This report is going to be a little wild again. Leading up to tax season we’d stopped investing the HST we had collected, and starting withholding income for tax payment to compensate for the HST we had invested over the majority of the tax year.
This effort was in hopes that we could avoid selling any of our mutual funds to pay our taxes, and instead replace the HST we’d invested earlier in the year with out-of-pocket income.
It seems to have worked. We were able to cover the HST we’d invested, successfully exposing those funds to market appreciation over the majority of the tax year. That said, appreciation currently lags at +1.61%, which is actually great (I think). It means we’re buying below normal (7%ish) growth. Just as long as the market picks up again at some point in the next 10-20 years before we need to sell!!!
One solid decision was made regarding whether to pay off the mortgage more aggressively – which was not to do it. The main reason we’d relied upon in our past deliberation over this idea is our mortgage rate of 2.92% should underperform index funds on average (7%). But this choice is vulnerable to instances like this past quarter where our portfolio lagged brutally at 1.61%… though really that doesn’t matter until we sell… I think. We’re still good as long as we never sell at 1.61%!
But the decisive reason for not paying back our mortgage more aggressively is this: we have mortgage life insurance. I think we pay a combined $12/month for this insurance, so if either of us die, the mortgage is paid off.
It would suck to pay the mortgage aggressively only for one of us to die and have the remaining (much smaller mortgage balance) forgiven, AND have no other investments. Better to sock our money into indexed mutual funds and pay the mortgage at our normal rate for the time being.
If we max out our TFSAs, and/or we renew for a higher than 7% mortgage rate… we’d probably switch tactics… and we’d likely keep the mortgage life insurance anyway.
Another trap people fall into with paying the mortgage off early is this (thanks Kyle Collins for pointing this out!): once they no longer have a mortgage to pay each month, that “extra” money starts to feel disposable. Hedonic adaptation kicks in, and most people (and I would probably do this too) simply end up spending the extra cash on silly shit every month.
Winter-long trip to Costa Rica? Fuck it! Our mortgage is paid off!
This extra cash is only useful to our long-term financial stability if invested. For this reason, in comparisons between people who invest early in mutual funds versus people who pay off their mortgage early, the investors generally end up way ahead come retirement.
It just requires too much discipline to take all the money you would normally put toward a mortgage and immediately transition into socking that cash right into index funds… especially after the marathon of paying off a house!
After all that rambling, here are our retirement figures for the quarter:
TFSA: $36,829.37 (up $12,459.54 from last report… again this is a bit blown out of proportion because we’d been sandbagging leading up to tax season)
Mortgage: $163,575.34 (down $1,782.65 from last report)
Net worth shift: + $14,242.19
I’m going to attempt some forecasting here. I want to bake two new and exciting metrics into these quarterly retirement reports.
Metric 1 is a percentage representing our progress toward the $800,000 retirement goal.
According to the Mr. Money Moustache equation of “multiply your annual spending by 25 to see how much you need to have invested in order to retire”, my family would be comfortable retiring on $800,000.
MMM’s “safe withdrawal rate” of 4% works out to $32,000 – which would cover our annual spending. Assuming our mortgage is paid off, we can retire once we’ve invested $800,000.
Metric 2 is the number of years remaining until we can retire, calculated based upon a $30,000/year rate of investment.
Here we go.
To make things easier, I’ve added our mortgage onto the $800,000 to represent the total amount of money yet to be invested/put toward the house. That leaves us with a target asset value of $963,575.34.
Retirement Progress = $36,829.37 / $963,575.34 = 3.8% of the way there! Pretty fucking low, but far better than 0% haha. The early years are the hardest.
Here comes the compound interest. According to the moneychimp.com compound interest calculator, if we invest $30,000 per year for 15.6 more years at 7% we’ll end up with $964,882.15.
So at our current rate, it will take Lia and me 15.6 more years to reach retirement. If this is true, our 48th birthdays will be epic!