Author Topic: Huband is against putting money in 401k or taxable brokerage accounts  (Read 7389 times)

dinkhelpneeded

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OK, this is going to sound awful.

My husband is risk-averse.
He likes real estate (a lot)
He has never put money in a 401k. He knows about the backdoor Roth (but he thinks its too "little" money to be moving tax free yoy)
He makes $300K/yr + ~$300K/yr in appreciation on our nicely cash flowing properties which we 1031 exchange. We buy one apartment on average a year.

I have been arguing/trying to convince him we need to diversify.
He has agreed to diversify (but he thinks Index Funds are more risk and only average 8% return, he believes he can do "better" with our money)
He likes hard money lending (again in real estate!)

I have a 401K with 60K in it.
I earn 130K on my own FT job.

  • Can someone give me either anecdotal evidence or real hard evidence for diversification?
  • Throw at me some scenarios where real estate can collapse (and we would have a problem) given our properties have a good amt of equity built in plus they cash flow very well
  • Should I just let him be? and maybe just invest "my" excess cash in my 401k?
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RFAAOATB

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #1 on: March 31, 2016, 12:40:14 PM »
It sounds like you both have enough money to live good to really good lifestyles on your own.  This will only be a problem if both of you fail miserably at the same time.  If one of you lost your income would you be ok living a lower end six figure lifestyle?  Although risk-averse and real estate don't go together in my mind, I'm inclined to tell you to take care of your own cash and let him have his fun.

I would advise more caution if your lifestyle is closer to the 300k side than the 100k side as cutting back if he loses it will hurt a lot more.

protostache

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #2 on: March 31, 2016, 12:48:10 PM »
The argument for diversification isn't to "do better" than your primary economic engine, it's to protect the household from any inherent risks that that engine has. For example, is there just one major employer or industry in your metro area? If so, he should be concerned about the prospect of that employer folding or massively changing their workforce needs, which would lead to the rental market imploding.

Hard money lending could be a good component in a diversification strategy, but it's also subject to wipeout risk.

Maybe he would be interested in a baby step into equities investments with REITs. That would give you more diversification while staying within his zone of confidence.

Regardless, if I were you I would max out the 401(k) as much as possible, which you could spin as tax savings.

Trevor Reznik

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #3 on: March 31, 2016, 12:54:40 PM »
Do you have the freedom to do your own investing outside of the real estate?  You could let him go on his real estate tangent while doing the diversifying yourself off the back of your own salary.

BBub

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #4 on: March 31, 2016, 12:57:08 PM »
Wow.  It sounds like your husband is a successful real estate investor (you should tell him to join the forums and share some of his knowledge!).  He may not need stocks.  I can understand your concern about diversification, but perhaps you could approach it from a different angle than stocks/index funds...  You could urge him to diversify his real estate holdings.  Maybe accept a slightly lower cap rate for a more stable property type such as commercial, office, medical, light industrial or warehouse type properties with stable tenants and long-term leases.  Hard money lending is diversification - it's in a similar industry, but holding a loan is much different than owning/operating a property.  Finally, you could discuss the possibility of taking a position in privately held businesses - lawn service, cleaning business, restaurant, mechanic shop, gas station, laundromat, whatever.. you name it - there's an unlimited variety of businesses out there in need of equity for growth.  That could be a way to provide equity exposure and access to a new profit stream without having to deal with stock market volatility.  Private investing is certainly not for everyone, but he seems to be pretty sophisticated based on your very limited description.  Also make sure he is holding plenty of cash to ride out lean times.  Not just lines of credit, which can be cut off just when he may need them most.  Cold cash or cash equivalents (CD's, US treasuries).  The abysmal return on cash is simply the price paid to avoid a wipeout.  Plus, if he's earning substantially more than 'a paltry 8%' he should be willing to set aside some cash to protect the portfolio in the event of a downturn.  Just my 2 cents.

Here's a little commentary on your 3 points:

Diversification: diversification won't make you rich - it'll keep you rich.  Getting rich, as a standalone goal, isn't what most people on this forum are all about.  FIRE is the goal, and diversification plays a critical role in helping people have the most successful shot at FIREing within a reasonable amount of time.  It sounds like your husband has already won.  If he thinks so too, you could make the case for diversification from a risk-management perspective.  You say he is risk averse - pointing out that he is fully exposed to one asset class could help him rethink things.  It's not always about making more money, and spreading the chips around a bit can be wise.

Potential 'collapse' scenario: I had the opportunity to speak at length with a very successful apartment investor in the recent past.  He's 70 with a high 8-figure net worth.  Nearly all made from apartments & basically a one man operation.  He puts together the deals, lines up financing then outsources all of the management, bookkeeping, legal, etc.  His finger is on the pulse of everything, but he's never involved in the daily grind once the property is stabilized.  He said the biggest risk in apartment investing is oversupply.  Even in a large market, an oversupply of just several hundred units can drive prices to the floor.  That was his biggest warning about investing in apartments.  And he said an oversupply situation can take years, or even close to a decade to work itself out.  Cash flow compresses, equity plummets.. basically a race to the bottom & only the strongest balance sheets survive.  In a situation like that, a diverse revenue stream would allow a shrewd investor to not only survive but make opportunistic acquisitions in a depressed market.  Based on my limited conversations with people who seem to know what they're talking about, many large and sophisticated multifamily investors believe the market is currently a bit toppy with cap rates at historically low levels & boatloads of cash piling into the space from private equity & insurance companies starved for yield.  Hell I don't know if it's true & that's totally out of my wheelhouse - it's just what I've heard.  Not sure where your husband stands on his view of the market.

Let him be?: Yeah, maybe.  If he's not at all receptive to hearing about the risks involved, and he is convinced that he knows where to find the best returns (which may be true, by the way), your advice could fall upon deaf ears.

Hopefully you found something in there useful.
« Last Edit: March 31, 2016, 01:04:40 PM by BBub »

Drifterrider

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #5 on: March 31, 2016, 12:58:00 PM »
The best reasons I can offer for a 401K is a deferral of taxes and an enforced savings account.  Out of sight, out of mind (or out of pocket really).

I used to buy savings bonds so I couldn't impulse shop.

RWD

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #6 on: March 31, 2016, 02:27:00 PM »
He likes hard money lending (again in real estate!)
I've also done some hard money lending in real estate but taxes ate up too much. Index funds are more tax efficient so even though the gross rate of return is higher for the hard money lending in practice it was worse than index funds.

Scandium

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #7 on: March 31, 2016, 02:47:56 PM »
Wow, if you two make over $450k/year isn't the $18k to max your 401k just pocket change?! If you can't even convince him to do that he really is stubborn..

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #8 on: March 31, 2016, 04:28:19 PM »
It sounds like you both have enough money to live good to really good lifestyles on your own.  This will only be a problem if both of you fail miserably at the same time.  If one of you lost your income would you be ok living a lower end six figure lifestyle?  Although risk-averse and real estate don't go together in my mind, I'm inclined to tell you to take care of your own cash and let him have his fun.

I would advise more caution if your lifestyle is closer to the 300k side than the 100k side as cutting back if he loses it will hurt a lot more.

We live on my post 401k contribution salary i.e. about 60-70K on the lower of the two incomes in HCOL area. The rest of the money gets funneled into the acquisition and renovation of a new property each year. I am encouraging him to stop acquisition since our equity RE part of the portfolio is over 1M+ and he has agreed to keep churning (1031 exchange) or use leverage/debt to keep that going. This year I am planning to accumulate the post-tax portion of his 300K salary ~ 175K. But since we are arguing, that money is in stalemate.

I have a 600K mortgage that could go against
No other debt

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #9 on: March 31, 2016, 04:30:52 PM »
Do you have the freedom to do your own investing outside of the real estate?  You could let him go on his real estate tangent while doing the diversifying yourself off the back of your own salary.

Yes, that is what I am doing currently, but living expenses come out of my income, so there is not a lot to invest. We are currently in argument/stalemate so the money is sitting in a savings account.

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #10 on: March 31, 2016, 04:40:06 PM »

Potential 'collapse' scenario: I had the opportunity to speak at length with a very successful apartment investor in the recent past.  He's 70 with a high 8-figure net worth.  Nearly all made from apartments & basically a one man operation.  He puts together the deals, lines up financing then outsources all of the management, bookkeeping, legal, etc.  His finger is on the pulse of everything, but he's never involved in the daily grind once the property is stabilized.  He said the biggest risk in apartment investing is oversupply.  Even in a large market, an oversupply of just several hundred units can drive prices to the floor.  That was his biggest warning about investing in apartments.  And he said an oversupply situation can take years, or even close to a decade to work itself out.  Cash flow compresses, equity plummets.. basically a race to the bottom & only the strongest balance sheets survive.  In a situation like that, a diverse revenue stream would allow a shrewd investor to not only survive but make opportunistic acquisitions in a depressed market.  Based on my limited conversations with people who seem to know what they're talking about, many large and sophisticated multifamily investors believe the market is currently a bit toppy with cap rates at historically low levels & boatloads of cash piling into the space from private equity & insurance companies starved for yield.  Hell I don't know if it's true & that's totally out of my wheelhouse - it's just what I've heard.  Not sure where your husband stands on his view of the market.


Thank you! Lots of good stuff in here

-Cash reserves - we probably need to build this up a bit more
-Oversupply issue (we live in highly dense tech area of California, with zoning laws that dont easily allow new construction (but it is happening)
- I have already pointed out that we have most of our money in RE (he agreed to stop adding more) but does not agree on where to invest next
- You think like him (he suggested much of the same things you did) small business, franchise,  hard money lending etc. but I inherently think these are "less" passive which is why he expects to get the > 8% return!!

I will definitely bring up your conversation with the apartment investor + all the cash flowing into the market as a point of discussion.

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #11 on: March 31, 2016, 04:44:10 PM »
He likes hard money lending (again in real estate!)
I've also done some hard money lending in real estate but taxes ate up too much. Index funds are more tax efficient so even though the gross rate of return is higher for the hard money lending in practice it was worse than index funds.

Interesting, you must be right, based on my rough math! Hard money is probably 11% or so, so I can see a 28% tax rate wipe out gains between 8 and 11%

How are index funds tax efficient? from inside a 401K? or do you mean tax loss harvesting? or the fact that you only sell just enough of how much you need?

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #12 on: March 31, 2016, 04:46:36 PM »
Wow, if you two make over $450k/year isn't the $18k to max your 401k just pocket change?! If you can't even convince him to do that he really is stubborn..

I max my 401k, I am trying to convince him to max his, but he wont do it. He also is not willing to do a post-tax brokerage account investing.

Yes, he is very stubborn! But he wont do anything stupid, and we trust each other 100% and I know all the financials, so we are in stalemate and the money is accumulating till we make a decision.

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #13 on: March 31, 2016, 05:19:23 PM »
Hard money lending could be a good component in a diversification strategy, but it's also subject to wipeout risk.

You are first in line to get the property if a default happens. This might be a good thing or a bad thing, if you personally chose to lend on properties you would only buy yourself then maybe good. If markets are shit, (as typically is when defaults are high) then if you have cash reserves to hold out you can, if not might have to sell.
Plus clauses include permitted renovations only (which has to be monitored in theory)


protostache

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #14 on: March 31, 2016, 05:24:51 PM »
He likes hard money lending (again in real estate!)
I've also done some hard money lending in real estate but taxes ate up too much. Index funds are more tax efficient so even though the gross rate of return is higher for the hard money lending in practice it was worse than index funds.

Interesting, you must be right, based on my rough math! Hard money is probably 11% or so, so I can see a 28% tax rate wipe out gains between 8 and 11%

How are index funds tax efficient? from inside a 401K? or do you mean tax loss harvesting? or the fact that you only sell just enough of how much you need?

Equities can be more tax efficient for a few reasons. First, dividends will mostly be taxed at long term cap gains rates (top out at 20% + the 2.9% ACA surtax) instead of ordinary income rates, unless you start investing in REITs or MLPs. Second, you can tax loss harvest, which will reduce your taxable income by up to $3k a year. Third, when you sell you'll again just pay the long term cap gains rates.

Honestly, if you're not going to be putting more cash into real estate you should probably sit down with a CPA/CFP and talk about options like a solo 401k or a defined benefit plan. It'll cost some to run, but you'd be able to drastically reduce your tax bill.
« Last Edit: March 31, 2016, 05:26:59 PM by protostache »

RWD

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #15 on: March 31, 2016, 05:52:01 PM »
He likes hard money lending (again in real estate!)
I've also done some hard money lending in real estate but taxes ate up too much. Index funds are more tax efficient so even though the gross rate of return is higher for the hard money lending in practice it was worse than index funds.

Interesting, you must be right, based on my rough math! Hard money is probably 11% or so, so I can see a 28% tax rate wipe out gains between 8 and 11%

How are index funds tax efficient? from inside a 401K? or do you mean tax loss harvesting? or the fact that you only sell just enough of how much you need?

I see protostache has already answered, but here's my answer as well.

My hard money loans were at 11.5% in the 25% tax bracket. Which effectively made them 8.625% after tax, assuming no losses to defaults. With an 11% rate in the 28% bracket you're looking at a post-tax return of 7.92%. On top of that you can't have your money invested all the time, there is a bit of a lag between loans which also cuts into the return.

Index funds are more efficient because you generally only pay taxes on dividends and when you sell and the long-term capital gains rate is lower than for normal income (15% for you in the 28% tax bracket). So let's say you invest $100k in an 11% hard money loan for five years. You will receive $7,920 after tax in the first year and $46,389.42 over five years if you can reinvest your earnings (compounding). If you instead invest the $100k in an index fund with an expected performance of 8% (2% of which is dividends), you end up with $2,000 in taxable dividends in the first year and a $6,000 increase in value of the initial shares. Assuming qualified dividend tax rate you'll be left with $1700 of the dividend to reinvest. After five years of reinvesting dividends you have gained $47,366.74. Which would be $40,261.73 after capital gains tax. This is less than the loan but remember we were comparing 8% to 11%. The S&P 500 has averaged closer to 10% returns and you probably can't keep 100% of your funds invested in hard money loans all the time. Also, you may be able to wait to sell the shares until you're in a lower tax bracket (15% bracket and below pay no long term capital gains tax).

MustacheAndaHalf

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #16 on: March 31, 2016, 06:34:57 PM »
Diversification is not just to stay rich.  Someone might invest in a single company, and anything happening to that company impacts their net worth significantly.  They can get similar returns with the entire S&P 500, where no single company has as much impact (even Apple is less than 5%).

What if he just agrees to buy Vanguard S&P 500 index ETF ("VOO") in the brokerage of his choice?  No retirement accounts, just buying 500 companies that represent the large company stocks of the US.  Look at it another way: the S&P 500 survived 2008, but some real estate investor's wealth didn't.  Even in a taxable account, without selling the long-term gains will pile up.  Just the (qualified) dividends will be taxed, and that at a better rate.  An index fund lets you keep more of it's earnings, and decide when to realize taxes much more than other investments.

StressLess

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #17 on: March 31, 2016, 09:24:55 PM »
i believe 401ks and rollover IRA are safe from creditors...

http://www.racklaw.com/pdfs/Law_Library/estate-planning/IRA%20Creditor%20Protection.pdf

a good hedge when building a big nest egg!

with your income you are at the very top of the tax brackets. 18.5k a year (plus company match) in tax deferred savings or 9k a year after tax....tell him he can buy REITS if he wants in the 401k

BBub

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #18 on: April 01, 2016, 07:49:01 AM »
Thank you! Lots of good stuff in here

-Cash reserves - we probably need to build this up a bit more
-Oversupply issue (we live in highly dense tech area of California, with zoning laws that dont easily allow new construction (but it is happening)
- I have already pointed out that we have most of our money in RE (he agreed to stop adding more) but does not agree on where to invest next
- You think like him (he suggested much of the same things you did) small business, franchise,  hard money lending etc. but I inherently think these are "less" passive which is why he expects to get the > 8% return!!

I will definitely bring up your conversation with the apartment investor + all the cash flowing into the market as a point of discussion.

Glad you found it helpful. 

Full Disclosure: I don't currently invest in privately held businesses or real estate.  My personal investments are all stocks, cash, index funds via maxed 401k's, backdoor roths & taxable brokerage acct.. the standard mustachian setup.  I was just trying to help you explore alternatives that may suit his temperament because I've met people like him, and it's very hard to convince someone to alter their thinking when they've been highly successful in an area.  So, investing in private businesses could achieve your objective of diversification while keeping him comfortable with his level of control.

I'm down in the South (not that it matters - once you get past the veneer, people are pretty much the same everywhere), and a lot of folks here like timberland and real estate.  Love it, actually.  They seem to be almost blind to the risks of timberland.  Hurricanes, beetles, falling prices from overseas competition.. they view their land as a long term asset that will never go away, so if the trees get destroyed they'll just re-plant for the next generation.  If prices fall they'll just cash in on the next boom in a decade or so.  I think if people view their stock investments the same way they'll be just as successful.  Stocks too can be a multi-generational asset, a collection of businesses controlling valuable assets and knowledge that sends a steady stream of profits to shareholders year after year.  Instead, most people lack understanding and view securities as fickle ticker symbols flashing on the screen like a roulette scoreboard.

Back to the private businesses & real estate, I certainly would do it if I had the time and inclination.  I plan to in the future.  But at the moment DW & I are dinks grinding out overtime and piling the surplis into liquid accounts.

zephyr911

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #19 on: April 01, 2016, 08:05:23 AM »
I'm all about real estate investing, but as has pretty much been said, even if you're pulling high returns, not maxing out both your 401ks is just silly... you need to diversify.
I am seeing 20-40% leveraged cap rates on multifamilies in my county, but I continue to push max TSP+IRAs and even some taxable brokerage accounts, as well as encouraging DW to do the same. With the resources at your disposal, you could easily accumulate dual-redundant replacement income that way (stock returns > spending, and rental profits > spending). That is my eventual plan. It's overkill, but I want a pile to give away later, and with the kind of returns we see here, it's actually going to be pretty easy.

BBub

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #20 on: April 01, 2016, 08:24:26 AM »
Diversification is not just to stay rich.  Someone might invest in a single company, and anything happening to that company impacts their net worth significantly.  They can get similar returns with the entire S&P 500, where no single company has as much impact (even Apple is less than 5%).

Sure, you can get rich with diversification - thousands of people on this forum are doing exactly that (myself included).  It just takes a little time. 

My comments were made in the context of how OP might go about explaining the benefits to her spouse.  She specifically asked for a different perspective, so I was attempting to provide that - the comments don't represent my entire and complete thoughts on the subject.  Say OP's husband has $175k/yr in cash flow to deploy.  He can put it in the S&P at 9% and most likely have several million by the next decade.  Or, he could leverage that $175k into $700k per year and if he can deploy it at 20% he'll have over ten million.  Much higher risk, much less diversification, but if it works he will become much richer.  A person like that typically doesn't want to hear about long-term averages & riding out the business cycle until performance reverts back to the high single digits.
« Last Edit: April 01, 2016, 08:33:35 AM by BBub »

Retire-Canada

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #21 on: April 01, 2016, 08:31:19 AM »
If he only wants to invest in RE let him. You can invest in equities. You both make enough that you can save and invest for FIRE independently as you see fit.

You as an individual will have a diversified portfolio to count on for FIRE and the two of you together will have a diversified set of investments even if they are overweighted in RE.

There is no point trying to push a square peg into a round hole. Perhaps he will change his mind at a later date. Perhaps he won't. Either way what's going on is not crazy or awful despite some other options that could be better.

Proud Foot

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #22 on: April 01, 2016, 09:11:36 AM »
Show him the numbers for putting maxing out the 401k. 

18k pretax savings - 33-35% return just by Federal tax savings, not sure of state taxes where you live but that would add to it
If his company matches contributions 50%, unless the match limit is less than 6% ($300,000 @ 6% is the current max) he will max that as well and it will be an immediate 50% return. So all that combined is a pretty significant return.  And then you add in the market returns and it continues to compound.  I think he would have to agree that he would have a hard time beating this himself.

Tjat

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #23 on: April 01, 2016, 09:13:26 AM »
Could one strategy be to have his salary contribute somewhat to living expenses? You would then have more opportunity to invest on your own. Seems like a very odd arrangement where you subsidize his lifestyle costs so he can buy apartments.

MidWestLove

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #24 on: April 01, 2016, 09:28:52 AM »
Short answer- the following topics should be discussed
Asset protection
Tax liability reduction benefits
Diversification

Long answer which you may not like is that right now the things are not great- this is a situation of addict behavior by person blinded by greed and enabled by pushover victim/partner

Betting all of you livelihood on single asset class that is highly cyclical, not diversified and worse in single Geo area is plain stupid and similar to behavior of person in Vegas who believes his lucky streak and keep piling everything on black while times are good without taking money off the table. Anyone who says this is"guaranteed" to continue is lying to themselves and others

Not taking money off the table is greed running(ruining) the person.no one yet went broke taking profits ( money off the table) and this high risk activity is not the place to double down with each and every resource you have. What happens if or when this goes into downturn or you get sued or hundreds of other events? If this is so risk free why is the other party selling? Every transaction has a buyer and a seller and there is a lesson and the story there..If this time is different or real estate never goes down, this is what speculators in Vegas or Florida or many other places also thought..

For the enabling behavior - if this real estate thing is so awesome , why do you have to use you salary to live on? Why are you denied from being able to bank/invest all of it? Is that greed ( I can do better because I am the smartest man in this state) talking again along with overconfidence?

In my opinion you should have serious conversation with you husband and at least invest your salary ( title it for joint account if you want to but do invest)..



elaine amj

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #25 on: April 01, 2016, 11:41:46 AM »
My DH is super stubborn. He still feels my push for low fee ETFs is a mistake and grumbles every once in a while since there has been a lot of red in our portfolio since switching over last year. Over the past year+ I have been trying to get him to sit down and look at returns on high-fee stocks vs ETFs. I bring it up in conversations and talk him to death, but he hasn't chosen to listen yet. He says to talk to him "when he is in the mood". Not been successful yet.

On the good side, we finally agreed to a compromise. He agreed to selling all our Edward Jones/other mutual funds and transferring them all to a brokerage account. I control exactly how that money is invested. I also get to control all new investments - about $3-5k every month. On the flip side, this is only about 40% of our savings. He insisted on leaving the rest where it is for now. The bulk is in a very low cost mutual fund we started buying when we got married. It's still higher than ETFs, but relatively low fees in the grand scheme of things.

As a compromise, it worked out for us. I'm still not entirely pleased about not just transferring everything, but decided to let things lie for a while. It is our money and he's also just trying to make the best decisions for us. I'll be working on further analysis and discussions in the future :)

Perhaps your DH could be persuaded to agree to let you invest your income as you see fit and channeling more of his income into the household budget? It's a good thing for each spouse to learn more about finances and investing in general. He may not agree it is the "best" way to invest - but might be persuaded by the thought of your learning more about investments in general? While I have always handled our long range budgets, etc, DH has been the financial day-to-day guy and I know he worried about my lack of experience in that sphere. In the last 6 months, I have been more involved in the day to day stuff and investments and while we may not always agree, I know he feels more confident in my abilities to manage.

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #26 on: April 01, 2016, 01:18:22 PM »
Thank you for all your suggestions!

Some things to clarify:
Reason for living on my income: We targeted to live on the lesser of the two incomes and found that we saved better when we didn't touch the "other" pile. Keeping the saving money separate just works for us. No "marital" issues here :) but of course the burden is on the person trying to convince the other until we are both on the same page. For context, getting into Real Estate/Apartments etc was my idea as well - we went to see many properties together, I built the first spreadsheet to compare properties, we made all decisions together, its only over the past year I stepped away due to some medical issues I was dealing with. See update below for "good" progress!

I read out all your answers to him last night! And we had some constructive conversation and criticism around the various points made here.

The points he thought were valid: (let me know if my understanding on any of these are wrong!)
- Diversification is intended for preservation more than rapid "growth"
- Tax implications of hard money might bring down the returns to levels that previously seemed less attractive
- He understands reducing "tax liability" now by contributing to a 401k but he does not believe his tax rate in the future will be lower than his tax rate today.
- Agrees there is an element of "greed/arrogance" in the I can get "better" returns.
- 401k and IRA are safe from "potential lawsuits" on our RE side of the business
- We are already working aggressively on tax reduction strategies (however suggestions made here about solo 401K and defined benefit plan, apply less since our taxes are so high, mostly based on current W2 incomes. The RE we hold with depreciation and capex losses, dont contribute much to the tax basis. We 1031 all our properties, so taxes are deferred on those sales.
Based on my understanding I dont think I can put W2 income in either a solo 401k or a defined benefit plan.
- We are working with these guys http://provisionwealth.com/ to reduce our tax liability for next year.
-He liked all of Bbub's answers (ha ha!).

We downloaded this spreadsheet from NYU and worked on some of the stock market returns/numbers.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
He felt better, though not fully convinced (baby steps!)

The good news!
We have agreed to put in the next accummulated $100K into index funds (needs more work on convincing him about the 401K)
Since today is Friday, I am starting to write out the tax benefit math on the 401K to illustrate my point, and play around with tax rates in our future.
We will continue to explore other options over the next year, and might consider new opportunities in non RE businesses.
He has agreed to not channel any more money into RE (only play with existing money+equity).
He already tried to partner with another Hard money lender (who refused our money since its a family business) but we got some insight to suggest that unless you are playing with 1M+ in cash in rotation, it will take more time and effort to get "established" among RE agents and mtg brokers. Might be something for the future, definitely not right now. 

« Last Edit: April 01, 2016, 01:32:34 PM by dinkhelpneeded »

beltim

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #27 on: April 01, 2016, 01:24:07 PM »
I might be missing something, but if you're living on 60-70k per year, and you're cash-flowing 300k from your real estate portfolio, why are either of you still working?

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #28 on: April 01, 2016, 01:37:21 PM »
I might be missing something, but if you're living on 60-70k per year, and you're cash-flowing 300k from your real estate portfolio, why are either of you still working?

300K is appreciation on sale of property (not cash-flow). Cash flow is about ~150K.
We live in a HCOL area, we are close but there are 2 more things we need to do before FIRE
- Pay off our house (debating this because this isn't our forever home)
- Diversify :)


beltim

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #29 on: April 01, 2016, 01:48:17 PM »
I might be missing something, but if you're living on 60-70k per year, and you're cash-flowing 300k from your real estate portfolio, why are either of you still working?

300K is appreciation on sale of property (not cash-flow). Cash flow is about ~150K.
We live in a HCOL area, we are close but there are 2 more things we need to do before FIRE
- Pay off our house (debating this because this isn't our forever home)
- Diversify :)

Ah, okay, so I did miss that.  But still, if you're cash flowing twice your annual expenses, can't you do those two things after you retire?

dinkhelpneeded

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #30 on: April 01, 2016, 02:24:24 PM »
Quote

Ah, okay, so I did miss that.  But still, if you're cash flowing twice your annual expenses, can't you do those two things after you retire?

Mortgage is ~600K (in HCOL) so we dont feel comfortable retiring without that being atleast brought down to say 300K?
As for diversification we can pull $ out of RE (for now they are all deferred through a 1031 exchange) so pulling it out means getting taxed at our current income tax rate, so we are holding off on that. It is possible to diversify existing RE money after FIRE (that will be a harder battle to fight, since he loves RE and enjoys it)

Jack

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #31 on: April 01, 2016, 02:28:04 PM »
Wow, if you two make over $450k/year isn't the $18k to max your 401k just pocket change?! If you can't even convince him to do that he really is stubborn..

I max my 401k, I am trying to convince him to max his, but he wont do it. He also is not willing to do a post-tax brokerage account investing.

Yes, he is very stubborn! But he wont do anything stupid, and we trust each other 100% and I know all the financials, so we are in stalemate and the money is accumulating till we make a decision.

Here's what you do: you tell him that you're going to max your 401k and then invest another $18K of your income in the stock market, in a taxable account. But then tell him that if he maxed his 401k then you'd give him your extra $18k to put into real estate instead. After all, why pay taxes when you don't have to?

You just need to frame the choice as "$18K is going into stocks one way or another; you get to decide whether the taxes are deferred or not."

MidWestLove

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #32 on: April 02, 2016, 06:20:26 AM »
Looks like you are on the right path, the only item that stood out right away was this

"
- He understands reducing "tax liability" now by contributing to a 401k but he does not believe his tax rate in the future will be lower than his tax rate today."

where is this belief coming from? what is your current tax rate on the last dollar (tax bracket)? what do you expect your retirement income to be?

If you expect your retirement income not to be much higher than your working income, the statement above is false. Math does not care how someone "feels", what one "understands", "believes" , or otherwise emotes  - math is math. 

the_gastropod

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #33 on: April 02, 2016, 07:10:10 AM »
where is this belief coming from? what is your current tax rate on the last dollar (tax bracket)? what do you expect your retirement income to be?

If you expect your retirement income not to be much higher than your working income, the statement above is false. Math does not care how someone "feels", what one "understands", "believes" , or otherwise emotes  - math is math.

Taxes in the US are, from a historical perspective, quite low. If you expect to spend a lot in retirement, it's not unreasonable to skip the tax deferred 401k. But if that's the case, a Roth401k is an excellent option.

Dicey

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Re: Huband is against putting money in 401k or taxable brokerage accounts
« Reply #34 on: April 02, 2016, 08:16:57 AM »
Marking my page so I can find it again.