you'd end up with $3300 in gains after 30 years.

As for the tax consequences, paying long term capital gains on your investment gains is currently 20% rate and the deduction on your mortgage interest is at your marginal rate (probably 37%).


And keep in mind that 3% equity return over 3 decades is probably lower than the most bearish prognosticator on the planet and it still beats paying that 4% mortgage, the math if equities return anything like a normal 30 year period is staggering. The worst 30 year return in S&P history was 8%.

 

[dpmd]

You're losing 4%+ in mortgage interest every year. It's a cost that is forever lost.

Investments in equities are subject to risk and taxation, both on growth and on dividends.

Paying $20-$40k in interest every year for so many years goes against any potential unrealized gains.

The total interest payment over the life of your mortgage is a known set amount that is simple interest. For many people it is tax deductible meaning the amount "lost" is even less. Taxable investments however are likely compound interest and therefore over the life of the loan the amount your gain will far outpace the amount you lost to mortgage interest even after taxes. If your mortgage rate is higher or your time horizon is shorter than the equation may switch to favoring paying off the mortgage (especially for nondeductible interest). But as a blanket statement it is incorrect that you must pay off a mortgage before taxable investing.

 

[Mikkel]

The total interest payment over the life of your mortgage is a known set amount that is simple interest. For many people it is tax deductible meaning the amount "lost" is even less. Taxable investments however are likely compound interest and therefore over the life of the loan the amount your gain will far outpace the amount you lost to mortgage interest even after taxes. If your mortgage rate is higher or your time horizon is shorter than the equation may switch to favoring paying off the mortgage (especially for nondeductible interest). But as a blanket statement it is incorrect that you must pay off a mortgage before taxable investing.

$10k cap on mortgage interest deduction, and it's a discount of maybe 35% ($3500).

Mortgage interest is compounded as well, which is why it takes so many years to get 50% equity in your house.

 

[dpmd]

$10k cap on mortgage interest deduction, and it's a discount of maybe 35% ($3500).

Mortgage interest is compounded as well, which is why it takes so many years to get 50% equity in your house.

No, mortgage interest is simple for all the typical types of loans people take. If you make your payments late you may get late fees, but the interest never gets added to the principal with you paying more interest later. You might be confused because extra payments do compound (in that if you pay more now you pay less overall interest), but if you pay normal payments you never pay interest on any accrued interest.

 

[banister]

$10k cap on mortgage interest deduction, and it's a discount of maybe 35% ($3500).

Mortgage interest is compounded as well, which is why it takes so many years to get 50% equity in your house.

Mortgage interest is capped at a mortgage value of $750,000, or $1M for mortgages that existed as of December 14, 2017. So for a $750,000 mortgage at 3.5%, it could be over $25k in deductions, making it worth itemizing eductions.

You're thinking about SALT (state and local taxes) that is limited to $10k cap.

 

[Mman]

$10k cap on mortgage interest deduction, and it's a discount of maybe 35% ($3500).

Mortgage interest is compounded as well, which is why it takes so many years to get 50% equity in your house.

you are failing basic financial literacy on this one. The interest you pay on a mortgage decreases every single month over the course of the loan which makes it simple interest, not compound. Every payment has principal and interest, so your next month the interest is calculated from a lower principal than the previous month (hence the drop in interest paid each month).

Investments generate compound interest in that the interest is paid on both the initial principal but also on the accumulated interest which is why it's a larger and larger amount each month. Obviously stocks go up and down, but over 30 years it's going up and probably way up. The tax deductibility of the mortgage payments combined with the long term capital gains rate makes it a total no brainer financially.


Like I said, I'm not saying every person should necessarily only pay the bare minimum amount on their mortgage and put every other penny into stocks. I and others in this thread are just saying that if you run the numbers that would almost always be a better idea long term. I actually have no problem with people paying extra on their mortgage if it helps them feel good about staying on course and not making rash decisions if the market tanked.

 

[Mikkel]

I have over $400k of mortgage left at nearly 5%. I can deduct $21k of mortgage interest this year, so I'll get a discount of $7.5k.

For the life of the loan if over 30 years, I would have paid $750k in interest, $262k in discount via tax deduction, so net negative $500k from interest alone.

Inflation will devalue the principal I pay early, but doesn't it devalue the stock as well? 6% annualized return, minus the 1% annual inflation, gets me near the 5% interest rate on the mortgage.

And any realized gains on stocks get taxed at capital gains rate, so marginal discount is absolute 15% (35% top bracket vs 20% marginal rate).

I can see what you're saying, but I think the calculations aren't as favorable as you think, especially with the risk of stock devaluation in any bear market (and I understand realized vs unrealized loss in bear markets, but I'm factoring in illiquidity during those bear markets as a disincentive for loading up heavy on stocks instead of paying debts).


Hind sight is great, it could prove anyone right or wrong, but I feel safer knowing that my worst case scenario is not having as much gain in a market as someone else, but your worst case scenario might be 50% down in the market and no liquidity to invest low.

 

[Mikkel]

you are failing basic financial literacy on this one. The interest you pay on a mortgage decreases every single month over the course of the loan which makes it simple interest, not compound. Every payment has principal and interest, so your next month the interest is calculated from a lower principal than the previous month (hence the drop in interest paid each month).

What I meant by compounded interest is that the longer you pay your mortgage, the less money you have available for the life of the loan compared to your twin who paid off the mortgage as quickly as possible.

I ran the calculations of 5% interest rate vs annualized 6% gain in the market minus inflation, and it's almost equivalent (more in favor of early mortgage completion), but slightly less in favor if itemizing and deducting all mortgage interest and accounting for capital gains rate of 20% vs marginal rate of 35%.

I factored in the risks of one approach to the other, and you're right, I do feel better avoiding risks in a downturn.

 

[dpmd]

you are failing basic financial literacy on this one. The interest you pay on a mortgage decreases every single month over the course of the loan which makes it simple interest, not compound. Every payment has principal and interest, so your next month the interest is calculated from a lower principal than the previous month (hence the drop in interest paid each month).

Investments generate compound interest in that the interest is paid on both the initial principal but also on the accumulated interest which is why it's a larger and larger amount each month. Obviously stocks go up and down, but over 30 years it's going up and probably way up. The tax deductibility of the mortgage payments combined with the long term capital gains rate makes it a total no brainer financially.


Like I said, I'm not saying every person should necessarily only pay the bare minimum amount on their mortgage and put every other penny into stocks. I and others in this thread are just saying that if you run the numbers that would almost always be a better idea long term. I actually have no problem with people paying extra on their mortgage if it helps them feel good about staying on course and not making rash decisions if the market tanked.

Yeah, as part of diversifying your portfolio it could take the place of bonds probably.

 

[Mman]

What I meant by compounded interest is that the longer you pay your mortgage, the less money you have available for the life of the loan compared to your twin who paid off the mortgage as quickly as possible.

I ran the calculations of 5% interest rate vs annualized 6% gain in the market minus inflation, and it's almost equivalent (more in favor of early mortgage completion), but slightly less in favor if itemizing and deducting all mortgage interest and accounting for capital gains rate of 20% vs marginal rate of 35%.

I factored in the risks of one approach to the other, and you're right, I do feel better avoiding risks in a downturn.

You ran your numbers incorrectly for 5% mortgage vs 6% gain in the market. It's not even close at that point.

$500,000 mortgage at 5% interest would have a monthly payment of $2684. If you wanted to pay it off in 10 years, you'd have to pay $5303 per month ($636,360). Those $2619 per month ($5303-$2684) invested for 10 years at a 6% annual return would generate a final total of $429,200 as compared to the $406,727 you would have left on the mortgage at that point if you had only paid the minimum $2684. So your twin who did not pay off the loan early has an extra $22,500 or so in net worth compared to you who paid off their mortgage 20 years early.

And that's ignoring that you can deduct the mortgage interest for a higher marginal tax rate than you would pay on the gains you invested. And that's ignoring that 6% return would be like 25% worse than the previous worst 30 year return of all time in the S&P.

Investing to gain compound interest always beats paying simple interest mortgage unless you are getting a far lower return than your mortgage rate.

Paying a mortgage early can have a behavioural benefit for some people, but there is no real mathematical justification for it.

 

[Kuratz]

I'm still a resident so hitting just a positive net worth seems so far from reality that it's hard to relate to others suggesting they need $5-10MM to retire.

Have a feeling the compensation aspect of medicine won't be so kind to my generation, which is fine since I think $2-3M + paid off home is more than enough. But it also feels a bit discouraging to know that I won't hit zero until mid-thirties while plenty of peers will be far ahead. It's a scary prospect if you have both large debt and the spectre of the floor giving out on salaries at the same time. Need medicine to continue to pay ~$200k in 2019 dollars over the course of a career in order for this debt and time sacrifice to be worth it, imo.

As an aside: my in-laws have offered to pay private K-12 tuition for our future kids but there is no way in hell we'll do it. I grew up blue collar and after having been around the private school sphere via my wife I will not let my kids isolate themselves in a high society bubble. They can sit next to the immigrant/trailer park/middle class kid at public school and learn to recognize how lucky they are. Most cradle to grave private school folks have a condescending aura about them that is usually not at all intentional but glaringly tone-deaf to anyone who has genuinely struggled or doesn't have much.

Honestly I think some of this multi-million dollar talk is tone deaf when the techs/nurses/aides you work with on a daily basis bust their ass and will never sniff anything close to that.

 

[vector2]

As an aside: my in-laws have offered to pay private K-12 tuition for our future kids but there is no way in hell we'll do it. I grew up blue collar and after having been around the private school sphere via my wife I will not let my kids isolate themselves in a high society bubble. They can sit next to the immigrant/trailer park/middle class kid at public school and learn to recognize how lucky they are. Most cradle to grave private school folks have a condescending aura about them that is usually not at all intentional but glaringly tone-deaf to anyone who has genuinely struggled or doesn't have much.

Honestly I think some of this multi-million dollar talk is tone deaf when the techs/nurses/aides you work with on a daily basis bust their ass and will never sniff anything close to that.

You are a fool if you refuse your in-laws generous offer. If your kids go to private school and turn into obnoxious snobs, that is your failing- not the school's.

 

[VA Hopeful Dr]

I'm still a resident so hitting just a positive net worth seems so far from reality that it's hard to relate to others suggesting they need $5-10MM to retire.

Have a feeling the compensation aspect of medicine won't be so kind to my generation, which is fine since I think $2-3M + paid off home is more than enough. But it also feels a bit discouraging to know that I won't hit zero until mid-thirties while plenty of peers will be far ahead. It's a scary prospect if you have both large debt and the spectre of the floor giving out on salaries at the same time. Need medicine to continue to pay ~$200k in 2019 dollars over the course of a career in order for this debt and time sacrifice to be worth it, imo.

As an aside: my in-laws have offered to pay private K-12 tuition for our future kids but there is no way in hell we'll do it. I grew up blue collar and after having been around the private school sphere via my wife I will not let my kids isolate themselves in a high society bubble. They can sit next to the immigrant/trailer park/middle class kid at public school and learn to recognize how lucky they are. Most cradle to grave private school folks have a condescending aura about them that is usually not at all intentional but glaringly tone-deaf to anyone who has genuinely struggled or doesn't have much.

Honestly I think some of this multi-million dollar talk is tone deaf when the techs/nurses/aides you work with on a daily basis bust their ass and will never sniff anything close to that.

If you have good public schools, by all means go that route.

But if you don't, or if your children would benefit from the extra attention of a private school, don't deprive them of an advantage just because you don't like the way some private school graduates conduct themselves.

Edit: @vector2 beat me to it

 

[Mman]

I grew up blue collar and after having been around the private school sphere via my wife I will not let my kids isolate themselves in a high society bubble. They can sit next to the immigrant/trailer park/middle class kid at public school and learn to recognize how lucky they are. Most cradle to grave private school folks have a condescending aura about them that is usually not at all intentional but glaringly tone-deaf to anyone who has genuinely struggled or doesn't have much.

I think a person's attitude as an adult is far more a function of their parents and how they were raised than it has anything to do with where they went to school as a child.

 

[deleted50478]

Yeah, as part of diversifying your portfolio it could take the place of bonds probably.

It could very well provide a better return than bonds but wouldn’t allow you to rebalance into stocks (aka buy low) following a downturn.

 

[dpmd]

It could very well provide a better return than bonds but wouldn’t allow you to rebalance into stocks (aka buy low) following a downturn.

True. I can't say i didn't fail to assess the numbers correctly at first either. I have two homes I have paid off the mortgages on early (both are currently rentals but used to be my residences). But I have learned my lesson and am not prepaying my current mortgage.

 

[pgg]

As an aside: my in-laws have offered to pay private K-12 tuition for our future kids but there is no way in hell we'll do it. I grew up blue collar and after having been around the private school sphere via my wife I will not let my kids isolate themselves in a high society bubble. They can sit next to the immigrant/trailer park/middle class kid at public school and learn to recognize how lucky they are. Most cradle to grave private school folks have a condescending aura about them that is usually not at all intentional but glaringly tone-deaf to anyone who has genuinely struggled or doesn't have much.

There are good public schools where that kind of mixing is maybe beneficial, and at the other end of the spectrum there are public schools that are disruptive gladiator academies that will stunt growth and harm your kids' mental health.

There are private schools that are high society bubbles full of ****head entitled teenagers driving beemers, and there are private schools with normal kids from normal middle class families in them.

And it doesn't have to be an either/or all-or-nothing K-12 public vs K-12 private. In the worst case, bad kids don't start becoming bad influences and disruptive until about middle school. We ended up sending our kids to a private high school but they were in public schools before then.

 

[pgg]

Mortgage interest is capped at a mortgage value of $750,000, or $1M for mortgages that existed as of December 14, 2017. So for a $750,000 mortgage at 3.5%, it could be over $25k in deductions, making it worth itemizing eductions.

You're thinking about SALT (state and local taxes) that is limited to $10k cap.

With the near-doubling increase in the standard federal deduction in 2018, the mortgage interest deduction got a lot less useful.

Paying 3.5% on $750K just to squeeze a few $K over the $24,400 standard deduction and ultimately save a couple thousand $ on actual taxes paid isn't really a compelling benefit.

As an inflation hedge, maybe it makes some sense to keep a low fixed rate mortgage for a longer period.

Carrying debt just for the interest deduction on taxes is a weak at best rationale. People do funny things for tax reasons, like buy overpriced electric vehicles for the state rebate, or 6001 pound SUVs they don't need for the old section 179 loophole ...

For physicians, the lion's share of legit deductions are going to come off the 1099 side, or be deducted before the corporation pays the individual. Including mortgage interest, I didn't have more than $24K to deduct on the W-2 side in 2018.

 

[Mman]

For physicians, the lion's share of legit deductions are going to come off the 1099 side, or be deducted before the corporation pays the individual. Including mortgage interest, I didn't have more than $24K to deduct on the W-2 side in 2018.

My SALT taxes blow past 10K early in the year so the additional 25K or so in mortgage interest I can deduct helps go way past the standard deduction.

But for investing instead of paying off mortgage early, the real benefit is the giant gains you see down the road in the invested compound interest returns compared to the relatively low simple interest you pay on a mortgage. Tax write deduction is just a secondary mild benefit.

 

[pgg]

My SALT taxes blow past 10K early in the year so the additional 25K or so in mortgage interest I can deduct helps go way past the standard deduction.

But for investing instead of paying off mortgage early, the real benefit is the giant gains you see down the road in the invested compound interest returns compared to the relatively low simple interest you pay on a mortgage. Tax write deduction is just a secondary mild benefit.

Got it

My mortgage interest (approximately a $300K house in sorta-rural Virginia) had never been above about $10K, all of my my W-2 income is untaxed at the state level, and I'm exempt from state personal property taxes too. Being about 10 years into a 15 year loan, the amount of interest we were paying was nearly nothing. Just no way to exceed the standard deduction without some really dodgy accounting.

As for the invested compound interest down the road - that assumption has held well the last 10 years, but who knows if it will for the next 10 or 20? It assumes real returns after taxes of more than 3.5% or 4% which seems reasonable. Fixed income investment options being what they are of late, a guaranteed 3.5 or 4% return by paying a mortgage early doesn't seem so bad. I wonder if there's some recency bias influencing the idea of buying stocks instead of paying off a mortgage.

 

[dpmd]

Got it

My mortgage interest (approximately a $300K house in sorta-rural Virginia) had never been above about $10K, all of my my W-2 income is untaxed at the state level, and I'm exempt from state personal property taxes too. Being about 10 years into a 15 year loan, the amount of interest we were paying was nearly nothing. Just no way to exceed the standard deduction without some really dodgy accounting.

As for the invested compound interest down the road - that assumption has held well the last 10 years, but who knows if it will for the next 10 or 20? It assumes real returns after taxes of more than 3.5% or 4% which seems reasonable. Fixed income investment options being what they are of late, a guaranteed 3.5 or 4% return by paying a mortgage early doesn't seem so bad. I wonder if there's some recency bias influencing the idea of buying stocks instead of paying off a mortgage.

You are still making the mistake of comparing compound interest investments with simple interest mortgage though. You are correct that keeping it for a deduction would be dumb. Paying a little extra while also investing may give you both benefits instead of making it an either or proposition. But if you have a sub 3% mortgage you might prefer to use your money elsewhere.

 

[Mman]

Got it

My mortgage interest (approximately a $300K house in sorta-rural Virginia) had never been above about $10K, all of my my W-2 income is untaxed at the state level, and I'm exempt from state personal property taxes too. Being about 10 years into a 15 year loan, the amount of interest we were paying was nearly nothing. Just no way to exceed the standard deduction without some really dodgy accounting.

As for the invested compound interest down the road - that assumption has held well the last 10 years, but who knows if it will for the next 10 or 20? It assumes real returns after taxes of more than 3.5% or 4% which seems reasonable. Fixed income investment options being what they are of late, a guaranteed 3.5 or 4% return by paying a mortgage early doesn't seem so bad. I wonder if there's some recency bias influencing the idea of buying stocks instead of paying off a mortgage.

like I said, the worst 30 year return in S&P history is 8% and that is compound interest which grows exponentially as opposed to simple interest of a mortgage that decreases each year. 3% compound interest is a better investment than paying 4% simple interest early over a 30 year time horizon. And it isn't even "real" return in the market you need, simply nominal because the mortgage interest rate isn't really 4% real because the dollar amount is fixed for all 30 years. It's more like a 2% real interest rate on a mortgage of which a decent chunk is tax deductible.

 

[BLADEMDA]

like I said, the worst 30 year return in S&P history is 8% and that is compound interest which grows exponentially as opposed to simple interest of a mortgage that decreases each year. 3% compound interest is a better investment than paying 4% simple interest early over a 30 year time horizon. And it isn't even "real" return in the market you need, simply nominal because the mortgage interest rate isn't really 4% real because the dollar amount is fixed for all 30 years. It's more like a 2% real interest rate on a mortgage of which a decent chunk is tax deductible.

Let's put away the math for a moment. Do you want to be in debt at age 50? age 55? I have never regretted being debt free and encourrage those who have a desire to FI or FIRE to consider debt as part of the equation. Perhaps, you can afford that 15 year mortgage instead of the 30 year one to reach that debt free zone.

When you are starting out I can see using "math" to decide to invest over paying off lower interest debt like mortgage loans or student loans. But, true FI to me means no debt other than maybe a lease payment through the corporation. For others, FI may mean making payments on homes and student loans for life to capture the difference in market returns with compounding. As for me, I like it keep things simple and reduce debt to zero as FI is attained.

 

[dpmd]

Let's put away the math for a moment. Do you want to be in debt at age 50? age 55? I have never regretted being debt free and encourrage those who have a desire to FI or FIRE to consider debt as part of the equation. Perhaps, you can afford that 15 year mortgage instead of the 30 year one to reach that debt free zone.

When you are starting out I can see using "math" to decide to invest over paying off lower interest debt like mortgage loans or student loans. But, true FI to me means no debt other than maybe a lease payment through the corporation. For others, FI may mean making payments on homes and student loans for life to capture the difference in market returns with compounding. As for me, I like it keep things simple and reduce debt to zero as FI is attained.

Except some are recommended pouring money into mortgage and student loan at the expense of retirement and taxable investing which means they want those ataring out to focus on that. The math means that they might they never reach FIRE. We aren't saying don't do any prepayment (or not to get a 15 yr instead of a 30). We are saying you need to not let that keep you from investing for the future also.

 

[Drangue]

The things you own, end up owning you.

Whoa, that is deep.

 

[Guillemot]

What I do is make extra payments on my student loans lieu of having a bond allocation in my investment accounts. I view it as a lower yield and lower risk investment just like bonds. When the loans are paid off I'll start putting a certain % into bonds. Probably an over simplified view of things.

 

[Mman]

Let's put away the math for a moment. Do you want to be in debt at age 50? age 55? I have never regretted being debt free and encourrage those who have a desire to FI or FIRE to consider debt as part of the equation. Perhaps, you can afford that 15 year mortgage instead of the 30 year one to reach that debt free zone.

I find it a little disingenuous to phrase like "do you want to be in debt at age 50"? A better question would be to ask if you had a much larger net worth, would you mind still having a small mortgage payment at age 50? The phrase "being in debt" carries an emotional response similar to feeling you have a negative net worth, yet when used that way it'd be like Bill Gates taking out a small mortgage because the rate he got was so low. He definitely has a loan (mortgage) he is paying, but nobody would claim he was "in debt".

I don't like to "put away the math" when it comes to talking about financial planning for retirement, because at it's heart it is a math problem.

I'm OK with people paying off their mortgage quickly, but that's an emotional argument to be made not a financial argument. And it's OK to make that emotional decision if it helps you stay the course with your planning. Pouring money into equities at a young age is easily a smart financial decision, but if the market tanks it doesn't help if you panic and bail on it.

 

[Mikkel]

I find it a little disingenuous to phrase like "do you want to be in debt at age 50"? A better question would be to ask if you had a much larger net worth, would you mind still having a small mortgage payment at age 50? The phrase "being in debt" carries an emotional response similar to feeling you have a negative net worth, yet when used that way it'd be like Bill Gates taking out a small mortgage because the rate he got was so low. He definitely has a loan (mortgage) he is paying, but nobody would claim he was "in debt".

I don't like to "put away the math" when it comes to talking about financial planning for retirement, because at it's heart it is a math problem.

I'm OK with people paying off their mortgage quickly, but that's an emotional argument to be made not a financial argument. And it's OK to make that emotional decision if it helps you stay the course with your planning. Pouring money into equities at a young age is easily a smart financial decision, but if the market tanks it doesn't help if you panic and bail on it.

If you're 50, and you've already paid a half a million in interest to a bank already, and you're still paying $12k a year to the bank in interest... While the guy who paid off his mortgage early can put all his money in investments for compounding interest...

You're not playing with "free money" when you're using borrowed money to invest in risky securities. 8% theoretical gain vs 5% known loss. 3% gain ain't worth it to risk.

 

[chocomorsel]

bolded is exactly what I’m talking about- lot of posters here saying that 1-2 million per kid is bizarre and ridiculous but that’s based on basically *hoping* that the data driven predictions and current trend are wrong. Like I mentioned above- higher-Ed is a 2-tier pricing scheme now, and if you make 300k+ then you are paying sticker price.

I’m telling you - 1-2 million is a safe estimate without the Dr. Evil luge lessons in Ragoon. Possibly wrong - but not unreasonable.

I know you and I live in totally different worlds. But your kids DON’T have to go to private school to succeed in life.

 

[Mman]

If you're 50, and you've already paid a half a million in interest to a bank already, and you're still paying $12k a year to the bank in interest... While the guy who paid off his mortgage early can put all his money in investments for compounding interest...

You're not playing with "free money" when you're using borrowed money to invest in risky securities. 8% theoretical gain vs 5% known loss. 3% gain ain't worth it to risk.

you keep failing math by noting the person that is "still paying the interest to the bank" is collecting far more in compound interest from their decades earlier investments and will continue do so for the rest of their life.

If you cannot understand that not paying off the mortgage early is likely a better financial move in the long run, well you just don't understand the math. If you want to argue that they feel better about staying the course because they don't have a mortgage payment to worry about that is a much more reasonable position.

But stop pretending that paying the mortgage early leads to a higher net worth. You are basically arguing you'd rather have no mortgage and $100K invested in a taxable account instead of having $250K left on a mortgage and $500K in a taxable account. Make yourself a spreadsheet and do some math. You claimed you ran the numbers earlier, but your answer was so incorrect as to lead me to believe you don't know how to do it.

 

[VA Hopeful Dr]

you keep failing math by noting the person that is "still paying the interest to the bank" is collecting far more in compound interest from their decades earlier investments and will continue do so for the rest of their life.

If you cannot understand that not paying off the mortgage early is likely a better financial move in the long run, well you just don't understand the math. If you want to argue that they feel better about staying the course because they don't have a mortgage payment to worry about that is a much more reasonable position.

But stop pretending that paying the mortgage early leads to a higher net worth. You are basically arguing you'd rather have no mortgage and $100K invested in a taxable account instead of having $250K left on a mortgage and $500K in a taxable account. Make yourself a spreadsheet and do some math. You claimed you ran the numbers earlier, but your answer was so incorrect as to lead me to believe you don't know how to do it.

My thoughts as well.

Let's take a 500k mortgage 0 down, no PMI or anything. Across a 30 year term you're paying 360k in interest with a monthly payment total of 2.4k.

Take that same mortgage at 15 years. You pay 200k less in interest across the life of the mortage but your monthly payment is 3.6k.

If you take the difference in monthly payments of 1.2k and invest, assuming an 8% return rate, you'll end up with 415k at the end of those 15 years which is over double what you'll save in interest. If you continue that for the full 30 years of the mortgage you'll end up with 1.78 million.

Contrast that with paying off the mortgage more quickly, you then have 3.6k/month to invest for 15 years but starting 15 years later. That will yield 1.25 million at the end of the same 30 year span. So even adding the 200k less in interest paying off the mortgage more slowly still wins out by 330k.

 

[BLADEMDA]

Whenever we see Bull markets like this one in 2019 people start assuming those 8-10% returns are guaranteed. They are not. There will be a patch of bad years where the market is negative. If those negative years occur in the middle of your 15 year mortgage pay back then the math works in favor of paying off debt. Volatility in the market is such that some portion of a portfolio doesn't need to be in equities for you to do quite well. This has been well researched by others. If you have a 100% equity portfolio then paying off debt could be your non equity side until debt free.

 

[Mman]

Whenever we see Bull markets like this one in 2019 people start assuming those 8-10% returns are guaranteed. They are not. There will be a patch of bad years where the market is negative. If those negative years occur in the middle of your 15 year mortgage pay back then the math works in favor of paying off debt. Volatility in the market is such that some portion of a portfolio doesn't need to be in equities for you to do quite well. This has been well researched by others. If you have a 100% equity portfolio then paying off debt could be your non equity side until debt free.

the worst 30 year return in S&P history is 8%

 

[BLADEMDA]

Richard Ferri, CFA, strongly makes this point in his book All About Asset Allocation, writing:

Your investment policy and portfolio asset allocation will be unique. It will be based on your situation, your needs today and in the future, and your ability to stay the course during adverse market conditions. As your needs change, your allocation will also need adjustment. Monitoring and adjusting is an important part of the process.

In other words, there is no perfect asset allocation; there is only a perfect asset allocation for you. And not only is asset allocation personal, but it's also dynamic. It changes over time as you age, your financial situation changes, and your goals evolve.

 

[BLADEMDA]

 

[BLADEMDA]

I certainly understand the 100% stock allocation model. Here is what the Financial Samurai has to say about it:

Nothing-To-Lose Asset Allocation Model Of Stocks And Bonds
Given stocks have shown to outperform bonds over the past 60 years, the Nothing To Lose Asset Allocation model is for those who want to go all-in on stocks. If you have a long enough time horizon, this strategy might suite you well.

Candidates:

* You are rich and don’t count on your stock portfolio to survive now or in retirement.

* You are poor and are willing to risk it all because you don’t have much to risk.

* You have tremendous earnings power that will continue to go up for decades.

* You are young or have an investment horizon of at least 20 more years.

* You believe you are smarter than the market and can therefore choose sectors and stocks which will consistently outperform.

 

[deleted126335]

the worst 30 year return in S&P history is 8%

We only have one century of good data with less than 4 non overlapping 30 year periods. Also the last 100 years were the US’s century. We were the winner in almost every way. If you look at the world’s stock markets over the last 100 years in their local currency, the results aren’t nearly that good. I still own plenty of stocks, but the stock market is not an actuarial table that owes anyone any set return even over very long periods of time.


Sent from my iPhone using SDN mobile

 

[Mman]

We only have one century of good data with less than 4 non overlapping 30 year periods. Also the last 100 years were the US’s century. We were the winner in almost every way. If you look at the world’s stock markets over the last 100 years in their local currency, the results aren’t nearly that good. I still own plenty of stocks, but the stock market is not an actuarial table that owes anyone any set return even over very long periods of time.


Sent from my iPhone using SDN mobile

all that is true, but there is nothing about "non overlapping periods" that means anything when you are looking at that long of a stretch of data. Also, nobody said you need 8% or 10% or 12% returns to make it a wise idea to invest. Also, the stock market returns of places like Nigeria or China or Japan or Spain have almost nothing to do with US returns for various reasons and it would be dishonest to try to draw conclusions from them.

The stock market definitely doesn't owe anybody anything, but it would be unwise to suggest the odds are not overwhelmingly in favor of it outperforming a low interest rate mortgage (of which you can deduct a portion of the interest from taxes). When planning retirement, gotta stack the odds in your favor.

 

[doctalaughs]

My thoughts as well.

Let's take a 500k mortgage 0 down, no PMI or anything. Across a 30 year term you're paying 360k in interest with a monthly payment total of 2.4k.

Take that same mortgage at 15 years. You pay 200k less in interest across the life of the mortage but your monthly payment is 3.6k.

If you take the difference in monthly payments of 1.2k and invest, assuming an 8% return rate, you'll end up with 415k at the end of those 15 years which is over double what you'll save in interest. If you continue that for the full 30 years of the mortgage you'll end up with 1.78 million.

Contrast that with paying off the mortgage more quickly, you then have 3.6k/month to invest for 15 years but starting 15 years later. That will yield 1.25 million at the end of the same 30 year span. So even adding the 200k less in interest paying off the mortgage more slowly still wins out by 330k.

I agree with the cold, hard calculation that a 30 year mortgage outperforms 15 year for long-term investment portfolio --- however, that comes with a BIG caveat.

It assumes that you have the financial discipline to invest every single dollar that you WOULD have used on the 15-year, instead of spending some of it. Unfortunately, this is not the case with most people. They see their monthly disposable budget being bigger (due to less money going to the mortgage every month) and end up spending 1/2 those dollars to expand their lifestyle.

Also, 30 vs 15 -- the former used to outperform by alot over a long time-frame with the tax laws, but now that fewer people can deduct all the interest and instead take the standard deduction, it's only a mild-to-moderate win (again, assuming you invest every single dollar).

I see a 10 or 15 year mortgage as a "forced" low-yield savings part of the portfolio. Better than a checking account - not as good as equities. Way better than the ferrari (especially if you get pleasure out of "no debt" more than a fast car).