Author Topic: Case Study: Should we buy a house? Are retirement accounts still needed?  (Read 2811 times)

cincystache

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Life Situation: Wife and I (33) file jointly. One child (age 3) and one due this fall (yay!)

Gross Salary/Wages: 80,500 + 10% employer contribution to retirement (not a match, just a bonus).

Other Ordinary Income: Wife works a PT job making about $400 per month but will stop that for at least a year when baby 2 arrives.

Taxes:
Fed income: 2,200 (assuming no IRA/401k contributions)
State Income: 1,400

Current expenses:
I donít track this by category but our total expenses have averaged 3,400 the past 28 months.

Housing Expenses:
457 - mortgage P&I
250 - HOA fee
210 - Property taxes
20 - Home insurance
120 - gas+electric


Assets: Total = 389k
Condo: 135k
401k: 98k (80% stock, 20% bond)
IRAs: 37.5k (100% VTWAX)
Roth IRAs: 90k (100% VTWAX)
HSA: 14k (100% VTSAX)
Cash: 5k
Car 1: 2k
Car 2: 7.5k

Liabilities: 93k
Mortgage: 93k @3.75% fixed

Specific Question(s):
Iím struggling with the conflicting desires to push for FI while also upgrading our lifestyle in the form of a house. I donít necessarily want to retire early but being able to work a PT job or a fun FT job earning about 40k per year would be ideal by the time I turn 40 (7 years). I think we have our ďold peopleĒ money squared away in our retirement accounts already so we just need to support our lifestyle until ~62 when our retirement accounts will take over thanks to compounding. Here are my questions:

1. Should we sell our condo and buy a ~300k house in an area with good public schools in the next year or two? Should we try to rent in the desired area instead (2k/month) or do something else? We are kind of tired of condo life at the moment and would like something where we donít have to deal with noisy neighbors and not having outdoor space. The schools in the area where we would move are very good and we have some friends that live there and enjoy the tight knit community feel of the place.

2. Should we stop adding more money to retirement accounts? Our taxable income is low enough that we qualify for the 0% rate on dividends and LT cap gains so what advantage does putting the money in a Roth offer over sticking it in VTSAX in a taxable account?

Thanks for your time, I think the new baby on the way has us questioning where we are and where we are going. Need some different perspectives on how to proceed, any advice is appreciated, even if you think we are crazy for considering changing things up before we hit FI.

MDM

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I think we have our ďold peopleĒ money squared away in our retirement accounts already so we just need to support our lifestyle until ~62 when our retirement accounts will take over thanks to compounding.
Maybe, maybe not.  $235K earning 4%/yr real for 29 years will generate <$30K/yr using a 4%/yr withdrawal rate at that time.

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1. Should we sell our condo and buy a ~300k house in an area with good public schools in the next year or two? Should we try to rent in the desired area instead (2k/month) or do something else? We are kind of tired of condo life at the moment and would like something where we donít have to deal with noisy neighbors and not having outdoor space. The schools in the area where we would move are very good and we have some friends that live there and enjoy the tight knit community feel of the place.
Very much a personal choice.

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2. Should we stop adding more money to retirement accounts?
Probably not - see first answer above.

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Our taxable income is low enough that we qualify for the 0% rate on dividends and LT cap gains so what advantage does putting the money in a Roth offer over sticking it in VTSAX in a taxable account?
One advantage: Roth withdrawals do not count toward Adjusted Gross Income (AGI) while dividends and cap gains do.  AGI affects many things, with taxation of SS benefits one that comes to mind as possibly relevant.

But if your marginal tax rate on withdrawals will be less than your marginal tax saving rate for contributions now, traditional may be better than Roth now.

Nick_Miller

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Is it really necessary to move up to a $300K house?

I assume you live in Cincinnati. We live in a similarly-sized city not too far away, and here a $300K house is definitely very nice and/or large. We live in a $200K house (4 bedroom/3 bath, 2000 square feet, family of four) and we managed to find it in an area in our city where the kiddos would go to good schools. However, I know school districts in larger urban areas can have some confusing student assignment plans that don't always make sense, although some make it easier with "neighborhood schools."

My point is just that, even accounting for your current HOA, you would be moving up a LOT with your housing costs going with a $300K house. Not just the mortgage debt, which would more than double. But also there are so many more expenses when you own a free-standing home (yard crap, decoration, outside maintenance), insurance costs go up, and I'm guessing you or your wife would want to buy some new furniture (tell me if I'm wrong), even if it's just to "fill the house up." Hell, you might end up tripling your housing costs.

Do you really want to do that?

cincystache

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@MDM  thanks for the reply. I was assuming 5-6% real return, I should probably use 4% instead. I'll plan on keeping up contributions a few more years even if just a few thousand per year.

@Nick_Miller you bring up great points, many that I have considered and agree with. I certainly don't want to triple our housing costs and you are right, there is potential to do that.

Is it necessary to move up in house? Absolutely not, this is clearly in the "want" column. We do live in Cincy, based on where I work, we would either want to live where we are now or move to this nicer area. Schools are a primary driver but there are several others. We have lived in our current area for 2.5 years and it just doesn't strike us as a nice community that we are proud to call home. We haven't met the other people in our condo and almost none of them have young kids. The houses, if we were to buy here are very cookie cutter with endless cheesy subdivisions everywhere with very few sidewalks. Nothing is walking distance, most restaurants are chain or fast food, we have every big box stores within a 5 mile radius and there isn't really a sense of community here. Nobody walks or bikes anywhere (except us, and we are called weird for doing so) modest 4/2 houses start around 250k. Schools are good but also very large and not as highly rated as others. Could we make it work here? Yes, but my wife is feeling isolated from her friends and activities closer to the city and we both want to live somewhere where we know and care about our neighbors and community and vice versa.

Lots of factors to consider. In terms of the house, it would actually be pretty modest for this area, likely a 3/2 and under 1800 sqft. We wouldn't plan on buying new furniture.

I wish there were more options but that is why I'm conflicted. The mustachian in me want to cut everything to the Bone and push for FI in 8 years but we have some big decisions to make before that around school.

ysette9

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Those are big decisions and considerations. In your shoes I would rent in the area you think you are interested in and try it out for at least one year of school. Youíve given your current place a good shot and know it isnít the best fit for you; do a trial run in the next place before making financial decisions that are hard and costly to reverse.

And definitely put more $ into retirement accounts. You should be maxing those suckers out before saving in taxable accounts.

better late

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Btw I agree with your inclination to move. There is so much community-building in Cincy itís one of the perks. But you have to find your place and your people.

I agree on the renting in an area first.

Right now itís about the house and community but soon enough it will be about schools as well.

The thing about Cincinnati is that there are so many different types of schools. Public, private, parochial, sure. But also public Montessori (K through 12), Paideia, German, and The school for Performing Arts and as your kids get older, Walnut High School which consistently ranks in the top 100 public high schools in the nation. There are great suburban schools - some small and nurturing (where itís much easier to make ďthe teamĒ, for example) and others huge and extremely competitive.  And then thereís partial and full homeschooling with places like leaves of learning.

« Last Edit: April 30, 2019, 08:09:30 AM by better late »

RFAAOATB

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Did you grow up in a big house, a small apartment, or somewhere in between?  What about your wife?  Does the current situation for your children look like a step backwards compared to both of your childhoods?  My goal is to buy a house bigger than my parents, and if you can safely do that itís worth exploring.

Freedomin5

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I also noticed you have no emergency fund (besides $5k in cash). You need to build up an emergency stash of between 3 to 6 months expenses, especially because you basically only have one income and young kids. At $3800/month expenses, your e-fund should be between $12k and $24k. If you anticipate an increase in expenses due to the new little one (congratulations by the way!), then factor that in when building your e-fund.

Fund the things necessary to keep your family safe, houses, and fed (e-fund, life insurance, long term disability insurance, critical illness insurance), before thinking of upgrading your house and your lifestyle.

The only reason that I would say it makes sense to move immediately is if you live in a dangerous neighborhood where your life is in danger every time you leave the house. But it sounds like the only bad thing that happens is that the neighbors make fun of you for biking and no one wants to be your friend/no sense of community. In that case, I think there are more important things to fund at this moment than lifestyle inflation. 

MrThatsDifferent

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And I noticed, whatís the educational plans for the kids after HS? Are you doing 529s or anything? Those are pretty big expenses. Also, wonít your expenses increase as they get a bit older?

Personally I think you have the right mortgage for what you can safely afford. If you want a bigger house, you need more income. It feels like youíre way to conservative with your estimates while supporting 3 other humans. What happens if you lose your job?

cincystache

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@MrThatsDifferent : I don't have any plans for kids after HS, that is pretty far away. I don't know if expenses will increase or not, probably yes. I agree more income is probably necessary, I think if I lost my job I'd find any job to keep us afloat and tap the Roths if absolutely necessary.

@Freedomin5 Thanks! I agree we probably need a little more in savings right now. The plan is to pile up cash until the baby comes. Our insurance is in pretty good shape, I agree that it is important. Certainly not dangerous to live where we are so we'll probably stay put at least another 6 months to a year.

@RFAAOATB We both grew up in 4/2 houses in the burbs in the midwest. Nothing fancy. We haven't really thought about it in those terms.

@better late  You're absolutely right. It is hard to find your people and cincy has a wide range of options. Renting is nice but gets harder and much more expensive as the family grows. Oh how I miss the days of renting a studio for $425 per month back in 2010

MonkeyJenga

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@RFAAOATB We both grew up in 4/2 houses in the burbs in the midwest. Nothing fancy. We haven't really thought about it in those terms.

How many people lived in those 4/2's?

The_Pretender

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Your case is eerily similar to my situation.  My difference really is we have our home in the neighborhood we want.  Our problem is the public schools are awful and we are trying to figure out how we can manage private. 

My advice for you around whether to move or not.  I'd suggest you and your wife start thinking of what exactly you would like in your house.  Spend a lot of time with this...  Also discuss an OK timeline.  I have found that people who have 1.) Time & Patience 2.) know what they want.  3.) Watch realtor.com like a hawk, find out what realtor has their finger on the pulse of that region and talk to them to let them know you're passively looking at the are 4.) Check realtor.com and share possible houses w/ your wife...
^^^ Risks with this plan is that You could find your "Dream" home the first month... refer to #1 patience.  Be okay with letting those homes go to another family.

Examples:  I am assuming Cincy has a similar housing market as my market.  Homes do not sit on the market for much more than a couple days. 

We have one couple friend who moved out to the burbs to get that 4/2 cauldesac home with 1/2 acre lot.  They had no patience and their plan was to just browse with plan to become active in 8-10 months but the first month they started putting offers (plural) on several houses.  They finally ended up with a nice house, but I can tell sometimes they are not happy with things and probably have some twinge or regret to not be more patient.  Again really nice house, I feel they paid top $$. 

Now, the other couple rented a very un-attractive house (read: low rent, met needs) in the neighborhood they wanted.  Spent a year in the area and decided it was the 'hood for them.  They noticed during this year that houses in this neighborhood are under contract w/in a day or are half-mil and are brand new builds which people don't want (lack character and yard).  So they talked to one of the neighborhood leaders and asked what they could do and that they are looking for a house.  Got referred to a local realtor who then told them that a good amount of homes sell w/o being listed.  So what ended up happening was they ended up buying a house from an estate that was about to list the house with that realtor.  all 3 parties involved discussed and met on a price and they bought a great house and avoided any bid war. 

So, have patience and many conversations... With your case you seem to be open to working until 62 and if you got a house and planned to be there for 30 years... you'd be retiring w/ an almost paid off mortgage.  Now the big thing to avoid would be keeping up with your friends/joneses and lifestyle creep moving to a house.

Good luck

Nick_Miller

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I disagree about the lowkey relator.com shopping.

At least when my wife and I started looking for a home a few years ago, once we started looking at houses...BAM HOUSE FEVER was in dah...ummm house. I should have thought that saying through. And we are fairly logical people, but looking at realtor.com drags you into a deep vacuum that is hard to escape.

But yeah I think it's very hard to "casually browse" for homes without getting too attached. I would recommend only looking when you're actually ready to buy. At least that way you will start the search in a more logical way.

MrThatsDifferent

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@MrThatsDifferent : I don't have any plans for kids after HS, that is pretty far away. I don't know if expenses will increase or not, probably yes. I agree more income is probably necessary, I think if I lost my job I'd find any job to keep us afloat and tap the Roths if absolutely necessary.

@Freedomin5 Thanks! I agree we probably need a little more in savings right now. The plan is to pile up cash until the baby comes. Our insurance is in pretty good shape, I agree that it is important. Certainly not dangerous to live where we are so we'll probably stay put at least another 6 months to a year.

@RFAAOATB We both grew up in 4/2 houses in the burbs in the midwest. Nothing fancy. We haven't really thought about it in those terms.

@better late  You're absolutely right. It is hard to find your people and cincy has a wide range of options. Renting is nice but gets harder and much more expensive as the family grows. Oh how I miss the days of renting a studio for $425 per month back in 2010

That time goes quick and now is the time to start saving for them and letting compound interdo its thing. Finding any job might not cover your expenses and pulling from your retirement accounts will hurt you later.

My point is that you donít seem to be in the strong position that you would want to make the changes youíre contemplating. To me, youíre quite vulnerable and I wouldnít add more risk now until your financial situation improves dramatically. Even then Iíd work on a more comprehensive strategy and then achieve that. Try not to live beyond your means.

cincystache

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Thanks for the advice everyone. We're going to focus on growing the stash at least another year and then re-assess... Deleting Realtor and Zillow off my phone :) We also can't casually browse houses, we get sucked in...

We are also considering living in cheaper areas and looking at other options for schooling. I appreciate the advice here, thanks again!