Author Topic: Saving Potential House Downpayment  (Read 6200 times)

Alabaster

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Saving Potential House Downpayment
« on: April 11, 2015, 08:36:33 PM »
I wasn't sure where to put this one but I choose  Investor Alley. Feel free to move it :)

My situation is this:
I have no debt and save ~2/3 of my post tax and tithe income.
I'm maxing out my tax advantaged space cost dollar averaging into index funds leaving me with about $1500 free to invest after tax
Currently that money is getting invested with Betterment
Housing market in my area is doing very well (annoyingly so)

I'm not totally convinced that I want to buy a house, but if I can ever settle down and say "ok, I will live here for ever" then the opportunity to live rent free is almost too good to pass up. The big problem I see is that stocks certainly go though cyclical cycles and houses are not completely unrelated. I want to buy after the market has a chance to correct itself but I'm worried that the correction will be more sever in my (largely stock) portfolio.

I'd rather not sell off stocks when they are under-priced to access my down payment but I'm unwilling to have (eventually) 50K sitting around in a savings account. 

Does anyone have a good solution to this?

The adviser at work suggested high dividend stock for horizons over 3 years (I am pretty sure I won't want to access the money for at least 5 years, probably more like 10).

SaintM

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Re: Saving Potential House Downpayment
« Reply #1 on: April 11, 2015, 08:59:31 PM »
The haters will crucify me for saying this...but whole life insurance can be excellent savings accounts. The problem is finding a company that doesn't rip you off. I use AAFMAA on a 5-year payoff plan, but you have to be a vet.

Alabaster

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Re: Saving Potential House Downpayment
« Reply #2 on: April 11, 2015, 09:13:18 PM »
The haters will crucify me for saying this...but whole life insurance can be excellent savings accounts. The problem is finding a company that doesn't rip you off. I use AAFMAA on a 5-year payoff plan, but you have to be a vet.

That is definitely an out of the box suggestion :P

Indexer

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Re: Saving Potential House Downpayment
« Reply #3 on: April 11, 2015, 09:29:52 PM »
Well the real risk is losing a significant amount.  So you don't need to be 100% stock for a short term goal.

For goals less than 1 year:  Savings.  Ally is over 1%.  Mangomoney is 6% but only on 5k.

Beyond that you can look at short term bond funds.  You might get 1-2% there.

1-3 year goals:  The riskiest  would go is with a 80% bond, 20% stock portfolio.  It has about the same amount of risk as being 100% bonds, but you can get more return this way.  Potential downside in a major crisis(1929/2008) is about 10.5%.  This might cause you to delay buying the home for a few months while you save a little more but honestly in a situation like that home values are going to come down at least 10% over the following 6 months so it wouldn't be a bad thing.

5 years?  You could look at a 50/50 allocation if you are ok with a possible 20-25% drop in a bear market.

The haters will crucify me for saying this...but whole life insurance can be excellent savings accounts. The problem is finding a company that doesn't rip you off. I use AAFMAA on a 5-year payoff plan, but you have to be a vet.

Yup I'm going to hate.  A whole life policy is life insurance.  It is not a savings vehicle.  After fees I'm going to have a VERY hard time believing a whole life policy is going to outperform any of the other options.  Plus if you overfund the thing, which is easy if you are using it to save at mustachian levels, it can turn it into a MEC.  Have fun getting money out of a MEC ;).

SaintM

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Re: Saving Potential House Downpayment
« Reply #4 on: April 12, 2015, 06:47:08 AM »
Plus if you overfund the thing, which is easy if you are using it to save at mustachian levels, it can turn it into a MEC.  Have fun getting money out of a MEC ;).

Avoiding the MEC was the reason I had to stretch payments over 5 years. Anything shorter would put the annual contributions over the MEC limit.

The policy expenses are about $240/year. Half of that is for $250k of insurance (works out to $10/mo). Of the remaining expenses, most will go away in a couple of years. Plus, the plan allows you to cancel at any time and receive the greater of premiums or cash value. No lost value to some salesperson's commission.

Dodge

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Re: Saving Potential House Downpayment
« Reply #5 on: April 12, 2015, 12:22:44 PM »
1.  Buying a house.  This is always a hot topic.  Make sure you do the math to see if it makes sense in your area.  This statement concerns me, "the opportunity to live rent free is almost too good to pass up".  These statements typically aren't made on the basis of math/analysis, but on emotion.  How do you know it's "almost too good to pass up"?  Here's a great Buy vs Rent calculator that does the math for you:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Note, I've never lived in an area where it made sense to buy, and as a result, have come out way ahead by renting.

2.  Betterment.  They just take your money, and invest in Vanguard for you, after adding their fee on top.  Skip the middle man.  I'd recommend a Vanguard LifeStrategy automatic/robo account instead.  Much less fees involved (by about half), and they handle everything for you.  As Indexer mentioned, a 20/80 stock/bond portfolio would be good for this, so look at the LifeStrategy Income Fund:

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

It has an expense ratio (yearly fee) of 0.14%, compared to the 0.41% total fee you're paying at Betterment.

3.  Whole Life Insurance.  OMG, don't even give this another thought.  They will just take your money, put it in bonds for you, and charge you a 2-5% fee.  Again, skip the middle man.

4.  Dividend stocks.  This is almost as bad as the Whole Life Insurance recommendation.  Anyone who recommends 100% dividend stocks for someone's short-term house downpayment money, should not be in a position to recommend anything to anyone.  Dividend stocks, almost as a rule, fall harder during downturns.

In short, typically the answer is to keep short term money in a savings account.  You'd like to avoid that, which makes sense considering you aren't sure if you even want a house, so I think a LifeStrategy account makes sense.  Personally, I just throw everything at my 80/20 stocks/bonds portfolio.  If I need money in the short term, the 20% bonds is enough to take care of those needs.  But I'm not looking for a house, so in your situation, the 20/80 stock/bond portfolio makes sense.

SaintM

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Re: Saving Potential House Downpayment
« Reply #6 on: April 12, 2015, 04:47:54 PM »
3.  Whole Life Insurance.  OMG, don't even give this another thought.  They will just take your money, put it in bonds for you, and charge you a 2-5% fee.  Again, skip the middle man.

Like I said, the haters will crucify.

Where else can I get a guaranteed 6% interest rate net of fees if I live, and my heirs can get a 900% return if I die?

Dodge

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Re: Saving Potential House Downpayment
« Reply #7 on: April 12, 2015, 05:00:39 PM »

3.  Whole Life Insurance.  OMG, don't even give this another thought.  They will just take your money, put it in bonds for you, and charge you a 2-5% fee.  Again, skip the middle man.

Like I said, the haters will crucify.

Where else can I get a guaranteed 6% interest rate net of fees if I live, and my heirs can get a 900% return if I die?

Let's keep this thread on topic. Make a new thread if you'd like to be reminded of the idiocy of using whole life insurance as an investment to save for a house down payment.

beltim

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Re: Saving Potential House Downpayment
« Reply #8 on: April 12, 2015, 05:16:21 PM »

3.  Whole Life Insurance.  OMG, don't even give this another thought.  They will just take your money, put it in bonds for you, and charge you a 2-5% fee.  Again, skip the middle man.

Like I said, the haters will crucify.

Where else can I get a guaranteed 6% interest rate net of fees if I live, and my heirs can get a 900% return if I die?

Let's keep this thread on topic. Make a new thread if you'd like to be reminded of the idiocy of using whole life insurance as an investment to save for a house down payment.

It seems to me that a guaranteed 6% net of fees, if true, over a 5 year period is an excellent suggestion and exactly on point for this thread. 

On the other hand, it seems hard to imagine that there's a whole bunch of insurance companies out there willing to guarantee 6% annual returns over a 5 year period without making up for it by severely overcharging on fees or insurance.

SaintM

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Re: Saving Potential House Downpayment
« Reply #9 on: April 12, 2015, 05:41:44 PM »
Dodge and I disagree on just about everything. He is entitled to his opinion and I am to mine.

Financial.Velociraptor

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Re: Saving Potential House Downpayment
« Reply #10 on: April 12, 2015, 06:08:53 PM »

It seems to me that a guaranteed 6% net of fees, if true, over a 5 year period is an excellent suggestion and exactly on point for this thread. 

On the other hand, it seems hard to imagine that there's a whole bunch of insurance companies out there willing to guarantee 6% annual returns over a 5 year period without making up for it by severely overcharging on fees or insurance.

You can make the profit margin (combined ratio) moot by choosing one the *mutual* whole life insurance companies.  Over charges come back to you as dividends.

I'm in the whole life agnostic camp.  I think it can be a good investment for someone who needs 1) security 2) life insurance 3) a large amount of cash outside their brokerage account.   I need neither 2 nor 3 and will not even consider whole life. 

beltim

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Re: Saving Potential House Downpayment
« Reply #11 on: April 12, 2015, 06:17:36 PM »
Are there any companies without restricted membership that offer such a product?

Alabaster

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Re: Saving Potential House Downpayment
« Reply #12 on: April 12, 2015, 10:49:43 PM »
1.  Buying a house.  This is always a hot topic.  Make sure you do the math to see if it makes sense in your area.  This statement concerns me, "the opportunity to live rent free is almost too good to pass up".  These statements typically aren't made on the basis of math/analysis, but on emotion.  How do you know it's "almost too good to pass up"?  Here's a great Buy vs Rent calculator that does the math for you:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Note, I've never lived in an area where it made sense to buy, and as a result, have come out way ahead by renting.

2.  Betterment.  They just take your money, and invest in Vanguard for you, after adding their fee on top.  Skip the middle man.  I'd recommend a Vanguard LifeStrategy automatic/robo account instead.  Much less fees involved (by about half), and they handle everything for you.  As Indexer mentioned, a 20/80 stock/bond portfolio would be good for this, so look at the LifeStrategy Income Fund:

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

It has an expense ratio (yearly fee) of 0.14%, compared to the 0.41% total fee you're paying at Betterment.

3.  Whole Life Insurance.  OMG, don't even give this another thought.  They will just take your money, put it in bonds for you, and charge you a 2-5% fee.  Again, skip the middle man.

4.  Dividend stocks.  This is almost as bad as the Whole Life Insurance recommendation.  Anyone who recommends 100% dividend stocks for someone's short-term house downpayment money, should not be in a position to recommend anything to anyone.  Dividend stocks, almost as a rule, fall harder during downturns.

In short, typically the answer is to keep short term money in a savings account.  You'd like to avoid that, which makes sense considering you aren't sure if you even want a house, so I think a LifeStrategy account makes sense.  Personally, I just throw everything at my 80/20 stocks/bonds portfolio.  If I need money in the short term, the 20% bonds is enough to take care of those needs.  But I'm not looking for a house, so in your situation, the 20/80 stock/bond portfolio makes sense.

Hey Doge;

Thank you for your reply. That is a really convenient rent vs buy calculator!

If I buy a house, it will be because I think I can't really rent for less and want an opportunity to diversify my money a little. My statement came from realizing that a primary residence is generally hedged against inflation, (correct me if I'm wrong) the gains on it if sold are not taxed, and its dividend (the rents I wouldn't have to pay someone else) is tax free.

I will look into the Vanguard account. I read several posts by you and some others about Betterment and wasn't completely convinced that Betterment wasn't worth it. It did open my eyes to understanding that Betterment's fees are in addition to Vanguard's expense ratio (which I had miss understood when reading the paperwork since I assumed the 'all inclusive' or 'wrap' fee was an aggregate of all expenses.) Up until now, I had chosen to stay with Betterment because 1) I wanted to see how their tax-loss harvesting would work out (I only have about 18K with them atm, but they just opened that up to everyone...) and 2) I wanted an international bias on my portfolio. Which I understood Betterment to have. But I believe I read a post here about Vanguard increasing their international tilt as well.

Do you have any references for your claim that dividend stocks would fall hardest during a crash? My thinking was that tech/growth stocks that paid very low dividends would fall the hardest since they essentially have nothing backing their price except the amount people are willing to pay. I assumed a crash in price earnings multiples would cause the dividend yields to look better and that people would migrate to buying those stocks.
« Last Edit: April 12, 2015, 10:51:58 PM by Alabaster »

Dodge

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Re: Saving Potential House Downpayment
« Reply #13 on: April 13, 2015, 02:04:26 PM »
1.  Buying a house.  This is always a hot topic.  Make sure you do the math to see if it makes sense in your area.  This statement concerns me, "the opportunity to live rent free is almost too good to pass up".  These statements typically aren't made on the basis of math/analysis, but on emotion.  How do you know it's "almost too good to pass up"?  Here's a great Buy vs Rent calculator that does the math for you:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Note, I've never lived in an area where it made sense to buy, and as a result, have come out way ahead by renting.

2.  Betterment.  They just take your money, and invest in Vanguard for you, after adding their fee on top.  Skip the middle man.  I'd recommend a Vanguard LifeStrategy automatic/robo account instead.  Much less fees involved (by about half), and they handle everything for you.  As Indexer mentioned, a 20/80 stock/bond portfolio would be good for this, so look at the LifeStrategy Income Fund:

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

It has an expense ratio (yearly fee) of 0.14%, compared to the 0.41% total fee you're paying at Betterment.

3.  Whole Life Insurance.  OMG, don't even give this another thought.  They will just take your money, put it in bonds for you, and charge you a 2-5% fee.  Again, skip the middle man.

4.  Dividend stocks.  This is almost as bad as the Whole Life Insurance recommendation.  Anyone who recommends 100% dividend stocks for someone's short-term house downpayment money, should not be in a position to recommend anything to anyone.  Dividend stocks, almost as a rule, fall harder during downturns.

In short, typically the answer is to keep short term money in a savings account.  You'd like to avoid that, which makes sense considering you aren't sure if you even want a house, so I think a LifeStrategy account makes sense.  Personally, I just throw everything at my 80/20 stocks/bonds portfolio.  If I need money in the short term, the 20% bonds is enough to take care of those needs.  But I'm not looking for a house, so in your situation, the 20/80 stock/bond portfolio makes sense.

Hey Doge;

Thank you for your reply. That is a really convenient rent vs buy calculator!

If I buy a house, it will be because I think I can't really rent for less and want an opportunity to diversify my money a little. My statement came from realizing that a primary residence is generally hedged against inflation, (correct me if I'm wrong) the gains on it if sold are not taxed, and its dividend (the rents I wouldn't have to pay someone else) is tax free.

I will look into the Vanguard account. I read several posts by you and some others about Betterment and wasn't completely convinced that Betterment wasn't worth it. It did open my eyes to understanding that Betterment's fees are in addition to Vanguard's expense ratio (which I had miss understood when reading the paperwork since I assumed the 'all inclusive' or 'wrap' fee was an aggregate of all expenses.) Up until now, I had chosen to stay with Betterment because 1) I wanted to see how their tax-loss harvesting would work out (I only have about 18K with them atm, but they just opened that up to everyone...) and 2) I wanted an international bias on my portfolio. Which I understood Betterment to have. But I believe I read a post here about Vanguard increasing their international tilt as well.

Do you have any references for your claim that dividend stocks would fall hardest during a crash? My thinking was that tech/growth stocks that paid very low dividends would fall the hardest since they essentially have nothing backing their price except the amount people are willing to pay. I assumed a crash in price earnings multiples would cause the dividend yields to look better and that people would migrate to buying those stocks.

Yes, buying a house can be an inflation hedge.  It can also lock the majority of your net worth to an asset which only grows with inflation.  There are pros and cons to each, so it's important to run the math for your area.

A few things to note regarding the Betterment decision:

  • With 18k, your current total expense ratio at Betterment is about 0.51%.
  • In a taxable account, you run the risk of feeling locked-in to Betterment's higher fees for the long haul, as you will feel less inclined to switch once you have built up some capital gains.  Especially since Tax Loss Harvesting will reduce your cost basis, resulting in higher capital gains when you sell.  Every dollar you saved in taxes, will have to be paid back, in addition to any capital gains accrued via appreciation.  This means the benefits of Tax Loss Harvesting can only be seen over the long term, by waiting to sell until you're in a lower tax bracket, or by investing the tax deduction before you have to pay it back. But this is still a losing scenario, because over the long term the extra fees compound faster than the benefit.
  • I've written a lot about Tax Loss Harvesting.  Specifically, paying an extra fee to get it:

    http://forum.mrmoneymustache.com/investor-alley/betterment-$50k-'safety-net'/msg487232/#msg487232
    http://forum.mrmoneymustache.com/investor-alley/betterment-for-taxable-holdings/msg550033/#msg550033

    I'll spare you the details.  Long story short, it is inevitable that you will end up paying more in extra fees to Betterment, than you will receive in Tax Loss Harvesting, for the simple reason that the fees are both percentage based (so they get higher as your account grows), and forever (each and every year, for the rest of your life), while the tax loss harvesting benefit on each individual deposit is temporary.
  • Wanting more international exposure makes sense.  The old 80/20 LifeStrategy portfolio had a breakdown of 56/24/20 US/INT/Bonds.  The new 80/20 LifeStrategy portfolio has a breakdown of 48/32/20 US/INT/Bonds.  The Betterment 80/20 portfolio has a breakdown of 40/40/20 US/INT/Bonds.  While Vanguard's study shows that international exposure past 40% of equities (the new LifeStrategy has 40% international equities) doesn't really help:



    Wanting a more cap-weighted portfolio like 40/40/20 makes sense to me.  The question is, will an extra 8% international exposure justify paying over 3.5x the fees?  Only time will tell...

Regarding dividend funds/stocks crashing harder.  I first noticed this in a thread about dividends, where a hot-shot dividend investor was being interviewed about how dividend stocks always outperform.  I pulled up his biggest fund, the WisdomTree Total Dividend Fund (their total dividend index fund - DTD), a dividend fund with about 1000 stocks in the US, listed on the NYSE, AMEX or NASDAQ Global Market, which pay regular cash dividends, and plotted it against the market index (VTSAX - blue line):



Then I plotted their Small Cap dividend fund (DES), one of their biggest funds in terms of dollars invested:



A $900,000 portfolio, would have dropped to $315,000 during the last crash.  While not all dividend funds were this bad, they all had a commonality to them...they all dropped harder in 2008-2009 than the market.  By going this route, you have the worst of both worlds during a bear market.  Lower gains than 100% bonds, and higher risk than 100% stocks.

I noticed this time and time again, but didn't have a good reason why it happens so uniformly across dividend stocks, until I saw Skyrefuge's recent post:

http://forum.mrmoneymustache.com/investor-alley/ive-decided-on-vanguard-but-need-some-help-please/msg584803/#msg584803
« Last Edit: April 13, 2015, 05:01:42 PM by Dodge »

sirdoug007

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Re: Saving Potential House Downpayment
« Reply #14 on: April 13, 2015, 04:10:01 PM »
What is the fund shown by the orange line?

Dodge

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Re: Saving Potential House Downpayment
« Reply #15 on: April 13, 2015, 04:58:02 PM »
What is the fund shown by the orange line?

My apologies, I mislabelled the chart above.  I will edit the post.
« Last Edit: April 13, 2015, 05:02:03 PM by Dodge »