Author Topic: Case Study - What to do after sale of old house?  (Read 5986 times)

AerynLee

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Case Study - What to do after sale of old house?
« on: August 27, 2015, 11:04:38 AM »
Life Situation: DINKs, LCOL, rural mid-west. We just moved from way too large house, 30 miles from work to much more appropriately sized house <5 miles from work. I will be picking up the proceeds check from the sale of our old house today and I can't quite decide what order to tackle debt/savings goals.

Gross Salary/Wages:
Me - $53k
DH - $45k

As things stand now we'll have $1800/month after taxes/debts/expenses so quite a bit of wiggle room

Liabilities: Current balance, rate, loan term, minimum payment
Mortgage - $78k, 4.75%, 30 years, $590 (100 Prin, 310 Int, 117 tax, 27 insurance, 26 PMI)
My SL - $7.1k, 6.55%, 10 years, $105 (65 Prin, 40 int)
DH SL1 - $2.4k, 4.25%, 5 years, $50 (40 prin, 10 int)
DH SL2 - $49k, 3.75%, 25 years, $266 (113 Prin, 153 int)
My Car - $8.2k, 1.59%, 5 years, $320 (310 Prin, 10 Int)
401k - $6.3k, 4.75%, 2.5 years, $294 (269 Prin, 25 Int)
Credit cards - $0, combined over $40k credit limits most of that at 10% rate)

Total Debt - $151k, $1,625/month


Specific Question(s): So once I pick up the proceeds from the sale of the house today we will have $20k plus a crap-ton of extra money every paycheck. What order would you tackle these goals?

Max ROTH IRAs for 2015 - $11k
Pay off 401k Loan - $6.3k
Pay off my SL - $7.1k
Pay off DH SL1 - $2.4k
Pay off car loan - $8.2k
Set my 457 contribution rate to max out over a year - $600/check additional
Set DH 401k to max out over a year - $600/check additional (note, I will be setting his HSA to max for next year)
Refinance mortgage to 15 year w/o PMI - $8.5k paydown (net increase in payment is only ~$50/month)

I should be getting the following refunds in the next month or so:
$1,175 - old homeowners insurance premium
$300 - old electric bill credit
$450 - escrow refund
$1,450 - property tax escrow they held at closing but said I'd get back
$1,200 - refund from my mortgage broker for screwing up
« Last Edit: August 27, 2015, 01:32:55 PM by AerynLee »

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #1 on: August 27, 2015, 11:45:27 AM »
We literally cannot finish maxing out the 401k and 457 for the year since we only have 9 paychecks left. And I'm not sure I can talk DH into doing as much as we can while living off sale proceeds since it's a little radical for those who haven't drunk the kookaid but I will bring it up to him and see what he says.
I am definitely leaning towards setting my 457 to where it maxes over a year as a first step. I have the form in front of me right now and am trying to find out who I have to call in HR to find out the best way to set it (our payroll system isn't very sophisticated so we have to be careful when doing something different). The 457 is priority over the 401k since we can withdraw proceeds before 'normal' retirement age without a penalty and we're hopefully (semi)retiring in 5 years at age 35.

I'm going to edit down the original post to make it more concise.

MDM

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Re: Case Study - What to do after sale of old house?
« Reply #2 on: August 27, 2015, 12:25:55 PM »
Specific Question(s): So once I pick up the proceeds from the sale of the house today we will have $20k plus a crap-ton of extra money every paycheck. What order would you tackle these goals?
See below for one defensible prioritization order.  The current 10-year Treasury note yield is ~2.2%.  Differences of a few tenths of a percent will be insignificant over a few years, so using a coin toss (or gut feel) when options are that close is fine.

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial

charis

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Re: Case Study - What to do after sale of old house?
« Reply #3 on: August 27, 2015, 12:29:20 PM »
I like MDM's list of priorities.   How much have to contributed to the 401K and 457 accounts so far this year?

Argyle

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Re: Case Study - What to do after sale of old house?
« Reply #4 on: August 27, 2015, 12:46:04 PM »
If I calculate correctly, you have $73,000 worth of debt, not counting the mortgage.  That's not an insignificant amount of debt.  And 25 years to pay off the student loan!  Do you really want that hanging around your neck for that long?

I myself would not take that $73,000 worth of money and gamble on clearing a profit on the stock market.  Your chances of clearing enough, after taxes, to outrun the annual 6.55% interest on the $7100 of student loan well, it's not a sure thing by any means. 

My view is that you have a hair-on-fire debt emergency, and that advising you to invest rather than to clear those loans off the deck is backwards and could come back to bite you.  You've already borrowed from your 401(k) if you don't start knocking down those loans, as well as building up an emergency fund, you could just end up borrowing more rather than accumulating more.  Leveraging debt to buy stocks is a risky business.  I vote for knocking out the debt as a top priority.

lhamo

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Re: Case Study - What to do after sale of old house?
« Reply #5 on: August 27, 2015, 12:59:48 PM »
Given your positive cash flow situation, why did you accept a mortgage where you have to pay PMI?  It isn't much, granted, but it would be much better for you to have that money going toward the principal....

Agree with serpentstooth that given the state of the markets at the moment the best thing you can probably do long-term is to throw as much as you possibly can into your retirement accounts while the market is on this dip, but if you really can't stomach that or if the logistics of your employers' plans make it complicated, then I would take it in this order:

1)  Max Roths ASAP, because -- EVERYTHING'S ON SALE!!  Well, maybe not as much of a sale as on Monday, but you're still getting in at a great level compared to a week ago.  Amount from house sale left to work with:  $9k

2)  Pay off 401k loan, both due to the comparatively high interest rate and the fact that you are losing out on returns the longer you fail to repay yourself.  Also, since everything is on sale now this is a good time to get that money working for you in a positive way.  That will also give you an extra $294/month to apply to the other debts.  Amount from house sale left to work with:  $2.7k

3)  Pay off DH SL#1 -- I know, the math isn't optimal but I'm thinking eliminating one payment helps streamline your payments and will allow you to throw more at your retirement accounts/your SL repayment faster.  This leaves you with only about $400 left from the house sale.  But you'll have roughly $2150/month to apply toward retirement savings/debt repayment.

From this point, I'd put as much as you can into employer based retirement for the rest of the year, and apply the rest in the following order:

A)  Your SL payoff -- highest interest and smaller balance, so easier to knock off
B)  Mortgage refi (since they probably wouldn't let you refi immediately anyway)
C)  DH SL 2
D)  Car loan -- lowest interest, though you might want to adopt the Dave Ramsey approach and knock this out earlier just because the balance is lower and it is easier to tackle, thereby freeing up  money/focus for paying off the bigger debts.

If you are disciplined/focused you should be able to plow through all of this pretty rapidly, especially if you have in the neighborhood of $3400/month to be applying to investment and debt repayment.  ($1600 current payments + est $1800 in excess).


4) 

3) 

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #6 on: August 27, 2015, 01:21:09 PM »
Given your positive cash flow situation, why did you accept a mortgage where you have to pay PMI?  It isn't much, granted, but it would be much better for you to have that money going toward the principal....
The house we just sold had a monthly payment of over $1400 and we had no idea how long we'd have both houses (turned out to be 3 months to the day luckily). I wanted to hold onto any extra cash even though it meant temporary PMI as a safety measure so I put down as little as possible. We were not nearly so cash flow positive until today :)

Overall I'm leaning towards your suggestion except maybe bump up the car loan just because it's a relatively high payment and I hate paying on a depreciating asset. I'm very torn with that interest rate though.

As for the speed on the refi, we bought our old house in 06/2008 and refi'd in 02/09 so they do allow fairly quick refi's (or did back then)

LAGuy

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Re: Case Study - What to do after sale of old house?
« Reply #7 on: August 27, 2015, 01:24:24 PM »
I'm with those that say pay down that debt. Even though you can write off that student loan interest at your income, you'll feel much better being out from under it. And it will increase the amount you have monthly going forward to invest.

1) Get any 401k match.
2) With the 20k and the money coming in next month, pay off all loans except the big 49k student loan...you're going to be stuck with that one for awhile. Definitely pay off the 401k loan. That will increase your monthly income by nearly $300 per month AND get you a nice investment. Win, win!
3) MAYBE consider keeping the car loan since it's the cheapest. Instead go ahead and plow it into the Roth instead.

I know there's an argument to be made to invest first since you can beat those interest rates, but I think you'll feel a lot better with fewer debt accounts and levels to juggle.

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #8 on: August 27, 2015, 01:30:41 PM »
If I calculate correctly, you have $73,000 worth of debt, not counting the mortgage.  That's not an insignificant amount of debt.  And 25 years to pay off the student loan!  Do you really want that hanging around your neck for that long?

My view is that you have a hair-on-fire debt emergency, and that advising you to invest rather than to clear those loans off the deck is backwards and could come back to bite you. 

It is a lot of debt but I wouldn't call it "hair on fire". All of it except my student loan is under the 5% cutoff many on here use as the divider between pay it off and invest. I have no intention of letting DH's big loan hang around for 25 years, it's just my last priority since the rate is so low especially since I can deduct it (unlike my mortgage interest). We're hoping to (semi)retire in 5 years and we will be debt free before we do

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #9 on: August 27, 2015, 01:36:19 PM »
I like MDM's list of priorities.   How much have to contributed to the 401K and 457 accounts so far this year?
Not as much as I'd like this year since we were prepping for this move most of the year I lowered DH's contributions form 15% to 6% (just enough to get the match)

So DH has ~$2k and I've done about $1.7k (not including my 403b that's at 7% but I can't do any more or less than that)

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #10 on: August 28, 2015, 07:56:10 AM »

I should be getting the following refunds in the next month or so:
$1,450 - property tax escrow they held at closing but said I'd get back
$1,200 - refund from my mortgage broker for screwing up
Wow, we already got both of these. Yesterday was a good day :) DH was making fun of me for being so happy about the massive influx of money.

Anyway, here's what I've done so far:

Set DH's 401k to max out over a year
Filled out the form to have my 457 max out over a year (have to take it to HR today)
Paid off the small student loan
Maxed out both of our ROTH IRA's (kinda, I accidentally put mine to a Trad but will reclass it once it posts)
Once this week's payment on the 401k loan hits I'll pay that off (early next week)

Leaving me with about $3k in cash to figure out. I think we'll hold onto that until we see exactly how our paychecks change with the new contributions. We may foolishly spend at least some of it since we want patio furniture and are contemplating a low key kitchen and laundry room remodel.

My next priority on debt will probably be my student loan since it's the highest interest rate. Either that or paying down the mortgage to refi without PMI, I'll have to ponder that one for a bit

eyePod

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Re: Case Study - What to do after sale of old house?
« Reply #11 on: August 28, 2015, 08:46:49 AM »
Does your husband have access to a 401k and a 457b? My wife does and they actually stack. You can contribute 18k per year into each of those. With her two accounts and my 401k, we could theoretically contribute 54k pre-tax each year. Nowhere near that but still nice to see and try to use as a goal!

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #12 on: August 28, 2015, 08:56:44 AM »
Does your husband have access to a 401k and a 457b? My wife does and they actually stack. You can contribute 18k per year into each of those. With her two accounts and my 401k, we could theoretically contribute 54k pre-tax each year. Nowhere near that but still nice to see and try to use as a goal!
No, he just has a 401k. I have a 403b and a 457 but the 403b is set at 7% contribution from me, I can't make it any higher or lower than that :( But we wouldn't be able to put a ton more in anyway: $97.7k gross - $18k 401k - $18k 457 - $3,740 403b - $11k ROTH IRA - $3,350 HSA = $43,610 before any taxes or remaining debt payments

charis

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Re: Case Study - What to do after sale of old house?
« Reply #13 on: August 28, 2015, 11:36:45 AM »
At your gross incomes, I would be doing a traditional IRA instead of a Roth. 

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #14 on: August 29, 2015, 10:07:43 AM »
At your gross incomes, I would be doing a traditional IRA instead of a Roth.
A few reasons for a ROTH:
Even this year when we're not maxing out all retirements the Traditional doesn't save us a ton in taxes, next year it'll save us even less
Since we're only 30 the tax free withdrawals on earnings 30+ years down the line will be a huge savings
We're planning on retiring at ~35 years old so we need a way to access funds for the next 25 years without a penalty if we need them
And a ROTH can be a last ditch emergency savings since we don't like to keep a bunch of cash on hand while we're paying off debt (I don't care how low the interest rate is, it's better to pay it off then let cash sit earning next to nothing)

MDM

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Re: Case Study - What to do after sale of old house?
« Reply #15 on: August 29, 2015, 01:01:03 PM »
...the tax free withdrawals on earnings 30+ years down the line will be a huge savings

This is true if the earnings are so high that they would (if taxable) be taxed at a marginal rate higher than your current marginal rate.

If the marginal rate in retirement is lower than current, traditional would be better than Roth regardless of earnings.

muckety_muck

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Re: Case Study - What to do after sale of old house?
« Reply #16 on: August 30, 2015, 06:41:39 AM »
Personally - I would pay off the highest rate student loan (I think it's $7k?) and also the 401k loan. In general, loans from 401k are a bad idea... After that, I would put the rest in emergency/savings fund. You actually have until April 15, 2016 to make 2015 Roth IRA contributions, so split $11,000 over the remaining 8 months. That's a little over $1k/mo for the next 8 months. Then rinse/repeat for next year. This way you will take advantage of dollar cost averaging, instead of putting it all in at the high/low of the market.

If you prioritze paying down debt, you will free-up additional money every month for saving/investing. Have you looked into Dave Ramsey yet? While he gives terrible investing advice, the debt advice is pretty spot-on. Will make you rethink all that debt. Get you in a better position to save/invest/give back/retire early... which is what most of us are planning to do. Good luck! :)

AerynLee

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Re: Case Study - What to do after sale of old house?
« Reply #17 on: August 31, 2015, 09:47:27 AM »
...the tax free withdrawals on earnings 30+ years down the line will be a huge savings

This is true if the earnings are so high that they would (if taxable) be taxed at a marginal rate higher than your current marginal rate.

If the marginal rate in retirement is lower than current, traditional would be better than Roth regardless of earnings.
I'm certainly hoping for high earnings over that many years :)

If nothing else call it diversification. We're putting in almost $50k a year pre-tax including employer contributions and only $11k post-tax