Author Topic: Save for house, build EF, invest more? COVID has us questioning what to do next  (Read 1351 times)

PNW_FIRE

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Background: Married (him late 40s & her late 30s); two young kids and done; VHCOL area; own one vehicle outright; rent home; no debt/no loans of any kind.
Caveat: Our life/economic situation changed within the last couple years for the better. Started saving for retirement in the past ~2 years; recently have seen increases to our incomes and feel like we’re finally making progress on our financial goals (we know we’re late to the game and have lots of catching up to do).
Current combined income: $182K/year
Savings: $140K saved in high interest savings account
Debt: ZERO debt
Retirement: Combined current value total of $101,000
   Him: $22K in Traditional 401K and $11K in Roth IRA
   Her: $17K in 457 Plan; $11K in Roth IRA; $40K in contributions to work pension plan
Spending: Don't track in detail but believe we're spending around $5k per month. We're auto investing $55K/year in tax-advantaged accounts and have about $3K extra each month that goes into savings.
Long Term Goals in priority order: 1. Retire in 18 to 20 years. 2. Own a home. 3. Have some $ to help kids with college expenses.

Question:

We would love to buy a house in the next year or two if A) we’re able to maintain our jobs and B) the local housing market cools down. We’d probably only buy if we could get something for ~$500K (in our VHCOL area, the “rent vs buy” calculator says this would be better than renting in the long term). We currently have $140K in savings (so if we do buy a house in the next few years, at least $100K of our savings would go to the down payment, and the rest would be our EF).

Given our personal economic situation & goals, and the current world situation, should we:
1. Keep piling money into our savings account? This is what we’re currently doing because it seems like the “safest” decision given the uncertainty in the world. Although I'm not sure this is really necessary. We have the potential down payment if we end up buying a house and a decent amount left over for an EF, so I'm not sure why we'd keep doing this. But again, the idea of having lots in savings/liquid feels really reassuring at this time. 

2. Stop putting more money into our savings and instead take advantage of the market being on “sale” and increase our investments. We currently max out all tax-advantaged retirement accounts (minus husband's crappy 401K, where he’s contributing only around $15K instead of the full $19,500). So we could start maxing out his 401K and put additional savings into a taxable brokerage account and/or 529 plans for the kids.

3. Something else we’re not thinking of? We're very new to investing, the FIRE movement, etc. and the current world situation has us really questioning what we should do with our money (grow a huge ass emergency fund to be safe, or invest more because the market is on sale, or save for a house because the housing market will possibly cool; etc.).

AardvarkPuppies

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1.  If you're already maxing out all of your tax advantaged space, you can use the investment order as a reference.  https://forum.mrmoneymustache.com/investor-alley/investment-order/

2.  I personally think that continuing to dump money into savings for the house is maybe a decent idea if you're in the market for a house.  The less of a mortgage you have, the better in my book.  This is also not a bad time to have a big safety net if your jobs could be in limbo due to COVID.

I would consider tracking your spending, at least for a while.  I have been using YNAB for years with good results.   What gets measured, gets managed.  Most people don't have any idea what they spend.  It's especially easy to not realize how much you spend when your combined income is high (at least I consider it high, it may not be that high for Seattle or BC or whatever expensive PNW area you're in).

You're saving $91,000 a year, which is half your income.  You're definitely doing something right!

zolotiyeruki

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AardvarkPuppies is right, you need to track your spending.  If your combined income is $180k, you save $55k, and you spend $6k, where's the other $65k going?  It's not *all* going to taxes.  When you track your spending, you'll find things you weren't aware of.

The $140k you have in the bank is enough for a 20% down payment on a house up to $700k.  That's well above the amount you mention ($550k) spending on a home, so I'd suggest socking the rest of your excess income away in higher-return investments.  The Investment Order thread is a great place to start.

Dicey

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Hi, I'm Dicey, a well-known fan of big, fat emergency funds and long, fixed-rate mortgages on affordable houses. Welcome to the MMM Forum!

If your present housing situation is agreeable, I'd keep renting for now while you figure this out. If you bolster your cash position, would you be tempted to spend more on a house? Is the price you're hoping to spend remotely realistic for your area or does it depend on a huge drop in values?

As to the 529, read this first: https://www.gocurrycracker.com/why-gccjr-has-no-529/

I third the Investment Order suggestion. Customize it since you have no debt, then memorize it.

Finally, and most importantly, your retirement savings are way low for your age. Practically a hair-on-fire emergency. It looks like you've only gotten serious about it for the last two years. You've got some catching up to do. The sooner you stuff those accounts, the faster they will begin to do the heavy lifting for you.

PNW_FIRE

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Thanks, all. This is helpful.

I agree that our meager retirement savings is very concerning. As such, and based on the Investment Order, I think the best choice for our next step is to:

1) Max out husband’s 401K (which he’s almost already doing)

and

2) Invest more for retirement by opening a taxable account. We would throw any extra monthly savings into the taxable account rather than opening up 529s for the kids (since we need to prioritize our retirement over their schooling) and we would stop contributing to our EF/Possible Future Home Down Payment account (I think we have enough in there for now and, as Dicey mentioned, the more cash we save the more tempted we’d be to spend more on a house, if we ever end up deciding to go the home purchasing route).

QUESTION/HELP:

The one thing stopping us from opening a taxable account is analysis paralysis. We don’t know what to invest in for a taxable account specifically! We’re new to investing and have all our retirement accounts in Target Date Retirement Funds. If we open up a taxable account, from my understanding, we’d want to hold only equities in the taxable account rather than bonds. Having TDRFs in all of our tax-advantaged accounts and also investing in something like VTSAX in the taxable account would obviously throw off our portfolio asset allocation. If we decide to open a taxable account, would we have to move all of our retirement investments into individual funds (instead of TDRFs) so that we could better manage our asset allocation across our portfolio, or is there a way around this?

zolotiyeruki

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What makes you think you'd want only equities in the taxable account?  Because of the lack of taxes on capital gains?

Given how far you are from FIRE, I'd suggest you plow everything into 100% equities, including moving your tax-advantaged accounts.  At this point, your TDRFs are probably almost 100% equities anyway, but you could transfer those into 100% equities as well if you wanted (it's what I'd do).  Or, you could just let them be, and make sure your taxable account is 100% equities.

Dicey

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Whoops, I meant to mention this in my last post. Go read JLCollinsnh's Stock Series. It has the answer to all your questions. And I completely agree that you want to be very close to 100% equities with all the new money. The uncertainty caused by CV19 could be the buying opportunity of a lifetime, provided you can take a long term POV and not panic if your investments enjoy a little roller coaster ride along the way.

https://jlcollinsnh.com/stock-series/

You are going to be so happy you did.

PNW_FIRE

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Thanks for the suggestion on moving to 100% equities and the JL Collins link (I've read a few of the articles previously and enjoy his simple approach). I'm comfortable with increasing my asset allocation more heavily towards stocks, but will keep some bonds as I'm not 100% comfortable with all equities (having some bonds just "feels" better personally). 

Changes I'm making:
-I went ahead and opened a taxable brokerage account where I'll dump all future monthly savings (all into VTSAX). And I have about $5 or $10K that I can invest there now to kick it off.

-I switched my future contributions to my 457 account out of the Target Date Retirement Fund and into single funds (90% VTSAX and 10% VBTLX). This has the benefit of slightly better expense ratios and better ability to control asset allocation across my portfolio.

-I'll make my future Roth IRA contributions to VTSAX instead of the Target Date Retirement Fund.

Question:

-Do I need to do anything with the money I already have invested in the Target Date Retirement Funds in my 457 and Roth IRA? I've changed my future contributions to single funds. Can I just leave my previous contributions alone as I begin with my new single funds strategy?

-For the $5K or $10K I have to invest right now in the taxable account, do I just dump that in all at once or spread it out? Or, given the current market volatility, should I wait to invest on a day in the next couple weeks when there's a dip in the market? Basically, do I just invest this money on Monday, for example, no matter what? Or agree I'll invest this $ all by June and try to see which day is best over the next few weeks?

zolotiyeruki

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You don't *have* to do anything with your current TD investments, if you don't want to.  The amount that's in them won't make much of a difference to your retirement date.

For the $5-10k, just go ahead an dump it in.  Otherwise, you're trying to time the market.  You could dollar cost average it, but it's not worth the effort.