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.

You make a very interesting point about letting apartment-bound gardeners use my land. I just saw one of my friends offer this service to another of my friends! Too bad I really don’t like vegetables. I still like your idea, though. If that plan between my other friends doesn’t work out, I’ll invite her to my place. She wants to plant natives, my favorite!

This year my roommate actually planted a garden for the first time, so there were lots of tomatoes, quite a few peppers and a few bits of basil. I harvested a few blueberries and I also harvest a lot of rosemary, but mostly for decorating wrapped gifts.

@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.

I think you could make the ceiling higher if you consider that homes have historically appreciated at approximately 1.5-2x inflation. Not to mention that you can add on the resale value of your RV, which, in theory, would be surplus to your needs.

That said, early retirment (I plan to retire sometime between 35-40) requires attention to all three areas of the equation: accumulating (saving), cost cutting, and investing.

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.

The point here is this, Jacob aside, for most people to early retire they need to accumulate a great deal of wealth. That means taking on more risk (though not doing so stupidly) in order to get a higher return. You just can’t do that if you are investing the bulk of your money in CDs or are paying down your 5% mortgage.

(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.

Investments in other instruments might return more than the 5% mortgage rate…or they might not. What would have been the better choice over the past 10 years…paying down a mortgage, or investing in stocks? It is often-reported that stocks return some figure “on average” around 8-11% (depending on the source) in the long term, but consider what that long term is…very long investment periods(usually a lifetime or longer). Compare that to a 15-year mortgage term. It’s much harder to make 8-11% on stocks in a 15-year period. Sure, it may be possible during an 80-year period. But who has an 80-year mortgage? I think it’s important to compare apples to apples.

Jacob states in his “About ERE” section that “The first premise is that financial independence is much more easily obtained by finding ways to reduce monetary expenditure than by finding ways to increase monetary income”. I can’t think of a better way to reduce monetary expenditure than to eliminate what is by far the largest single expense most people have on a monthly (or yearly) basis — the mortgage.

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.

From your example: “e.g. if you have 20% equity in a $100K house that appreciates by 3%, you get a 15% return on your investment”

A house selling for 103k, using a realtor, nets the seller $96,820 after 6% commission. No ROI there…

Perhaps you sell by owner. You put in $20k. If you hold the house for 1 year, financing $80K at 5%, you’ve paid $3973.20 in interest in that year, and accumulated $1181 in equity . You sell at $103,000, by owner– so no commission. Imagine you can get closing costs down to $500. Leaving you with $102500. You still owe the bank $78819.71, leaving you with $23680.29. You paid $3973.20 in interest during the year, but you get to deduct some of that from your taxes, so in the 28% tax bracket, you’re still out $2860.70, leaving you with $20819.59. You put in $20k to begin with, so your return is $819.59. Making your return about 4%…. But we haven’t thought about property taxes yet, or homeowner’s insurance, or HOA fees, or maintenance on the house. Imagine you have no HOA, do all of the maintenance yourself, and pay ultra low prop taxes of $600 for the year (you may be able to deduct those too)… even so… suddenly it seems that if the microwave breaks and you have to replace it you have no return at all… And in the meantime you maintained a house for a year, and sold it by owner, all of this takes your time, which is worth something right? At least in opportunity cost your time is worth something…

Is there really a 15% return in there?

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.

Also, if you are able to have a home in the same place as you built your wealth, more power to you. Most people I hear about, make their nest egg close to a high-paying job and then retire to a lower cost of living area.

Last, Opportunity Cost. Think of it this way: you’re not going to be able to accumulate enough to retire at the ridiculously early age we all would like, without making a higher return on your money. You can’t make that high return by paying down a 5% mortgage.

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.

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).