Author Topic: Reader Case Study - First, Kill All The Lawyers  (Read 16100 times)

davidlobsterwallace

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Reader Case Study - First, Kill All The Lawyers
« on: September 22, 2014, 03:43:10 PM »
**First time posting, so if I've been unclear or misunderstood any forum best practices, let me know and I'll amend.

Income: Approximately $200k/year after the whopping near-50% effective NYC tax rate.

Current expenses:
- Rent: $3,000
- Utilities: ~ $110/month electric and gas
- MetroCard: $112/month
- Groceries - ~ $300/month
- Internet: $29.99/month
- Student loans: $475/month
- Misc.: ~ $500/month. This is bike repair, eating out, personal care, entertainment, etc.    +
Total: ~ $4475 - 5000/month

Expected ER expenses: Baby... inbound 8 months. No idea.

Assets:
- $1.1M in a brokerage account, pretty well diversified. (ST CapGains bill of around $60k coming up this year, though)
- $40k in retirement account. $10k liquid emergency fund (Betterment, 60/40 stock/bond allocation)
- A house in DC DC. Worth ~ $500k  +
Total: $1,550,000


Liabilities:
My student loan: ~ $250,000 @ 7.9%
His student loan: ~ $150,000 @ 7.9%
Mortgage on rental house ~ $380,000 @ 3.5%    +
Total: $780,000

Specific Question(s):

We are both lawyers. We both kind of hate being lawyers. We are sure of this, and want to be freeeeeeeeeeeee within the next few years. A combination of aggressive MMM behaviors and a lot of hustle on the job front left us in a pretty good position. We know we have a lot of money socked away, compared to most people our age.

1. Do we pay off the student loans now? Like, today? All of them? If not all, how much?
2. How much should we start saving for Future Baby's college tuition? How are those of you with young or prospective spawn forecasting those kinds of needs? If you extrapolate out the current growth in tuition prices, it's something like $130k in 18 years. Is anybody actually saving close to $600,000 for this purpose?!
3. Do we need to leave Manhattan to live the dream? (The dream is not necessarily not working at all, but it is not having to work exhausting, soul-crushing hours at a moment's notice)
4. How long to hold onto DC rental property? Should we pay off the mortgage instead? I love the house (We lived there for 2+ years), and it is in a rapidly gentrifying neighborhood so the price is escalating, but will likely stabilize in the next couple years. Tenants are awesome, but currently not much spread: we are at break-even or slight net positive after mortgage interest deduction. I would like to move back to DC eventually, and would absolutely consider living there, but the house is also 100 years old and I can't help but thinking that something's bound to go wrong. If I knew 100% that I was going to move back to DC and live there, I'd pay it off, but at 3.5% and nothing out of pocket per month (the rental income also pays the taxes and homeowners insurance) it doesn't seem like an insane amount to pay for the optionality.

Thanks in advance for the help, everyone.
« Last Edit: September 22, 2014, 04:26:12 PM by davidlobsterwallace »

zolotiyeruki

  • Magnum Stache
  • ******
  • Posts: 3131
  • Location: State: Denial
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #1 on: September 22, 2014, 04:00:29 PM »
I've got one comment and a couple questions:
--I would prioritize the student loans.  That's a *guaranteed* ROI.  IMO, That amount of loans should be considered hair-on-fire.
(can't comment on the "how much to save for kid's college" question, since we have no plans to fund our kids' college ourselves)

Questions:
1)  What is your vision for your ER?  What do you see yourself doing?  You need to answer this question before you can answer the question of whether to leave Manhattan.
2)  What are your long-term goals for the DC property?  The answer to this largely depends on your vision of retirement.  If you see yourselves living in/near DC, then keep the property until you retire.  If you see yourself heading into the country Green Acres-style, then managing the property may be too much hassle for the limited profit, and you may consider selling.  If you want to stay in NYC, then you could keep it as an (admittedly risky) investment.

RetireAbroadAt35

  • Stubble
  • **
  • Posts: 222
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #2 on: September 22, 2014, 04:02:47 PM »
I'd liquidate some stocks and pay off those loans today, if it were me.  7.9% - those must be private loans.  Whack 'em.

The mortgage I wouldn't be so stressed over as the interest is low.

As for keeping vs selling, it sounds like a terrible real-estate investment for cash flow.  I'd be looking at it and trying to decide when to sell.  I don't speculate or try to time markets, however, so I'd probably sell it today if I could.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #3 on: September 22, 2014, 04:04:34 PM »
Details are a bit confusing so I have some questions:

1) Are you saying $200K/year net after taxes and deductions?
2) What's the value of the DC house?
3) Are you currently paying down the SL's? They're not listed in expenses?

Monthly expenses appear to be $3,552 (42,624 annual) so obviously that leaves a lot of room for savings. Awesome brokerage account, sucky SL's. I would pay them off immediately unless there's something else you haven't mentioned. 8% is just too high of a rate. You've likely benefited greatly from the market over the last few years. I would not make any future purchases in the brokerage account and use all future monthly savings for debt repayment. This would be preferable to selling stocks due to the tax consequences on that high income.

Keep the mortgage on the rental unless selling it would free up enough capital to invest and live off the proceeds. Your current portfolio of $1.1 less the $400K SL debt is 700K, which times 4% would be 28K/year. It's a very good start, but obviously you'd have to move to sustain your current expenses. Your expenses would also likely increase due to health insurance and baby costs.

With that high income just another year or two and you guys should have more than enough. Alternatively, you could stop working once baby arrives and let him keep working but at a slower pace for a few years. This would let the portfolio grow slowly, allow for a little more SL debt payoff and mortgage pay down.

Don't worry about college tuition specifically. It should just be one thing to consider as part of your entire portfolio. You don't need a 529 plan.

eudaimonia

  • 5 O'Clock Shadow
  • *
  • Posts: 72
  • Age: 41
  • Location: Sacramento, CA
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #4 on: September 22, 2014, 04:09:54 PM »
It isn't entirely clear if your take home is $200k or if that is gross.

In either event you are currently paying about $30k a year in interest on your student loans. Your hair should be on fire to eliminate these.

If you are taking home $16k a month and your expenses are $3.5k then you can take your $400k student loans to $0 in about 2 and a half years. If not for these loans you would have a 4% SWR right now.

Based on the way that debt bubbles go it is likely that college education is in the midsts of a massive bubble. This bubble may last a few more years; however, it is unsustainable. As such, I'm predicating our college savings based on a reversion to the mean and that we'll see more typical college education inflation over the next 18 years. So if you are planning on sending your child to an Ivy League school (about $200k tuition today) I would anticipate you'll need $340k in 18 years. This is approximately $15k of savings a year and we'll assume you put it in a 60/40 stock/bond allocation with an ROI of about 5% per annum.

It depends on the dream; however, if you eliminate your school loans you will have a lot more options on the table.

davidlobsterwallace

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #5 on: September 22, 2014, 04:22:04 PM »
Details are a bit confusing so I have some questions:

1) Are you saying $200K/year net after taxes and deductions?
2) What's the value of the DC house?
3) Are you currently paying down the SL's? They're not listed in expenses?

Monthly expenses appear to be $3,552 (42,624 annual) so obviously that leaves a lot of room for savings. Awesome brokerage account, sucky SL's. I would pay them off immediately unless there's something else you haven't mentioned. 8% is just too high of a rate. You've likely benefited greatly from the market over the last few years. I would not make any future purchases in the brokerage account and use all future monthly savings for debt repayment. This would be preferable to selling stocks due to the tax consequences on that high income.

Keep the mortgage on the rental unless selling it would free up enough capital to invest and live off the proceeds. Your current portfolio of $1.1 less the $400K SL debt is 700K, which times 4% would be 28K/year. It's a very good start, but obviously you'd have to move to sustain your current expenses. Your expenses would also likely increase due to health insurance and baby costs.

With that high income just another year or two and you guys should have more than enough. Alternatively, you could stop working once baby arrives and let him keep working but at a slower pace for a few years. This would let the portfolio grow slowly, allow for a little more SL debt payoff and mortgage pay down.

Don't worry about college tuition specifically. It should just be one thing to consider as part of your entire portfolio. You don't need a 529 plan.

Responses to questions:

(1) The $200k is net, after all deductions (including 401k) and taxes.
(2) Value of the DC house is around $500,000, but I haven't priced it recently and am relying on Zillow/Trulia estimates so YMMV.
(3) Student loans payment is currently $475/month. Relatively tiny bill is due to the government using AGI from 2012 (when I worked for the gov't) to calculate the payment. Will edit to reflect.

PS. Guys, these are FEDERAL LOANS. For education. For the youth. This is what they are charging them.

davidlobsterwallace

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #6 on: September 22, 2014, 04:23:50 PM »
Details are a bit confusing so I have some questions:

1) Are you saying $200K/year net after taxes and deductions?
2) What's the value of the DC house?
3) Are you currently paying down the SL's? They're not listed in expenses?

Monthly expenses appear to be $3,552 (42,624 annual) so obviously that leaves a lot of room for savings. Awesome brokerage account, sucky SL's. I would pay them off immediately unless there's something else you haven't mentioned. 8% is just too high of a rate. You've likely benefited greatly from the market over the last few years. I would not make any future purchases in the brokerage account and use all future monthly savings for debt repayment. This would be preferable to selling stocks due to the tax consequences on that high income.

Keep the mortgage on the rental unless selling it would free up enough capital to invest and live off the proceeds. Your current portfolio of $1.1 less the $400K SL debt is 700K, which times 4% would be 28K/year. It's a very good start, but obviously you'd have to move to sustain your current expenses. Your expenses would also likely increase due to health insurance and baby costs.

With that high income just another year or two and you guys should have more than enough. Alternatively, you could stop working once baby arrives and let him keep working but at a slower pace for a few years. This would let the portfolio grow slowly, allow for a little more SL debt payoff and mortgage pay down.

Don't worry about college tuition specifically. It should just be one thing to consider as part of your entire portfolio. You don't need a 529 plan.

Why no 529 plan? I know next to nothing about them (but was told to investigate) and would love some information if you're knowledgeable. Thanks!

RetireAbroadAt35

  • Stubble
  • **
  • Posts: 222
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #7 on: September 22, 2014, 04:28:00 PM »
PS. Guys, these are FEDERAL LOANS. For education. For the youth. This is what they are charging them.

7.9% is the current rate for Parent Plus loans, which are sort of facilitated by the feds through Sallie Mae but they are private loans with private loan rules.  The federal stafford loan rates are 3.4% for subsidized and 6.8% for unsubsidized.  I have no idea what kind of loans you have or what is typical for a JD.

Anyhow, my point here is that while yes, it is possible for students to take on 8% loans for school, they aren't coming from the federal stafford loan program today (the program relevant to the majority of students in the US).

dandarc

  • Magnum Stache
  • ******
  • Posts: 3404
  • Age: 36
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #8 on: September 22, 2014, 04:29:15 PM »
You might want to look into maxing your traditional retirement accounts as opposed to putting more in taxable investments - if you're really paying a 50% marginal tax rate, that is a no-brainer - defer as much as you possibly can.

See if your employers won't let you do some kind of self-matching arrangement - if you're pulling in 200K after tax and spending less than 60K, invest that 104K into retirement (52K each assuming 401K or 403B is available) tax-deferred, and save 52K in taxes this year.  You clearly can afford it based on the numbers presented, and then you can pay your current expenses with tax savings alone!  You'll get to your number that much faster by having that much more money to play with.

In addition:
1) Pay off the student loans - 7.9% is very high
2) Sounds like the DC house is not cash-flowing - maybe you expect big appreciation and keep it?  Maybe you say, eh it isn't producing any cash returns (tax savings notwithstanding) and sell it. 120K in equity doesn't change your world
3) As far as staying in Manhattan - how stable is the rent situation?  You might want to shoot high for your 'Stache to compensate.  It definitely delays your retirement - you could sell your DC house, pay off your SLs, go buy a pretty reasonable place where we live (or in many other places where you can get a decent house for 100-120K) in cash with just the proceeds from DC, and then if your expenses presented are correct, you'd be retired.  So staying in NYC clearly comes with a cost - just need to decide if it is worth it to you.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3404
  • Age: 36
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #9 on: September 22, 2014, 04:30:48 PM »
Details are a bit confusing so I have some questions:

1) Are you saying $200K/year net after taxes and deductions?
2) What's the value of the DC house?
3) Are you currently paying down the SL's? They're not listed in expenses?

Monthly expenses appear to be $3,552 (42,624 annual) so obviously that leaves a lot of room for savings. Awesome brokerage account, sucky SL's. I would pay them off immediately unless there's something else you haven't mentioned. 8% is just too high of a rate. You've likely benefited greatly from the market over the last few years. I would not make any future purchases in the brokerage account and use all future monthly savings for debt repayment. This would be preferable to selling stocks due to the tax consequences on that high income.

Keep the mortgage on the rental unless selling it would free up enough capital to invest and live off the proceeds. Your current portfolio of $1.1 less the $400K SL debt is 700K, which times 4% would be 28K/year. It's a very good start, but obviously you'd have to move to sustain your current expenses. Your expenses would also likely increase due to health insurance and baby costs.

With that high income just another year or two and you guys should have more than enough. Alternatively, you could stop working once baby arrives and let him keep working but at a slower pace for a few years. This would let the portfolio grow slowly, allow for a little more SL debt payoff and mortgage pay down.

Don't worry about college tuition specifically. It should just be one thing to consider as part of your entire portfolio. You don't need a 529 plan.

Why no 529 plan? I know next to nothing about them (but was told to investigate) and would love some information if you're knowledgeable. Thanks!
What if baby doesn't go to college?  Based on account balances, you're not even taking full advantage of your retirement account options yet - fill that space up before you start getting into more restricted tax-advantaged vehicles.

former player

  • Magnum Stache
  • ******
  • Posts: 4273
  • Location: Avalon
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #10 on: September 22, 2014, 04:47:02 PM »
Two stressful jobs with long hours and baby on the way?  I say your priorities are to reduce risks and reduce outside stressors.

To reduce risk, pay off the student loans out of the brokerage account, provided there are no tax issues with cashing out this much - if there are, start directing your savings towards paying off the loans.  You get a cast-iron, guaranteed return of 7.9% on everything you put towards getting rid of the loans, and you free yourselves up to walk away from your jobs and live a more mustachian life.

The house in DC is a potential stressor so you might well have the thought "with baby on the way we don't need the work and worry of dealing with an old house in a different city, so we'll sell it.  We can buy another similar house if that's where we decide to live once we leave NYC."   Only if you are certain that you will want to live in that part of DC when you retire, and the house is special enough to be not easily replaceable in your affections, would it seem worth holding on to.

marblejane

  • Bristles
  • ***
  • Posts: 357
  • Location: SF Bay Area
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #11 on: September 22, 2014, 04:52:11 PM »
I would suggest that you attempt to refinance the student loans through SoFi or Common Bond immediately to reduce your interest rates, if you went to one of the participating colleges and universities. You can cut those rates in half. (Shameless plug: If you do decide to use SoFi, here is my referral link- we each get $100 if you use it:
http://friends.sofi.com/7qRTZ)

firelight

  • Handlebar Stache
  • *****
  • Posts: 1061
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #12 on: September 22, 2014, 05:42:13 PM »
Start with paying off student loans and building up enough buffer so you can cut back on work hours once baby is here.

YMMV but I've seen a number of parents go through life changes once baby comes and you might want to be in the most flexible position possible.

mozar

  • Magnum Stache
  • ******
  • Posts: 2904
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #13 on: September 22, 2014, 06:17:09 PM »
+1 for paying off your student loans with your current income. That will take 2-3 years then you are free.
Oh and DC is counter cyclical. As the rest of the country gets better economically, DC will start going down. This is because the federal govt floods the area with money and then stops when the economy gets better. People are already struggling to sell houses in Northern Virginia, and Zillow lags behind with their data. So I think you should decide whether or not sell soon. In a few years you probably won't get as much as 500k for it.
See article
http://www.washingtoncitypaper.com/blogs/housingcomplex/2014/09/17/d-c-area-economy-takes-a-hit-as-government-spending-drops/

Exflyboy

  • Walrus Stache
  • *******
  • Posts: 6172
  • Age: 57
  • Location: Corvallis, Oregon
  • Expat Brit living in the New World..:)
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #14 on: September 22, 2014, 06:35:54 PM »
If you are paying CG tax with sales of stock in the $1.1m account.. And you have 350k in there after this tax bill (without seeing any more gains of course).. then you should pay off those loans immediately.

If not and your jobs are secure then pay them off with future income.

Frank

okashira

  • Bristles
  • ***
  • Posts: 416
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #15 on: September 22, 2014, 06:44:35 PM »
Details are a bit confusing so I have some questions:

1) Are you saying $200K/year net after taxes and deductions?
2) What's the value of the DC house?
3) Are you currently paying down the SL's? They're not listed in expenses?

Monthly expenses appear to be $3,552 (42,624 annual) so obviously that leaves a lot of room for savings. Awesome brokerage account, sucky SL's. I would pay them off immediately unless there's something else you haven't mentioned. 8% is just too high of a rate. You've likely benefited greatly from the market over the last few years. I would not make any future purchases in the brokerage account and use all future monthly savings for debt repayment. This would be preferable to selling stocks due to the tax consequences on that high income.

Keep the mortgage on the rental unless selling it would free up enough capital to invest and live off the proceeds. Your current portfolio of $1.1 less the $400K SL debt is 700K, which times 4% would be 28K/year. It's a very good start, but obviously you'd have to move to sustain your current expenses. Your expenses would also likely increase due to health insurance and baby costs.

With that high income just another year or two and you guys should have more than enough. Alternatively, you could stop working once baby arrives and let him keep working but at a slower pace for a few years. This would let the portfolio grow slowly, allow for a little more SL debt payoff and mortgage pay down.

Don't worry about college tuition specifically. It should just be one thing to consider as part of your entire portfolio. You don't need a 529 plan.

Responses to questions:

(1) The $200k is net, after all deductions (including 401k) and taxes.
(2) Value of the DC house is around $500,000, but I haven't priced it recently and am relying on Zillow/Trulia estimates so YMMV.
(3) Student loans payment is currently $475/month. Relatively tiny bill is due to the government using AGI from 2012 (when I worked for the gov't) to calculate the payment. Will edit to reflect.

PS. Guys, these are FEDERAL LOANS. For education. For the youth. This is what they are charging them.

I suggest some basic financial education , and logic. You are thinking of paying the mortgage on your rental, but didn't mention paying the student loans.

Does. Not. Compute.

Sell stocks and pay the student loans 100%. All 400k. Now.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #16 on: September 22, 2014, 06:53:19 PM »
Why no 529 plan? I know next to nothing about them (but was told to investigate) and would love some information if you're knowledgeable. Thanks!
What if baby doesn't go to college?  Based on account balances, you're not even taking full advantage of your retirement account options yet - fill that space up before you start getting into more restricted tax-advantaged vehicles.

Yeah, what dandarc said. The big problem is they are not very flexible. Use them for school or pay big penalties. Sometimes limited investment options. Better to max your 401ks while you can for tax deferral. Also see about a backdoor roth contribution for more tax free growth. Much more flexibility with those options.

The one advantage 529s would have for you is they don't restrict contributions based on income (at least I don't think, please correct me if I'm wrong anyone).

Also, search the forum for 529s. Lots of good info.

brizna

  • 5 O'Clock Shadow
  • *
  • Posts: 38
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #17 on: September 22, 2014, 07:47:36 PM »
 I vote for working for 3 more years in nyc paying the minimum on your student loans. Then quit your jobs and move to Boulder and become public defenders and raise your kid(s) while your assets compound. Then retire once your loans are forgiven (do the math on the forgiveness though and make sure you qualify). If you're as miserable as most of my NYC big law friends, I do not envy you my friend.

I would say GTFO of Manhattan. Your friends and peers will all be doing nannies and private schooling and you'll feel pressured to conform given NYC public school quality.

I'm kind of projecting my plans on you though so good luck (I'm not in law though (finance)).
« Last Edit: September 22, 2014, 07:53:41 PM by brizna »

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3027
  • Age: 37
  • Location: Texas
    • Years in the making, I created a journal!
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #18 on: September 22, 2014, 07:54:54 PM »
Payoff the loan

You don't need 529 plans, you already have plenty invested that'll grow over the next 19'years

You have a nice small house in DC and obviously big firm experience, why not move back there?  Just how specializes is your knowledge and how good are you?  You could always on hang a shingle in an area you like and keep doing some remote work related to your current job.


Sent from my iPad using Tapatalk

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3027
  • Age: 37
  • Location: Texas
    • Years in the making, I created a journal!
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #19 on: September 23, 2014, 05:25:59 AM »
I took a look at this and ran through the numbers.  The way I see it, you have one or two options, both of which are pretty good:

Once you payoff the student loans and draw down the brokerage account, you basically have $750,000 invested plus the house in DC.  If I were in your position (and I kind of exactly am in your position), work for the next 12-24 months and hammer down the DC mortgage with all your excess income.  When you get to $900,000 and no liabilities, then walk away.  That's $36,000/year and a free and clear out (outside of maintenance, insurance, and DC property taxes).   Then you can do whatever you want to do.

You also have the option to retire your student loans now, move, and start a low overhead, low cost practice.

In my opinion, it would be difficult to do that when you're so close to a number where you'd never have to work again it you don't want to.

davidlobsterwallace

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #20 on: September 23, 2014, 08:04:30 AM »
PS. Guys, these are FEDERAL LOANS. For education. For the youth. This is what they are charging them.

7.9% is the current rate for Parent Plus loans, which are sort of facilitated by the feds through Sallie Mae but they are private loans with private loan rules.  The federal stafford loan rates are 3.4% for subsidized and 6.8% for unsubsidized.  I have no idea what kind of loans you have or what is typical for a JD.

Anyhow, my point here is that while yes, it is possible for students to take on 8% loans for school, they aren't coming from the federal stafford loan program today (the program relevant to the majority of students in the US).

Here's what's typical for a JD: A combination of Stafford and Federal Direct GradPLUS loans. The GradPLUS loans are unsubsidized. The Stafford have subsidized and unsubsidized portions. When you consolidate the sub/unsub portions, they take the average of the rates (7.5%). So these are 100% federal loans, with an interest rate of 7.5%. They don't have private loan rules (e.g. they are dischargeable with death, do not require a co-signer, are eligible for IBR, PAYE, and PSLF).

CommonCents

  • Handlebar Stache
  • *****
  • Posts: 2386
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #21 on: September 23, 2014, 10:05:51 AM »
What year associate are you?
What are your maternity/paternity benefits?
When is your bonus set and distributed?

I'd suggest:
- Paying off student loans ASAP with brokerage account if possible
- Staying at the firm to take advantage of the maternity/paternity benefits.  (At my old firm, they up'd it to 6 months of maternity leave, which is hard to turn down).  If you need to, come back after the leave for long enough to get the benfits.
- Sock away as much as you can in the next 1-2 years.  Know it will be harder after kiddo.
- Decide whether you want one or both of you to continue working at a lesser paid job, and run the numbers to make sure everything works (cutting costs if necessary)
- Max out retirement money
- Look for a new job, aiming to move after you collect the annual bonus if eligible.  (Note, mom may not collect much if any of a bonus if out for 6 months, but for the other parent this could be substantial money for the stash).  In my experience, government jobs move slowly and you can delay your start, so look before you get the bonus.  My coworker and I both applied to a job posted in october, and started in March and April.

cynthia1848

  • Stubble
  • **
  • Posts: 156
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #22 on: September 23, 2014, 11:28:51 AM »
I agree with CommonCents.  Stay at your firms until after maternity/paternity leave; consider moving up having a kid for that purpose.  Also pay off the high interest loans asap.

If not NYC, where would you move?  Biglaw somewhere else?  Small or midlaw?  What practice areas?

Catbert

  • Handlebar Stache
  • *****
  • Posts: 1686
  • Location: Southern California
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #23 on: September 23, 2014, 11:59:57 AM »
Pay off the SLs by selling from your brokerage account.  Manage taxes as much as possible in selling mutual funds/stock.  Sell assets with the lowest gain first.  You'll be paying at least 15% on the cap gain.  But it could be more...ACA surcharge on taxable income over 250K I think...20% capital gain over 400K I think.  Maybe sell over 2 tax years to avoid as much tax as possible.   

$200k

  • Stubble
  • **
  • Posts: 107
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #24 on: September 23, 2014, 12:08:39 PM »
Forgive my math, but if you have roughly $400k in SL at 7.9%, then the accrued interest alone is $2633.33 per month.  But you are only paying $475 per month.  Also, when you are on IBR doesn't interest capitalize every year (I could be wrong here; not sure).  I would pay the student loans immediately. 

dandarc

  • Magnum Stache
  • ******
  • Posts: 3404
  • Age: 36
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #25 on: September 23, 2014, 12:44:26 PM »
Forgive my math, but if you have roughly $400k in SL at 7.9%, then the accrued interest alone is $2633.33 per month.  But you are only paying $475 per month.  Also, when you are on IBR doesn't interest capitalize every year (I could be wrong here; not sure).  I would pay the student loans immediately.
That's a good point - if the payment is really $475 the balances should be going up every month and not down, so the minimum payments quite literally would equal paying forever, if not for some forgiveness down the road.

OP - how are  you only paying $475 / month on these loans?  Which programs are you taking advantage of?

CommonCents

  • Handlebar Stache
  • *****
  • Posts: 2386
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #26 on: September 23, 2014, 12:58:17 PM »
I agree with CommonCents.  Stay at your firms until after maternity/paternity leave; consider moving up having a kid for that purpose.  Also pay off the high interest loans asap.

Looked like they are already 1 month pregnant, so it's harder to move it up faster from there :)  But I could have misread, maybe they meant they will try in 8 months?  Clarity is good.

KittyFooFoo

  • Stubble
  • **
  • Posts: 112
  • Age: 32
  • Location: NYC
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #27 on: September 23, 2014, 01:32:28 PM »
Forgive my math, but if you have roughly $400k in SL at 7.9%, then the accrued interest alone is $2633.33 per month.  But you are only paying $475 per month.  Also, when you are on IBR doesn't interest capitalize every year (I could be wrong here; not sure).  I would pay the student loans immediately.
That's a good point - if the payment is really $475 the balances should be going up every month and not down, so the minimum payments quite literally would equal paying forever, if not for some forgiveness down the road.

OP - how are  you only paying $475 / month on these loans?  Which programs are you taking advantage of?

With that payment, it sounds like they must be on IBR (or PAYE).  Under IBR, interest does *not* capitalize.  In fact, it doesn't capitalize under standard repayment, either (little known fact).  Interest does capitalize once and only once if you switch from IBR to a standard repayment. 

I figured that maybe they have been letting interest grow on these loans for like 5 years under IBR, and therefore felt committed to ride the loans out until forgiveness (20 years, when the forgiveness will be taxable income).

However, I am confused as to why their payment is so low--under IBR, your annual payment is 0.15*(AGI - 1.5(poverty line)).  For their $350kish income, that would be like $30k a year?  For example, my wife made $55 last year, we filed separately, and her monthly payment is $270. I must be missing something.
« Last Edit: September 23, 2014, 01:34:47 PM by KittyFooFoo »

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #28 on: September 23, 2014, 01:36:46 PM »
OP stated their IBR is based on 2012 tax return when she worked in gov't for a lesser wage. It will likely be going up soon based on the facts.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3404
  • Age: 36
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #29 on: September 23, 2014, 02:02:35 PM »
OP stated their IBR is based on 2012 tax return when she worked in gov't for a lesser wage. It will likely be going up soon based on the facts.
Thanks - missed that.  So current expenses <> future expenses for this family - that's a key piece of information.  2012 must have been a relatively horrible year, income-wise.

Maybe they should keep the loans, but retire to a much lower income and ride out the loans - take advantage of that government program!  Of course they are generating 60K / year in taxable income from the portfolio, so that might not work out so great.

I'm still trying to figure out how you wind up with 1.1million in a taxable account and only 40K in retirement, and in high-tax states no-less.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #30 on: September 23, 2014, 02:16:41 PM »
Maybe gov't pension so no desire to defer into 457 plan. Then career change.

Maybe options trading and hit a few home runs.

Maybe inheritance.

Maybe no 401k plan at employer with the high wage for many years.

RetireAbroadAt35

  • Stubble
  • **
  • Posts: 222
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #31 on: September 23, 2014, 02:17:20 PM »
Here's what's typical for a JD: A combination of Stafford and Federal Direct GradPLUS loans. The GradPLUS loans are unsubsidized. The Stafford have subsidized and unsubsidized portions. When you consolidate the sub/unsub portions, they take the average of the rates (7.5%). So these are 100% federal loans, with an interest rate of 7.5%.

Damn.  Those gradPlus lonas must be really high interest.

Quote
They don't have private loan rules (e.g. they are dischargeable with death, do not require a co-signer, are eligible for IBR, PAYE, and PSLF).
Highly recommend paying off loans early vs dying or creative repayment schemes.  Running the student loan calculators on studentloans.gov will give you a comparison of principal vs interest on the repayment plans.  You'll pay a metric shitload of interest on all of them. 

But if you paid them off today (or at the very least all the unsubsidized ones) ... so much cheaper.

myDogIsFI

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #32 on: September 23, 2014, 04:07:14 PM »
Fellow lawyer here.  My suggestions:

1. Loans.  Pay them off immediately.  Sell your stocks.  If you are waffling on this, make sure you have a written investment plan with an asset allocation you like.  Compare the return on paying these loans down with the return on your bond funds, and maybe get rid of your bond funds if you still want such an aggressive allocation.

2. College tuition.  Consider front loading a 529 plan.  Say you want to pay for in-state tuition and board for four years at state U, and that's $100k in 2014.  So you dump money into the 529 plan until you hit $100k (or $80k or some fraction to avoid contributing too much), and then you're done. You assume that investments will keep up with tuition inflation.  This won't happen exactly, but IMHO it's a reasonable starting point (5% tuition inflation, 5% nominal return on a mixed portfolio of stocks/bonds with a glide path to mostly bonds over 18 years).   

3. Manhattan.  No, you don't have to leave, but it will make it easier and/or faster if you do.  Especially after you have the kid.

4. Rental property.  I suggest a separate post for this with more details, but it looks like a bad deal for you.  The returns don't look great and it'll add yet another source of stress to what is probably a pretty stressful life.  You may be happier just dumping it into your paper portfolio, putting it on auto-pilot, and doing legal work when you want to do work.

Mazzinator

  • Pencil Stache
  • ****
  • Posts: 570
  • Location: Pa, Ga, Fl, Pa, Az, Tn, Va, Hi, Va, Pa, NoVa
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #33 on: September 23, 2014, 04:48:22 PM »
I also have my SL on IBR, and it is my understanding that you must update this each year. So this should be based off the 2013 AGI. (I guess the update happens from the month when you first put the loans on IBR, and i guess you could've filed an extension into Oct to file your taxes??? I'm no tax expert) but it seems these will need/or should've been updated to the new AGI, which i'm guessing will be higher??

Quote
If your reduced payment under IBR does not cover the interest on your loans, the government will pay that interest on your Subsidized Stafford Loans during your first three years in IBR. After three years, and for all other loan types, the interest will accrue but not compound.

aspiringnomad

  • Pencil Stache
  • ****
  • Posts: 800
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #34 on: September 23, 2014, 09:50:40 PM »
One hundred year old houses in DC, while charming as hell and not really growing in supply, can be money pits. But if you think you'll end up back here,  it makes sense to hold given the steep transaction costs of buying and selling - especially if in gentrifying area that hasn't already priced in pending development. Like others said, the clear priority should be paying down that expensive student loan debt.

dude

  • Handlebar Stache
  • *****
  • Posts: 2353
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #35 on: September 24, 2014, 05:55:06 AM »
Yeah, wow, the loans at nearly 8% -- OUCH.  That's got to be a priority.

dude

  • Handlebar Stache
  • *****
  • Posts: 2353
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #36 on: September 24, 2014, 06:01:00 AM »
Details are a bit confusing so I have some questions:

1) Are you saying $200K/year net after taxes and deductions?
2) What's the value of the DC house?
3) Are you currently paying down the SL's? They're not listed in expenses?

Monthly expenses appear to be $3,552 (42,624 annual) so obviously that leaves a lot of room for savings. Awesome brokerage account, sucky SL's. I would pay them off immediately unless there's something else you haven't mentioned. 8% is just too high of a rate. You've likely benefited greatly from the market over the last few years. I would not make any future purchases in the brokerage account and use all future monthly savings for debt repayment. This would be preferable to selling stocks due to the tax consequences on that high income.

Keep the mortgage on the rental unless selling it would free up enough capital to invest and live off the proceeds. Your current portfolio of $1.1 less the $400K SL debt is 700K, which times 4% would be 28K/year. It's a very good start, but obviously you'd have to move to sustain your current expenses. Your expenses would also likely increase due to health insurance and baby costs.

With that high income just another year or two and you guys should have more than enough. Alternatively, you could stop working once baby arrives and let him keep working but at a slower pace for a few years. This would let the portfolio grow slowly, allow for a little more SL debt payoff and mortgage pay down.

Don't worry about college tuition specifically. It should just be one thing to consider as part of your entire portfolio. You don't need a 529 plan.

Responses to questions:

(1) The $200k is net, after all deductions (including 401k) and taxes.
(2) Value of the DC house is around $500,000, but I haven't priced it recently and am relying on Zillow/Trulia estimates so YMMV.
(3) Student loans payment is currently $475/month. Relatively tiny bill is due to the government using AGI from 2012 (when I worked for the gov't) to calculate the payment. Will edit to reflect.

PS. Guys, these are FEDERAL LOANS. For education. For the youth. This is what they are charging them.

Holy shit, really?  My law school loans are federal, too, though they date back to 1994-97; I consolidated them with the Education Dept's Direct Loan program and they are currently at 2.33%.  Why the hell are yours so expensive???

Love the username, btw!  (big fan of DFW, and Consider the Lobster is a classic!)

Thegoblinchief

  • Guest
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #37 on: September 24, 2014, 06:15:47 PM »
Damn, and I thought my loans were high interest. I'd reduce your taxable income every way you can, but absolutely 100% of free after-tax income goes to paying those. Look carefully at your portfolio's capital gains. If you can sell blocks where the gains are small enough (factoring tax) that you beat 8%, I'd pay them off ASAP via liquidating.

A guaranteed 8% return is hard to beat.

$200k

  • Stubble
  • **
  • Posts: 107
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #38 on: September 24, 2014, 06:48:53 PM »
Quote
Holy shit, really?  My law school loans are federal, too, though they date back to 1994-97; I consolidated them with the Education Dept's Direct Loan program and they are currently at 2.33%.  Why the hell are yours so expensive???

If you had the unfortunate luck of taking out law school loans between 2006 and 2009, like me, federal gradplus loans had an interest rate of 8.5%.  Yes, I have those loans (in an amount shown by my username), which means that with incentives for consolidating and automatic payments, I am lucky to have the rate dip down to only 8%. 

So what is my strategy? I throw every dollar at those loans, I do not contribute any amount to my 401k, and with my high-ish paying salary, I will be able to pay them off within 4 years.  Lesson learned and now I am mustachian for life.   

mozar

  • Magnum Stache
  • ******
  • Posts: 2904
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #39 on: September 24, 2014, 07:37:21 PM »
You still want to get the 401k match and even the full 17.5k to lower your tax rate.

$200k

  • Stubble
  • **
  • Posts: 107
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #40 on: September 24, 2014, 07:43:32 PM »
Quote
You still want to get the 401k match and even the full 17.5k to lower your tax rate.

My employer does not match any 401k contributions.  Thanks for the input though.

Hotstreak

  • Pencil Stache
  • ****
  • Posts: 770
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #41 on: September 24, 2014, 10:01:27 PM »
Two things that have been brought up but not thoroughly discussed:

  • Your DC rental sounds like it's not cash flowing.  Generally, a property should rent for at least 1% of it's market value.  This is enough for not only PITI, but also maintenance, occasional vacancy, and occasional expensive repairs.  There are a lot of discussions over on the real estate/land-lording forum if you want details (and not to say you shouldn't keep it if it's below 1% - but you are either counting on appreciation, or planning to move there within the next few years and trying to avoid transaction costs.
  • I recommend you work on a) budgets.  You have 1) your current budget, and need to make 2) a budget for when the baby is born, and 3) your budget in retirement.  Once you have those, make b) a life plan.  Decide where you want to live, how much longer you're willing to work, where your priorities lie, if you plan for more kids, etc.  Basically balance those things to 3), and when you have a sufficient safety margin, retire.

It bears repeating - pay off your SL's as soon as you can liquidate some stock, and max your retirement accounts.  Good luck with the pregnancy, too.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 2167
  • Age: 50
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #42 on: September 24, 2014, 10:53:00 PM »
My opinions:

1. Do we pay off the student loans now? Like, today? All of them? If not all, how much?

Yes.  Today.  All of them.

2. How much should we start saving for Future Baby's college tuition? How are those of you with young or prospective spawn forecasting those kinds of needs? If you extrapolate out the current growth in tuition prices, it's something like $130k in 18 years. Is anybody actually saving close to $600,000 for this purpose?!

Highly individual decision.  Generally speaking, sit down with your partner and decide how much you plan to fund, then fund that much.  Personally, I decided to fund 4 years of public in-state university tuition+fees+room+board+books+travel-to-and-from per kid.  I personally like the tax deductions of 529s, and so I use those, especially because I can transfer 529 assets between my kids, and if the kid gets scholarships you can remove that money without penalty.  If it isn't used for college, I believe the penalty is 10% plus taxes on any earnings, but in the mean time the money has grown tax deferred and possibly with an up-front state tax deduction, which if you're in NYC may be considerable.

3. Do we need to leave Manhattan to live the dream? (The dream is not necessarily not working at all, but it is not having to work exhausting, soul-crushing hours at a moment's notice)

Up to you, but flyover country is really cheap, so if you like the flyover country lifestyle, you can rapidly accelerate retirement by moving from NYC to, say, South Dakota, or Georgia, or Utah.

4. How long to hold onto DC rental property? Should we pay off the mortgage instead? I love the house (We lived there for 2+ years), and it is in a rapidly gentrifying neighborhood so the price is escalating, but will likely stabilize in the next couple years. Tenants are awesome, but currently not much spread: we are at break-even or slight net positive after mortgage interest deduction. I would like to move back to DC eventually, and would absolutely consider living there, but the house is also 100 years old and I can't help but thinking that something's bound to go wrong. If I knew 100% that I was going to move back to DC and live there, I'd pay it off, but at 3.5% and nothing out of pocket per month (the rental income also pays the taxes and homeowners insurance) it doesn't seem like an insane amount to pay for the optionality.

Depends on how much you like the (what I view as) hassle of being a remote landlord, but I would sell it, pay off the mortgage, and use any remaining equity towards the student loans and then towards 529s.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3239
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #43 on: September 25, 2014, 12:24:09 AM »
Do nothing different at all until you see how the baby changes things. You may want to move to a new area and work a much less stressful job so you can spend more time with the wee one, or you may not particularly enjoy changing diapers and keep the nose to the grindstone and hire a nanny.

I mean, seriously - there is no way you can make any realistic plans until you see how your life works with a kid (and whether you want more). Total game changer, come back in a year or two and ask these questions again.

-W

Mister Fancypants

  • Bristles
  • ***
  • Posts: 296
  • Age: 42
  • Location: New York
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #44 on: September 25, 2014, 11:50:16 AM »
@davidlobsterwallace

Fellow New Yorker here, welcome to the forums!

I am going to address you questions inline one by one

1. Do we pay off the student loans now? Like, today? All of them? If not all, how much?

Not all... You are not thinking like a person with options and for a couple with your salaries and asset base you have many options. I am going to suggest some out of the box things here that others on the boards may not agree with or even be aware of, but then again my demographic matches yours fairly closely.

You have a brokerage portfolio of $1.1M and student loan debt of ~$400k @ 7.9%. Everyone here is telling you that is a hair on fire emergency, and well it is. But you can refinance that debt to much cheaper rates. Your just not thinking like a wealthy person, student loans may not be able to be refinanced directly but you have access to very cheap borrowing due to your other assets and income. As you might have noticed I started this paragraph with the brokerage portfolio, you are an accredited investor with over a million liquid in a taxable brokerage account(s). If you are not familiar with the firm Interactive Brokers you need to, they generally cater to more sophisticated investors, not your typical Mustachian. However one of the great features they offer is extremely low margin rates to portfolio margin accounts. Margin borrowing is taking a loan out using your portfolio as collateral. most brokerages only allow you to do this to buy additional stock, IB lets you take the proceeds and do what you want. Here is a link to the interest fees page: https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2 As you can see, borrowing up to $1M will only run you 1.09% so you can refi your student loans and save 6.81% annually not sell your investments and no longer have a hair on fire emergency.

You would never have a margin call as you only need to borrow $400k against your $1.1M and you can decide how to accelerate the payback with your savings.

You make too much to have gotten any tax benefit from having a student loan anyway so there is no reason to not shift the loan to a margin loan and if i am not mistaken margin interest is an itemizable deduction so you get a tax benefit for it as well. Cheddar or dandarc can confirm that, they are accounts on this thread.

Oh and by not selling to pay off the loans you have no capital gains either... who ever said all debt was bad?

2. How much should we start saving for Future Baby's college tuition? How are those of you with young or prospective spawn forecasting those kinds of needs? If you extrapolate out the current growth in tuition prices, it's something like $130k in 18 years. Is anybody actually saving close to $600,000 for this purpose?!

I am personally saving to fully fund both of my children's college education and at private school levels, they may or may not need that much, as they begin there elementary education I can adjust accordingly. NY state has one of the best 529's in the country, it is run by Vanguard, the fees are the lowest you can have, the investment options are broad. In fact if the state people live in has a crappy plan NYS is the recommended plan to use. The caveat is it the hardest to get your assets out of if you don't need them for education, so don't over fund if education isn't going to be in the cards. But lets be frank, you are both lawyers, you kid is going to college. NYS gives you a tax deduction up to $10k for married filling jointly so depending on your tax bracket annually savings of $685 to $882. Its something... woo hoo... The account works like a Roth on withdrawals, as long as it is an education expense completely tax free.

3. Do we need to leave Manhattan to live the dream? (The dream is not necessarily not working at all, but it is not having to work exhausting, soul-crushing hours at a moment's notice)

No but it makes it harder... We live in the burbs, moved back to where we grew up to have the family, both of our families still live here. Manhattan can be a big money drainer, but it is an awesome place to be, sometimes I just forgot how lucky I am (although not on my daily commute).

So you have options in the area, you just have figure out what it is that your dream is, NYC is not for everyone, but if you love it you love.

4. How long to hold onto DC rental property? Should we pay off the mortgage instead? I love the house (We lived there for 2+ years), and it is in a rapidly gentrifying neighborhood so the price is escalating, but will likely stabilize in the next couple years. Tenants are awesome, but currently not much spread: we are at break-even or slight net positive after mortgage interest deduction. I would like to move back to DC eventually, and would absolutely consider living there, but the house is also 100 years old and I can't help but thinking that something's bound to go wrong. If I knew 100% that I was going to move back to DC and live there, I'd pay it off, but at 3.5% and nothing out of pocket per month (the rental income also pays the taxes and homeowners insurance) it doesn't seem like an insane amount to pay for the optionality.

Your rate is low, don't pay it off, if it is going up now don't make a hasty financial decision as time is on your side and this is clearly more than a financial decision for you. Everything isn't just about dollars and cents, so since there is no pressure take it off the table and deal with some other things first.

My guess is there are other things you could do in general as you to optimize you finances and you gave a fair amount of info but with more details we could discuss further...

Like I said above you have lots of options, so take your time.

By the way what type of lawyers, I am always on the lookout for new lawyers to kill use

-Mister FancyPants
« Last Edit: September 25, 2014, 01:07:22 PM by Mister Fancypants »

sobezen

  • Bristles
  • ***
  • Posts: 374
  • Age: 890
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #45 on: September 25, 2014, 01:57:38 PM »
@ Mister Fancypants:  Those are some great ideas that really show some creative thinking especially the idea to consider Interactive Brokers portfolio margin accounts.

@ davidlobsterwallace:  If you can get a handle on your loans, I'd recommend still funding the NYS 529 plans even if it is less than the maximum limits. Regarding leaving Manhattan that's a personal choice for you and your wife. I am not married but as a cityslicker born and raised, I prefer living in San Francisco. In the future if I have a family I would still prefer staying in the City and raising a family. Finances aside I feel there are tons of opportunities and advantages raising a family in a major metropolitan environment. Still the suburbs appeals to some people for different reasons that do not appeal to me. I suggest discovering what you both value most about the community and environment you call home. Those values will help clarify if living in Manhattan or moving away (regardless of the financial reasons) is worth pursuing. Lastly, regarding the DC rental, I'd hold onto it for the growth and deductions. Also, you have no real pressing reasons to sell it now or in the foreseeable future.

Good luck and thanks for sharing your story. Let us know how it goes. Cheers!


eudaimonia

  • 5 O'Clock Shadow
  • *
  • Posts: 72
  • Age: 41
  • Location: Sacramento, CA
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #46 on: September 25, 2014, 02:09:39 PM »
As you can see, borrowing up to $1M will only run you 1.09% so you can refi your student loans and save 6.81% annually not sell your investments and no longer have a hair on fire emergency.

You would never have a margin call as you only need to borrow $400k against your $1.1M and you can decide how to accelerate the payback with your savings.

I think it's key to point out that this strategy is available to anyone with a $10k account at IB not just accredited investors. Also, far better to be a sophisticated investor rather than just accredited. Being accredited just means you have money. Not that you are necessarily smart enough to play with the big dogs.

Actually, you could indeed have a margin call with this strategy. Over the last 120 years the US Stock markets have had several drawdowns exceeding 45% and one that exceeded 60% (1896). If you were invested in all stocks under that scenario you would have received a margin call. Also, IB is notorious for automatic liquidations under margin call scenarios. You could be subject to massive fees as well as locking in huge losses in your portfolio.

The odds of that happening are exceedingly small at least according to US historical stock indices. Other stock markets have not faired nearly so well. The Nikkei suffered a 77% peak to trough drawdown starting in 1990 that it has yet to fully recover from.

Point being this is not free money. That being said I would be hypocritical to say "don't look into sophisticated" investing strategies since I do similar things myself. However, as my friend stated to me after selling his strategy to a hedge fund - "you must know what you are doing if you are going to swim with the sharks".
« Last Edit: September 25, 2014, 02:12:59 PM by eudaimonia »

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #47 on: September 25, 2014, 02:42:34 PM »
You make too much to have gotten any tax benefit from having a student loan anyway so there is no reason to not shift the loan to a margin loan and if i am not mistaken margin interest is an itemizable deduction so you get a tax benefit for it as well. Cheddar or dandarc can confirm that, they are accounts on this thread.

True, and true.

Itemized deduction for margin interest, but only to the extent you have investment income taxed at ordinary rates. These are interest income, non-qualified dividends, and short-term capital gains. Any un-used margin interest carries forward. You can also elect to have your qualified dividends and long-term cap gains treated as ordinary income in order to use up margin interest deductions. Sometimes that is a beneficial option.

Mister Fancypants

  • Bristles
  • ***
  • Posts: 296
  • Age: 42
  • Location: New York
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #48 on: September 26, 2014, 11:29:34 AM »
As you can see, borrowing up to $1M will only run you 1.09% so you can refi your student loans and save 6.81% annually not sell your investments and no longer have a hair on fire emergency.

You would never have a margin call as you only need to borrow $400k against your $1.1M and you can decide how to accelerate the payback with your savings.

I think it's key to point out that this strategy is available to anyone with a $10k account at IB not just accredited investors. Also, far better to be a sophisticated investor rather than just accredited. Being accredited just means you have money. Not that you are necessarily smart enough to play with the big dogs.

Actually, you could indeed have a margin call with this strategy. Over the last 120 years the US Stock markets have had several drawdowns exceeding 45% and one that exceeded 60% (1896). If you were invested in all stocks under that scenario you would have received a margin call. Also, IB is notorious for automatic liquidations under margin call scenarios. You could be subject to massive fees as well as locking in huge losses in your portfolio.

The odds of that happening are exceedingly small at least according to US historical stock indices. Other stock markets have not faired nearly so well. The Nikkei suffered a 77% peak to trough drawdown starting in 1990 that it has yet to fully recover from.

Point being this is not free money. That being said I would be hypocritical to say "don't look into sophisticated" investing strategies since I do similar things myself. However, as my friend stated to me after selling his strategy to a hedge fund - "you must know what you are doing if you are going to swim with the sharks".

I made mention that OP was accredited, that in itself was to make a point. They have enough money/income to make bolder moves. This isn't a typical case study where the OP has a car loan at 6.9% and we jump in and say refi, or they have 2 credit cards with high interest vs. a car loan and which to pay off first.

True anyone with $10k can take advantage of IB's margin offer, however I would not advise it to someone without a much large asset base, and even someone with a much larger asset base (like you said accredited doesn't mean sophisticated), however the OP did say there portfolio was diversified, based on there income, the mention of diversification and the portfolio size, I am making the assumption (Ass out of you and me) that they can handle the margin account to save a shit ton of interest, ~$2200/month.

As far as a margin call, they would have to lose 73+% if they are borrowing $400k on $1.1M assuming Reg(T), but IB uses Portfolio margin so you would get better then 50% leverage based on your assets so if you have any bonds in that portfolio you would need to draw down like 80-85%... So it is extremely unlikely that a margin call would happen. Especially if the goal is rapid debt reduction and the loan balance is being reduced with the surplus income which seems to be on the high side.

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8520
  • Registered member
Re: Reader Case Study - First, Kill All The Lawyers
« Reply #49 on: September 26, 2014, 04:02:33 PM »
As you can see, borrowing up to $1M will only run you 1.09% so you can refi your student loans and save 6.81% annually not sell your investments and no longer have a hair on fire emergency.

You would never have a margin call as you only need to borrow $400k against your $1.1M and you can decide how to accelerate the payback with your savings.

I think it's key to point out that this strategy is available to anyone with a $10k account at IB not just accredited investors. Also, far better to be a sophisticated investor rather than just accredited. Being accredited just means you have money. Not that you are necessarily smart enough to play with the big dogs.

Actually, you could indeed have a margin call with this strategy. Over the last 120 years the US Stock markets have had several drawdowns exceeding 45% and one that exceeded 60% (1896). If you were invested in all stocks under that scenario you would have received a margin call. Also, IB is notorious for automatic liquidations under margin call scenarios. You could be subject to massive fees as well as locking in huge losses in your portfolio.

The odds of that happening are exceedingly small at least according to US historical stock indices. Other stock markets have not faired nearly so well. The Nikkei suffered a 77% peak to trough drawdown starting in 1990 that it has yet to fully recover from.

Point being this is not free money. That being said I would be hypocritical to say "don't look into sophisticated" investing strategies since I do similar things myself. However, as my friend stated to me after selling his strategy to a hedge fund - "you must know what you are doing if you are going to swim with the sharks".

I made mention that OP was accredited, that in itself was to make a point. They have enough money/income to make bolder moves. This isn't a typical case study where the OP has a car loan at 6.9% and we jump in and say refi, or they have 2 credit cards with high interest vs. a car loan and which to pay off first.

True anyone with $10k can take advantage of IB's margin offer, however I would not advise it to someone without a much large asset base, and even someone with a much larger asset base (like you said accredited doesn't mean sophisticated), however the OP did say there portfolio was diversified, based on there income, the mention of diversification and the portfolio size, I am making the assumption (Ass out of you and me) that they can handle the margin account to save a shit ton of interest, ~$2200/month.

As far as a margin call, they would have to lose 73+% if they are borrowing $400k on $1.1M assuming Reg(T), but IB uses Portfolio margin so you would get better then 50% leverage based on your assets so if you have any bonds in that portfolio you would need to draw down like 80-85%... So it is extremely unlikely that a margin call would happen. Especially if the goal is rapid debt reduction and the loan balance is being reduced with the surplus income which seems to be on the high side.

So if OP has $1 million in securities they have two options to pull this off:

1) Transfer (ACATS) all securities to IB, and then withdraw $500k cash to pay down debt.  In this scenario, there's no tax event, but the interest isn't tax deductible (or dubiously so)

2) Transfer (ACATS) $500k securities to IB and liquidate the remaining $500k.  Pay down debt with the $500k cash and purchase $500k more securities on margin at IB.  In this scenario, there's a tax event (ideally a tax loss harvest!), but the margin interest is tax deductible.

I'm not a tax expert, so feel free to let me know if you see any errors in the above.

Note that the Fed has indicated they will start raising rates relatively soon, which could (likely?) correlate with losses in the stock market.  Thus, the very time you will want to eliminate your margin loan could be the same time your equity is falling.  Something to keep in mind. 

I would only borrow as much as I could reasonably pay off quickly.  Personally, I've used IB's margin to temporarily increase my cash liquidity cheaply, but not as a long term play.