Pay cash for your house?

The best way to give up your ‘day job’ is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at ….


We have dealt with the concept of how much ‘house’ you can afford while you are still working, but what about when you ‘retire’ (young … very young!); that is the question posed by Ryan:

Regarding “the number”. I know you’ve touched on this briefly before, but when considering a multi-million dollar home to live in during retirement, would you suggest putting in a number to rent or to pay for a mortgage? If for a mortgage, do we assume a certain percentage down? And what kind of interest rate can we assume we’ll get in 10-20 years?

We basically have three options when acquiring a house:

1. Pay Cash

2. Take out a mortgage

3. Rent

The rental optionn is actually not so dumb in the high-end bracket, as rents tend to fall way behind house prices (hence mortgage payments) … just check out what you can rent for $40,000 – $50,000 a year compared to what the same level of mortgage payment (assuming a reasonable deposit of only 15% – 25%) will get you.

But, let’s also assume that your idea of ‘retirement’ isn’t to pack up and shift houses every couple of years so that leaves us with paying cash or financing.

The first thing to realize is the fundamental difference with buying a house when you are working and when you aren’t:

When you aren’t working all the money that you have is what you have already manufactured …

… so, all you are doing by mortgaging or paying cash for a house is shifting money to/from your house from/to your ‘retirement nest egg’.

Let’s look at an example:

You decide that you need $100,000 a year to live off (before considering mortgage payments) but you want to retire into a nice $750,000 townhouse … your current house, after you pay back its mortgage will provide $250,000 of that, leaving you to ‘find’ $500,000.

Not exactly Ryan’s “multi-million dollar home” but it’ll do for the sake of this exercise …

Scenario 1 – Pay Cash for the House

Let’s see; we need:

a) $500k to pay the cash upgrade to the nice townhouse (on a golf-course, of course!)

b) $2 Million (according to the Rule of 20) to deliver $100,000 (indexed for inflation i.e. so next year it becomes $105k; and so on) living expenses.

So, we can afford to ‘retire’ as soon as we have built a $2.5 Million ‘nest egg’ …simple!

Scenario 2 – Borrow Money for the House

Now we need:

a) $2 Million (according to the Rule of 20) to deliver $100,000 living expenses

b) Another $1,100,000 (according to the Rule of 20) to generate the $4,500 monthly mortgage on the $500,000 townhouse balance (assuming 6.5% fixed interest for 15 years), plus $20k closing costs

Now, we have to wait to retire until we have built a $3,100,000 ‘nest egg’

But, it is actually a wash because we can afford to use the Rule of 10 on the mortgage payments rather than the Rule of 20 … why?

The mortgage is a fixed dollar amount: $4,500 every month for 15 years. If we consistently achieved 10% return on our investments, we would only need $540,000 set aside to generate the required monthly payment.

Then our total nest-egg would be $2,560,000 or a virtual ‘wash’ either way … but, this is heavily interest rate dependent:

– if interest rates are low and investment returns are high: mortgage.

– if interest rates are high and investment returns are low: pay cash.

Since you won’t know which way to expect the interest / investment markets to be aligned when you do retire in 5, 10, or 20 years, my advice is to plan to pay cash …

… calculate your Number using Scenario 1.

That’s what I did … then when I get the urge to invest a little of my home equity, I simply turn up the juice on the HELOC that I have sitting there ‘just in case’ and hop in / out of the investment markets as is my desire.

The lament of the middle-class millionaire ….

I must confess that I understand EXACTLY what this ‘poor woman’ is saying …

Ryan (who is one of the Final 15 in my 7 Millionaires … In Training! ‘grand experiment’) sent the link to me saying:

About 6 months ago I did a similar exercise to determine how much I would need to “retire” and live the kind of life I wanted to (travel, philanthropy, golf, bigger house,activities, etc.). Although it seemed like a stretch to even write down, I settled on $10 million in 10 years. After watching a show on cnbc, in particular this clip, , I think it’s time to revise my estimate!!! And to think that a couple of years ago I thought if you had a million dollars you could do anything you wanted.

The exercise that Ryan is referring to is the culmination of a series of posts on designed for one purpose and one purpose only: to help you find your Number.

This video – I believe – helps explain why I think that your Number should be couched in terms of required living expenses rather than some nebulous lump sum (such as $1 million; $5 million; $10 million; etc.) … although I also show you how to calculate the ‘lump sum’ that you will need.

But, Ryan doesn’t need more than $10 Million (a.k.a. $500,000 per year … indexed for inflation) to live a life that simply involves “travel, philanthropy, golf, bigger house,activities, etc.”; he just needs to realize that on $500k per year:

1. He will not be able to afford ownership (fractional or full) of multiple houses, jets, yachts and the like (although one used Ferrari isn’t out of the question), and

2. He will NOT be rich … rather ‘comfortably off’ – at least, according to Felix Dennis the rather quirky (and exceedingly rich) British/American magazine publisher.

… it’s a tough life 😉

Life is a ballgame … you in or out?!

Amal is an applicant for my 7 Millionaires … In Training! ‘grand experiment’ [AJC: we are down to our Final 30 now! Good Luck to all of those who made it this far!].

She says that she is 51 and came from Egypt (“the Land of the Pyramids, the Pharaohs Legends”) to the US 20 yrs ago. Since then Amal has studied nursing, worked as a personal banker and teller, even started a small business but she says that it “didn’t make me a Millionaire either!!”

Amal e-mailed in this question for Thursday night’s Live Chat Show:

What you do if you are alone in a world of a desire of making millions? When your hard work and persistency attitude toward reaching the ultimate goal, don’t make any sense to others?

I answered last night with the need to have a clear idea of why you need to be “making millions” in the first place; without the massive why, you won’t have the driving need that creates the massive action needed to make the big bucks. But, you can see me answer Amal’s question on YouTube, so I won’t repeat it here …

No, the part of Amal’s question that I want to discuss today is “when you don’t make sense to others”.

You see, I’m in the middle of a harmless ‘tussle’ with a couple of the ‘save your way to wealth … because there can be NO other way in our book’ guys on one of the forums that I occasionally drop into, but a couple of them started to become quite nasty and personal.

According to these ‘save and ye shall be delivered’ boneheads (you won’t see this post because the comments were so vile that the original poster removed the quote thread!): I have an “infomercial” (I don’t); I “spam” (I provide links to relevant posts where allowed by the host site); I “scam” (I don’t sell/endorse any products or even allow any advertising on my sites); and, I even have “zits” (I don’t … but, I am thinning on top, so “baldy” would be a better insult) …

… but, would I let it get me down? Of course not – but, it does put into new perspective the e-mail that I just received from JD Roth (who writes Get Rich Slowly, perhaps the most widely read personal finance blog on the blogosphere) unexpectedly and out of the wild, blue yonder. JD says:

Hey, Adrian.

I spent several hours going through most of your archives. I’m impressed. Though you and I disagree on some fundamental points (such as the value of diversification), not only do I agree with and support most of what you say, I actually think you’re covering territory that nobody else is covering. I *want* to focus on money-making strategies at Get Rich Slowly, but I’m not doing a good job of it. For the most part, my readers love the frugality stuff, and so getting them to pay attention to boosting their income is a challenge.

Anyhow, count me as a new subscriber!


You see, JD also doesn’t agree with everything that he found on my blog … and, some things that I say even run totally counter to what he tells his readers – which is how he makes his living!

Yet, he can sift through what he likes, and what he doesn’t like … and, take away what he wants to, simply leaving the rest.

Similarly, I’m still an avid reader of personal finance books; some things I take on board, others I discard. But, I don’t dismiss the author and their writings out of hand. I wouldn’t be writing this blog today, if some other authors hadn’t shaken my entrenched belief system … THEY made me rich!

So, here’s what I sent back to JD:

Well JD that’s a mark of the Man … you have a fantastic blog; you’re a pioneer in this ‘industry’ and an inspiration to all of us following along. You are right at the top of the PF blogosphere … yet you actually take the time to investigate a potentially opposing view!

 Most people respond to a differing point of view far more negatively/aggressively – these are the guys sitting in the bleachers with their faces painted, yelling at the players who are actually out there on the field working their butts off for them.
But, you are right there … in the dugout, patiently waiting for your turn with the bat. I am just an average player on the other team, covering 2nd base. My ‘team’ dares to question diversification and other PF mantras.
It’s true that we have some heavy hitters, and some guys who seem to swing and miss a lot … all in all, we do pretty well.
Your pitcher is John Bogle; mine is Warren Buffett … two great players who openly show great mutual respect and admiration.

Now, you can see why some people are pioneers in their field (JD being the clear leader in personal finance blogging) and others are relegated to shouting abuse from the sidelines …

So, are you in the game or just hurling abuse at the players from the bleachers?