Our Mortgage Swoop

Ever since we purchased our first home, Mrs. Done by Forty and I have had no idea what to do with our mortgage. When we first got in to personal finance we were against debt of any sort, so we threw every dime we could at our first mortgage, paying it off in just over three years.

Seeing how we did this from 2010-2013, this plan had opportunity costs that are so large that it hurts my heart to even think about it. Still, it felt good at the time.

After paying off the house and enjoying debt-free bliss for a year, we up and bought a couple adorable rental properties, complete with tiny mortgages.

After a while, we realized that opportunity costs are just as real as any other cost. So we took out another mortgage on our primary residence in 2016, just three years after paying it off. I always wished I'd called in to Dave Ramsey's show to tell him that.

Now, nine years after buying our first home, both of the rentals and our first primary residence are long gone, as are our dreams of lording over a real estate empire. It turns out we hate being landlords.

Do we hate mortgages, too? Let's find out, because we're about to pivot on our mortgage once again.
Every so often I'll speak with a CFP who offers a free financially planning call, which is really just a pitch to start doing business with them. Vanguard has a call like this once a year, and one of the hidden benefits in our company's EAP plan is a call with a CFP every twelve months, too.

Each time I ask them the same thing: if we're planning on retiring early, should we pay off the mortgage? I send them Big ERN's post ahead of time, the one on how mortgages and early retirement don't mix, so they can see where the question is coming from and why the answer might be different for someone retiring at 40 instead of 65. But these CFPs must be busy or lazy because I don't think a single one has read it yet.

Somewhat surprisingly, they all say to keep the mortgage around, even with our plan for a fifty or sixty year retirement, even with our protests about sequence of return risk (the bad thing that happens if you get some very bad returns in your first years of retirement). These dudes all seem more concerned with us having bigger lump sums when I'm in my eighties than they are with the sequence risks in the first five to ten years of an early retirement.

Maybe I'm just an asshole, but I don't think any of these guys know what they're talking about when it comes to the risks inherent with a fifty year retirement. The only financial planner I really trust, Joe Saul-Sehy, was nice enough to answer this question on one of his shows: he thought paying off a mortgage prior to an early retirement was prudent, and he gave the green light on our latest plan to do so: the Mortgage Swoop.

Rather than making big payments to principle over a period of years, our new plan is simply to wait until our nest egg gets to $1M + our mortgage principle balance (currently $260,000, at 3.75% on a 30 year fixed), and then sell $260k of investments and pay the whole thing off at once, leaving just the million.

Like, we come in all quick...and then, swoop, no more mortgage.

This isn't coming off well in print, but in real life I make a swoop gesture when Mrs. Done by Forty and I talk about it. You know, a swoop.

Also, swoop sounds like other fun words.

What we like about this plan is that it gets us to be mortgage free and mitigates the dreaded sequence of return risk, but it does so in a way that protects us in case something bad happens in the middle of a traditional mortgage pay off plan (where we'd just pay extra to principle every month). In a traditional mortgage pay off plan, there's some risk that you could lose your job or have a costly emergency midway through your mortgage payoff. If that happens in the middle of our plan, we can adjust it, because all the money's just sitting there in a brokerage account.

And since we'd wait until we have a million plus our mortgage balance, we'd be left with enough to generate $40,000 annually under the 4% rule, or $35k annually assuming a 3.5% safe withdrawal rate.

This admittedly doesn't sound like nearly enough money, but there's the fact that the principle and interest portion of our mortgage payment accounts for over $15k in our annual spending. If we can make it on a $50,000 budget with the mortgage, then our annual expenses would immediately drop down below $35k once the mortgage is paid off.

(A quick aside: it bugs me when bloggers say they spend something like $24k annually but don't point out that their mortgage is paid off, nor do they state what their budget was when they still had a mortgage payment. The latter is much, much more representative to just about anyone reading your blog. Use that figure, dudes, or be sure to note that your tiny-but-good-sounding budget is misleading because it just happens to miss the largest line item in everyone else's budget.)

Anyway, we don't really know exactly when we'll hit this $1.26M figure, being in the tenth year of a bull run and all. But my optimistic guess would be sometime in early 2021, roughly two years from now.

If we were to pull the trigger on our mortgage swoop, we'd technically be financially independent at that point, presuming our budget doesn't keep growing uncontrollably. We might even be able to time our early retirement to coincide with the birth of our second baby, whom we're tentatively naming "MC Baby" for the blog.

If the timing worked out, I could stay home and help Mrs. Done by Forty post-birth more than I did with Baby AF, when I only had five weeks of parental leave and vacation before having to head back to work.

Anyway, that's the loose plan: hopefully pull off the mortgage swoop sometime in early 2021, hit financial independence, bring MC Baby into the world later that year, and maybe pull the trigger on early retirement that year as well.

Some readers may have already noticed the big problem with this plan already: won't there be a mess of capital gains taxes to pay if you sell $260,000 of investments all at once?

Potentially, yeah. Without knowing what the market is going to do in the next few years I can't say what kind of gains we'd be looking at. Still, we have two half-baked plans to mitigate those taxes.

One, we plan on selling the lots that would incur the smallest amount of gains (probably the most recent deposits into the brokerage account) and trying to do some tax loss harvesting to offset the gains as well.

Our second tactic is to try to time my early retirement to hit in the same year as the mortgage swoop, so we can potentially get many or all of those capital gains taxed at 0%. Let me explain. If we retire early enough in that year that our taxable income is under $78,850 (or whatever the cap will be in 2021), then we'll have some space to have those gains taxed at 0% instead of 15%. [There's a good primer on how to leverage the 0% capital gains rate here.]

With some lucky timing and some decent planning, it's possible there might not be many, or any, capital gains taxes to pay. We won't let the tax tail wag the dog, either. If we're not actually ready to pull the trigger on early retirement (e.g. - if there's a market correction in 2021) then I'm not going to quit my job just to avoid a few thousand in taxes.

We've changed our minds on our mortgage plans many, many times over the years so who knows if this is the plan we'll actually stick with, let alone if it's a good idea. But it's an idea Mrs. Done by Forty and I are both excited about, and that hardly ever happens when it comes to our finances.

But I'd love to hear what you readers think about it. Is this a good idea, or is there a better way?


*Photo is from Ruth and Dave at Flickr Creative Commons.