Author Topic: Deciding between 403(b), VTSAX, and saving for down payment on a house  (Read 4504 times)

mrteacher

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Hey all, I am a 26 year old trying to decide how best to optimize the allocation of money I save each month. In the past few years my savings have gone to maxing out my Roth IRA, funding an emergency fund, and, this past year, investing in VTSAX. Now, I am taking advantage of the 5% employer match for my 403(b), still fully funding the Roth, and deciding what to do with any leftover: beef up the 403(b), invest in VTSAX, or save for a down payment (Research cautions against keeping down payment savings invested in the market.) Edit: I've decided not to save for a down payment.

Gross pay: $54,000 (this is my base. As a teacher, I'll make quite a bit more for coaching two sports, running clubs, and for any summer work I do - this number could be a bit north of $60,000, but I want to go off just my base, as stipends can change).

After health, state/income tax, the 5% 403(b) deduction, full Roth contribution, and my monthly expenses, I have around $700-$800 leftover/month (just under $10,000/year).

- Do I contribute more than 5% to my 403(b), even though the employer match is capped at 5%? FWIW, when I run the numbers and max out my 403(b) on the Cash Flow worksheet, I'm left with -$233/month. I could cap out around $14,000 of my gross to the 403(b), assuming I make no more than my base salary.

- Do I plop that right into VTSAX? I currently have $12,000 invested in VTSAX.

- Decided not to do this: Do I put some/all in a place TBD for a down payment on a home? I currently have almost $20,000 in a savings account that is semi-earmarked for a down payment - I may address that and put it somewhere that will make me more money. I'm at least three years away from buying...potentially 5+ years away.

- Or is there another alternative that I have not presented that bears consideration...Should I consider funding my HSA?

Thanks everyone!


« Last Edit: September 01, 2015, 08:44:49 AM by mrteacher »

BarkyardBQ

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #1 on: August 25, 2015, 01:39:48 PM »
How much will you be making in 3-5 years? Could you come up with the cash then and try to invest more now?

The tax savings by putting more into 403b now will benefit you for a long time, while holding cash for 5 years will slow everything down.

Does your employer offer a 457b as well?

Argyle

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #2 on: August 25, 2015, 01:41:24 PM »
How much does a reasonable house cost where you live?  Are you planning to live in the area for quite a while?

mrteacher

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #3 on: August 25, 2015, 01:45:05 PM »
Salary in 3-5 years will be anywhere from $65,000-$75,000. My employer does not offer a 457b.

I'm in the Boston area; houses - even simple, starter homes - are $$$. But, my long-term girlfriend is from Michigan. We may end up moving there if/when we are married, in which case a 20% down payment would be drastically smaller/easier to come up with. (Granted, my salary would take a hit, too).

BarkyardBQ

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #4 on: August 25, 2015, 01:48:40 PM »
Sounds like you have a lot of changing options...

I would try and defer more income to the 403b, keep investing in the Roth, and taxable account for now.

If you decide to stay in Boston, and in 3-5 years want to buy a house, you can probably make up the cash by lowering your 403b contributions. Your future income may make both of these real easy on you. If you do move instead of stay, you will have assets instead of cash and you can reevaluate your home purchase based on your new income and savings ability.

I'm a red panda

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #5 on: August 25, 2015, 01:50:11 PM »
I would be putting a lot more into the 403b before investing in taxable accounts (VTSAX). 

However, I do invest in taxable accounts without fully maxing my 403b.  That said- if the house is a few years down the road, there is no reason you can't save for it IN an investment account.  It is a gamble, but holding the cash doesn't make a lot of sense to me if you don't have a date for the purchase.

mrteacher

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #6 on: August 25, 2015, 05:06:58 PM »
Yeah, the more I've been thinking about having cash kicking around for the eventual down payment, the more it seems silly. The comments so far affirm this feeling.

With the home purchase not happening for likely 5+ years, I'd be a fool to not have that money working for me. This is especially true if our home purchase is in Michigan, where, in the areas we are looking, the type of home we'd want can be had for $90,000-$140,000. A 20% down payment there is $20,000-$30,000. Obviously not a small amount of money, but a hard number to achieve with the both of us saving hard for 1-2 years (and, potentially, pulling back on the 403(b) contributions.)

Or, as iowajes says, I could withdraw money from VTSAX a year or two before I make the home purchase and slide it into a more conservative investment option.

Other thoughts?

mrteacher

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #7 on: August 28, 2015, 10:02:47 AM »
Anyone have fresh insight or a different opinion?

BarkyardBQ

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #8 on: August 28, 2015, 10:32:44 AM »
We personally don't plan to ever pull money out of stocks until we are retired. Using stocks for other purchases or emergencies seems dumb if you are currently working for income. While we have our 'emergency' fund invested, if we had a true emergency we'd probably open a 0% promo credit card and place it there while we slowly paid it off, that's option 1. Option 2 would be to take any cash we're currently sitting on for projects etc; and lastly we would just slow down contributions to pretax accounts for a couple months and try to make it back in before year end.

I don't see any point in selling VTSAX down the road and putting it in more conservative funds for your home purchase. To get the full momentum of FI/RE you need to invest everything you can into stocks except for when you need cash. My suggestion stays the same then, invest in stocks until you are more certain of your future needs for a downpayment, then when you are 1-2 years out from buying modify your contributions and start holding cash in a cash savings account. The more you reduce your spending now, the quicker you can come up with the cash in the future by not deferring it to your 403b and taxable accounts.

Example. We are currently living in a very low cost area, we plan to stay here for 5 years and will probably move about 1 year before we'd be FI. We are maxing out retirement accounts and stashing everything extra in to taxable accounts. When we move, we will likely rent near work for the first 6 months until we figure out what neighborhoods, communities, schools etc provide the options we want. During those 6 months we will probably just save cash for a downpayment, if we need more we will just keep saving cash while we look and rent, but I definitely wouldn't pull/sell/rebalance VTSAX in our taxable account 1-2 years before the move just to hold cash for an eventual purchase... you severely deplete those shares ability to compound for your future retirement.

It's market timing. How do you know what the market will be doing when you decide to sell VTSAX?
You will pay taxes on your gains when you sell VTSAX... you will also pay taxes on the income you don't defer too.
« Last Edit: August 28, 2015, 10:53:34 AM by BackyarBQ »

justajane

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #9 on: August 28, 2015, 10:41:30 AM »
You could open a Total Bond (VBFMX or VBTLX) fund with Vanguard as a compliment to your VTSAX. That's what we have done. We put 10K into each to start and have been adding to each monthly . We are treating those like our "mortgage payoff fund" if we ever decide to do that. For us, it's a decision to do that instead of prepaying our mortgage. It gives us more freedom that way.

The reason for the Total Bond over the VTSAX is that it will fluctuate less and be more stable if and when you decide to take it out for a down payment.

Retire-Canada

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #10 on: August 28, 2015, 12:06:44 PM »
Yeah, the more I've been thinking about having cash kicking around for the eventual down payment, the more it seems silly. The comments so far affirm this feeling.

Other thoughts?

You nailed it. Invest now. Get your money working for you.

When you are ready to buy you can divert all savings to the project and it will force you to take some time to find a good house deal as you will be watching sales and getting to know the potentially new area over a year or two as you save.

Derrian

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #11 on: August 28, 2015, 03:53:41 PM »
If you are working for a public school district or charter in massachusetts, you will have access to a 457 plan (masmartplan). They don't do a good job advertising it, but it is available to all public employees in mass (I'm a teacher in the boston area).

Also, take a look at the salary schedule for your district or nearby districts. Many will substantially increase your salary for having a master's degree (i have 17,000 bump by switching districts and completing my degree). If you are planning to stay in education and you don't already have a degree, take a look at some of the options for earning your Master's degree or continuing to earn graduate credits to keep moving up in salary lanes.

Salary in 3-5 years will be anywhere from $65,000-$75,000. My employer does not offer a 457b.

I'm in the Boston area; houses - even simple, starter homes - are $$$. But, my long-term girlfriend is from Michigan. We may end up moving there if/when we are married, in which case a 20% down payment would be drastically smaller/easier to come up with. (Granted, my salary would take a hit, too).

Jeremy E.

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #12 on: August 28, 2015, 04:06:54 PM »
Hey all, I am a 26 year old trying to decide how best to optimize the allocation of money I save each month. In the past few years my savings have gone to maxing out my Roth IRA, funding an emergency fund, and, this past year, investing in VTSAX. Now, I am taking advantage of the 5% employer match for my 403(b), still fully funding the Roth, and deciding what to do with any leftover: beef up the 403(b), invest in VTSAX, or save for a down payment (Research cautions against keeping down payment savings invested in the market.)

Gross pay: $54,000 (this is my base. As a teacher, I'll make quite a bit more for coaching two sports, running clubs, and for any summer work I do - this number could be a bit north of $60,000, but I want to go off just my base, as stipends can change).

After health, state/income tax, the 5% 403(b) deduction, full Roth contribution, and my monthly expenses, I have around $700-$800 leftover/month (just under $10,000/year).

- Do I contribute more than 5% to my 403(b), even though the employer match is capped at 5%? FWIW, when I run the numbers and max out my 403(b) on the Cash Flow worksheet, I'm left with -$233/month. I could cap out around $14,000 of my gross to the 403(b), assuming I make no more than my base salary.

- Do I plop that right into VTSAX? I currently have $12,000 invested in VTSAX.

- Do I put some/all in a place TBD for a down payment on a home? I currently have almost $20,000 in a savings account that is semi-earmarked for a down payment - I may address that and put it somewhere that will make me more money. I'm at least three years away from buying...potentially 5+ years away.

- Or is there another alternative that I have not presented that bears consideration

Thanks everyone!
I know you aren't ready to buy a house now, but read this before even saving for a down payment
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
Next here is a post that will teach you about some of your different options, it will tell you that you should probably max your 403b out, it will also help you decide if you should continue doing Roth IRAs, or instead do traditional IRAs
http://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/
Also, You should Prioritize the employer match over your other investments.
Lastly, try to read JLCollinsNH's entire stock series if you have time, so you can be better informed in your financial decisions.
http://jlcollinsnh.com/stock-series/

mrteacher

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #13 on: September 01, 2015, 08:26:52 AM »
Thanks everyone for the thoughtful and helpful replies. I read the jcollins series a week ago, actually, and learned quite a bit.

I like the idea to, when I am actually planning to buy a house, switch up my savings and focus all savings on the down payment. With 1-2 years super focused down payment savings I would imagine that I (or, we!) could easily hit 20% of the house cost - especially if the house purchase is in Michigan. 

As I work for a private school I do not believe I am offered a 457 plan. Also, I completed my Master's degree a couple years back - I go back and forth regarding a PhD/EdD, as I'd like to be an administrator somewhere down the road.

One option I forgot to mention is that I can contribute to a HSA. I'm less familiar with those than I am the other options I've been discussing here, and I, thankfully, have no real medical costs at the moment. But, I understand that have fantastic tax advantages, so I plan to do some more research.

Thanks for all the opinions!

tyort1

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #14 on: September 01, 2015, 08:38:12 AM »
Of all the options, I would NOT recommend saving up for a house, if by that you mean keeping cash in a savings account.  I'd still invest in an index fund any extra saved. 

But here's something to consider - if you save and invest money not only does it grow much faster due to compound interest, but it gives you flexibility.  If you put your $$ into investments and a killer job comes up in a few years in another town or city, you can move much more easily.  If you buy a house, you are more likely to feel like you are stuck in Boston no matter what. 

Boston is a cool city, but there are LOTS of cool cities out there, and buying a house sort of roots you down more than if you simply invested and grew your stache.  Also, one thing to consider with a house - if you need to sell, you end up losing a ton of equity during the sale process.  When we sold our condo, we had $120k in equity before the sale, that was down to $95k after all the costs and fees.  You have to factor that in if you are looking at buying a house - even when the market goes up, you're gonna lose a chunk when you sell.

mrteacher

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #15 on: September 01, 2015, 08:41:12 AM »
Good points, tyort. I've had confirmed here what I was thinking on my own: it does not make sense to buy a house in the next couple years, and it makes even less sense to accumulate savings for the eventual down payment in a low-interest savings account.

Now I need to decide how big of an emergency fund I want to have in that low-interest savings account, and dump the rest into my taxable account.

Jeremy E.

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #16 on: September 01, 2015, 10:31:52 AM »
Thanks everyone for the thoughtful and helpful replies. I read the jcollins series a week ago, actually, and learned quite a bit.

I like the idea to, when I am actually planning to buy a house, switch up my savings and focus all savings on the down payment. With 1-2 years super focused down payment savings I would imagine that I (or, we!) could easily hit 20% of the house cost - especially if the house purchase is in Michigan. 

As I work for a private school I do not believe I am offered a 457 plan. Also, I completed my Master's degree a couple years back - I go back and forth regarding a PhD/EdD, as I'd like to be an administrator somewhere down the road.

One option I forgot to mention is that I can contribute to a HSA. I'm less familiar with those than I am the other options I've been discussing here, and I, thankfully, have no real medical costs at the moment. But, I understand that have fantastic tax advantages, so I plan to do some more research.

Thanks for all the opinions!
Here is a cool article about HSAs that might help you learn a little.
http://www.madfientist.com/ultimate-retirement-account/
here's another
http://jlcollinsnh.com/2014/08/18/stocks-part-xxv-hsas-more-than-just-a-way-to-pay-your-medical-bills/

mrteacher

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Re: Deciding between 403(b), VTSAX, and saving for down payment on a house
« Reply #17 on: September 01, 2015, 11:13:58 AM »
Thanks everyone for the thoughtful and helpful replies. I read the jcollins series a week ago, actually, and learned quite a bit.

I like the idea to, when I am actually planning to buy a house, switch up my savings and focus all savings on the down payment. With 1-2 years super focused down payment savings I would imagine that I (or, we!) could easily hit 20% of the house cost - especially if the house purchase is in Michigan. 

As I work for a private school I do not believe I am offered a 457 plan. Also, I completed my Master's degree a couple years back - I go back and forth regarding a PhD/EdD, as I'd like to be an administrator somewhere down the road.

One option I forgot to mention is that I can contribute to a HSA. I'm less familiar with those than I am the other options I've been discussing here, and I, thankfully, have no real medical costs at the moment. But, I understand that have fantastic tax advantages, so I plan to do some more research.

Thanks for all the opinions!
Here is a cool article about HSAs that might help you learn a little.
http://www.madfientist.com/ultimate-retirement-account/
here's another
http://jlcollinsnh.com/2014/08/18/stocks-part-xxv-hsas-more-than-just-a-way-to-pay-your-medical-bills/

From the little reading I've done it seems that the HSA option is best for those who are already maxing out 401(k)/IRA. Is this necessarily the case?