Planning for Retirement

[AJ_Katz]

Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

Refinancing will cost us $1,893, but we will receive a $1,483 credit from the lender == $410 net cost to refinance
Total interest paid on new 15 year loan at 2.875% will be approx. $23,300
Total interest paid in the existing 20 year loan over the coming 5 years if we do not refinance is approx. $42,150

So, over 5 the next five years, if we refinance into the 15 year loan, we would save $18,440.

[AJ_Katz]

Do what you can to max your tax advantaged accounts, but I'm risk averse, and I would not put any "extra" into the market now. The prices are still too over-inflated for my taste. If the market goes 'on sale' again for a more extended period,  I might change my mind. I haven't changed my monthly contribution since the onset of Covid.

There's quite a bit of detailed discussion along these lines on the Mr. Money Mustache forums, if you are not familiar with the boards over there.

I think that your recommendation aligns with my own thoughts on this decision, that I don't want to compromise my ability to max out my tax advantaged Roth 403b, which is what would happen if I refinanced into the 10 year loan.  By going with the lower payment, it also provides greater flexibility in managing our monthly income because if we have an unexpected expense, I could always reduce my contributions to the 403b to manage the expense (not using it as an emergency fund strategy, but using that to recoup my emergency fund if we need to use it).  However, refinancing into the longer-term loan and putting more into retirement accounts might not be necessary if we're already saving enough to meet our early retirement goal.   

I am familiar with the MMM forums.  I tried to create an account and they apparently have it locked so new accounts can't be created because of a problem with too many fake accounts.  Nevertheless, the existing information and resources has some value.  For example, I found this nice FIRE calculator that has provided some indication about the amount that I am contributing into retirement and whether it may be enough to meet my goal to have financial independence at 60.  I've also previously found information and resources from Get Rich Slowly to be helpful.  But there are a lot of variables in planning for early retirement, so I'm back to work on crunching my numbers. 

[monarda]

Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

Refinancing will cost us $1,893, but we will receive a $1,483 credit from the lender == $410 net cost to refinance
Total interest paid on new 15 year loan at 2.875% will be approx. $23,300
Total interest paid in the existing 20 year loan over the coming 5 years if we do not refinance is approx. $42,150

So, over 5 the next five years, if we refinance into the 15 year loan, we would save $18,440.

I would go for the 15 year loan, then. 
Do ask your bank if you can also set up a HELOC for no cost at the same time. You don't have to use it. But they're nice to have. Then you might not need to mess around with your 403b contributions, in case of need of funds.

[AJ_Katz]

Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

Refinancing will cost us $1,893, but we will receive a $1,483 credit from the lender == $410 net cost to refinance
Total interest paid on new 15 year loan at 2.875% will be approx. $23,300
Total interest paid in the existing 20 year loan over the coming 5 years if we do not refinance is approx. $42,150

So, over 5 the next five years, if we refinance into the 15 year loan, we would save $18,440.

I would go for the 15 year loan, then. 
Do ask your bank if you can also set up a HELOC for no cost at the same time. You don't have to use it. But they're nice to have. Then you might not need to mess around with your 403b contributions, in case of need of funds.

I read about HELOCs when we were selling and buying a new house a couple of years ago....  I heard a lot of negatives about them (sorry, too long ago for me to recall), so have not gone down that route further.  That said, in an emergency situation, having a line of credit like that could be valuable and would likely be better than some other options.

Along those lines of emergency funding though....  have you heard of Health Savings Accounts?  I just learned about them and it's blown my mind...  https://www.youtube.com/watch?v=B05OtAHXuJI

From what I understand so far, you can make tax advantaged contributions to the account and withdraw tax-free at anytime to pay for out-of-pocket medical costs.  The amounts in the account roll-over and if you don't spend them by the time you're retirement age, you can use them without tax for other expenses.  Also, you can use these accounts to "go back in time" and reimburse yourself for a past out-of-pocket medical expense.  My university just started offering the HSA for high-deductible health insurance policy holders, so definitely need to take advantage of this!

[Cheerful]

AJ_Katz, are you familiar with the Bogleheads fora?  Informative, helpful communities on Personal Investments, Personal Finance, and Personal Consumer Issues.  Named after Jack Bogle, Vanguard founder.

https://www.bogleheads.org/forum/viewforum.php?f=1

If you post your investment/finance questions there, you'll likely get prompt responses.  The community includes some academics.  Mortgages and HSAs are often discussed.  TIAA Traditional comes up every so often, and much more.

They have a google search function that yields relevant Bogleheads posts.

[monarda]

I would go for the 15 year loan, then. 
Do ask your bank if you can also set up a HELOC for no cost at the same time. You don't have to use it. But they're nice to have. Then you might not need to mess around with your 403b contributions, in case of need of funds.

I read about HELOCs when we were selling and buying a new house a couple of years ago....  I heard a lot of negatives about them (sorry, too long ago for me to recall), so have not gone down that route further.  That said, in an emergency situation, having a line of credit like that could be valuable and would likely be better than some other options.

Along those lines of emergency funding though....  have you heard of Health Savings Accounts?  I just learned about them and it's blown my mind...  https://www.youtube.com/watch?v=B05OtAHXuJI

From what I understand so far, you can make tax advantaged contributions to the account and withdraw tax-free at anytime to pay for out-of-pocket medical costs.  The amounts in the account roll-over and if you don't spend them by the time you're retirement age, you can use them without tax for other expenses.  Also, you can use these accounts to "go back in time" and reimburse yourself for a past out-of-pocket medical expense.  My university just started offering the HSA for high-deductible health insurance policy holders, so definitely need to take advantage of this!

Yes, I have an HSA. Your understandings about them are correct. You can roll them over. (As opposed to an FSA, which you can't)
I don't really understand FSAs.

Our university has only been offering HDHP with HSA options just for the past few years. I've had one for two years. The neat thing is that my plan fills the HSA with $750 per year, and I can add (through pretax payroll deduction) up to ~$4000 annually on top of that (not sure of the exact amount, I'm not sure I will be able to look it up before the editing window on posts ends, but I know that I contribute $300 per month, and I wasn't quite at the max). My premium is only $35 per month. It's really great if you don't go to the doctor much.  Beyond the first ~$2000 in the account which must be kept in cash, I can invest in a mutual fund - I've chosen a Vanguard target date retirement fund. And everything else you said makes it great. Accessible, tax free medical OOP costs.  Since I'm older than 59.5,  all my IRAs are accessible at this point, too.  I've only used my HSA.

We used our HELOC to buy solar panels last fall. The balance is still on a 1.99% promotional rate (since it's still the first year). We might use it to buy our next car a few years from now. It's just so easy to have it all set up and ready to go.

I plan to use the HELOC as well as 0% credit card balance transfer promotions (which are typically actually 2% per year, or 3% for 18 months) in case of emergency expenses beyond the cash I have on hand (which isn't as much as some people's emergency funds).

Or if we want to buy another rental property, we can use our HELOC for that.

[polly_mer]

The point of an FSA is for those of us who know we'll use our health insurance this year and will still use all the pretax FSA to fill the gaps.  There's seldom an ability to rollover the money when our medical bills including glasses, dental work, and copays average more than the couple thousand we can put in the FSA.

Taking the high-deductible medical plan is bad idea for those of us who regularly use our health insurance.

[AJ_Katz]

AJ_Katz, are you familiar with the Bogleheads fora?  Informative, helpful communities on Personal Investments, Personal Finance, and Personal Consumer Issues.  Named after Jack Bogle, Vanguard founder.

https://www.bogleheads.org/forum/viewforum.php?f=1

If you post your investment/finance questions there, you'll likely get prompt responses.  The community includes some academics.  Mortgages and HSAs are often discussed.  TIAA Traditional comes up every so often, and much more.

They have a google search function that yields relevant Bogleheads posts.

Ooo..  no, I had not seen bogleheads forum.  A lot of the topics look interesting.  There's even one topic in alignment with my original question "pay off house or invest?"   Thank you!

[Cheerful]

Mortgage questions come up frequently there, AJ_Katz.  Click on "Board Index" at top left of link I posted and you'll find the other two main fora:  Personal Finance and Personal Consumer Issues.  Enjoy and good luck!

[monarda]

The thing that bothers me about this kind of thread, found on just about every financial forum, is that folks making posts on these threads often see it as a black and white issue, either you pay off your mortgage, or you are mortgaged for as long as possible.  There's plenty of gray area middle ground for your comfort zone.  It's certainly a good mental exercise to read through these threads while you're defining your attitude toward debt and risk. On the MMM forums, there's a long one "Don't pay off your mortgage club". Search with the text  "don't pay off"  or "mortgage pay off" you'll see  the variety of opinions.

The 15 year loan (with no extra prepayments) is in that middle ground

That's why I said it depends on your age (or the number of years until you plan to retire). The closer you are to your retirement date, the better it is (in general) to be debt-free.

And clean's initial point,  whether you'd refinance to invest in the market if you'd have a paid off house really is a simple way to define your attitude.

The people posting on these financial forums are all about more more more more more more.
Rarely if ever is the concept of enough brought up.

[AJ_Katz]

Taking the high-deductible medical plan is bad idea for those of us who regularly use our health insurance.

Absolutely!  And taking a low-deductible medical plan is bad for those us who rarely use it too.  So, the HSA (when available) is a good option to try to offset unexpected heavy out-of-pocket costs.

[spork]

What investments will be safest when collateralized loan obligations collapse?

[clean]

"when collateralized loan obligations collapse?"

Which particular type?  So many things are collateralized... Student loans and home loans are for sure.
The 2008/9 'Great Recession' was exacerbated by the CLO issues of mortgages.  In part, the demand for CLO products meant that there was a great search for mortgages and in order to make mortgages, almost anyone qualified, and the resulting housing booms in resort cities like Vegas and Miami lead to the subsequent collapse of those markets. 

Federal student loans are insured by the federal government, though private ones are not insured, but still have protections against bankruptcy. 

For definition purposes, here is how a CLO works.  The 'simple' kind may have 3 main parties  (banks/borrowers, the company that bundles and repackages the loans, and the people/parties/institutions that buy the rebundled assets) .  A bank makes a student loan for instance. These loans are then bundled together. The bundle is then purchased by a 'Wall Street company' (WSC).  The WSC then takes that bundle and sells it to investors. SO let's say that this bundle is $10M. Some investors buy just the first part, say the payments for the first $3M of principle.  These investors get all of the principle and interest for the first $3M.  The other investors dont get any payments until the first traunch is completely paid off.  Then the payments start on the second $3M traunch, the third one not getting paid until the other 2 have been paid off.  This traunch would take the most risk in this set up any defaults would be born by this group as the first 2 get all the payments until after $6M in face value is paid out.

Who would want this?  The A traunch investor is looking for shorter term, current income (like a car insurance company).  The other groups may be retirement accounts/pension plans/life insurers. They have money today but need an income stream later to pay out to beneficiaries later.

So how would the CLO market collapse? 
These instruments are sold to investors (or institutions like insurance companies or retirement plans).  Would market conditions change so that this is a risk of investing?
IS the worry that the payments to the underlying assets (the student loans or mortgages) will stop?  (Because those particular assets are backed by assets that are supported by assets like the Government guarantee or the house)

IF we are worried that people, en masse,  will stop making payments on their houses, then we already know the fallout.  Look to 2008/2009.

However, Im not too sure that is going to be a problem, Especially IF we do have "a 'V' Shaped recovery".  Only if we move into another long recession, a jobless recovery, or things get worse will these issues really develop.

(Id be more concerned with the future tax implications of the bailouts we made in March, and the potential inflation from the Fed's actions to support the economy.)

Anyway, this is likely too much typing to ask, What specifically concerns you?

If the concern is that, for instance, federally insured student loan payments are deferred, I dont think that will cause any problems the government payment guarantee will kick in and the government will pay as promised, so the investor is protected.

[spork]

I have two specific concerns:

First, the huge share of the economy composed of financial services, much of which consists of exotic and opaque (in my opinion) debt-based derivative instruments.

Second, the underlying creditworthiness of such instruments and the firms that trade in them.

For example, if I look at the consolidated balance sheet of Wells Fargo (on page 123), I see about half of its total assets -- roughly $950 billion -- described as loans, with another $410 billion in debt securities. A law professor at Berkeley says at least $38 billion of this is in the form of CLOs. Ok, $38 billion is a small chunk of ~ $1.3 trillion. But all these financial firms are wired into each other -- they trade in each other's instruments, have each other's debts listed as assets on their own balance sheets, etc. The main point of The Atlantic article is that to a large degree the CLOs are based on corporate debt from companies that were already in serious financial trouble before the pandemic. In other words, the collateral the instruments are based on and the ratings are crap. We know from 2007-2008 what all this can lead to.

Slightly related note: I managed to visit Turkey in mid-2018, when its currency value had collapsed by about 40 percent. The country's estimated economic growth for 2019 is zero. Economic performance like this in emerging markets, the reported slowing down of China's economy, and Trump's dumbass handling of foreign trade looked like an incipient global economic downturn. So I moved half my retirement assets from equity to bond funds on February 3 of this year. And now we have the economic effects of the pandemic to deal with. Retailers that were already having problems, with a lot of debt, seem to be the first firms to be going bankrupt. My guess is that this debt represents a small share of CLOs. But what's next?

I remember reading (maybe written by someone on the fora) a statement about how pre-2008 the economy was addicted to cheap individual credit (home mortgages), and since 2008 it's been addicted to cheap corporate credit.

[clean]

What investments will be safest when collateralized loan obligations collapse?

With the additional information, I think that we have already seen the playbook.  What performed best after 2008/2009?

Banks are (hopefully) in a better situation than they were 12 years ago. They undergo stress tests and have more of their own money in the game as a result of the higher capital requirements.  As long as the government and Fed are willing to bail them out, (as the Fed can print as much money as they need, they are always able to... the value of that money (ie inflation issues) is another issue).

The good news is that while the Great Recession had some long lasting problems, none were necessarily permanent.  Investments recovered.  Most housing markets recovered ( and more) .

My own thinking on the issue leads to a first pass answer of residential real estate as a solution.  IF paid for, then the cash flow from the rental will be inflation protected as the land lord can raise rents annually or so to keep up with inflation.  However, I would worry about the financial situation of the state and county or city that it is located.  IF they have to raise money, they will raise property taxes.  If there are no jobs (high unemployment in the area) then it is harder to rent the houses for a market rent (and collect it !) . 

Paid for, at least eliminates the risk that the tenants default will lead to the landlord's default.  However, IF there WERE inflation, then it would have been better to have borrowed the money as the money repaid would have a lower value than the money borrowed.   

another important caveat is whether one really wants to be a landlord?  Do you want a new career as a land baron/slum lord/ property manager in retirement?  Do you want to keep track of rent payments and deal with maintenance issues in your Golden Years? 

Still, I have a friend that has 8 rental houses.  She has a property manager for the rent and other issues, but when it is repair time, she does as many things as she can to save money.  (They property manager doesnt exactly economize on finding contractors to do the work... Off topic, but I recall her saying that her property manager's best price to repaint the inside of a house was $8000.  I lent her my Wagner Power Roller and she did it herself over a week.  It took longer than a professional crew but was no less quality a job, especially given the price range/neighborhood of the house).   So hiring a manager is a partial solution, but you will pay for that service in more ways than one!! 
Anyway, with 8 houses, there is enough cash flow to keep the mortgages paid and provide her enough to support her frugal lifestyle.  Once the mortgages are paid off, even more cash flow will come her way.

Perhaps the pros and cons of rental properties would be called for.

The bottom line answer to the question at hand, I think is to review the results of the 2008/2009 period and see what worked best and see if those outcomes will or will not come again.  (It is different now in a lot of ways!)