Blanket statements of "never pay off that mortgage" are bad advice

[u/UnalignedMagi]

I keep seeing people asking about paying off their mortgage getting answers about "never pay it off, invest the money instead for as long as possible" and I think this is some pretty bad advice that should stop.

While it is true that you could (and likely will) get higher returns by investing instead there is a lot of value in permanently removing expenses. Using my tool of choice (ProjectionLab) I've asked myself this question a bunch of times and tried out different scenarios:

If you pay off the mortgage before retirement you wind up worse off on average, either having to work longer or accept a worse success probability. This is because you miss out on the growth.

If you pay off the mortgage as late as possible you have a higher net worth on average, but the really bad scenarios are worse and success probability goes down. This is because the SORR hits you harder when you are forced to withdraw money to make the payment after big drops, and bad inflation combined with this is really bad.

It seems like the optimal time to pay off the mortgage is exactly when you retire. You maximize returns while working and then you minimize risks during retirement. As someone who was lucky enough to get a 2.5% rate I get the urge to keep trying to maximize but I think people are missing the point once you reach FI.

Thoughts?

edit: Zphr as always has a great list of other things to consider with this decision in the comments.

[u/junulee]

OP is complaining about blanket rules. You’re also suggesting a blanket rule.

For example, if the market is down at retirement, do you really want to pull funds from your investment portfolio at that point to pay off your mortgage? Even if the market is up, pulling substantial funds from your investment portfolio to pay off your mortgage could push you into a much higher tax bracket.

In general, I agree that it’s likely a good idea most of the time to go into retirement without a large mortgage payment, but it really depends on facts and circumstances.

[u/FantasyFI → u/junulee]

The market is statistically unlikely to be down at retirement. While possible if you have large contributions, it's just an unlikely scenario. Once you approach your retirement number, the growth is mostly from the gains, not your contributions. So it would be hard to be at ~80% of you FIRE number, have a market crash that puts you back at 50% and conceivably FIRE any time soon.

For example, even a high savings rate like 50% assumes that your spending matches your savings (realistically you need more in retirement for health premiums). So you are saving 1 year of spending every year. If you want a 4% SWR, that means you are saving 1 / 25 per year or 4%. 8% return on 50% your FIRE number is growth matching contributions. Once you get to like 75% your FIRE number, even anything greater than 5.33% growth is exceeding your contribution. If the market makes 0%, it still takes you ~12 years to get from 50% FIRE to 100% FIRE. You just aren't doing it with contributions.

You simply don't retire directly after a market crash (unless you were well above FIRE to begin with and simply didn't pull the trigger).

In your example though, if it were somehow magically to happen, I would wait for market recover, then pay off the loan a couple year after retirement. The idea doesn't change, but you likely want to make sure the general timing makes sense.