Paying off the loan does two things at once: it shrinks the portfolio and it shrinks the spending that portfolio has to fund. Which effect wins depends entirely on when the bad market arrives — and this is the one question the simple interest-rate comparison can't answer.
For sequence risk in general, see calculator 01. This one is specifically about the mortgage decision.
Both scenarios, same market, same downturn.
Portfolio left at the end, depending on which year the downturn arrives.
4,000 simulated markets each, with the downturn forced into the year you selected.
The mortgage decision, stress-tested against the worst plausible timing.
Paying off the mortgage does two opposite things at once, and people usually only think about the first.
It shrinks your portfolio, which is bad — there's less capital to ride out a downturn and less to recover from. But it also shrinks your spending, which is good — no repayment means the portfolio has less work to do every year.
Which effect wins depends on when the bad market arrives. Early on, the smaller portfolio takes its percentage hit on a smaller base, so paying off often helps. Later, the larger portfolio has had years to compound first, so keeping the loan often helps. The awkward part is that you can't know which you'll get.
Mei retires with $850,000, spends $50,000 excluding her mortgage, and has $26,000 of pension income. She owes $200,000 at 4.2% with 14 years left — a repayment of about $1,577 a month, or $18,919 a year.
If she clears it: her portfolio drops to $650,000, but the amount it has to find each year falls from $42,900 to $24,000.
The calculator then drops a 35% crash into her first year — the scenario in the warning, six months into retirement.
With the crash arriving early, paying off wins comfortably. She finishes with about $224,000, while keeping the mortgage leaves her running out right at the end of the 30 years. Her smaller portfolio loses less in dollar terms, and the lower withdrawals mean she sells far fewer units at depressed prices. Move the same crash to year 12 and the answer reverses — keeping the loan ends about $39,000 ahead. Same decision, opposite outcomes, driven by something entirely outside her control.
Try setting the cash buffer on the left to zero, then to two years of spending, and watch both failure rates.
In most realistic setups, that buffer moves the odds more than the mortgage decision does. Which is the practical lesson: people agonise over whether to pay off the loan and skip the question of whether they've kept enough cash to survive the aftermath. The second question is usually the more important one, and it's much easier to answer.
General information only — not financial advice. The downturn is imposed deterministically on top of otherwise random returns, which is a stress test rather than a forecast; real crashes vary in depth, duration and recovery shape, and don't announce themselves. Paying off the mortgage is modelled as an immediate lump sum from the portfolio, ignoring any tax on the sale of assets to raise it — which in practice can be substantial and makes the payoff scenario look worse than shown here.