@Alex – The allocation contains derivatives only. It could be diversified into commodities (particularly the useful ones, oil, copper, grain), land, rentals, and, believe or not, (consumer) durables. For the latter, I suggest tools, guns, knives, and ammo or whatever you think will be useful 50 years from now. Land is forest but more importantly good soil. Also develop more skills to be more resilient. Relying on the supermarket for stuff and wall street for money to pay the supermarket is risky.

By eliminating your mortgage payment you are reducing your estimated future monthly expenses by 20%. Nice work! And your mortgage payment ($505 per month) is pretty darn small…imagine if it was twice or thrice that amount.

I really can’t understand why so many financial advisers refer to a mortgage as a “good” debt. I guess it is relatively better than credit card debt, but the absence of any debt sounds like the best idea of all when planning for financial independence.

Did you make extra payments toward your mortgage in the past, or are you doing so currently?

This a great, detailed plan. You can tell Debbie has thought long and hard about it. Thanks for sharing.

My plan is similar in that a majority of it is based on paying off the mortgage (or basically 1/2 of our monthly disbursements) – since that’s likely 12-15 years away I haven’t done the detail analysis Debbie has, but I have the “big picture” in mind as well as several intermediate goals to make sure we stay on track.

@Executioner- I think paying your mortgage off before you retire is a good idea as it greatly reduces the total amount of money you need to save, but that said, I still think its a “good debt” to have when you are trying to build your wealth to get to the retirement stage.

The reasons are basically opportunity cost and leverage: 1)opportunity cost- mortgage debt, especially when you factor in the tax credit, is incredibly cheap, and you can usually get a much better return on your money by investing it elsewhere and 2) leverage- as long as house values are increasing (which lately has not been a given, admittedly) you receive the total value of your house appreciation while only having to invest a small amount. (e.g. if you have 20% equity in a $100K house that appreciates by 3%, you get a 15% return on your investment)

@Executioner, I bought my house 13 years ago. At that time my payment was about $610/month and only $30 of that was going toward principal. Depressing! But then I realized that if I paid an extra $30, that would be like cutting a month off at the end. And so I paid $100 extra a week and made a chart showing how many months I still had left. That chart was much more exciting than the chart showing how much my principal was(n’t) decreasing.

Two years later interest rates dropped even further. I refinanced from a 30-year fixed mortgage at over 8% to a 15-year fixed mortgage at 6.625%. My payments increased slightly but were less than the amount I had been paying. At that point I switched strategies and started contributing more toward my retirement accounts. The reasons were, a) higher returns (oops! wrong about that!), b) by maximizing contributions for more years, I’d save more money, and c) by contributing over more years, I’d be buying at more prices and thus reducing risk (oops, didn’t work out!)

Note my mortgage payment is $840; $505 is just the principal-and-interest part. Back when I got my mortgage it seemed awfully big. Thirteen years later, it’s awfully small!

**More later, guys, I’m running off to dance class.

I retired last year (October 31) at the age of 45. I worked for 23 years in the actuarial field, the first 16 of them full-time and the last 7 of them part-time. I had an awful commute from where I lived on Long Island (New York) to Manhattan for the 16 full-time years and to Jersey City (New Jersey) for the part-time years. My company became a for-profit company in 1997 and I took a big company stock payout (about 300k) last year, invested it in a high-yield (not junk) bond fund to generate enough money (along with my other considerable savings) to cover my expenses with room to spare. I have an IRA from my old 401(k) which has bounced back nicely in the last 12 months. It has nearly 300k in it and it waiting and growing until I can tap into it in 14 years. I have a frozen pension waiting for me, too, at age 65. So, all I have to do is live off my dividends fr 14 more years until the “reinforcements” start arriving. Even if I have to tap into principal in 10 years that is okay. I checked this out with a financial advisor. Playing with numbers is something I became very good at in my 23 years in the actuarial field.

I have been debt-free since 1998, having paid off the mortgage on my co-op apartment. I found a decent and affordable individual health insurance policy last year. I bought a new car in 2007. My monthly expenses are both affordable and mostly predictable. I am single and am childfree, the latter my biggest reason for being able to retire.

The last 12 months have been great. No more alarm clocks, no more trains, no more commute, no more office stuff (I actually liked the work most of the time, though), no more lousy lunches in New Jersey. Even working two days a week from mid-2007 to my final week at the end of October, 2008, was an awful experience, mainly because of the tiring, annoying, and often sickening commute.

Once I began working part-time in 2001, I was able to reclaim my life. I resurrected an old hobby (at night, something I had no energy to do while I worked full-time) and began doing volunteer work in several area schools as part of the school Scrabble program. Otherwise, I come and go as I please, including spending time with my ladyfriend of 5 years.

@Mo, my giant pension including free health insurance is indeed an amazing benefit. But the rules can change at any time. For example last I heard, the relevant union is actually assuming that the free insurance will disappear, and they’re not even willing to fight for it. There have also been rumors to increase the age I could retire by five years. Already the pension is based on my highest 5 salaries instead of my highest 3, and there are no raises this year of course. So my main goal is to make sure I can retire at age 52 regardless of what happens.

Covering inflation is a good point. I’d been thinking that my main problem would be that all the baby boomers would try to retire while I’m trying to retire, and they’ll sell their stocks, forcing the prices down, and then buy bonds, bringing the interest rates down, and they would be collecting their Social Security while leaving behind too many open jobs, so that taxes would go up, but demand for workers might bring salaries up, so the only way to get a good income would be to go back to work, which I really don’t want to do.

But instead, the market plummeted first, leaving the boomers quaking in their jobs, but then the government is finding all the money it can and throwing it into a big compost heap (yes, compost is a good thing, but…), so some pretty bad inflation does seem to be in our future.

I’ve read that stocks are better for dealing with the risk of inflation and bonds are better for preserving value, so those two goals are somewhat at odds with each other. That’s why my goal is to maximize diversification, which I don’t exactly know how to do yet.

How do you recommend hedging against inflation? I’m pretty sure you’re not recommending debt! I guess you’re saying bonds, blue chips, and dividend-paying stocks.

I did experiment recently with picking some dividend-paying stocks. One dropped its dividend; the other cut its in half. I noticed the S&P 500’s dividends are better than what I’m getting now. So the US large cap part of my investments seem to qualify as both blue chip and dividend paying stocks.

@Executioner, I agree about the home value. Basically, I want my assessed value to go down (while the personal value to me remains high) so my taxes stay low. But if my taxes ever get too high, especially because the value has skyrocketed, that means I can sell the place and use the money to move somewhere cheaper.

I think mortgages are most awesome for people who are done moving, who aren’t good at saving, and who don’t get suckered into stupid loans (interest-only, variable mortgages when rates are at historic lows, home equity loans to let them spend more than they earn, etc.) Eventually their housing expenses will be reduced in spite of themselves.

The tax deduction is of some value to people who itemize (though usually not as valuable as they think because it’s only the amount beyond the standard deduction that is a benefit).

Debbie, Isn’t the rent you’re able to charge for your extra room a source of income that will keep up with inflation (if not beat inflation)? It seems like rent–and housing prices–have gone up much faster than the alleged 3-4% inflation over the years! So, the rent you charge could continue to increase over a period of 20 years, keeping up with your higher living costs.

Also, you mentioned not wanting to grow your own veggies. But do you have land? I ask because you may be able to find someone who’d like to grow veggies in your garden and give you a share of whatever they produce. As someone with a green thumb who’s been apartment bound for years, I’d love to have such an opportunity. I’m looking around where I live. . . unfortunately I don’t get the feeling we’re neighbors 🙂

And I agree with you. Maybe it’s stupid to buy a home when you’re going to be paying a mortgage you can’t afford or monthly interest that’s more than rent–clearly not wise. But if you can buy in such a way that you never have to pay rent again and you’re not tying up all your money and becoming house poor, well, I’d do it.

@Debbie M: “How do you recommend hedging against inflation? I’m pretty sure you’re not recommending debt!” No, certainly not. All I was trying to suggest with that discussion is that the prevalence of debtors is high, thus any concentrated effort to minimize inflation would be opposed by numerous powerful forces. Avoid debt as much as you can– no matter what unfolds in any type of market, you’re always better to be free of debt.

I’m 34, and I don’t have any formal financial training, so my advice is worth what you’re paying for it :). My mom is turning 65 soon, and she has a great pension, nice nest egg, and paid off home. We’ve been looking into ways to try to minimize the impact of inflation on her, as that seems to be her biggest threat. She has essentially no tolerance for loss of principal, and up until recently had all of her money in CDs (which paid off well for her last year!).

Some of the things we’ve looked at are TIPS, Blue chip funds (and similar funds made up of stocks that pay dividends, or are thought to be more stable), stable value funds, foreign currencies, and even inflation adjusted annuities. Due to an inheritance, she does hold a portion of her nest egg in a foreign currency in Europe, and that opens some other considerations too.

If you have an interest in TIPS, you might be able to get into those by putting some money into a 403b plan, which I assume is an option for you since you have a Roth 403b. That would seem to reduce the issue of phantom income that can be problematic when dealing with TIPS.

I really don’t know enough about commodities and gold and the like to use them confidently at this point. So, I’m sticking to what I think I’ve got figured out, and trying to learn more. Good luck.

@Mo- Lol wow. But seriously, you raise a good point. There is a lot more to home ownership than just the house value and the mortgage. But, I think a mortgage, even with the fees you mentioned would be better than completely owning your home outright.

If you owned your home, you would face all of the same fees (minus the mortgage payments) so when you went to sell your house (minus the $500 in your example) you would get a return of $2,500 or 2.5% (not including the HOA fees, insurance fees, etc. that you didnt list out). Obviously, that’s lower than the 4% you got on a mortgage.

But, the better reason not to pay down the mortgage is that with the other $80,000 you didn’t sink into the house, you could invest it in a diversified portfolio of investments making a return of say 6%, or $4,800.

So under the mortgage scenario you make ($4800 +$820) $5,620 (not including those fees we didn’t quantify), under the owning your home outright you make $2500 (not including those same fees). Due to the magic of compounding interest, this disparity becomes greater and greater as time goes on.

Thus, if you’re looking to build wealth (versus a goal of reducing risk/increasing security), you shouldn’t pay down your mortgage.

My decision to pay off my $50k mortgage in 1997-98 was based on 4 things:

(1) I wanted to assure myself of some of the gains in the stock market I obtained in the few years I had been in it. I had invested close to $25k in the stock market via a mixed-asset-class (mostly stock) mutual fund. In that time, its value had doubled to $50k. I took $25k out to go towards paying down the mortgage so I was in effect playing with the “house’s money” going forward. The federal (USA) tax rate on cap gains had recently dropped due to law changes, too.

(2) The interest rate on my mortgage had risen since I refinanced it in 1992 from 6% to 8%. This meant that implied rate of return by paying it off would have grown, too, after discounting for the loss of deductible home mortgage interest. (More on that below.)

(3) The rest of the funds used to pay off the mortgage came from a tax-free muni bond mutual fund whose rate of return was about 5%, so my net rate of return from paying off the mortgage had now risen above the tax-free return of the bond fund.

(4) One thing I had not realized until I was halfway through paying off the mortgage was that I had lost the state tax deductibility of my home mortgage interest because the high standard deduction (“floor”) kicked in. Lessening the increased tax bite due to paying off the rest of the mortgage made it MORE appealing to pay it off.

Alex, are you reading the same blog that I am? This blog is not about early retirement. It is about extreme early retirement. Jacob’s been trying to demonstrate that even though “most people” don’t make the same choices that he did, many people could make those choices if they wanted to.

http://earlyretirementextreme.com/2007/12/how-i-became-financially-independent-in-5-years-part-i.html

“…an important point is that I did not invest for the first 3 years out of the 5 years it took me to gain financial independence. For extreme savers, financial independence is not achieved through investing. There is simply not enough time for compounding to make much of a difference. Instead compounding becomes somewhat irrelevant as the eventual portfolio becomes more focused on preserving principal, generating income, and not suffering too much in terms of inflation and taxes.”

The name of the game is reducing expenses as much as possible in order to maximize savings. Eliminating a mortgage is not the only way to do this, but it’s the way I’ve chosen to go.

@Alex – The RV is a California measure. Living here is just too expensive otherwise. However, consider our rent of 12*$475. If I divide this with a 4% withdrawal rate, we could and probably eventually will exchange this with a house costing no more than 12*475/0.04 = $142500 in some other state (the ceiling would be lower as I would need to reserve some money for a cash flow to porperty taxex, etc.). It is possible to get some nice houses in that price range.

Oops, got distracted, but there are more comments to reply to!

@van, I already have three legs: pension, house, and my “too risky” investments (not to mention Social Security to cover inflation in my later years). Your idea of a small source of side income sounds to me like a small job, which is what I’m trying to get away from.

That doesn’t mean I’ll never do anything for money, but I don’t want working to be part of my plan.

@Mo, thanks for your advice on reducing risk. I have a feeling that TIPS will be in my future.

Even if I can’t get everything I want now, I’ll be rolling my 403(b) into an IRA when I retire, and at that point I can get whatever I want.

Hmmm…. this is less than half my targeted amount. I have to study this carefully and compare it to my data.

Some really resourceful information here. I to want to retire quickly and am adopting a similar approach of picking low cost index funds. Thanks for sharing, it is possible! One step at a time.

Looks like a very good plan. I am sure you’ll be able to achieve it. Good luck and please keep us posted on your progress.