Author Topic: Is using my minimal retirement savings for down payment a terrible idea?  (Read 3433 times)

PaulM12345

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Hello,

I have a question about what to do about my retirement savings. The question is a little multifaceted, and please keep in mind I am kind of clueless about this kind of thing (although trying to clue myself in).

My family has no debt and we rent a house. We have been relatively thrifty over the years. I got some money for college from a relative about 10 years ago, and I worked in college so I managed to have about $16,000 left over when I graduated. About six years ago I entered a brief period of investment excitement, and I invested it in Vanguard funds. Unfortunately, I didn't stick with the S&P 500 funds - I put about half in a total international stock fund (VGTSX) and half in an emerging market find (VEIEX) - why? Because I let my gambling get the best of me, I think. (Neither seem to be doing that well compared to S&P.)  I have about $12K in Roth IRAs, and $4K in a regular Individual account.

Okay, sorry for all the background, on to my main questions: 1) Should I redistribute all of these funds in a better-allocated distribution? What are the costs of selling them all and rebuying? Still don't quite understand the IRA system enough to know if I'd lose out.

2) My wife and I want to buy a house. I won't go into whether or not this would be a good investment here, but let's assume it IS for the moment (and we're planning on paying it off quickly).

Now, I believe that I can use my Roth IRA funds for a down payment on a first home purchase without paying early withdrawal fees. a) Is this true? b) How do I determine whether this makes sense or not? Do I prioritize getting a 20% down payment together? The standard doctrine is to not touch my retirement at all. They way I see it though, is that 16K is not that much money and it's not making money either. My wife and I have good careers and the potential to save a lot more over the next 10 years, at least moving in the direction early retirement, if not fully retired. I like my job and it is very flexible, so I don't particularly want to retire from it anyway.

So: What should I do? Cash out my $16K in about a years time and count it towards my down payment? Or save less than 20% and keep my investments invested? And either way, should I just go ahead and redistribute all my investments into a more intelligent allocation?

I would appreciate any advice. I'm trying to educate myself on all this stuff by reading books, but it would be helpful for me to get input from folks who have the particular perspective promulgated on this great website.

smedleyb

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justin, if you bought those funds in 2006, you're basically breaking even at this point, right?  The S&P is barely up since 2006 levels so I don't see why you think you've been (a) gambling with your investments (international growth is a long term bet, and a wise one I think) and (b) underperforming vs S&P 500.

Aside from that, I'm not a fan of borrowing against your retirement savings, for any reason.  If you and your wife have good jobs, start saving today for a future down payment (as well as make regular contributions to retirement savings if at all possible).   

If you have a problem with the way your money is allocated in your investment portfolio, there's plenty of sharp cookies around here who can steer you toward funds which might better suit your risk tolerance or long-term investment goals. 

PaulM12345

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Thanks for the reply.

Just to clarify about my investments: When I said gambling, I was sort of exaggerating... basically I meant "going against my original plan because I saw that other funds (e.g. emerging markets fund) were doing better than the S&P 500 fund and total stock market fund.

I just looked over the performance compared with S&P 500, and you are right - I'm not doing as bad as I thought. VEIEX since 2006 is out performing the S&P a little. I'd been looking at the last year, where it's doing more than 25% worse. Does this mean it is a good investment? Should I leave it there and start adding to another fund to diversify?

As far as spending the retirement on a down payment, that's what I was expecting to hear.
Thanks again...
« Last Edit: July 21, 2012, 07:52:50 PM by justinFarnsworth »

AdrianM

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Justin, lots of questions in there so will start at the begining and just work through them

1.a) Should I redistribute all of these funds in a better-allocated distribution?
What was your orginal plan? Did you plan to hold them into eternity? or when a certian condition occured sell them?
I ask because you need to have a plan!!!!!!!!
(The 6P's method of investing/trading "Proper Planning Prevents Piss Poor Performance")

1.b) What are the costs of selling them all and rebuying?
Mate you are smart enough to ask us question, How about you ask google, I am willing to wager that in 30mins you will have the answer.

1.c) Still don't quite understand the IRA system enough to know if I'd lose out.
See response above.

2) My wife and I want to buy a house. I won't go into whether or not this would be a good investment here, but let's assume it IS for the moment (and we're planning on paying it off quickly).
Lets just start with this, are you are buying a home or an investment? What is the differance?
A home is where you will live and raise a family.
An investment is something you plan on making you money.

2.a) Now, I believe that I can use my Roth IRA funds for a down payment on a first home purchase without paying early withdrawal fees. Is this true?
See answer to qestion 1.b

2.b) How do I determine whether this makes sense or not?
See answer to qestion 1.b

2.c) Do I prioritize getting a 20% down payment together?
Yes, this is a priority, why? it will teach you to save and build in you a habit of saving.
I am also dubious as to your ability to save, as after 6 years you want to access you retirment savings to buy a home, you speculate that it will be a good invetment and you make no suggestion that you have already saved a considerable sum except for a general "we are releatively thrifty" statment. Sounds to me like you looking for someone to justify your actions.

3)I would appreciate any advice. I'm trying to educate myself on all this stuff by reading books, but it would be helpful for me to get input from folks who have the particular perspective promulgated on this great website.
So have you even begun to read through MMM reading suggested list?
http://www.mrmoneymustache.com/the-mmm-reading-list/
Start with the Richest man in Babylon

Enjoy the journey.
Adrian

PaulM12345

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Adrian,

Ha - thanks for the straight talk. I guess I need it.

What was my original plan? I don't even remember. I was single, childless, and just out of college, and now I'm married, with kids, and with a profession. I guess the best thing to do now is to come up with a current plan. So thanks for reminding me...

As for the Googlable stuff, yes you got me. I could have looked it up myself. I guess I was just throwing it all out there to provide a picture of my general lack of knowledge.

I see your point about the house as investment versus home. For me it is primarily a home that I hope will, over time, save us money when compared to indefinite renting. So only in that sense is it an investment. There is also a potential for using part of the home for my business, which would be less feasible in a rental. So in that sense it is partly a business investment.

As far as whether we are frugal; we were full-time students for about 5 years. We managed to save money during that time, while also racking up student debt. Upon graduation we used our whole stache (if you can call it that - 25K or so) to pay off all our loans. I guess compared to others here we aren't frugal (is going to grad school every frugal?) but are at least in no debt and we are currently saving money. But yes, saving up the down payment would probably be a good exercise in frugality.

Thanks for the book tip. I just checked out a few of his investment books, but I didn't reserve that one - I will.

CptMrPants

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I think people are on the same page here.

There are few, non-emergency reasons to raid retirement funds given normal circumstances.  When you pull out, you loose time and we all know that time is the greatest assert in compounding returns.

I think Adrian is getting to the point that if you're buying home, a place to call your own, to be patient and save for down payment.  Leave your funds alone.  A home isn't an investment, it's a place to hang your hat.  Any return on a home is a bonus. 


$25k in a down payment on a $100k house= 1. $25k tied into house, 2. Lost compounding time, 3. ($3,000) interest payments per year (and shrinking)
vs.
$25k in a bond fund or even a high-yield checking account (3%) = $25k liquid, 2. Compounding time, 3. +$750 interest earned per year (and growing)

That's almost a $4,000 swing in your budget.


The other side on this, is that you could buy an investment property.  Depending on what the housing stock in your area lends to, you might purchase a 2 or 4 family building, live in one unit and rent out the others.   If you buy well, you can end up with a great place to live and a return on your investment.