petsetc
11-08-2021, 08:51 AM
Been on TOTV almost 7 years and have read numerous threads on bonds and mortgages without comment. Now I would like to offer my thoughts based on numbers. If you are a believer in “Debt-Free” (as is my wife), this post may not be for you.
Main reasons people give for and against paying off the bonds include;
Pro – Debt-free, high interest rate, can recoup if you sell…
Con- May adversely affect future resale price, can’t be recouped if you sell, you have the
money available…
I have not seen anyone attempt a cash flow analysis, so that is my approach using my own bond number in CDD10 – Unit204 with an interest rate of 5.993%
CCD10 Unit 204 5.992%
..............Principal.....Interest.......Admin.. ...Total...........Balance.....Tax Discount 4% *
2020.............................................. ....................................20,806.43
2021.......417.30.......1,211.15.....111.35....1,7 39.79.......20,389.14........69.59
2022.......439.00.......1,189.21.....111.35....1,7 39.53.......19,950.14........69.58
2023.......462.37.......1,166.11.....111.35....1,7 39.82.......19,487.77........69.59
* Assumes you pay in November and take advantage of the 4% discount.
Looking specifically at 2022, the “cost” is $1,230.98 (interest + admin - discount)
My thoughts are, you put the balance in a S&P500 fund or a Total US Equity Fund and take a “safe withdrawal” of 4%** or $798.01 for a net negative flow of ($432.97) and you still have about $20K available should you suddenly need it.
In additional, the remaining balance is in the market growing at 8% (historical rate). If you use a more aggressive withdrawal rate the numbers improve (I use 5%).
** The bond payment is fixed whereas the "safe withdrawal rate" is adjusted for inflation in future years)
Looking at a new house, I arbitrarily chose CCD13 Unit 52V with an interest rate of 3.670%
CDD13 Unit 52V 3.670%
..............Principal.....Interest.......Admin.. ...Total...........Balance.....Tax Discount 4% *
2020.............................................. ................................... 31,276.03
2021.......629.89......1,072.78......120.32....1,8 22.99......30,646.14..........72.92
2022.......645.51......1,056.04......120.24....1,8 21.79......30,000.63..........72.87
2023.......662.86......1,038.86......120.25....1,8 21.97......29,337.77..........72.88
* Assumes you pay in November and take advantage of the 4% discount.
Again, using the same analysis,
Looking specifically at 2022, the “cost” is $1,103.41 (interest + admin - discount)
You put the balance in a S&P500 fund or a Total US Equity Fund and take a “safe withdrawal” of 4%** take $1,200. for a net POSITIVE cash flow of $96.59 and you still have about $30K available should you suddenly need it. In additional, the remaining balance is in the market growing at 8% (historical rate). If you use a more aggressive withdrawal rate the numbers improve.
It appears the “sweet spot” for the bonds is about 4%.
My final thought, do not pay off the bond because you don’t spend or bank "interest rates", you spend or bank cash.
---------------------------------------------------------------------------------------------------------------------
Mortgages Too !!!
I would contend the exact same reasoning applies to a mortgage. For simplicity, assume a loan to value of less than 80% to eliminate PMI and an escrow account.
The current 30 years fixed is about 3.2%, about 3.3% on a refinance.
Assume closing costs of $1,500 per $100K rolled back into the loan and no money out.
Loan amount $101,500. Interest Rate 3.3%
Monthly payment $439. Or $5,268 per year.
Principal paid down in first year $2,040.
$100,000 in an S&P500 or Total Market Fund
Safe Withdrawal Rate 4%** or $4,000 in year 1 for a net positive flow of $722.
Result – immediate positive cash flow with immediate access to the entire $100K
My final conclusion, my retirement is not about being debt-free, it’s about being able to live well with a solid cash strategy. I know this is not for everyone, but I do believe you have to “run-the-numbers” to be able to make an informed decision and this has been my attempt to help.
Main reasons people give for and against paying off the bonds include;
Pro – Debt-free, high interest rate, can recoup if you sell…
Con- May adversely affect future resale price, can’t be recouped if you sell, you have the
money available…
I have not seen anyone attempt a cash flow analysis, so that is my approach using my own bond number in CDD10 – Unit204 with an interest rate of 5.993%
CCD10 Unit 204 5.992%
..............Principal.....Interest.......Admin.. ...Total...........Balance.....Tax Discount 4% *
2020.............................................. ....................................20,806.43
2021.......417.30.......1,211.15.....111.35....1,7 39.79.......20,389.14........69.59
2022.......439.00.......1,189.21.....111.35....1,7 39.53.......19,950.14........69.58
2023.......462.37.......1,166.11.....111.35....1,7 39.82.......19,487.77........69.59
* Assumes you pay in November and take advantage of the 4% discount.
Looking specifically at 2022, the “cost” is $1,230.98 (interest + admin - discount)
My thoughts are, you put the balance in a S&P500 fund or a Total US Equity Fund and take a “safe withdrawal” of 4%** or $798.01 for a net negative flow of ($432.97) and you still have about $20K available should you suddenly need it.
In additional, the remaining balance is in the market growing at 8% (historical rate). If you use a more aggressive withdrawal rate the numbers improve (I use 5%).
** The bond payment is fixed whereas the "safe withdrawal rate" is adjusted for inflation in future years)
Looking at a new house, I arbitrarily chose CCD13 Unit 52V with an interest rate of 3.670%
CDD13 Unit 52V 3.670%
..............Principal.....Interest.......Admin.. ...Total...........Balance.....Tax Discount 4% *
2020.............................................. ................................... 31,276.03
2021.......629.89......1,072.78......120.32....1,8 22.99......30,646.14..........72.92
2022.......645.51......1,056.04......120.24....1,8 21.79......30,000.63..........72.87
2023.......662.86......1,038.86......120.25....1,8 21.97......29,337.77..........72.88
* Assumes you pay in November and take advantage of the 4% discount.
Again, using the same analysis,
Looking specifically at 2022, the “cost” is $1,103.41 (interest + admin - discount)
You put the balance in a S&P500 fund or a Total US Equity Fund and take a “safe withdrawal” of 4%** take $1,200. for a net POSITIVE cash flow of $96.59 and you still have about $30K available should you suddenly need it. In additional, the remaining balance is in the market growing at 8% (historical rate). If you use a more aggressive withdrawal rate the numbers improve.
It appears the “sweet spot” for the bonds is about 4%.
My final thought, do not pay off the bond because you don’t spend or bank "interest rates", you spend or bank cash.
---------------------------------------------------------------------------------------------------------------------
Mortgages Too !!!
I would contend the exact same reasoning applies to a mortgage. For simplicity, assume a loan to value of less than 80% to eliminate PMI and an escrow account.
The current 30 years fixed is about 3.2%, about 3.3% on a refinance.
Assume closing costs of $1,500 per $100K rolled back into the loan and no money out.
Loan amount $101,500. Interest Rate 3.3%
Monthly payment $439. Or $5,268 per year.
Principal paid down in first year $2,040.
$100,000 in an S&P500 or Total Market Fund
Safe Withdrawal Rate 4%** or $4,000 in year 1 for a net positive flow of $722.
Result – immediate positive cash flow with immediate access to the entire $100K
My final conclusion, my retirement is not about being debt-free, it’s about being able to live well with a solid cash strategy. I know this is not for everyone, but I do believe you have to “run-the-numbers” to be able to make an informed decision and this has been my attempt to help.