Author Topic: Where do we go next?  (Read 1583 times)

livinglife

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Where do we go next?
« on: October 24, 2020, 12:33:18 PM »
After our retirement accounts and expenses are all covered, we've still got a surplus of about $3,000 per month. I'm not sure what the best option is for this, and would love some input.

Family of five, with three young children (ages 3,5,7).

Current Assets:
Traditional 401k $91,000
Traditional IRA $100,600
Roth 401k $18,800
Roth IRA $84,700
Taxable Brokerage Account $12,000
Cash Savings $18,000

Mortgage Remaining $30,000 (house value~ $400,000)

We max out retirement accounts, with a preference for ROTH options as possible ($31,500 ROTH annually plus $24,500 per year into Traditional).


Some considerations:
1) I'm not interested/up for being a landlord, but owning land is potentially of interest
2) I very much value being debt-free (hence the low mortgage balance)... but also recognize that rates are dirt cheap. I know intellectually that investing is more likely to increase my net worth faster than paying down mortgage, but internally I still feel better sans monthly obligations.
3) Projecting FIRE expenses of ~ $45,000/year (assuming no debts)
4) While much could change between now and college, we'd like to have our FAFSA numbers be low as is possible (we anticipate being FIRE and before kids reach college). We have not saved anything in 529 accounts, as we are prioritizing saving for ourselves.


What are some options for our monthly $3,000 surplus? And fairly soon we'll be done with childcare expenses, which'll bump that up to $4,000. Any recommendations for current assets?

MDM

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Re: Where do we go next?
« Reply #1 on: October 24, 2020, 01:24:21 PM »
If you are all set with your Investment Order and looking for details on step 8, consider Tax-efficient fund placement .

livinglife

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Re: Where do we go next?
« Reply #2 on: October 24, 2020, 01:46:17 PM »
If you are all set with your Investment Order and looking for details on step 8, consider Tax-efficient fund placement .

Fantastic resources, thank you for highlighting!

Anyone have thoughts on maintaining low/no mortgage vs pulling out equity (~320,000 so no PMI) and investing it instead (just not in rental homes please)?

philli14

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Re: Where do we go next?
« Reply #3 on: October 24, 2020, 01:56:45 PM »
Anyone have thoughts on maintaining low/no mortgage vs pulling out equity (~320,000 so no PMI) and investing it instead (just not in rental homes please)?

2) I very much value being debt-free (hence the low mortgage balance)... but also recognize that rates are dirt cheap. I know intellectually that investing is more likely to increase my net worth faster than paying down mortgage, but internally I still feel better sans monthly obligations.

Can't weigh in much on the argument from a numbers perspective, but I think your earlier words has the answer. You seem to be in a really good position, with a healthy lifestyle and well on your way to FI. Why sacrifice your comfort and sanity to potentially eek out a few extra fractions of percentage points of return when it won't make a meaningful positive difference in your life?

bbqbonelesswing

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Re: Where do we go next?
« Reply #4 on: October 24, 2020, 05:17:59 PM »
If it's going to make you feel safe/accomplished by having no mortgage, pay that off. You don't have much left. Otherwise, sock that money away in a taxable account.

waltworks

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Re: Where do we go next?
« Reply #5 on: October 24, 2020, 10:54:37 PM »
I would personally be super uncomfortable with that much of my NW tied up in a house, but to each their own. At this point you should probably either pay the mortgage off ASAP, or else pull some equity and invest. Your current position (still owe significant money to the bank every month, relatively cash-poor without tapping retirement accounts) is super risky - if you have a serious illness or job loss or some other unlikely but catastrophic event, it's possible to lose the house.

Rates are crazy low - but valuations on basically every asset class are crazy high, so you'll have to decide where you're comfortable putting the money if you did cash-out refi.

At this point, assuming you have a secure job, I'd just try to kill the mortgage over the next 3-6 months or so (prioritize that over everything else and maybe use most of the cash/EF as well). Then you're still on the hook for taxes, but in much better/safer shape. You can still change your mind later and refi/invest cash at any point after you've paid it off, so you're not burning any bridges. Market crash? Awesome, pull some equity and go nuts.

Good problem to have, right?

-W

livinglife

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Re: Where do we go next?
« Reply #6 on: October 30, 2020, 05:50:10 AM »
I would personally be super uncomfortable with that much of my NW tied up in a house, but to each their own. At this point you should probably either pay the mortgage off ASAP, or else pull some equity and invest.

We were fortunate to be first-time homebuyers in 2010, so purchased at $200,000 and have now benefited by seeing home prices around us rise dramatically. A massive chunk of our networth is tied to the house, but most of it is just fortuitous timing. I've often contemplated selling, I'd so love to cash in my chips and reap that extra money the place is now worth, but of course the nature of the beast is that we'd still have to live somewhere and all these other houses are much more expensive now too...

Rates are crazy low - but valuations on basically every asset class are crazy high, so you'll have to decide where you're comfortable putting the money if you did cash-out refi.

At this point, assuming you have a secure job, I'd just try to kill the mortgage over the next 3-6 months or so (prioritize that over everything else and maybe use most of the cash/EF as well). Then you're still on the hook for taxes, but in much better/safer shape. You can still change your mind later and refi/invest cash at any point after you've paid it off, so you're not burning any bridges. Market crash? Awesome, pull some equity and go nuts.

Good problem to have, right?

Well summarized all around. Using the cash/EF, we could pay off mortgage by Dec 31, which might be a pretty nice way to start the new year. It would leave us super low on cash temporarily, but jobs are secure and we should be able to build up a hefty EF reserve in ~6 months. We've got an 'in case of emergency-break glass' account as well in the form of a Home Equity line. Never tapped it and don't plan to, but it's available to serve as mental comfort until EF is established. After that, I suppose just continuing to dump extra funds into brokerage account until the day I'm ready to stop squirreling and enjoying?

waltworks

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Re: Where do we go next?
« Reply #7 on: October 30, 2020, 06:56:06 AM »
Yep, just dump money in the market like a robot after that, since you've said you're not interested in landlording.

It was an unfortunate decision to aggressively pay down the mortgage (you'd be probably hundreds of thousands wealthier if you'd invested instead) but the perfect isn't the enemy of the good here. You're doing great.

-W

JGS1980

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Re: Where do we go next?
« Reply #8 on: October 30, 2020, 07:13:36 AM »
Yep, just dump money in the market like a robot after that, since you've said you're not interested in landlording.

It was an unfortunate decision to aggressively pay down the mortgage (you'd be probably hundreds of thousands wealthier if you'd invested instead) but the perfect isn't the enemy of the good here. You're doing great.

-W

+1

Pay the damn thing off. Dump 3-4 K into market every month. Check in with us in 5 years and tell us how you feel about it all.

Steeze

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Re: Where do we go next?
« Reply #9 on: October 30, 2020, 07:32:10 AM »
We are in a similar situation -

Paid off condo w/ HELOC (unused), max out our retirement accounts, 1 kid on the way, and have a surplus of a few thousand per month (for now).

$1000/mo goes to our savings account for emergency fund / market timing fund :) (shh!)
$833/mo goes to a 529 account for college ($10k max for state tax deduction in NY)
$4000/mo goes to our taxable brokerage account at Vangaurd via automatic purchases

Basically any additional funds go straight to the brokerage account. Got a raise the other day and upped the automatic purchases. Bonus this year will pre-pay the 529 & Roths for next year (hopefully).

If I come across a multifamily that interests me I will use the HELOC / emergency fund / brokerage account to purchase it.
If we have another large market drop (30%+) I will use the HELOC / EF to purchase shares.

waltworks

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Re: Where do we go next?
« Reply #10 on: October 30, 2020, 07:42:14 AM »
Steeze, we had a 30% market drop earlier this year. Did you pull the trigger?

-W

Steeze

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Re: Where do we go next?
« Reply #11 on: October 30, 2020, 07:50:27 AM »
Steeze, we had a 30% market drop earlier this year. Did you pull the trigger?

-W

Didn't have the HELOC then unfortunately, closed on it in July - but drained the emergency fund and converted bonds to equities. Started building up cash again since June.

Fuzz

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Re: Where do we go next?
« Reply #12 on: November 18, 2020, 10:58:18 PM »
Congrats on the savings. Impressive. Kill the mortgage. You're close.

I'd encourage you to allocate a bit more to a taxable account. You are putting like 50K a year into tax protected accounts and have less than 30K in a cash/taxable account. Sure, from a tax POV, you may be better off deferring taxes to retirement, assuming marginal rates stay the same and you don't end up saving too much in your traditional IRA. But you have almost all of your net worth tied up in home equity and retirement accounts. Your net worth is something like 700k, and it would tap you out to come up with $30K for a 3 year old clown car or a couple of medical procedures. Sure, if you had a true emergency, you could use a HELOC or sell stocks from the retirement accounts and pay the 10% penalty. You'd be fine. But it seems pretty skewed to me. Is this all to keep your NW low for FAFSA purposes? That may make sense, but then you can't early retire, either since the cash is locked up until you're 59. What am I missing?

Steeze

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Re: Where do we go next?
« Reply #13 on: November 19, 2020, 05:11:19 AM »
Congrats on the savings. Impressive. Kill the mortgage. You're close.

I'd encourage you to allocate a bit more to a taxable account. You are putting like 50K a year into tax protected accounts and have less than 30K in a cash/taxable account. Sure, from a tax POV, you may be better off deferring taxes to retirement, assuming marginal rates stay the same and you don't end up saving too much in your traditional IRA. But you have almost all of your net worth tied up in home equity and retirement accounts. Your net worth is something like 700k, and it would tap you out to come up with $30K for a 3 year old clown car or a couple of medical procedures. Sure, if you had a true emergency, you could use a HELOC or sell stocks from the retirement accounts and pay the 10% penalty. You'd be fine. But it seems pretty skewed to me. Is this all to keep your NW low for FAFSA purposes? That may make sense, but then you can't early retire, either since the cash is locked up until you're 59. What am I missing?

Roth principal can be withdrawn tax and penalty free before 59. Traditional and be converted to Roth tax free after you retire if your spending is low enough. Basically your tax rate is 0 or close to 0 after standard deductions.

If you are living on Roth principal or long term capital gains then you can probably convert a bit to Roth every year while staying in the 0 tax bracket. Unless your spend is over $75k or so.