Author Topic: May need to raise lump sum of cash in 2-3 years. How to manage investments?  (Read 2694 times)

Ursus Major

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Currently my GF and me live in a house that is owned by her. I am FI and planning to RE soon, but she wants to work for another 2-3 years. Currently we are discussing to move to a different town, after she retires and to buy a condo ($500k-$600k) together. Now she could pay her half of the condo from the sales proceeds of her house, but I would need to have enough liquidity either for a substantial downpayment or - if the banks won't finance me because of RE - even have up to $300k in cash.

Now the question for me is how to approach this: Except for $100k in an emergency fund (which I want to use to ride out down markets, once RE), I have all my after-tax money (ca. $1.9M) in stocks. Do I start slowly selling some stocks to raise more cash to have cash ready, when we buy the condo or do I stay put in the market and only sell, if I really need to, that is we buy the condo and the banks won't finance the purchase?

Some random contradictory thoughts I have on this:
- The stock market isn't exactly cheap. Raising at least some part of $300k would protect me from having to sell stocks, if the market tanks. Anything can happen in a 2-3 year period and downmarket protection might be more valuable than any misses on the upside.

- It isn't really clear, if we actually are going to move and buy a condo. Anything could happen in 2-3 years, so starting to move now on this is kind of early. And having up to $300k around in cash is a dead weight with current interest rates.

- On the other hand: While $300k might be a dead weight, the rest of the after-tax money (ca. $1.6M) would remain in stocks, so the asset allocation isn't totally out of whack and the $300k cash can function as a bond proxy for 2-3 years, even if we don't buy the condo after all.

So what would you do here? And if you would raise at least some cash, where would you park it? (The best I've come up with so far is a 5yr CD at 2% with a 5 months interest penalty at Ally Bank, so after 12 months I would be ahead of a 1% online savings account).

protostache

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You could look into a securities backed loan or line of credit, also called a "pledged asset line". That would get you the cash you need to pay for your half while being able to sell assets on your own schedule. You could even set this up now with a portion of your assets (say $600k worth) just so it's ready to go if/when you need it. If you don't need it, no harm done, just transfer the assets back into your normal brokerage account.

nereo

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well, let's see here.  You list your $1.9MM in 'after-tax' money, $100k in an ER fund and no mention of tax-advantaged accounts.  Also, you haven't mentioned what your planned spending level will be in ER, but let's say you have $76k/year at your disposal post ER (using a 4% WR).

A securities backed loan is certainly an obvious way of bridging that gap if the bank won't qualify you for a standard mortgage (but ask at your local credit union - with your assets a $300k mortgage with 20% down should be a no brainer for them... especially if you are co-signing with your GF and she's providing half the cost in cash).

I'd hate to have that much cash sitting as dead weight, especially for something that 'might' happen in a couple of years. Worse comes to worse, you could use a combination of your taxable accounts and some of your ER fund to buy the home and be left with a stach north of $1.6MM (giving you an $64k/year with no mortgage and fairly low tax burden).

When this goes from a possibility to something that you are actively considering in the next 3-6 monhts you can make the call about how much of your stocks you should sell, how much of your ER fund you should use and how big mortgage/line of credit you should take out.  A lot can happen in 3 years but you should have the upper hand regardless.

MustacheAndaHalf

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Why do you need 50% down on a $600k condo?
Instead of guessing, you could walk into a lender that services the area you're moving to and ask for pre-qualification now.  That just means the bank looks at whatever numbers you provide, and estimates what you can afford.  You don't want the loan now, but are planning for the future - and figuring out what lender you might pick.  I suspect they would only require 20% down, or $120k between you and your girlfriend.

Assuming you both plan to retire in 2-3 yrs, you better both have $60k lying around!  But that seems like a more reasonable allocation for the down payment.  And if you're still unsure, you could pull $20k or $40k out of stocks now, and only pull the full $60k when you're confident of the plan to buy a condo.

MishMash

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Couldn't you just switch off dividend reinvestment for a few years? 

nereo

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Couldn't you just switch off dividend reinvestment for a few years?

Confused - what would this accomplish?  I'm not following the logic here.

MishMash

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Couldn't you just switch off dividend reinvestment for a few years?

Confused - what would this accomplish?  I'm not following the logic here.

He's got 1.9 million dollars in stocks, assuming it's after tax, and has a 2% dividend rate (standard for most funds like VTSAX, you can get higher), that's almost 120k in dividends/gains payouts over 3 years...without having to sell any of the funds.  Doesn't make sense if he isn't planning on needing it since it can continue to earn 2% instead of 1% in a savings account but if he needs more cash on hand and doesn't want to sell...well there's 6 figures in dividend payouts alone.

nereo

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Couldn't you just switch off dividend reinvestment for a few years?

Confused - what would this accomplish?  I'm not following the logic here.

He's got 1.9 million dollars in stocks, assuming it's after tax, and has a 2% dividend rate (standard for most funds like VTSAX, you can get higher), that's almost 120k in dividends/gains payouts over 3 years...without having to sell any of the funds.  Doesn't make sense if he isn't planning on needing it since it can continue to earn 2% instead of 1% in a savings account but if he needs more cash on hand and doesn't want to sell...well there's 6 figures in dividend payouts alone.
right, but I was assuming he'd need that money (and possibly more) for his living expenses, since he's about to RE.  So I don't see how that answers the question of how to come up with up to $300k in 2-3years to buy a condo with.

...or maybe I'm just misunderstanding the OP. Clarity is always appreciated.

MishMash

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Couldn't you just switch off dividend reinvestment for a few years?

Confused - what would this accomplish?  I'm not following the logic here.

He's got 1.9 million dollars in stocks, assuming it's after tax, and has a 2% dividend rate (standard for most funds like VTSAX, you can get higher), that's almost 120k in dividends/gains payouts over 3 years...without having to sell any of the funds.  Doesn't make sense if he isn't planning on needing it since it can continue to earn 2% instead of 1% in a savings account but if he needs more cash on hand and doesn't want to sell...well there's 6 figures in dividend payouts alone.
right, but I was assuming he'd need that money (and possibly more) for his living expenses, since he's about to RE.  So I don't see how that answers the question of how to come up with up to $300k in 2-3years to buy a condo with.

...or maybe I'm just misunderstanding the OP. Clarity is always appreciated.

100k is currently in ER fund, live cheaply off of that, harvest the 2-3% each year and toss it into the cash account, sell a chunk if absolutely needed in 3 years but this way would mitigate sitting on more of a hunk of cash for a "maybe" purchase years in the future vs selling off 300k immediately and sitting on it (if the condo does indeed cost 600k too).  He'd still have 6 figures in cash when the time came, combined with sale proceeds from the previous house no reason he shouldn't be able to get a cheap mortgage so I don't see a reason to sit on 400k in cash for years.  But I'm with you, more details are probably needed. 

Ursus Major

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Thanks so much to all of you, who responded so far. It appears that I wasn't as clear and precise as it is necessary, so here is some more info and clarification.

I am actually planning to RE in a few weeks with the following assets:
- Taxable accounts $1.9M (all stocks) [About $1.2M are not in a U.S. account, but in an account in my country of origin, in case that matters.]
- Emergency fund: $100k (cash)
- Roth IRA       ca. $100k (all stocks)
- 401k & IRA   ca. $650k (>90% stocks)

My annual expenses would be around $60k-$65k, so I'm under 3% WR, thus no problem with RE (or so I hope ;) ). Dividends in my taxable account are about $40k p.a., so my plan is to cover the rest of my expenses by selling some stocks as needed. The Emergency fund seems high, but it's also a cash bucket to cover 2-3 years of a down market, so I don't have to sell stocks in a bad market.

So for our current living situation, I'm set up just fine, but now comes the eventuality of buying a condo in a few years time.

Why do you need 50% down on a $600k condo?

It would be 100% down on my half of a $600k condo. My GF would cover the other half. Essentially this would be to cover the situation, if I am unable to get a mortgage, because of RE, so I would need to pay cash.

Couldn't you just switch off dividend reinvestment for a few years?

Oh, I will, but as I'm going to RE in the new few weeks, these dividends will cover my living expenses.

I hope that this clarifies the situation a bit better,  but please feel free to ask away, if anything else is not clear.

protostache

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There's another way to approach this. Would your GF qualify for the mortgage on just her income? If so, you could just pay your half of the standard 20% downpayment and cashflow your half of the mortgage payments out of dividend income. There's no reason why you can't have both of your names on both the mortgage and the deed, even if you only use one of your incomes to qualify.

Edit: Re-reading your original question, it sounds like your GF would be getting $300k from the existing house and you need to come up with $300k for the balance. If your GF can qualify for a $300k mortgage on her own, then I think the plan above would make sense. Her $300k counts as the downpayment on the mortgage, her income qualifies you for said mortgage, both of your names are on the mortgage and the deed, and your dividend income actually pays the mortgage every month.
« Last Edit: April 05, 2016, 01:38:51 PM by protostache »

nereo

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There's another way to approach this. Would your GF qualify for the mortgage on just her income? If so, you could just pay your half of the standard 20% downpayment and cashflow your half of the mortgage payments out of dividend income. There's no reason why you can't have both of your names on both the mortgage and the deed, even if you only use one of your incomes to qualify.

Edit: Re-reading your original question, it sounds like your GF would be getting $300k from the existing house and you need to come up with $300k for the balance. If your GF can qualify for a $300k mortgage on her own, then I think the plan above would make sense. Her $300k counts as the downpayment on the mortgage, her income qualifies you for said mortgage, both of your names are on the mortgage and the deed, and your dividend income actually pays the mortgage every month.

I like it!
Of course, this has to be something GF it amenable to.  You could write a legally binding loan stating that you 'owe' your GF $300k should you not pay the entirety of the mortgage over xx years.

My guess is, with that much of an ER fund + a sub 3% WR you'll find yourself with such a surplus of assets in a decade that the mortgage payment will be a tiny amount of your total stache.