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

[Mman]

I attached a modifiable spreadsheet showing the following exercise...

$500K mortgage
4% interest rate
$8000 per month to devote to mortgage or investing
5% investment return

After 30 years, plowing the extra $ into investments instead of mortgage yields a >$200K difference in favor of not paying off the mortgage. If you make it only a 4% return over 4 years it is still in favor of the investments. If you make it 8% or 10%, the differences are millions of dollars. If you think the odds are good the mortgage payment would be a better idea, you have to be forecasting stock returns approaching 1% over the next 30 years.

(too complicated to account for all the tax possibilities, but they are almost always in favor of not paying off the mortgage. Also apologize for anything weird when I converted it to an excel spreadsheet)

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[Mikkel]

I attached a modifiable spreadsheet showing the following exercise...

$500K mortgage
4% interest rate
$8000 per month to devote to mortgage or investing
5% investment return

After 30 years, plowing the extra $ into investments instead of mortgage yields a >$200K difference in favor of not paying off the mortgage. If you make it only a 4% return over 4 years it is still in favor of the investments. If you make it 8% or 10%, the differences are millions of dollars. If you think the odds are good the mortgage payment would be a better idea, you have to be forecasting stock returns approaching 1% over the next 30 years.

(too complicated to account for all the tax possibilities, but they are almost always in favor of not paying off the mortgage. Also apologize for anything weird when I converted it to an excel spreadsheet)

$200k is really not a lot in the grand scheme of things, that's half a year of post-tax earnings.

 

[deleted126335]

There are risk assets and riskless (or nearly riskiness) assets. (nearly) Riskless assets include Money market funds, Treasurys, CDs, Highest Quality Muni and Highest Quality Corporate bonds. Prepaying a mortgage is almost always better than the after tax risk free rate of return. So, if you are thinking about adding bonds to a 100% stock portfolio, prepaying mortgage is a solid choice. Similarly if you have a 60/40 portfolio, It is reasonable to mentally subtract the balance of your mortgage from the bond component.

 

[doctalaughs]

There are risk assets and riskless (or nearly riskiness) assets. (nearly) Riskless assets include Money market funds, Treasurys, CDs, Highest Quality Muni and Highest Quality Corporate bonds. Prepaying a mortgage is almost always better than the after tax risk free rate of return. So, if you are thinking about adding bonds to a 100% stock portfolio, prepaying mortgage is a solid choice. Similarly if you have a 60/40 portfolio, It is reasonable to mentally subtract the balance of your mortgage from the bond component.

Exactly. 30-year mortgage just so that you can add to your 100% stock portfolio is (usually) not the best choice.

 

[dpmd]

Exactly. 30-year mortgage just so that you can add to your 100% stock portfolio is (usually) not the best choice.

Yeah, but what some were advocating is for a 99% allocation towards the mortgage which is what we are arguing against.

 

[Mikkel]

Yeah, but what some were advocating is for a 99% allocation towards the mortgage which is what we are arguing against.

Nobody is arguing for a 99% allocation, especially if tax advantaged accounts aren't maximized.

I'm all about dollar cost averaging, and prepaying my mortgage will give me more resources available to do that when the time comes.

 

[BLADEMDA]

Yeah, but what some were advocating is for a 99% allocation towards the mortgage which is what we are arguing against.

Of course not. I'm stating that sticking with a payoff of 15 years for your mortgage is part of FI. Similarly, paying off student debt over time towards FI. That said, if your student debt interest rate is less than 2.5% I totally understand not paying that off as the rate is lower than most bond yields.

The stock market is inherently volatile which most people equate with risk. That means, part of your financial plan should include less risky assets. If you run the numbers and there is no way to achieve your financial goal without 100% equities then by all means proceed. I can see a person humping it out for an AMC quite cash strapped if he/she has a family to support. Perhaps, all he/she can afford to invest is $40,000 total per year. With that amount of money, one has to be very aggressive in equities to achieve FI.

This is not a one size fits all problem. Mman is raking in cash 2-3 X more than some of you. The wisest financial advisers all say the same thing: Diversify. As one gets older the vast majority of people should not be invested in 100% equities.

 

[doctalaughs]

Of course not. I'm stating that sticking with a payoff of 15 years for your mortgage is part of FI. Similarly, paying off student debt over time towards FI. That said, if your student debt interest rate is less than 2.5% I totally understand not paying that off as the rate is lower than most bond yields.

The stock market is inherently volatile which most people equate with risk. That means, part of your financial plan should include less risky assets. If you run the numbers and there is no way to achieve your financial goal without 100% equities then by all means proceed. I can see a person humping it out for an AMC quite cash strapped if he/she has a family to support. Perhaps, all he/she can afford to invest is $40,000 total per year. With that amount of money, one has to be very aggressive in equities to achieve FI.

This is not a one size fits all problem. Mman is raking in cash 2-3 X more than some of you. The wisest financial advisers all say the same thing: Diversify. As one gets older the vast majority of people should not be invested in 100% equities.

Exactly. If you put about 10k a month heavily tilted toward stocks (say 90/10) then paying an additional 1.5k/mo towards a 15 (or 10 year) mortgage instead of a 30-year is good

 

[BLADEMDA]

THE ONLY THING THAT MATTERS IN INVESTING: ASSET ALLOCATION

thecollegeinvestor.com/19023/investing-asset-allocation/


Asset allocation is very similar. By taking the time to define how much of your money will be concentrated in stocks, and how much in bonds, and how much in commodities, you are laying a foundation for long-term success. Each month, as you put more and more money into your brokerage account, every dollar follows the logic set forth in your asset allocation, steering the ship of your portfolio towards your ultimate destination of wealth.

 

[dpmd]

Nobody is arguing for a 99% allocation, especially if tax advantaged accounts aren't maximized.

I'm all about dollar cost averaging, and prepaying my mortgage will give me more resources available to do that when the time comes.

You are advocating for not doing any taxable investing until the mortgage is gone. Not sure if it was this thread or another where a few people were advocating not even doing retirement investing until all debt was paid off.

 

[BLADEMDA]

You are advocating for not doing any taxable investing until the mortgage is gone. Not sure if it was this thread or another where a few people were advocating not even doing retirement investing until all debt was paid off.

I am advocating for a common sense approach based on volatility/risk. For a 35-40 year old this means a high equity exposure in both retirement accounts and taxable brokerage accounts.

1. 80/20 allocation strategy or even 90/10.

That means your total allocation for all assets would be 10-20% for non equities. You can include your extra mortgage payment in that 10-20%. That can act as part of the bond portion. A 10-15 year mortgage payoff plan is solid for FI.

You should maximize your 401K and Roth IRAs. Then, open a taxable brokerage account for any extra cash you can invest. Do all this while paying down debt over a reasonable time frame of 10-15 years. If your student loan interest is low then that too can be paid off over 10-15 years.

By the time you reach age 50 most of you will be closer to your goal of FIRE.

 

[dpmd]

I am advocating for a common sense approach based on volatility/risk. For a 35-40 year old this means a high equity exposure in both retirement accounts and taxable brokerage accounts.

1. 80/20 allocation strategy or even 90/10.

That means your total allocation for all assets would be 10-20% for non equities. You can include your extra mortgage payment in that 10-20%. That can act as part of the bond portion. A 10-15 year mortgage payoff plan is solid for FI.

You should maximize your 401K and Roth IRAs. Then, open a taxable brokerage account for any extra cash you can invest. Do all this while paying down debt over a reasonable time frame of 10-15 years. If your student loan interest is low then that too can be paid off over 10-15 years.

By the time you reach age 50 most of you will be closer to your goal of FIRE.

This I can agree with. It has gotten me to my F U number at age 42 (I haven't really decided about the RE part of FIRE but it feels nice to know I am working because I want to). Part of it was my first retirement account was opened at age 18 and has grown a ton over the years which is why I am such a believer in starting as early as possible for both tax deferred and then taxable investing.

 

[Mman]

$200k is really not a lot in the grand scheme of things, that's half a year of post-tax earnings.

That $200K ignores the tax savings and assumes almost worst case scenario investment returns and oh by the way becomes a much bigger difference later in life, that spreadsheet only cuts off after 30 years. If you bought the house at age 30 that stops at age 60. Those accumulated differences multiply for decades more.

Realistically it is probably millions of dollars difference over a lifetime at more realistic return rates.

 

[deleted50478]

Exactly. 30-year mortgage just so that you can add to your 100% stock portfolio is (usually) not the best choice.

Depends on the mortgage interest rate.

 

[deleted126335]

THE ONLY THING THAT MATTERS IN INVESTING: ASSET ALLOCATION

Well, 90%. (Not counting savings rate, discipline, and luck.)
The other 10% is tax management, keeping expenses low.

 

[doctalaughs]

Depends on the mortgage interest rate.

True. Although where interest has been in the last 10 years along with the abundant opportunity to refi I doubt anyone has a rate much more than 4- most between 2.5-4.

 

[Mikkel]

True. Although where interest has been in the last 10 years along with the abundant opportunity to refi I doubt anyone has a rate much more than 4- most between 2.5-4.

I'm at 5%.

 

[dpmd]

I'm at 5%.

Poor credit or not enough income to refi?

 

[Mikkel]

Poor credit or not enough income to refi?

Excellent credit, just got in at a bad time.

Refinance rates aren't that great now either, and refinance costs eat up enough of the benefits that I don't think it's worth the hassle.

I used to have a 3.25% on a different property. Those were the good days.

 

[dpmd]

Excellent credit, just got in at a bad time.

Refinance rates aren't that great now either, and refinance costs eat up enough of the benefits that I don't think it's worth the Hale l hassle.

I used to have a 3.25% on a different property. Those were the good days.

There are some very cheap refi options out there but I don't know current rates since mine is 2.875. But the hassle is much less for a refi anyway. Costco has some good low fee options. You can see what kind of rates are available and run it through a should I refi calculator to see if it might be worth your while. You can even look at ARMs if your plan is early payoff.

 

[Mman]

Excellent credit, just got in at a bad time.

Refinance rates aren't that great now either, and refinance costs eat up enough of the benefits that I don't think it's worth the Hale l hassle.

I used to have a 3.25% on a different property. Those were the good days.

have you checked Bankrate this month? I have a hard time coming up with a combination of house value and loan size that doesn't yield an APR under 4%.

 

[deleted162650]

You can even look at ARMs if your plan is early payoff.

If you look back historically at the last 30 years, you are better off going with an ARM regardless.

 

[dpmd]

If you look back historically at the last 30 years, you are better off going with an ARM regardless.

Some people dislike a mortgage where the payment will increase after 5 yrs unless they get lucky on timing. But I suppose the math for what rates actually did might be different than what feels right. I paid mine off after the first increase but before the second increase. However I didn't follow what it would have done after that so I could see how maybe it would have dropped a bunch later and that would have affected the total interest paid.

 

[deleted162650]

Some people dislike a mortgage where the payment will increase after 5 yrs unless they get lucky on timing. But I suppose the math for what rates actually did might be different than what feels right. I paid mine off after the first increase but before the second increase. However I didn't follow what it would have done after that so I could see how maybe it would have dropped a bunch later and that would have affected the total interest paid.

Also, most people will either sell or refi before the fixed rate period would have ended anyways (even if they got a fixed to begin with).

 

[nimbus]

Well to do anesthesiologist

Let’s discuss. There’s a lot to ask.

forums.studentdoctor.net

They are about the same age and both FI but with different values and priorities.

 

[vector2]

I've been putting most of my extra funds into my mortgage since I'm maxing out a 401a, 403b, and 457, but it's a good idea not to get too enamored with the "6%" long-term stock market return figure as if that is a mandatory return going forward. Take a look at the 20 year Dow 1000 barrier.

 

[Mikkel]

I've been putting most of my extra funds into my mortgage since I'm maxing out a 401a, 403b, and 457, but it's a good idea not to get too enamored with the "6%" long-term stock market return figure as if that is a mandatory return going forward. Take a look at the 20 year Dow 1000 barrier.

View attachment 291240

I really hated the idea that I would feel better to own a bunch of stocks worth 80% of what I paid for, and still owe $800k to a bank (or own $800k on a house valued at $600k).

We've all been through 2001 and 2009 and felt the hurt of "losing" half of our "worth" in a matter of weeks.

 

[BLADEMDA]

I really hated the idea that I would feel better to own a bunch of stocks worth 80% of what I paid for, and still owe $800k to a bank (or own $800k on a house valued at $600k).

We've all been through 2001 and 2009 and felt the hurt of "losing" half of our "worth" in a matter of weeks.

I half lost half my net worth but was fortunate enough to have 2 things on my side: Young enough to recover and 20% of my net worth in cash. When the market tanked I invested 1/2 of my cash reserves combined with my continued monthly investments. The market today is extremely expensive IMHO and being fueled by low interest rates and QE from the Fed. This forces money into equities driving up P/E ratios. Stocks are expensive and we will eventually correct during the next recession. But, when will that occur? We could go up another 20-30% before seeing a recession.

All I can say is that some stocks will lose 50% during the next recession. High growth stocks with over valued P/E ratios will get hit the hardest. I own some of these stocks and fully expect a 50% correction.

If you are young (under age 40) then having 20% in Cash or Bonds may not be necessary. But, it sure will be nice picking up today's growth stocks at 1/2 their current prices. Buffet bought Bank of America for $6.00 per share. You need some cash set aside as we go into 2020 as nothing goes straight up.

A diversified portfolio will weather the next recession much better than a pure high Beta growth portfolio.

 

[deleted126335]

I've been putting most of my extra funds into my mortgage since I'm maxing out a 401a, 403b, and 457, but it's a good idea not to get too enamored with the "6%" long-term stock market return figure as if that is a mandatory return going forward. Take a look at the 20 year Dow 1000 barrier.

View attachment 291240

It is even worse than that chart looks like. Inflation was high in the 1970s.

 

[deleted162650]

I half lost half my net worth but was fortunate enough to have 2 things on my side: Young enough to recover and 20% of my net worth in cash. When the market tanked I invested 1/2 of my cash reserves combined with my continued monthly investments. The market today is extremely expensive IMHO and being fueled by low interest rates and QE from the Fed. This forces money into equities driving up P/E ratios. Stocks are expensive and we will eventually correct during the next recession. But, when will that occur? We could go up another 20-30% before seeing a recession.

All I can say is that some stocks will lose 50% during the next recession. High growth stocks with over valued P/E ratios will get hit the hardest. I own some of these stocks and fully expect a 50% correction.

If you are young (under age 40) then having 20% in Cash or Bonds may not be necessary. But, it sure will be nice picking up today's growth stocks at 1/2 their current prices. Buffet bought Bank of America for $6.00 per share. You need some cash set aside as we go into 2020 as nothing goes straight up.

A diversified portfolio will weather the next recession much better than a pure high Beta growth portfolio.

Where do you keep your cash? Regular savings account? Online high yield account like Ally? Stuffed in the mattress?

Trying to figure out the best vehicle to park emergency/FU money that maintains liquidity without having the money be totally stagnant.

 

[deleted126335]

I really hated the idea that I would feel better to own a bunch of stocks worth 80% of what I paid for, and still owe $800k to a bank (or own $800k on a house valued at $600k).

We've all been through 2001 and 2009 and felt the hurt of "losing" half of our "worth" in a matter of weeks.

There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.

-Fred Schwed

 

[ZzzPlz]

Where do you keep your cash? Regular savings account? Online high yield account like Ally? Stuffed in the mattress?

Trying to figure out the best vehicle to park emergency/FU money that maintains liquidity without having the money be totally stagnant.

i keep my liquid funds in a money market account that gives 1.5% interest with essentially no restrictions

 

[dpmd]

Where do you keep your cash? Regular savings account? Online high yield account like Ally? Stuffed in the mattress?

Trying to figure out the best vehicle to park emergency/FU money that maintains liquidity without having the money be totally stagnant.

Online high yield accounts. Getting 1.7% right now so let me know if you find one higher. Does mean the money isn't as quick to get to for high amounts but I have some in a regular bank too. I have also started keeping some cash at home for power outage scenarios.

 

[Mman]

I've been putting most of my extra funds into my mortgage since I'm maxing out a 401a, 403b, and 457, but it's a good idea not to get too enamored with the "6%" long-term stock market return figure as if that is a mandatory return going forward. Take a look at the 20 year Dow 1000 barrier.

View attachment 291240

Just ballparking it that looks like 1964 to 1984 you are referencing. From January 1964 to January 1984, the S&P total return (including reinvested dividends) was 379% for a CAGR of 8.1%. Yes, you read that right.

But what about that sky high inflation people ask? That's true, it was a terrible time for inflation. The inflation adjusted real return of the S&P over that time had a CAGR of 1.88%. Here's the thing, though, inflation is usually great for having a mortgage because your monthly payments are fixed no matter how bad inflation gets so your mortgage functionally gets cheaper every month as you pay it with dollars less valuable than previously. Paying a mortgage early when you have a decade of sky high inflation about to hit is one of the worst things you could have done.

If you took out a mortgage in 1964, you had a fixed interest rate around 5.5% or so and would have severely underperformed any diversified stock investment made at the same time instead of early payments. And yes, that is the handpicked terrible start time you highlighted on the graph. The actual CAGR of S&P for next 30 years starting in 1964 was 10.4% or nearly double the fixed interest rate you would have had on the mortgage.

 

[vector2]

Just ballparking it that looks like 1964 to 1984 you are referencing. From January 1964 to January 1984, the S&P total return (including reinvested dividends) was 379% for a CAGR of 8.1%. Yes, you read that right.

But what about that sky high inflation people ask? That's true, it was a terrible time for inflation. The inflation adjusted real return of the S&P over that time had a CAGR of 1.88%. Here's the thing, though, inflation is usually great for having a mortgage because your monthly payments are fixed no matter how bad inflation gets so your mortgage functionally gets cheaper every month as you pay it with dollars less valuable than previously. Paying a mortgage early when you have a decade of sky high inflation about to hit is one of the worst things you could have done.

If you took out a mortgage in 1964, you had a fixed interest rate around 5.5% or so and would have severely underperformed any diversified stock investment made at the same time instead of early payments. And yes, that is the handpicked terrible start time you highlighted on the graph. The actual CAGR of S&P for next 30 years starting in 1964 was 10.4% or nearly double the fixed interest rate you would have had on the mortgage.

The inflation adjusted CAGR over that period was 1-something percent vs having to pay on a 5.5% mortgage. Explain to me again how early payments on the mortgage isn't the way to go there?

 

[Mikkel]

The inflation adjusted CAGR over that period was 1-something percent vs having to pay on a 5.5% mortgage. Explain to me again how early payments on the mortgage isn't the way to go there?

I think he's saying that if you held onto the stocks past 1984, you would be enjoying a CAGR of 10%.

But I think he's missing the point that the pre-paid mortgage guy saved tens of thousands of dollars in interest and also had a longer period of time with a greater proportion of income to invest at the tail end of the 100% stock guy's mortgage, when the market actually was taking off and inflation rates subsided. And prepay guy would have had more cash available in 1970, 1974, 1979, etc to buy during the dips and maximize his dollar cost averaging, whereas stock guy was still paying 5.5% on his mortgage and had no liquidity because he was holding onto his underperforming stocks (best case), or maybe he had some liquidity because he was a typical investor trying to time the market and getting even worse returns than the ideal 8% CAGR at that time.

I think he's also missing the point that fixed assets like real estate can appreciate along with inflation over time. A $100,000 Manhattan apartment in 1964 could be worth $3,000,000 now, so prepaid or not there's not a huge inflation penalty if you hold onto the asset long term.

 

[Mman]

The inflation adjusted CAGR over that period was 1-something percent vs having to pay on a 5.5% mortgage. Explain to me again how early payments on the mortgage isn't the way to go there?

your inflation adjusted mortgage rate was probably -2%. The 5.5% mortgage isn't inflation adjusted so you should not look at inflation adjusted stock returns as a comparison. Keep it apples to apples.

When inflation is sky high you WANT to have a mortgage at a fixed rate. Does that make sense?

 

[Mman]

I think he's saying that if you held onto the stocks past 1984, you would be enjoying a CAGR of 10%.

But I think he's missing the point that the pre-paid mortgage guy saved tens of thousands of dollars in interest and also had a longer period of time with a greater proportion of income to invest at the tail end of the 100% stock guy's mortgage, when the market actually was taking off and inflation rates subsided. And prepay guy would have had more cash available in 1970, 1974, 1979, etc to buy during the dips and maximize his dollar cost averaging, whereas stock guy was still paying 5.5% on his mortgage and had no liquidity because he was holding onto his underperforming stocks (best case), or maybe he had some liquidity because he was a typical investor trying to time the market and getting even worse returns than the ideal 8% CAGR at that time.

I think he's also missing the point that fixed assets like real estate can appreciate along with inflation over time. A $100,000 Manhattan apartment in 1964 could be worth $3,000,000 now, so prepaid or not there's not a huge inflation penalty if you hold onto the asset long term.

I'm not missing any point, I'm just doing the math. It's quite simple.

If you want to speculate on real estate as an investment, people can do that. But don't confuse that with fixed rate mortgages vs equity investments over decades.

You are also failing to grasp that in a flat market, you would want to be investing in stocks during that time instead of paying off the mortgage if the stock market would later explode in value because you'd be getting in cheaper than putting in more money later when it was already rising.

 

[Mikkel]

I'm not missing any point, I'm just doing the math. It's quite simple.

If you want to speculate on real estate as an investment, people can do that. But don't confuse that with fixed rate mortgages vs equity investments over decades.

You are also failing to grasp that in a flat market, you would want to be investing in stocks during that time instead of paying off the mortgage if the stock market would later explode in value because you'd be getting in cheaper than putting in more money later when it was already rising.

If from 1964-1984, the flat market had a CAGR of 8% but inflation was 8 percent, your investments would have increased in value by 0% by 1984. Without prepaying, you would be net negative at the end because of all the extra interest you paid over the life of the loan.

It's obvious that a fixed rate loan in runaway inflation is bad for the bank because the loan is a depreciating asset for them, but I can't figure out why it's good for the borrower, especially if the wage growth isn't there to make it actually easier to afford the loan, and inflating house prices make it harder to afford a new house and higher interest rate loans. It seems like a bad situation for everyone involved.

 

[Mman]

If from 1964-1984, the flat market had a CAGR of 8% but inflation was 8 percent, your investments would have increased in value by 0% by 1984. Without prepaying, you would be net negative at the end because of all the extra interest you paid over the life of the loan.

It's obvious that a fixed rate loan in runaway inflation is bad for the bank because the loan is a depreciating asset for them, but I can't figure out why it's good for the borrower, especially if the wage growth isn't there to make it actually easier to afford the loan, and inflating house prices make it harder to afford a new house and higher interest rate loans. It seems like a bad situation for everyone involved.

from 1964-1984, the CAGR of the market outpaced inflation which is why the real return was 1.88%. The fixed rate mortgage was at a lower rate than inflation so it was a negative real rate. You claim the investments would have "increased in value by 0%" between 1964 and 1984, but what you mean to say is your investments would have nearly quadrupled in value in actual dollars (yet note inflation ate a large portion of that gain).

Nobody is arguing hyperinflation is a good thing. But in such an environment, you'd rather have a fixed rate mortgage than have paid it off early and not have a mortgage any longer. And higher rates of inflation tend to lead to higher rates of wage growth.

I'm not quite sure why the math is so difficult for some people (not pointing fingers at you) to understand. I'm not arguing that paying off a mortgage is a bad idea. I'm saying that historically it has ended up to provide a worse return than investing the same amount in equities would have yielded and there is no reason to suspect that will change any time soon. The tax benefits to a mortgage (whether or not that is a good idea for society and government to continue those is a different question) make it even bigger difference.

Understanding the difference between simple interest and compound interest, understanding inflation and how that benefits having a mortgage, and understanding why you shouldn't compare inflation adjusted stock returns to a fixed rate mortgage that isn't adjusted for inflation are all not complicated financial topics and yet many physicians do not understand them.

Paying off a mortgage early should be an emotional decision because it helps you not panic in market downturns. It should not be construed as some wise financial move likely to provide huge benefits in retirement because it probably has a significant drag on your lifetime investing returns.

 

[dhb]

Just ballparking it that looks like 1964 to 1984 you are referencing. From January 1964 to January 1984, the S&P total return (including reinvested dividends) was 379% for a CAGR of 8.1%. Yes, you read that right.

But the index wasn't made of the same companies during that timeframe: how do you calculate the real return taking into account the companies that went bankrupt?

 

[BLADEMDA]

Where do you keep your cash? Regular savings account? Online high yield account like Ally? Stuffed in the mattress?

Trying to figure out the best vehicle to park emergency/FU money that maintains liquidity without having the money be totally stagnant.

Ally Bank. Best software period of any online bank. But, Goldman Sachs (MARCUs), Synchrony, CIT, etc are all decent alternatives. Fidelity and Vanguard pay around 1.5% to park your cash in their money market accounts. Online Banks pay in the range of 1.70-1.80%.

 

[vector2]

from 1964-1984, the CAGR of the market outpaced inflation which is why the real return was 1.88%. The fixed rate mortgage was at a lower rate than inflation so it was a negative real rate. You claim the investments would have "increased in value by 0%" between 1964 and 1984, but what you mean to say is your investments would have nearly quadrupled in value in actual dollars (yet note inflation ate a large portion of that gain).

Nobody is arguing hyperinflation is a good thing. But in such an environment, you'd rather have a fixed rate mortgage than have paid it off early and not have a mortgage any longer. And higher rates of inflation tend to lead to higher rates of wage growth.

I'm not quite sure why the math is so difficult for some people (not pointing fingers at you) to understand. I'm not arguing that paying off a mortgage is a bad idea. I'm saying that historically it has ended up to provide a worse return than investing the same amount in equities would have yielded and there is no reason to suspect that will change any time soon. The tax benefits to a mortgage (whether or not that is a good idea for society and government to continue those is a different question) make it even bigger difference.

Understanding the difference between simple interest and compound interest, understanding inflation and how that benefits having a mortgage, and understanding why you shouldn't compare inflation adjusted stock returns to a fixed rate mortgage that isn't adjusted for inflation are all not complicated financial topics and yet many physicians do not understand them.

Paying off a mortgage early should be an emotional decision because it helps you not panic in market downturns. It should not be construed as some wise financial move likely to provide huge benefits in retirement because it probably has a significant drag on your lifetime investing returns.

I understand the point vis a vis comparing inflation for both stocks and the mortgage. I would like to see an actual calculation of a few scenarios of how someone in 1964 with a 200k mortgage at 5.5% and a 100k/yr income would've made out with various stock returns vs earlier mortgage payments if they had to retire in 1984.. Also, even if one were to grant that your mortgage rate was "negative," how badly did inflation affect the underlying real estate asset value?

And even furthermore, your point that the market did really well after 1984 is irrelevant to the argument at hand. 1. There are a number of people with mortgages who likely had a 20-30 year investing horizon who had to retire in 1984 and their inflation adjusted return was garbage the day they left their jobs. 2. Your statement that "there is no reason to believe that [stock market returns] will change anytime soon" is pure gamblers' fallacy logic.

I'm still putting 95% in stocks because I'm young, but I'm honest with myself that it's at least in part a statement based somewhat on faith that the US will continue to be an economic powerhouse (and that our debt problems wont come back to bite us) at least until I retire.

 

[BLADEMDA]

I understand the point vis a vis comparing inflation for both stocks and the mortgage. I would like to see an actual calculation of a few scenarios of how someone in 1964 with a 200k mortgage at 5.5% and a 100k/yr income would've made out with various stock returns vs earlier mortgage payments. Also, even if one were to grant that your mortgage rate was "negative," how badly did inflation affect the underlying real estate asset value?

And even furthermore, your point that the market did really well after 1984 is irrelevant to the argument at hand. 1. There are a number of people with mortgages who likely had a 20-30 year investing horizon who had to retire in 1984 and their inflation adjusted return was garbage the day they left their jobs. 2. Your statement that "there is no reason to believe that [stock market returns] will change anytime soon" is pure gamblers' fallacy logic.

Mman makes a ton of dough. I have no idea why he chooses to remain in debt when his cash flow easily allows him to invest large sums of money in the market and pay off his mortgage early. Most traders in Options understand risk/benefits of the market. There is no free lunch. The market is inherently risky which is why the "experts" hedge so often with options.

But, if Mman prefers to invest all his net worth into equities then that is his choice. There are very few "experts" that would recommend such a strategy as a diversified portfolio still allows excellent returns with a lot less risk.

You do realize Mman can use his analysis to argue buying only high growth Beta stocks like technology. Over the past 20 years an investment in such stocks would have crushed the overall market. So, forget about "equities" using Mman's logic you should be buying growth stocks period!

 

[BLADEMDA]

Despite these fantastic returns a diversified portfolio is still recommended

 

[nimbus]

I think he's saying that if you held onto the stocks past 1984, you would be enjoying a CAGR of 10%.

But I think he's missing the point that the pre-paid mortgage guy saved tens of thousands of dollars in interest and also had a longer period of time with a greater proportion of income to invest at the tail end of the 100% stock guy's mortgage, when the market actually was taking off and inflation rates subsided. And prepay guy would have had more cash available in 1970, 1974, 1979, etc to buy during the dips and maximize his dollar cost averaging, whereas stock guy was still paying 5.5% on his mortgage and had no liquidity because he was holding onto his underperforming stocks (best case), or maybe he had some liquidity because he was a typical investor trying to time the market and getting even worse returns than the ideal 8% CAGR at that time.

I think he's also missing the point that fixed assets like real estate can appreciate along with inflation over time. A $100,000 Manhattan apartment in 1964 could be worth $3,000,000 now, so prepaid or not there's not a huge inflation penalty if you hold onto the asset long term.

Manhattan is one thing. Cleveland or Detroit are entirely another. Even in Manhattan you need to consider maintenance, remodeling, special assessments by the HOA or coop, and taxes.

 

[Mman]

Mman makes a ton of dough. I have no idea why he chooses to remain in debt when his cash flow easily allows him to invest large sums of money in the market and pay off his mortgage early. Most traders in Options understand risk/benefits of the market. There is no free lunch. The market is inherently risky which is why the "experts" hedge so often with options.

But, if Mman prefers to invest all his net worth into equities then that is his choice. There are very few "experts" that would recommend such a strategy as a diversified portfolio still allows excellent returns with a lot less risk.

You do realize Mman can use his analysis to argue buying only high growth Beta stocks like technology. Over the past 20 years an investment in such stocks would have crushed the overall market. So, forget about "equities" using Mman's logic you should be buying growth stocks period!

My "analysis" is that probably at every single moment in the last 150 years of the United States you would have been better off investing in equities instead of paying off a 30 year fixed mortgage in the first 5 or 10 years has nothing to do with growth stocks or beta or tech.

It has nothing to do with my personal income or my net worth or exposure to the stock market. I actually have probably no more than 50% of my personal net worth in equities.

I am providing the academic correct analysis of how people should think about mortgages and investments. I am not against people paying off their mortgage. They just need to understand the math that applies to such decisions. There seems to be widespread misunderstanding of how to think about these things.

 

[Mman]

And even furthermore, your point that the market did really well after 1984 is irrelevant to the argument at hand. 1. There are a number of people with mortgages who likely had a 20-30 year investing horizon who had to retire in 1984 and their inflation adjusted return was garbage the day they left their jobs. 2. Your statement that "there is no reason to believe that [stock market returns] will change anytime soon" is pure gamblers' fallacy logic.

You continue to misrepresent my idea. I never said that "there is no reason to believe that stock market returns will change any time soon". I said there is no reason to believe that the tradeoffs paying off a mortgage vs investing will change any time soon. That is a fundamentally different statement. The advantages over decades towards investing and getting compound interest so outweigh a tax advantaged fixed rate mortgage that it has never even been particularly close. The idea that it is overwhelmingly likely to continue favor investments, even if by only a small amount, is not really controversial if your timeline is 30+ years.

 

[Mman]

But the index wasn't made of the same companies during that timeframe: how do you calculate the real return taking into account the companies that went bankrupt?

it is the easiest available measure of broad stock market performance I can find for you and likely the most applicable to an expectation of what you would generate these days via ETFs or index funds over a similar macro environment.

 

[dhb]

it is the easiest available measure of broad stock market performance I can find for you and likely the most applicable to an expectation of what you would generate these days via ETFs or index funds over a similar macro environment.

But it's skewed by only taking positive results since the negatives are removed. So what's the real return?