Best way to budget for mortgage payment?

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jason
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Best way to budget for mortgage payment?

Post by jason » Thu Apr 04, 2019 9:00 pm

I am 47 years old and retired because I sold my business a few years ago. Not counting my mortgage payment, which includes taxes and insurance, my annual budget is under the safe withdrawal rate of 4%. My mortgage payment, however, puts me at around a 5% withdrawal rate. Obviously, building equity in a house is a different type of expense than taking lavish vacations, going out to dinner, throwing big parties, and so on where the money is just spent and gone forever. Am I taking too much risk? I know that, historically, a house leveraged with a mortgage is a pretty solid investment long-term. But I also know that there have been extended periods where real estate has done poorly. But it doesn't make sense to me to classify a mortgage payment that builds equity in the same category as taking a vacation when planning an annual budget. Any advice on this?
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sophie
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Re: Best way to budget for mortgage payment?

Post by sophie » Thu Apr 04, 2019 9:48 pm

Not enough info from your post to really know, but it sounds like you may be cutting things a bit close.

I suggest using the retirement simulation tool at http://www.cfiresim.com/. It can account for time-limited, fixed expenses like mortgages, and will tell you % success of historical retirement years. If it's below ~90%, you might want to think about a part time job or some other source of income.
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Re: Best way to budget for mortgage payment?

Post by jacksonM » Fri Apr 05, 2019 10:27 am

I don't know why you wouldn't include the mortgage payment as part of your annual budgeting. What you say about it when comparing it with other expenses like vacations may be true but it's also true that unlike those expenses it isn't discretionary. It will remain a fixed part of your budget for as long as you hold it.

(BTW, I am also holding a mortgage in retirement and DO include it in my budgeting. Right now my SS + 3.5% would meet our budget but my wife is still working so the withdrawal rate as actually negative right now and will get even more negative when the SS checks start coming in July. I think when the figure gets down to 2.5% it will be time to work even harder at convincing my wife to retire.)

And thanks to Sophie for that link. Never saw that website before. All of the planners I've used in the past say my plan looks good but it's nice to have more confirmation.
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ochotona
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Re: Best way to budget for mortgage payment?

Post by ochotona » Fri Apr 05, 2019 11:09 am

jason wrote:
Thu Apr 04, 2019 9:00 pm
I am 47 years old and retired because I sold my business a few years ago. Not counting my mortgage payment, which includes taxes and insurance, my annual budget is under the safe withdrawal rate of 4%. My mortgage payment, however, puts me at around a 5% withdrawal rate. Obviously, building equity in a house is a different type of expense than taking lavish vacations, going out to dinner, throwing big parties, and so on where the money is just spent and gone forever. Am I taking too much risk? I know that, historically, a house leveraged with a mortgage is a pretty solid investment long-term. But I also know that there have been extended periods where real estate has done poorly. But it doesn't make sense to me to classify a mortgage payment that builds equity in the same category as taking a vacation when planning an annual budget. Any advice on this?
Jason, you've gotten some unexamined assumptions that you need to take a look at, like immediately and urgently.

4% retirement withdrawal rule, original work by Bill Bengen... was NEVER NOT EVER designed to support a 47 year old to the end of their life. It was, if I recall, a 30 year retirement calculation. If you intend to be compost by 77, then fine, otherwise you're going to run out of money in your 80s. You need to look at PortfolioCharts.com and pursue the Perpetual Withdrawal Rate for your type of allocation, not the Safe Withdrawal Rate. From a retirement point of view, 50 years (your lifespan which remains for planning purposes) is practically Perpetual.

Also, what is your allocation? Some people think, "Oh I have my money at Bank of America earning 0.01%, I can use the 4% Safe Withdrawal Rule". You''ll be Safe Withdrawing your way to poverty.
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Re: Best way to budget for mortgage payment?

Post by jason » Sat Apr 06, 2019 7:16 am

ochotona wrote:
Fri Apr 05, 2019 11:09 am
jason wrote:
Thu Apr 04, 2019 9:00 pm
I am 47 years old and retired because I sold my business a few years ago. Not counting my mortgage payment, which includes taxes and insurance, my annual budget is under the safe withdrawal rate of 4%. My mortgage payment, however, puts me at around a 5% withdrawal rate. Obviously, building equity in a house is a different type of expense than taking lavish vacations, going out to dinner, throwing big parties, and so on where the money is just spent and gone forever. Am I taking too much risk? I know that, historically, a house leveraged with a mortgage is a pretty solid investment long-term. But I also know that there have been extended periods where real estate has done poorly. But it doesn't make sense to me to classify a mortgage payment that builds equity in the same category as taking a vacation when planning an annual budget. Any advice on this?
Jason, you've gotten some unexamined assumptions that you need to take a look at, like immediately and urgently.

4% retirement withdrawal rule, original work by Bill Bengen... was NEVER NOT EVER designed to support a 47 year old to the end of their life. It was, if I recall, a 30 year retirement calculation. If you intend to be compost by 77, then fine, otherwise you're going to run out of money in your 80s. You need to look at PortfolioCharts.com and pursue the Perpetual Withdrawal Rate for your type of allocation, not the Safe Withdrawal Rate. From a retirement point of view, 50 years (your lifespan which remains for planning purposes) is practically Perpetual.

Also, what is your allocation? Some people think, "Oh I have my money at Bank of America earning 0.01%, I can use the 4% Safe Withdrawal Rule". You''ll be Safe Withdrawing your way to poverty.
Thanks for the info! All of my savings are in a standard 25/25/25/25 HBPP. I have a hard time wrapping my mind around the concept that, for example, budgeting for $3,000 per month for a mortgage, or budgeting $3,000 per month for a rented home, or budgeting $3,000 per month to send a kid to fancy private school should all be treated the same when planning a budget. Unlike paying rent or private school tuition, the mortgage payments are building equity so, at last in theory, I will be able to get all that money back someday,, plus some profit. When my kids are older and move out of the house, I could potentially sell the house (hopefully for a profit) and downsize to a small condo, for example. So I think of a house as more of a Variable Portfolio than a regular expense line item where money is just spent and gone forever. Why can't my house be considered a VP with moderate risk? And if it is OK for my house to be classified as a VP, what's the best way to calculate potential returns and calculate the risk I am taking, and include the home equity in my retirement calculations?
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sophie
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Re: Best way to budget for mortgage payment?

Post by sophie » Sat Apr 06, 2019 7:58 am

I don't think you should assume that you'll profit from selling your house. Generally, housing prices keep up with inflation but don't do more than that, absent a housing bubble.

What most of us do is regard the house as a consumption item. Your home equity figures as part of your net worth, but it does you no good unless you plan to tap it using a home equity line of credit or reverse mortgage. You might reasonably do these things late in your life, but I'd regard as an emergency measure only. Personally, I'm reserving home equity as a form of long term care insurance.

If you plan to sell your house and downsize in the near future, you can figure that into your retirement calculator as a one-time income event (home equity minus costs of the selling and moving process and purchase price of the condo) followed by reduced annual housing costs. That's why I like cfiresim, it makes it easy to do that.
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Re: Best way to budget for mortgage payment?

Post by Kriegsspiel » Sat Apr 06, 2019 8:13 am

jason wrote:
Sat Apr 06, 2019 7:16 am
ochotona wrote:
Fri Apr 05, 2019 11:09 am
jason wrote:
Thu Apr 04, 2019 9:00 pm
I am 47 years old and retired because I sold my business a few years ago. Not counting my mortgage payment, which includes taxes and insurance, my annual budget is under the safe withdrawal rate of 4%. My mortgage payment, however, puts me at around a 5% withdrawal rate. Obviously, building equity in a house is a different type of expense than taking lavish vacations, going out to dinner, throwing big parties, and so on where the money is just spent and gone forever. Am I taking too much risk? I know that, historically, a house leveraged with a mortgage is a pretty solid investment long-term. But I also know that there have been extended periods where real estate has done poorly. But it doesn't make sense to me to classify a mortgage payment that builds equity in the same category as taking a vacation when planning an annual budget. Any advice on this?
Jason, you've gotten some unexamined assumptions that you need to take a look at, like immediately and urgently.

4% retirement withdrawal rule, original work by Bill Bengen... was NEVER NOT EVER designed to support a 47 year old to the end of their life. It was, if I recall, a 30 year retirement calculation. If you intend to be compost by 77, then fine, otherwise you're going to run out of money in your 80s. You need to look at PortfolioCharts.com and pursue the Perpetual Withdrawal Rate for your type of allocation, not the Safe Withdrawal Rate. From a retirement point of view, 50 years (your lifespan which remains for planning purposes) is practically Perpetual.

Also, what is your allocation? Some people think, "Oh I have my money at Bank of America earning 0.01%, I can use the 4% Safe Withdrawal Rule". You''ll be Safe Withdrawing your way to poverty.
Thanks for the info! All of my savings are in a standard 25/25/25/25 HBPP. I have a hard time wrapping my mind around the concept that, for example, budgeting for $3,000 per month for a mortgage, or budgeting $3,000 per month for a rented home, or budgeting $3,000 per month to send a kid to fancy private school should all be treated the same when planning a budget. Unlike paying rent or private school tuition, the mortgage payments are building equity so, at last in theory, I will be able to get all that money back someday,, plus some profit. When my kids are older and move out of the house, I could potentially sell the house (hopefully for a profit) and downsize to a small condo, for example. So I think of a house as more of a Variable Portfolio than a regular expense line item where money is just spent and gone forever. Why can't my house be considered a VP with moderate risk? And if it is OK for my house to be classified as a VP, what's the best way to calculate potential returns and calculate the risk I am taking, and include the home equity in my retirement calculations?
It looks like you're asking more about how to classify a mortgage payment, not how to budget for it.

I track my house value on the VP sheet, and I count it in my net worth, but I don't count it as part of my invested assets. Are you including your home equity in your withdrawal rate calculations? Owning a house is just a way to decrease housing expenses. It doesn't make sense to compare a mortgage to vacation and party spending. Compare it to renting.
To die, to sleep
To sleep, perchance to dream; ay, there's the rub
For in that sleep of death what dreams may come
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Re: Best way to budget for mortgage payment?

Post by pugchief » Sat Apr 06, 2019 8:35 am

Kriegsspiel wrote:
Sat Apr 06, 2019 8:13 am
It looks like you're asking more about how to classify a mortgage payment, not how to budget for it.

I track my house value on the VP sheet, and I count it in my net worth, but I don't count it as part of my invested assets. Are you including your home equity in your withdrawal rate calculations? Owning a house is just a way to decrease housing expenses. It doesn't make sense to compare a mortgage to vacation and party spending. Compare it to renting.
^This.

Look at it this way: When you pay off the mortgage, you will still have real estate taxes, upkeep and maintenance, etc., expenses forever if you stay there, but you won't have the equity to spend unless you sell. So you may eventually have lower living expenses than you do now, which will figure into your withdrawal rate needs, but you won't necessarily be able to have that equity as part of your portfolio, so only consider liquid assets as your pool to draw down from.
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Re: Best way to budget for mortgage payment?

Post by ochotona » Sat Apr 06, 2019 6:41 pm

If using an HBPP and planning to live 50 more years, best to use a 3.5% withdrawal rate.
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Re: Best way to budget for mortgage payment?

Post by sophie » Sun Apr 07, 2019 7:07 am

ochotona wrote:
Sat Apr 06, 2019 6:41 pm
If using an HBPP and planning to live 50 more years, best to use a 3.5% withdrawal rate.
Actually I beg to differ with this.

If you check withdrawal rates on Tyler's website, you'll find that the PP can actually support an SWR higher than 4%. The key is the portfolio stability. Failures in traditional stock/bond portfolios happen when there's a big drawdown soon after retiring. As long as the PP has a real return of at least 4%, it is almost bulletproof. In practice it's even better because of the cash component, which automatically helps you avoid selling assets when they're down.

My main concern with the "4% rule" and the retirement calculators/simulators is that in most of the retirement start years, over a 30 or 40 year retirement, portfolios are predicted to grow to absurd levels (e.g. 10s of millions). How often does this actually happen in practice? I'd guess rarely, and I think it's important to find out why that is. Could it be investing fees that have historically been much greater than they are today? Or is it higher spending during retirement than anticipated? Or poor investment management, e.g. panic selling during a downturn, or frequent portfolio switches? It would be interesting to know what happens to early retiree portfolios through the next major market slide. The ERE movement has essentially been untested under such conditions, which is probably why most of them advocate 100% stocks. If you remember, the authors of "Your Money Or Your Life" originally advocated putting everything into 30 year Treasuries and holding to maturity..
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ochotona
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Re: Best way to budget for mortgage payment?

Post by ochotona » Sun Apr 07, 2019 8:39 am

Sophie the OP has a 50 year planning horizon. "Safe withdrawal rates" have an implicit 30 year horizon. That's why he needs to pick a rate closer to the perpetual curve. I also got the same result from Monte Carlo is addition to Tyler's charts.
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Re: Best way to budget for mortgage payment?

Post by jason » Sun Apr 07, 2019 11:11 pm

sophie wrote:
Sat Apr 06, 2019 7:58 am
I don't think you should assume that you'll profit from selling your house. Generally, housing prices keep up with inflation but don't do more than that, absent a housing bubble.

What most of us do is regard the house as a consumption item. Your home equity figures as part of your net worth, but it does you no good unless you plan to tap it using a home equity line of credit or reverse mortgage. You might reasonably do these things late in your life, but I'd regard as an emergency measure only. Personally, I'm reserving home equity as a form of long term care insurance.

If you plan to sell your house and downsize in the near future, you can figure that into your retirement calculator as a one-time income event (home equity minus costs of the selling and moving process and purchase price of the condo) followed by reduced annual housing costs. That's why I like cfiresim, it makes it easy to do that.
I have also read that houses keep up with inflation. Homes appreciate around 3.5% per year, on average, which is similar to inflation. But because I have a mortgage with a 20% down payment, doesn't that mean I have 5X leverage? How do I calculate my potential CAGR on my own house based on historical averages?
I still don't get why a mortgage payment would be treated like a regular expense line item in a retirement budget. The main difference between making a mortgage payment and paying for a vacation is that if you spend $10K on a vacation, that money is gone forever. You will never get a single penny of it back, ever. But if you spend money by making mortgage payments, you will likely get a lot of that money back eventually, if you sell the house down the road. So, isn't making mortgage payments more like putting money into a piggy bank or into a forced savings account than a regular expense? If so, how do I incorporate the value/equity in my house into my withdrawal rate calculations?
My plan is that if the PP does very well, then I can likely just live in my house long term. If the PP does very poorly and my assets are shrinking too fast, then I can sell the house, likely at a profit, and then downsize.
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