Author Topic: Buying a House, Choosing Contributions, Lots of Decisions!  (Read 1023 times)

Scortius

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Buying a House, Choosing Contributions, Lots of Decisions!
« on: February 15, 2017, 12:27:22 AM »
Hello All!

I'm new here and quite happy to have found this site.  Now that I've gone through most of the blog, I have some questions regarding my personal scenario and how to get started in the right direction.

First off, I consider myself and my situation to be very fortunate.  I have a very stable and safe job with a great salary in a city with a low cost of living.  My wife works too and is able to bring in a reasonable salary as well.  We do have two young children who will certainly make things a bit more expensive, but so be it!

Right now we rent a small place for relatively little.  It meets our needs quite nicely, but with the two kids we'll be looking to find a modestly larger place to put down roots.  Given this, we have been holding on to our cash to have a liquid down payment.  We are not in a hurry to move, but we would like to be in the position to be opportunistic when it comes to a home purchase.  That could be in the next few months, or it could be a year (or more) from now.

So, here are the quick and dirty details.

Income:
Base Income: ~165k per year combined (pre-tax)
Matched Traditional 401k: ~15k per year combined

Assets:
Cash: 70k!
Roth IRA: 25k
Traditional 401k: 10k
529s: 7k
Rental Property: 100k mortgaged property (10 years into a 30 fixed), rents:expenses slightly positive?

Debts:
5k of student loans at <3%, no hurry here?

Expenses:
~40k per year?  I don't have a strong handle on this yet but we do reasonably well.

Of note:
- We have not contributed to our 2016 and 2017 IRAs as we have been saving for a down payment.
- Our likely housing budget will probably be ~400k given where we live.
- Depending on how taxes go, we're probably saving 50k/year beyond our 401k matching contributions.  This would be before we buy a house.
- We're in our mid-late 30s.  Given that we're not pursuing a grown-up Mustache level of frugality and have two young kids, I would anticipate we're about 15 years out (plus or minus).

So, my immediate questions are:
1) What do I do with all this cash?
2) Do I put 22k into IRAs now, knowing that this likely puts us out of reach of a 20% down payment this spring and summer?  Maybe put in 11k and wait and see how house shopping goes before the 2017 contribution?
3) Should we be contributing to our traditional 401ks at the 36,000 cutoff (or higher)?  At some point do we worry about over-maxing the 401k before 59.5? (We would likely want to help the kids with at least some college costs.)
4) In searching for a house, would there ever be a scenario where we'd be willing to put 10 or 15% down and then aggressively pay to 20% to quickly cut off PMI?  I assume not unless the opportunity was truly special.
5) I anticipate that my wife and I would do fine living at or below the 15% bracket upon retirement.  Is it worth it to invest in any regular investment accounts now?

I imagine this might be pretty basic stuff.  Fund the IRAs, max out the 401k, no need to rush into a new house so why hurry.  I just don't know how to handle such a large fountain of cash being thrown at us, what a great problem to have.  The kids do complicate things a bit assuming we want to have some money for them for college.  I also realize that getting a handle on our expenses will be more important in the long run, but that's going to take a little time.  As I said, we already do pretty well: functional used cars, cook at home, short commutes, dumb phones only, no cable TV, walk for most shopping trips, not really in to 'stuff' for us or the kids, but I'm sure there's always places to improve!

Thanks for letting me share and thanks in advance for any help!
« Last Edit: February 15, 2017, 12:32:48 AM by Scortius »

Vindicated

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Re: Buying a House, Choosing Contributions, Lots of Decisions!
« Reply #1 on: February 15, 2017, 06:15:34 AM »
Welcome to MMM!  Posting to see how this shakes out.

I'll let some of the more experienced Mustachians offer the real advice.  The only thing I can recommend is considering lower cost housing options.  Although, I'm not sure how LCOL your city is, but here in Indy, you can buy a McMansion for 400k.  My "dream home" that I found but won't be able to afford for years, was priced at $260k.

Really though, you guys are in great shape no matter what you decide!

zolotiyeruki

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Re: Buying a House, Choosing Contributions, Lots of Decisions!
« Reply #2 on: February 15, 2017, 10:10:16 AM »
Where do you live?  If you're truly in a LCOL area, $400k will buy a LOT of house.  If you can give us a bit more perspective on that, it would be helpful.

Here are a few more thoughts:
1) If you're actively looking for a new home, with the intent of buying, then keep your cash in the bank.  If your thinking is more along the lines of "it'd be nice to have a bit more space" but you're not doing anything about it, invest it.
2) You have an extra $50k/year that you can save.  Unless you're planning on buying your house in the next couple months, go ahead and max out your IRAs for 2016 while you still can ($11,000).  You'll be back up to your 20% of $400k (for a down payment) in just a few months.  You don't have to decide on 2017 contributions right now. 
3) I'm a fan of maxing out the IRA contributions first, then looking at increasing 401k contributions, especially if the 401k has high fees.  With your income, you certainly would benefit from increasing your pre-tax contributions either way.
4) Nope.  If it's that kind of situation, then either A) you bought an undervalued home that you're expecting to flip for >$400k, or B) you're buying too much house, and you'll be saddled with higher mortgage and tax bills for a loooong time.
5) DW and I are similar to you here in terms of expected retirement age.  You'll need to cover your income for 7ish years until you hit 59.5, at which point you'll be able to access your 401k/IRA accounts.  During that time, you can use a SEPP to withdraw about 2% of those tax-deferred accounts per year.  The remainder of your expenses you'll need to cover with traditional investments and savings.  You can use Roth contributions here as well.  Assuming you have $1MM when you FIRE at age 52, you'd need at least some of your nest egg in traditional investments.  If you have $800k in 401k/IRA and $200k in traditional investments, you'll be able to withdraw $16k/year from your 401k/IRA and pull $24k/year from your traditional investments to cover your remaining spending.

I think the first step with regards to budgeting is to actually track your spending.  You may be surprised, as DW an I were, at how much money is going where.  You make $165k/year, probably have $30k/year in income taxes, spend $40k, put $15k into your 401k's, and have $50k left over.  There's still $30k/year unaccounted for here.

historienne

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Re: Buying a House, Choosing Contributions, Lots of Decisions!
« Reply #3 on: February 15, 2017, 11:15:35 AM »
Agree with everyone that 400k is a lot of house if you are in a LCOL city.  We have a very similar financial situation, and are currently house shopping in what I would call a medium COL city (northeast corridor, but not DC/NY/Boston).  We are budgeting 300k for our house, and we have a lot of options for 3 bedroom houses at that price point (and most have finished basements, so effectively 4 beds).

Have you gotten numbers for how much money you need to close on a mortgage for the kind of house you intend to buy in your location?  For a 300k house, we are looking at 75k or so to close (with a 20% downpayment).  Our location has a transfer tax, so together with escrow prepayments, it is significantly more than just the raw downpayment.  Knowing that figure might help you with this decision.

FWIW, we have made maxing our IRAs and 401ks the priority.  We have the cash for a larger downpayment, but part of the reason we are not going to go above 300k for the house is that we want to be able to continue to max all of our contributions while still paying for daycare ($3600/month next year for two kids) and a 15 year mortgage on our house. 

College savings is not a priority compared to anything else for use, and I don't think it should be for you either.  You are not going to get a retirement scholarship.

Scortius

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Re: Buying a House, Choosing Contributions, Lots of Decisions!
« Reply #4 on: February 15, 2017, 11:03:49 PM »
Hello again.  Thanks for the replies!

To answer the first question, we're in the SW United States.  I agree that the house budget does sound extreme.  I'm honestly glad I found this site when I did as I was prepared to pay even MORE for a house had the opportunity arisen... that said  400k is already a whole lot for sure.  I've been justifying it by not being willing to compromise on any of the big factors such as neighborhood, square feet, and lot size, but I think there's a happy medium to be found. I do think we're looking to spend a bit more to stay in the area we're in now so that we can maintain a car-free lifestyle (walking distance to just about everything we need).  Regardless, the housing market is pretty dead right now as we finish the winter quarter.  We'll keep a close eye on the market as things heat up and will do our best not to rush into anything rash.  Southern facing windows!  I was trying to anticipate and plan for an extra buffer for closing costs and a modest emergency fund, so I was hoping to get to ~120k in an ideal scenario.  A cheaper house would make that much lower!  If we do need to move quick, our income is stable enough to justify cutting things a little tight if need be.

As for the investments, I agree that the 2016 IRA needs to happen, and that 2017 can wait.  We should hold off on anything beyond the matching portion of the 401k and then immediately max.  It looks like we're old enough that we don't have to worry too much about filling the gap to 59.5.  We can always switch to taxable accounts later.  One question I forgot to ask was do we go for a 15 or 30 year loan.  After looking around, maybe it's a good thing I didn't ask after all, seems like it's more of a philosophical choice regarding your peace of mind and risk tolerance.

Oof, and yes, daycare is quite the strange expense.  Pay someone money so you can stay away from your kids and make money to pay for daycare... In the end we do it part-time so that our kids get a social and educational experience and mom gets a bit of her own time to do grown-up work.  I'm looking forward to when the kids are both in public school and we can cross that expense off!

Thanks for the advice!