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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 7:48 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1975
We need to remember that anyone can panic and not execute properly, including buying too much house.

The thing is, you have to remember that these folks didn't borrow to invest in stocks; they borrowed to buy a house. And of late, they've refinanced it pay it in a shorter time, with lower interest. All good.

What they're really doing with this windfall is not leveraging debt; they're leveraging time. They're in their early 50s now, and don't have the advantage that younger folks have to let time work its magic on their money. So this windfall can be a godsend to help them in their efforts to get ahead of the curve.

Of course it goes without saying that at their age, they should be in a more conservative asset allocation in case of a downturn. That wasn't part of their question, so I didn't address asset allocation.

As long as they can make their payments for the next 15 years, they'll be fine. Is there a chance that something could happen that would prevent that? Of course. But you can mitigate that risk with insurance. Remember, there is risk in anything. Risk analysis is weighing those risks to determine the best course for yourself. Have a look at the statistics. Far more seniors are short of retirement funds than are being foreclosed upon. They have a house but they can't heat it. Or eat. Or much else. Yes, they could take a mortgage out on the paid off house, but that puts them back to making payments and paying interest. And this time, there's no income, so there's no tax deduction to help things out. Not a pretty scene.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 8:52 pm 

Joined: Mon Mar 18, 2013 9:48 am
Posts: 15
RayinPenn, I certainly appreciate your perspective, as we are extremely debt-adverse and conservative with our finances and investment choices because of our age and the late start with retirement saving. However, this money is a completely unexpected windfall, not borrowed to gamble with in the stock market or anywhere else. We were kind of hoping to find reasons that make sense to usto pay off our mortgage this year, but the more we read, the more we think that for us, paying off our mortgage with this windfall feels a bit like we are contemplating burying cash in the backyard. Our thoughts are focused on being good stewards, to ensure it benefits us in the longer term, and I was seeking different perspectives on how to make that happen.

VinTek, thank you for your precise summary of our situation. Mortgage debt is debt, but for us it's manageable and appropriate and has us in a great home that will be still be suitable when we are doddering senior citizens. Very bad things could happen between now and then, of course, but we have done our best (with insurance and savings) to try and minimize the impact.

My next step is to find a fee-based financial planner AND step-up our ongoing investment education so we're not part of the scary statistics and stories mentioned. Thank you all for the input and advice offered.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 9:32 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1975
4happycaligirl wrote:
My next step is to find a fee-based financial planner AND step-up our ongoing investment education so we're not part of the scary statistics and stories mentioned. Thank you all for the input and advice offered.

Start with this thread in terms of searching for a financial planner. Feel free to ask any questions.


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 Post subject: Re: inheritance
PostPosted: Wed Mar 20, 2013 3:41 am 

Joined: Sat Dec 10, 2011 7:25 am
Posts: 811
Paying off the mortgage isn't like burying the money in the back yard! Did your Mom have a mortgage on her home? For me You honor your Moms memory by locking it up in a prudent and safe investment like your home. Yeah safe because you have to live somewhere.

The wife and I had a couple of inheritances and we were always very careful with what we did with the money. For me the inheritances were very special money to be handled with great care.

Be careful with the investment advisor - the best investments are simple if anyone tries to sell you trust or anything that doesn't trade on the stock market fire him.

_________________
RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain


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 Post subject: Re: inheritance
PostPosted: Wed Mar 20, 2013 4:26 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1785
Location: Ottawa, Canada
VinTek wrote:
Take any 30-year period.


The only 30-year period that matters is the next one. And call me a pessimist, but I think the days of 10% average whole-market returns (as one would get with indexing) are over.

We had a good run, financing growth on an ever-growing pile of debt, but it looks like the party is finally over. It's finally time to pay the piper. The unprecedented pushback over raising the debt ceiling, the multi-billion Euro sovereign bailouts in Europe, and a tail-spinning debt-to-GDP ratio and trade deficit make such future growth mathematically impossible.

Even if you want to argue over it, it's still just that: arguing. Nobody knows for sure. What the market did in the past has no bearing on what it will do in the future.

Paying off the mortgage is a sure thing.


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 Post subject: Re: inheritance
PostPosted: Wed Mar 20, 2013 5:14 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1975
kombat wrote:
The only 30-year period that matters is the next one. And call me a pessimist, but I think the days of 10% average whole-market returns (as one would get with indexing) are over.

That's just great. You trot out a bunch of factoids to support your argument but when asked to put it in context, you turn around and say they don't count.
kombat wrote:
We had a good run, financing growth on an ever-growing pile of debt, but it looks like the party is finally over. It's finally time to pay the piper. The unprecedented pushback over raising the debt ceiling, the multi-billion Euro sovereign bailouts in Europe, and a tail-spinning debt-to-GDP ratio and trade deficit make such future growth mathematically impossible.

So now you abandon the facts that you made your case with and start with a bunch of new factoids. Okay, I call. Show me the math.
kombat wrote:
Paying off the mortgage is a sure thing.

So is a passbook savings account. Is that where you keep all your money?


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 Post subject: Re: inheritance
PostPosted: Wed Mar 20, 2013 6:00 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1785
Location: Ottawa, Canada
VinTek wrote:
You trot out a bunch of factoids to support your argument but when asked to put it in context, you turn around and say they don't count.


I corrected your incorrect assertion that "the market has returned 10%", then explained why I think the implied assumption ("so it will continue to do so indefinitely into the future") is also wrong.

VinTek wrote:
kombat wrote:
Paying off the mortgage is a sure thing.

So is a passbook savings account. Is that where you keep all your money?


Not as long as I have a mortgage, no.

All our extra money is currently going toward our mortgage. We're not currently adding anything new to investment or retirement savings. We're leaving the money that's already in retirement savings where it is, due to the unpleasant tax implications of taking it out. But we're not adding any more to the pile until we own our home free and clear.

And our mortgage is currently 3.69%. We have no deduction for mortgage interest up here in Canada, so 3.69% is what it is, no adjustment necessary. So to answer your question, if I could find a passbook savings account that returned a guaranteed 3.69%, then yes, that's exactly where I would put my money. But currently, they're only paying less than 1%, so I'm forced to take risks with my money if I ever want to see it grow.


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 Post subject: Re: inheritance
PostPosted: Wed Mar 20, 2013 7:03 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
VinTek wrote:
We need to remember that anyone can panic and not execute properly, including buying too much house.

The thing is, you have to remember that these folks didn't borrow to invest in stocks; they borrowed to buy a house. And of late, they've refinanced it pay it in a shorter time, with lower interest. All good.

What they're really doing with this windfall is not leveraging debt; they're leveraging time. They're in their early 50s now, and don't have the advantage that younger folks have to let time work its magic on their money. So this windfall can be a godsend to help them in their efforts to get ahead of the curve.

Of course it goes without saying that at their age, they should be in a more conservative asset allocation in case of a downturn. That wasn't part of their question, so I didn't address asset allocation.

As long as they can make their payments for the next 15 years, they'll be fine. Is there a chance that something could happen that would prevent that? Of course. But you can mitigate that risk with insurance. Remember, there is risk in anything. Risk analysis is weighing those risks to determine the best course for yourself. Have a look at the statistics. Far more seniors are short of retirement funds than are being foreclosed upon. They have a house but they can't heat it. Or eat. Or much else. Yes, they could take a mortgage out on the paid off house, but that puts them back to making payments and paying interest. And this time, there's no income, so there's no tax deduction to help things out. Not a pretty scene.


You may have said this already, but....

Even for young people, I don't think paying off the mortgage early is a wise move (Assuming a decent interest rate). One of the primary principles of investing is diversity. Say instead of investing during the down turn you paid off your mortgage. Hooray. But, you also missed one hell of an upturn. So, if you are too heavily weighted towards one thing or the other, you can be suboptimal in terms of performance AND take on more risk.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: inheritance
PostPosted: Wed Mar 20, 2013 7:41 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1975
kombat wrote:
VinTek wrote:
You trot out a bunch of factoids to support your argument but when asked to put it in context, you turn around and say they don't count.


I corrected your incorrect assertion that "the market has returned 10%", then explained why I think the implied assumption ("so it will continue to do so indefinitely into the future") is also wrong.

Actually, I'm not wrong, at least about the 10%. You haven't done the math over a 30-year period (and I'm saying any consecutive 30-year period. You can even include the last 2 downturns if you like. Or you can include the Great Depression if you like), including dividends. And don't put words in my mouth. I merely pointed out historical fact. We've been through depressions, recessions, 2 world wars which literally trashed Europe and Asia, a cold war, and the market went on, doing what it does. Seriously, do the 30-year period math. It's pretty obvious you didn't try it the last time it was suggested to you a few years ago.

And my request for math in the post above was in response to your statement that gains like those we've had historically were mathematically impossible (your words). I was just asking to see the math that supported your statement.

VinTek wrote:
kombat wrote:
Paying off the mortgage is a sure thing.

So is a passbook savings account. Is that where you keep all your money?

kombat wrote:
Not as long as I have a mortgage, no.

All our extra money is currently going toward our mortgage. We're not currently adding anything new to investment or retirement savings. We're leaving the money that's already in retirement savings where it is, due to the unpleasant tax implications of taking it out. But we're not adding any more to the pile until we own our home free and clear.

That's a pity (and I mean that sincerely, not in a sarcastic way), because every dollar you put into the market during the downturn would have yielded considerable gains. You know, buy low and all that.

kombat wrote:
And our mortgage is currently 3.69%. We have no deduction for mortgage interest up here in Canada, so 3.69% is what it is, no adjustment necessary. So to answer your question, if I could find a passbook savings account that returned a guaranteed 3.69%, then yes, that's exactly where I would put my money. But currently, they're only paying less than 1%, so I'm forced to take risks with my money if I ever want to see it grow.

You're not forced to take that risk. You choose to take that risk, in exchange for potential growth. And that's what investing is: taking calculated risks in exchange for calculated growth. You can have nice safe gains of less than 1% or take on more risk for greater returns (and volatility). I don't consider your 3.69% a true gain. Seems more like an assured reduction of liability to me.


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 Post subject: Re: inheritance
PostPosted: Wed Mar 20, 2013 11:37 pm 

Joined: Mon Mar 18, 2013 9:48 am
Posts: 15
Quote:
Did your Mom have a mortgage on her home? For me You honor your Moms memory by locking it up in a prudent and safe investment like your home. Yeah safe because you have to live somewhere.

Yep, my parents had a 30-year mortgage and made all 360 payments. Of course, they purchased their place in 1973, with a $15,000 mortgage, never refinanced, and had an interest rate higher than our original 4.5% rate.

Our home is also our home, not an investment. Yes, we do have to live somewhere, and our mortgage will be gone one way or another before we retire from the workforce completely. But if something truly catastrophic were to befall us and our safety nets (insurance, savings, investments) cannot soften the financial burden of our mortgage, we are practical people and would sell and either purchase another, less expensive property or revert to being renters. DH and I have discussed this endlessly, and as others have pointed out in this thread, it seems pointless to have this wonderful, mortgage-free home and not be able to maintain and enjoy it for lack of cash in our sunset years.

Quote:
One of the primary principles of investing is diversity. Say instead of investing during the down turn you paid off your mortgage. Hooray. But, you also missed one hell of an upturn. So, if you are too heavily weighted towards one thing or the other, you can be suboptimal in terms of performance AND take on more risk.

This is really close to what we are trying to express as to why paying off our mortgage does not feel right for us. We are trying to avoid the paralysis that comes from fear of investing in general and the stock market in particular. The discussions and varying viewpoints here have certainly helped focus our attention on the direction we think we want to pursue.


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 Post subject: Re: inheritance
PostPosted: Thu Mar 21, 2013 3:01 am 

Joined: Sat Dec 10, 2011 7:25 am
Posts: 811
There is a greater lesson here then whether it is prudent to invest or retire debt. Personal finances are just that personal; Our heir has stated she feels more comfortable investing. Then so be it- I really hope they find the right investment advisor and they do well. It is what works for them.

Many people will tell you never buy an annuity for a number of reasons, but for some who fear they will spend the nest egg it just might work out well. Many people will tell you to develop a detailed budget but for me, who deals with numbers all day long I just saved first and spent what was left over. It got me to the same place.

I grew up in a paycheck to paycheck home where we constantly lived on the edge. The stress was simply overwhelming - we didn't live we worried. I always felt education would get me out of that lifestyle and It worked for me. I work in the credit card industry and I unfortunately get to see what consumer debt can do to a family, marriage and life. My aversion to debt is understandable - without debt I feel like a country gentleman; I walk my property and think to myself I don't owe anyone, I am at peace, and I am truly blessed. I take that business of "Neither a borrower nor a lender be" seriously- there is great wisdom there.

There is a reason people used to celebrate that last payment by having a mortgage burning party. They celebrate a transition into a new kind of life; It is a life I have come to appreciate more each day.

_________________
RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain


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 Post subject: Re: inheritance
PostPosted: Sun Mar 24, 2013 8:16 pm 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 320
Location: Atlanta, Georgia
Food for thought on the mortgage debate: http://affordanything.com/2013/03/22/pay-off-your-mortgage-or-invest-in-the-stock-market/


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 Post subject: Re: inheritance
PostPosted: Mon Mar 25, 2013 7:33 pm 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 149
Using more than 40 years worth of data (ending 2009), the S&P 500 has returned just under 10% per year, as I recall.

I have to agree with Bichon Frise and Vintek here. At such a low interest rate, it is better to have it invested than paying off the mortgage.

If you don't know how to invest well, then index or find someone who does. If you do know how to invest well, then make your own investment decisions. Just the difference between that rate of interest and the rate at which indexing provides returns over the long run would make indexing a better choice than paying down the mortgage.


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