For those of you who either own or plan to own a home in the future, your current or future mortgage payment will allow you to increase your safe withdrawal rate without increasing your risk of portfolio failure. We know that financial independence is achieved when your investment balances represents 25x your annual expenses. So if your annual expenses are $30,000, you’d need to save $750,000 to be considered financially independent. This data comes directly from the Trinity Study which shows a success rate of 98% if you withdraw 4% of your investment balance each year. But there’s another line in the Trinity Study we should look at. The vast majority of people in the FIRE community use this inflation-adjusted 4% rule to calculate their number. But what does the data show when we look at withdrawal rates that ** aren’t** adjusted for inflation?

The same portfolio that grants a 98% success rate at a 4% inflation adjusted rate grants a 96% success rate at a 6% rate that ** isn’t** adjusted for inflation. Let’s stop and restate these two facts:

1) Success rates for inflation adjusted withdrawals of 4% are 98%

2) Success rates for non-adjusted withdrawals of 6% are 96%

As we can see, if all of your expenses didn’t rise with inflation, you’d be able to maintain a 6% safe withdrawal rate. But as we know, overall living costs do increase over time. But this is when your mortgage payment comes in. Assuming you have a fixed mortgage, your principal+interest payments * will never change*. This means as a homeowner with a mortgage, you can effectively raise your safe withdrawal rate without raising your risk!

To find out how much you can raise your SWR, add up all your projected post-retirement expenses. Here’s an example:

**Sample Monthly Expenses for a Family of 4:**

Mortgage: $1,200 ($300 goes to property tax/insurance, $900 goes to principal and interest)

Utilities: $200

Cell Phone: $80

Healthcare: $360

Groceries and Personal Care: $460

Gifts/Travel: $100

Gas & Auto Maintenance: $100

Home Maintenance: $100

Kids’ Programs: $100

Total Expenses: $2,700

In this scenario, total expenses are $2,700/month or $32,400/year. Based on a conventional SWR calculation, this family must save up 25x these expenses or $810,000 before they’d be considered financially independent.

But let’s throw the norm on its head.

Of the $2,700 in monthly expenses, the $900 that goes towards principal and interest isn’t impacted by inflation and that’s 33% of their monthly expenses. Because of this, they can increase their SWR and lower their FIRE number while *still keeping* their portfolio success rate above 95%. This is what that calculation would look like:

Inflation-Protected Expenses (aka principal and interest payment): 33% of total expenses

Inflation-Impacted Expenses: 67% of total expenses

Adjusted SWR calculation:

SWR for Inflation-Protected Expenses: 6%*33% of overall expenses = 1.98%SWR for Inflation-Impacted Expenses: 4%*67% of overall expenses = 2.68%** Adjusted overall Safe Withdrawal Rate**: 1.98%+2.68%=4.66%

With this new calculation, this family now needs to save $695,000 instead of $810,000, a ** $115,000 difference**!

The best part about this calculation is that it holds true regardless of if you’re a believer in the 4% rule or a more conservative 3.25% safe withdrawal rate. Since both figures factor in inflation, having a mortgage will allow you to increase your SWR without increasing your risk for both camps.

To calculate this yourself, follow these three easy steps:

1) Project your post retirement expenses

2) Find how much your principal+interest payment will be, as a percentage of your overall expenses

3) Subtract this percentage from 1 to find out how much your inflation-impacted expenses will be, as a percentage of your overall expenses

4) Take the percentage you calculated in step 2 and multiply it by 6%.

5) Take the percentage your calculated in step 3 and multiply it by 4%.

6) Add the figures calculated in step 4 and 5 together to find your new SWR!

7) Divide your projected annual expenses in FIRE by this new SWR to find your new number

Astute readers will notice that this calculation has one problem: as inflation increases your non-principal+interest expenses year and year, your principal+interest payment represents less and less of your annual expenses, as a percentage. For example, if during year 1, your fixed interest+principal payment represents $1,000 of your $4,000 expenses or 25% and five years later, your $3,000 of inflation-impacted expenses have risen to total $3,500, your fixed principal+interest payments now only represent 22% of your total annual expenses. While you can update the adjusted SWR each year to account for this, I’d hold that your eventual mortgage payoff and subsequent drastic drop in expenses cancels out this impact.

So what do you think? Will you stick with convention and work longer to save more than you actually need or buck the trend and follow the math? What does your new SWR or number look like? Let me know in the comments!

That’s a great analysis, Cody– thanks for writing the post!

I’m a fan of keeping a mortgage in retirement, but only if you can invest more aggressively than the interest rate. It makes no sense to borrow money at 4% if you’re holding bonds or CDs which yield less than 4% (after tax).

People with reliable pensions, diversified rental income, or other annuitized income can do very well by offsetting the mortgage payments against their income stream while the loan is invested in equities. But it requires a high equity asset allocation and a very strong tolerance of volatility.

Last year my spouse and I locked in a 30-year loan at 3.50%. I’ll make the last payment when I’m 87 years old, and it might be the lowest interest rate I’ll ever see. We’ve been doing this mortgage arbitrage since 2004 and refinancing when the lower rates make sense.

We’ve invested the funds in Vanguard’s total stock market ETF (VTI) and Berkshire Hathaway B shares. Those assets have a high volatility risk and a measurable loss-of-principal risk, but we’re staying invested for 30 years. The mortgage payment is less than my military pension (which rises with inflation) and our investment portfolio is 98% equities. The rest of our expenses are covered by the 4% Safe Withdrawal Rate.

Over 16 years of retirement, our spending has grown much less than inflation– it’s been nearly flat. Inflation in some areas (food, gas) is offset by cutting expenses in other areas (launching our daughter from the nest, cell phone bills, solar power, travel hacking, lower investment expense ratios). Our investment portfolio has also grown faster than inflation, so what started as the 4% SWR is now below 3.5% and approaching a sustainable level for the rest of our lives.

Thanks Doug! Refinancing introduces a new twist that would absolutely change the outcome of my analysis since I assume eventual mortgage payoff would offset some of the inflation risk I mention towards the end of the post, but I get wanting to lock in a lower rate and cash in on the equity gained.

Another thing to consider is that a mortgage won’t last forever. I’ve thought a lot about how to factor in a mortgage with my SWR and I haven’t come up with a good solution. Since I only have 9 years to go on mine, sometimes I think about it like this: I subtract my mortgage balance from my nest egg. I then figure out the new SWD and then compare that to my expenses sans mortgage.

In any case, I’ve never understood why folks are in such a hurry to get rid of a mortgage which has a low-interest rate. As you said, your principle and interest don’t go up, but the rate of my savings account is!

Yeah, for sure. That’s why I mentioned at the end of the post why the eventual payoff offsets the inflation risk. It’s tough to incorporate a mortgage into the SWR calculation so that’s what I attempted to do here and I hope this formula allows others to build their mortgage into the formula for finding their “number”. I think, for ourselves, we’ll either do this or pay it off altogether. But to me, the math checks out either way. The option of inflating the SWR while keeping risk the same with the adjusted SWR presented here would allow me to use my mortgage almost as leverage instead of paying it off.

I think the way you think about it makes sense too – almost thinking of the mortgage expense and other expenses as mutually exclusive.

As for your last point, I tend to agree but understand the position people take of wanting to pay off a mortgage ASAP. Paying off the mortgage helps with some of the sequence of return risk in case there’s a market downturn soon after someone hits FIRE. Ultimately though, I agree with you. The upside far outweighs the small increase in risk.