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Message
401K vs House note
Posted on 6/10/14 at 3:39 pm
Posted on 6/10/14 at 3:39 pm
Currently my wife and I (in our mid 40’s) are putting about 32K a year into our retirement between 401K, 401K match and a pension that my wife gets with the federal government. We are on track to have about $2 mil by the time we hit our early 60’s. So I feel comfortable that we will have what I need to retire when I want to in early to mid 60’s.
We are starting to work on our plans to build a house. I am trying to make a decision of 401K vs down pmt. I feel I am beyond what I need to save for my retirement to have the income I want. I know the best answer is don’t touch my 401K, but for the sake of argument, which option would be better.
Do I reduce my 401K contributions for 1 ½ - 2 years (contribute only to the match) and deposit the extra I take home into an account to add to my down pmt. Say if it amounts to $20K which would decrease my house note by say $100 a month. I would then increase my 401K back to the max at the end of that period or
Leave my 401K in place but reduce it when the house note comes around by the $100 a month for the next say 13 years that I work until retirement. Thanks for any advice.
We are starting to work on our plans to build a house. I am trying to make a decision of 401K vs down pmt. I feel I am beyond what I need to save for my retirement to have the income I want. I know the best answer is don’t touch my 401K, but for the sake of argument, which option would be better.
Do I reduce my 401K contributions for 1 ½ - 2 years (contribute only to the match) and deposit the extra I take home into an account to add to my down pmt. Say if it amounts to $20K which would decrease my house note by say $100 a month. I would then increase my 401K back to the max at the end of that period or
Leave my 401K in place but reduce it when the house note comes around by the $100 a month for the next say 13 years that I work until retirement. Thanks for any advice.
6
Posted on 6/10/14 at 4:20 pm to Tiger55
Posted on 6/10/14 at 5:06 pm to Tiger55
If you end up in as good a spot as it sounds you'll be in, well done.
As for the question of:
I don't think there is a wrong decision as long as you remain as responsible as you've been. Don't cut the 401k contribution to buy hookers and blow or put it all on black. I think the question is which scenario would help you and your wife sleep better at night?
Keeping the 401K investment as is gives you a longer time horizon to have better returns on the investment. You should also consider what you're invested in. If growth stocks or equities, you'd have a better chance of a higher return in the 401k. If you're heavily invested in bonds, treasuries, or target date funds, the return premium on investing in the 401k isn't as high as opposed to the guaranteed return on a lower interest rate and less interest.
As for the question of:
quote:
Do I reduce my 401K contributions for 1 ½ - 2 years (contribute only to the match) and deposit the extra I take home into an account to add to my down pmt. Say if it amounts to $20K which would decrease my house note by say $100 a month. I would then increase my 401K back to the max at the end of that period or
Leave my 401K in place but reduce it when the house note comes around by the $100 a month for the next say 13 years that I work until retirement. Thanks for any advice.
I don't think there is a wrong decision as long as you remain as responsible as you've been. Don't cut the 401k contribution to buy hookers and blow or put it all on black. I think the question is which scenario would help you and your wife sleep better at night?
Keeping the 401K investment as is gives you a longer time horizon to have better returns on the investment. You should also consider what you're invested in. If growth stocks or equities, you'd have a better chance of a higher return in the 401k. If you're heavily invested in bonds, treasuries, or target date funds, the return premium on investing in the 401k isn't as high as opposed to the guaranteed return on a lower interest rate and less interest.
Posted on 6/10/14 at 5:11 pm to Tiger55
Better to put a dollar in a 401K today than a dollar tomorrow. More time for compound growth, etc.
It seems to me, personal opinion, that I would not make dramatic changes to my retirement savings for the purposes of saving $100/month in mortgage note.
Another option (not pro or con) is borrowing some money from your 401(k) for the down payment, and paying it back over time. It would be a low interest rate, which would be added to your account balance in the 401(k).
It seems to me, personal opinion, that I would not make dramatic changes to my retirement savings for the purposes of saving $100/month in mortgage note.
Another option (not pro or con) is borrowing some money from your 401(k) for the down payment, and paying it back over time. It would be a low interest rate, which would be added to your account balance in the 401(k).
Posted on 6/10/14 at 5:52 pm to meldawg399
quote:
I don't think there is a wrong decision as long as you remain as responsible as you've been. Don't cut the 401k contribution to buy hookers and blow or put it all on black. I think the question is which scenario would help you and your wife sleep better at night?
Keeping the 401K investment as is gives you a longer time horizon to have better returns on the investment. You should also consider what you're invested in. If growth stocks or equities, you'd have a better chance of a higher return in the 401k. If you're heavily invested in bonds, treasuries, or target date funds, the return premium on investing in the 401k isn't as high as opposed to the guaranteed return on a lower interest rate and less interest.
^^^^^^ Great post.
Interest and returns have a lot (everything) to do with time value of money.
How long are you expecting to be paying on the mortgage? This is a low risk (fixed rate, I presume) tax deductible (I presume) loan. The longer you are paying on it, the more you lose out. But the risk of 'losing' on this loan is relatively small.
Taking money out of your 401k creates an opportunity lost. Whether the opportunity lost is large or small depends on the type of investments (and that usually depends on your retirement horizon).
If you are expecting to pay the mortgage off in about 10 years, then I think you are splitting hairs. Compound benefits/costs don't really have a big opportunity to take effect.
I recommend to put enough down on the mortgage/loan to get the best deal. That is typically 20 to 25%. Nothing more. The benefit for a better loan is larger if you plan on paying on the loan for more years.
Congrats on the retirement plan and house.
Posted on 6/10/14 at 7:16 pm to meansonny
I guess to clear my question up some. I rounded the numbers above to simplify my question but actual amount will be a little higher.
I guess would I do better holding back from 401k say $20k over next two years or $100 a month say for next 15 years.
I guess would I do better holding back from 401k say $20k over next two years or $100 a month say for next 15 years.
Posted on 6/10/14 at 7:55 pm to Tiger55
It's an interesting question, but if you qualify for the best rates available I would make no more than the minimum down payment that avoids PMI, or 20%. Once you take the interest deduction into account you're basically borrowing for roughly the rate of inflation, which means the loan costs nothing in real terms.
It might even be worth it to pay PMI under certain conditions. You need to do some spreadsheet work with real numbers. You can't get it exactly right since nobody can predict the future, but you can figure out how important various assumptions will be and plan accordingly.
It might even be worth it to pay PMI under certain conditions. You need to do some spreadsheet work with real numbers. You can't get it exactly right since nobody can predict the future, but you can figure out how important various assumptions will be and plan accordingly.
Posted on 6/10/14 at 8:08 pm to foshizzle
I should qualify for best rates. I will be putting down a lot more than 20% because my current house is paid off and I will roll that into the new house. It'll be a little over half that I will put down. With two kids cash flow is most important t to me so I want my note to be low. That's why I wanted to make sure keeping the 20k out initially and reducing my note another $100 or so wasn't greatly worse than the other scenario. I sleep better at night with as little debt as possible
This post was edited on 6/10/14 at 8:11 pm
Posted on 6/10/14 at 8:23 pm to Tiger55
quote:
I sleep better at night with as little debt as possible
You are costing yourself money if you can get the best rates. Cash flow should not be an issue if you set aside funds to invest in something even reasonably safe.
Remember that you have a tax shelter on the mortgage interest payment *and* a tax shelter in your 401(k) investment. You minimize taxes by shifting your mortgage cash outflow into your 401 cash inflow.
Posted on 6/10/14 at 9:01 pm to foshizzle
It will be about a year or so before I will be ready to build so I know rates may change.
Not to sound dumb but if mortgage rates are say running about 4.25% or so, what kind of investment would give me a monthly cash flow of more than that (has to be more for it to make sense) without having much risk? In no way would I want to risk my nest egg or in no way could I be in a position where that cash flow could dry up or go away for a few months.
I am very diversified and pretty aggressive in our 401k and other retirement funds but would be very hesitant to risk my house fund/money
Not to sound dumb but if mortgage rates are say running about 4.25% or so, what kind of investment would give me a monthly cash flow of more than that (has to be more for it to make sense) without having much risk? In no way would I want to risk my nest egg or in no way could I be in a position where that cash flow could dry up or go away for a few months.
I am very diversified and pretty aggressive in our 401k and other retirement funds but would be very hesitant to risk my house fund/money
This post was edited on 6/10/14 at 9:24 pm
Posted on 6/10/14 at 9:50 pm to Tiger55
I would decrease 401k contributions by $100/month. Kind of like a reverse dollar cost averaging of your potential gains/loses. If you hold back 20k over the next 2 years, an your current funds grow by 10% a year for the next two years, you'll miss out on a nice profit (of course if it decreases by 10% a year, you'll be grateful, but not happy).
Just make sure your 2 million estimate takes into account that you'll likely be transitioning your funds from primarily stocks to bonds/other less fluctuant investments over the next 20 years.
Taking taxes into consideration, I wouldn't decrease the 401k payment at all. I would find the sweet spot where you can put down >20% down payment, but keep the 401k fully funded. Remember that every dollar contributed to a 401k basically gives you an automatic 20% return based on tax savings the year of contribution (I'm guessing your tax bracket based on your current savings).
Just make sure your 2 million estimate takes into account that you'll likely be transitioning your funds from primarily stocks to bonds/other less fluctuant investments over the next 20 years.
Taking taxes into consideration, I wouldn't decrease the 401k payment at all. I would find the sweet spot where you can put down >20% down payment, but keep the 401k fully funded. Remember that every dollar contributed to a 401k basically gives you an automatic 20% return based on tax savings the year of contribution (I'm guessing your tax bracket based on your current savings).
Posted on 6/10/14 at 11:42 pm to LSUFanHouston
quote:
Better to put a dollar in a 401K today than a dollar tomorrow. More time for compound growth, etc.
You are neglecting the fact that the house stands just as much a chance to grow in value as the 401k.
Though personally I try not to think of my home as an investment. It IS - I know that - but we bought it because of its utility - not because it would appreciate in value.
Posted on 6/11/14 at 9:23 am to SpidermanTUba
quote:
Though personally I try not to think of my home as an investment. It IS - I know that - but we bought it because of its utility - not because it would appreciate in value.
I think there are two types of real estate purchases. Investment purchases or luxury purchases. If you but a base level house that is affordable to a large segment of the population and is easy to sell, the purchase is more of an investment. The more money you spend and the more you customize the house to your wants, it is more of a luxury.
As the value of a property goes up or it becomes more customized, the population of potential buyers decreases. The richer the buyer is, the more likely the buyer is to customize it for themselves and thus they'll want to shave money off the sales price for renovations/customizations.
And once a woman makes a decision in her head or wants a certain customization, no matter how the good a deal a property is, they guy won't be able to pull a trigger.
Posted on 6/11/14 at 10:28 am to Ric Flair
quote:
Taking taxes into consideration, I wouldn't decrease the 401k payment at all. I would find the sweet spot where you can put down >20% down payment, but keep the 401k fully funded. Remember that every dollar contributed to a 401k basically gives you an automatic 20% return based on tax savings the year of contribution (I'm guessing your tax bracket based on your current savings).
This can be a big point and include state taxes if applicable and marginal fed rate to foregone contributions used for excess down payment. Many people just accept that they will be able to itemize with mortgage interest and later find they either can't or it only lasts a few years as a function of low rates. The real unknown is what your tax situation will be in retirement, which is impossible to know.
I would probably put the minimum down to avoid PMI etc, and go from there as you could always apply a lump sum to the outstanding mortgage balance later if desired.
Posted on 6/11/14 at 12:52 pm to LSUFanHouston
DON'T borrow from your 401k!!! You don't earn interest on any of the money that is in your loan balance so you are really paying the interest+ whatever return you are seeing on your account.
Posted on 6/11/14 at 9:59 pm to Tiger55
quote:
if mortgage rates are say running about 4.25% or so, what kind of investment would give me a monthly cash flow of more than that
I don't know your tax bracket but assuming you're deducting the interest expense your real post-tax rate is about 3%. That is ideal because you don't want a rate below the rate of inflation.
If you can't beat the rate of inflation with your investments that is an entirely different problem.
Posted on 6/12/14 at 12:37 am to SpidermanTUba
quote:
You are neglecting the fact that the house stands just as much a chance to grow in value as the 401k. Though personally I try not to think of my home as an investment. It IS - I know that - but we bought it because of its utility - not because it would appreciate in value.
Long term... stocks have outpaced housing in value growth. However... you can't live in your stock portfolio!
I have never put much thought into your personal residence as an investment. If it happens to grow in value, that's a bonus to me.
Posted on 6/12/14 at 4:42 am to LSUFanHouston
In my opinion you are counting your eggs way to early in relation to your 401k, I don't like to think about what I could put away in the future but rather what I am now. I would save all you can up to the point it has to go twords the note.
If somthing dreadful happens down the road your savings will still be there, the house may be somthing you have to get rid of, even at a loss.
What I am trying to say is a dollar saved today is better than a dollar maybe saved in the future.
If somthing dreadful happens down the road your savings will still be there, the house may be somthing you have to get rid of, even at a loss.
What I am trying to say is a dollar saved today is better than a dollar maybe saved in the future.
Posted on 6/12/14 at 7:54 am to Tiger55
Stop your agony because you cannot predict your monetary needs in the future, except that more should be better except in the case of a higher level of income tax at retirement time.
Also, don't discount your ability to increase your income over the next few years should you decide to pause tax delayed account contributions.
Also, don't discount your ability to increase your income over the next few years should you decide to pause tax delayed account contributions.
Posted on 6/12/14 at 12:22 pm to bobaftt1212
quote:
DON'T borrow from your 401k!!! You don't earn interest on any of the money that is in your loan balance so you are really paying the interest+ whatever return you are seeing on your account.
I don't see this as borrowing from his 401k if the money would not have gone into the 401k in the first place. If he is going to reduce his 401k contributions by 10k/year over the next 2 years and invest it in a way that would generate taxable income, why not put it in the 401k, take the CY tax deduction, not generate taxable income, then take out the loan.
On a cash flow basis this may not make sense because you'll be paying back the 401k loan over 5 years, around 4.5% interest compared to paying the higher mortgage amount over a 15 year period at a lower rate. But you'll pay less interest over the 5 years than over the 15 years.
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