Author Topic: House fund vs. retirement savings?  (Read 4349 times)

oraclesimo

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House fund vs. retirement savings?
« on: November 18, 2015, 08:49:26 PM »
Hello all! I've done a lot of personal finance reading over the past few months and have learned a ton. My fiance and I have begun a life of saving and frugality (thanks to MMM and you all) after living a more typical existence up until now.

Here is the part of our scenario I can't figure out:

We've recently paid off all debt and are at the beginning of major saving -- around $4500/month. I can't decide how much of our savings to put toward a house (to buy in 3-4 years) vs. how much to put into retirement accounts. She'll get out of school next summer and we'll ramp up saving then to about $6k month.

Do we want to save it all outside of retirement accounts and put it toward a house? Or do we want to max out retirement and put away 20% for a down payment and get a mortgage when the time comes?

Other info: We are currently renting an inexpensive apartment in a major city. We hope to move closer to family when we purchase a house, which will be in a less expensive city.

Outside of home ownership, we also hope to have kids in about 3 years (and she'll stay home for 2 years) and then at some point we hope to have enough invested to quit our high-paying/high-stress jobs.

Any thoughts on how to divide our savings to meet our goals of future home ownership (3-4 years) as well as early retirement (7-10 years)?

Bracken_Joy

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Re: House fund vs. retirement savings?
« Reply #1 on: November 18, 2015, 08:53:02 PM »
Well, you can't make up for lost time with IRAs and 401ks. And $4500/month for 3-4 years is a lot... Do you intend to pay cash for the house outright?

An easy suggestion would be: make darn sure you are at LEAST contributing up to an employer match for a 401k, if available. That's just free money. After that, figure out how much house you will need and what your expected 20% down will be. Invest the rest.

oraclesimo

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Re: House fund vs. retirement savings?
« Reply #2 on: November 18, 2015, 09:09:50 PM »
I fear having a mortgage that we'll want to knock out as fast as possible, while having a lot in retirement account savings that's tied up. Maybe this is short-sighted of me?

Bracken_Joy

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Re: House fund vs. retirement savings?
« Reply #3 on: November 18, 2015, 09:17:52 PM »
Well, what do you expect from returns on your investments vs what is the rate of your mortgage? You're essentially borrowing money at 3.3% in order to invest and get a- an expected return, let's call it 7%, and b- MASSIVE tax advantages. I'm guessing with the high income you have some pretty brutal taxes. If you're not using tax advantaged accounts, you're paying the government lots of cash that could be growing and buying your independence instead.

Let the math guide you to your answer, not your fear. =)

oraclesimo

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Re: House fund vs. retirement savings?
« Reply #4 on: November 18, 2015, 09:22:39 PM »
Ah. Okay, that makes a lot of sense. Appreciate your input!

Bracken_Joy

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Re: House fund vs. retirement savings?
« Reply #5 on: November 19, 2015, 10:18:39 AM »
Ah. Okay, that makes a lot of sense. Appreciate your input!

Absolutely!

FWIW, my DH and I are in a similar place right now, although the timeline for our house is much shorter. We've chosen to only contribute to his SEP IRA (part of his employment benefits, so it's not like we could take it as cash anyway), and otherwise throw everything toward our downpayment.

If you have specific questions about your mortgage, the type/size/cost/location of the house you're looking for, anything like that, the Real Estate and Landlording section on this board is incredible. Lots of very experienced and intelligent folks on there. And if you haven't seen it, the Rent vs Buy calculator is always a good link to have:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0
And another calculator about whether to save and have a larger downpayment, or buy now:
http://www.mtgprofessor.com/Calculators/Calculator6a.html

SilveradoBojangles

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Re: House fund vs. retirement savings?
« Reply #6 on: November 19, 2015, 12:36:14 PM »
How much of a down payment do you think you'll need? And how will your mortgage compare to your rent? And will your salaries stay the same when you move?

Bracken_Joy

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Re: House fund vs. retirement savings?
« Reply #7 on: November 19, 2015, 01:05:10 PM »
Well, we will be moving to a different city, so that skews things a bit. We are aiming for a $40k downpayment for 20%. We're currently at $20k, and have been saving $2k per month. Downpayment obviously depends on the cost of living in your area though. Since we will stay in that house at least 10 years (no reason to move once we're in that city, and we know the areas very well), the rent vs buy calculator works out very favorably for buying. And since we live in a relatively HCOL city (certainly compared to where we are moving!), our mortgage payments will be less than the rent on our current place.

We're going to be looking for relatively small houses (around 1,000sq ft, which is what we have right now- and share with a roommate), and in the area we're moving there are many in the $175-225k range.

DH's salary will increase, as he gets raises every couple years pretty reliably. My salary will stay the same, as it is dependent upon government-set rates for the type of nursing care I provide. (Although to be fair, we both bill hourly, so our 'salary' depends a lot on the contracts we have and the hours we are putting in).

I'm curious how your numbers work out on the rent vs buy? Do you know the ballpark for the type of place you will be looking to buy?

boarder42

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Re: House fund vs. retirement savings?
« Reply #8 on: November 19, 2015, 01:29:00 PM »
with 54k a year in savings power and just you working

18k to 401k
6750 to HSA
11k to Roth IRA

35.75

leaves you 20k to put in taxable accounts for you house

once she starts working fund her 401k with the additional 18000(1500/month) and you will still have 20k to put in taxable.

what we're missing here though is the tax savings.  assuming this money is all coming out of a 25% tax bracket going into these retirement accounts you will actually have much much more taxable income to invest.  assuming you're in a state with 6% income tax thats 31%

SOO... addtional taxable income you can save over the 20k

before she starts working = (18k+6750)*.31 = 7600
after she starts working = 18k * .31 = 5580 More

so your house savings would be 20k + 5580 + 7600 = 33k per year. 

if your job lets you contribute str8 to the HSA you can add another 500 to that taxable savings. 

so basically if you dont even invest that 33k per year you'd have 100k in 3 years to use as a down payment while maxing all retirement accounts

But i would recommend investing it, AND i would recommend putting only 20% down and carrying a 30 year mortgage it will speed up your time to FIRE and give you a hedge against inflation when FIRE'd
« Last Edit: November 19, 2015, 01:32:05 PM by boarder42 »

Bracken_Joy

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Re: House fund vs. retirement savings?
« Reply #9 on: November 19, 2015, 01:38:39 PM »
Boarder, thank you for the thorough run through of the numbers! Much more weight than my "it's important... because math" claim =P

boarder42

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Re: House fund vs. retirement savings?
« Reply #10 on: November 19, 2015, 01:38:51 PM »
also depending on your income level you coudl go traditional IRA possibly and save another 3.3k in taxes and invest that in taxable accounts towards your house.

boarder42

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Re: House fund vs. retirement savings?
« Reply #11 on: November 19, 2015, 01:41:04 PM »
as for the projected FIRE date of 7-10 years ... you need to figure out what you plan to spend then its just a compounded interest equation to see when you will likely get there.

oraclesimo

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Re: House fund vs. retirement savings?
« Reply #12 on: November 19, 2015, 09:56:48 PM »
@boarder 42 -- wow! thanks for the responses. So much to think about.

Your earlier breakdown makes a lot of sense and we will definitely put that into motion.

Could you help me understand these two parts of your response?:

Quote
AND i would recommend putting only 20% down and carrying a 30 year mortgage it will speed up your time to FIRE and give you a hedge against inflation when FIRE'd

and

Quote
also depending on your income level you coudl go traditional IRA possibly and save another 3.3k in taxes and invest that in taxable accounts towards your house.

I make $90k. She is currently part-time making $40k and should be up to $100k in around 6 months.

Thanks again!

boarder42

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Re: House fund vs. retirement savings?
« Reply #13 on: November 20, 2015, 05:31:15 AM »
Just go with the Roth then it will allow for easier backdoor Roth conversions later when you're likely to need them with those salaries.

As for the mortgage.  At today's interest rates there has rarely/never been a time you would come out ahead by paying down your mortgage vs investing the money you would use for that.  over a 30 year window it has never happened and i think its only happened a couple times. 

easy way to think about it ... mortgage rate 4% ... real return on stock market avg is 7% ... you're cost yourself 4% by paying down that mortgage.

Now as for the inflation hedge.  your mortgage rate does not change with inflation meaning your payment is say 1500 its 1500 a month always.  if one year inflation is 10% your payment is still 1500.  there is a tool called CfireSim.com where you can test this. 

basically if you have say 1MM saved for retirement and a 4% swr or 40k per year you have a 76.27% of being successful in ER.  This assumes you house is paid off

Now lets flip it and for the sake of arguement say you REFI to a 30 Year at 4%APR at retirement on a 200k house.  and lets put that 200k into your retirement savings so now you have 1.2MM saved and you're sill withdrawing 40k to live and you're paying a 955 dollar a month mortgage payment P&I (remember you will pay taxes and insurance regardless of whether its paid off or not) 

This gives you a likelihood of success of . 77.97%  due to years of hyper inflation where your payment on your mortgage did not change.  its a fixed expense where as the cost of food in a year of 10% inflation goes up 10% you have to spend 10% more on food but not your mortgage.  and the stock market typically out paces inflation.  so that money being invested vs sitting in a fixed asset helps immensely. 
« Last Edit: November 20, 2015, 05:33:33 AM by boarder42 »

alf2015

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Re: House fund vs. retirement savings?
« Reply #14 on: November 20, 2015, 08:33:43 PM »
Awesome. Thanks for the explanation. Again, really appreciate your input.

oraclesimo

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Re: House fund vs. retirement savings?
« Reply #15 on: November 20, 2015, 08:55:54 PM »
Oops... posted message above while fiancÚ was logged in. We both appreciate the input!