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Re: Budgeting for a home

OP, if you have been saving such a big part of your income for a while, surely you can come up with a big enough down payment to make your mortgage payment manageable within your current take home amount. 

 

If that isn't the case, then it's simply a matter of shifting money to align with your priorities. If what you really want is a home in Boston, then you'll need to lower your savings rate to pay for it. That seems to be what a lot of people do, although I wouldn't recommend going below a 15% savings rate. 

 

But here's a question:  it seems you already have a house (you list a very low mortgage payment). Why not just stay there?

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Re: Budgeting for a home

[ Edited ]

tacpoly wrote:

CreditGuyInDixie wrote:

 

Still, we are talking about me putting away a LOT.  Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

 

 


How do you put $30K per year into a Roth?  I believe Roth IRA has a $5500 contribution limit and Roth 401K has $18,000.  I guess if you're over 50 you're participating in catch-up contributions?  That'll get you to $30K. 

 

But it then one has to ask the question:  if you are contributing this much because you "started late" with retirement saving (if I understand your post correctly) is the Roth the right vehicle to be putting your money into?  I say this because:

1.  The fact that you can afford to sock away $30K suggests your income is fairly high. And the fact that you're socking away money now suggests that you're probably earning more now than at any other point in your life. So...this means you're also at the highest tax bracket you've seen. 

2.  The fact that you started saving for retirement late suggests you might have difficulty saving enough so that your retirement income would equal what you're currently making -- or close to what you're currently making.  (Please correct me if I'm wrong.  I know I'm making a lot of assumptions that may not apply to you and I hope you don't take offense.  It's just I want people to think about these things.)

3.  If you are 50 or over, you'll likely be retired within 20 years. I doubt the tax rates will be increased significantly. 

 

So your Roth strategy therefore would not take advantage of the tax benefits:  the tax you are paying NOW on your Roth contributions is more that the tax you would save when you take this money out. 

 

The Roth is a vehicle best used by those starting off:  in the lower tax bracket with lots of time for their savings to become very big. So they pay a 12% income tax rate on the contributions initially, but are tax exempt when they are receiving their substantial retirement distributions that put them in a tax bracket much higher than 12%.  You might, instead, defer paying income tax now on a regular IRA and 401K, and pay them later when you are retired and making less. 

 

Now, like I said, I am making assumptions about your financial situation. You could have substantial assets and investments that would generate way more income in retirement than you are currently making. But then why worry so much about retirement savings, if that's the case. 


Double-dipping on the retirement accounts as near as I could figure it: the 401K contributions were well in excess of the maximums otherwise.

 

iced: out of curiosity why aren't you considering any house as an investment?  Yes, one pays taxes on it, yup there's interest paid on it, and yes it can go down... but otherwise it's just moving money from one side of your balance sheet to the other effectively.

 

Also don't discount the mortgage interest deduction, which just gets better and better on a higher priced home.

 

You're in a better position then when I went and qualified for a mortgage and I had a somewhat smaller DP and similar HOA numbers and I was able to reach 800k+ buy price on the loan at 43%.  As tacpoly has suggested elsewhere this does vary by location somewhat (though I still remain a bit dubious as the amount of the variance) but I think the salient difference is that the vast majority of humanity doesn't view a mortgage as a straight loss which it sounds like you are?

 

Anyway I went on the cheap for now as my life wasn't fixed, if you and your wife are happy where you're at stay with it... my life is still in flux so cheapish (which would admittedly be a real home somewhere else besides Los Angeles at the 345K buy price) works still for me; however, if it improves your quality of life to move, then consider it.  Anyway I thought I saved a bunch of money comparitively per month at ~3K + mortgage when employed: I know you're doing this on dual incomes but color me impressed and massive kudos for you and your partner being on the same page financially.... absolutely winning on that front.

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Re: Budgeting for a home


tacpoly wrote:

CreditGuyInDixie wrote:

 

Still, we are talking about me putting away a LOT.  Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

 

 


How do you put $30K per year into a Roth?  I believe Roth IRA has a $5500 contribution limit and Roth 401K has $18,000.  I guess if you're over 50 you're participating in catch-up contributions?  That'll get you to $30K. 

 


I work for the federal govt.  So our 401k is called the TSP, though the contribution limits are the same.  So in 2016, the TSP contribution limits were 18,000 but also an additional 6000 for people over the age of 50.  Starting a few years ago =, federal workers were allowed to make some or all of their TSP contributions as Roth, rather than conventional.  So that's 24k Roth.

 

Additionally, there is the 6500 I am allowed for my Roth IRA.

So the total is actually $30,500.

 

My gross income is a little over 100k.  My highest federal tax bracket is 25% (I am solidly in the middle of that).

 

You are absolutely right that as I get older, the advantage of electing Roth contributions over conventional will be less.  On the other hand, I am able to contribute the maximum now (as well as save an additional amount in cash each month).  If I shifted my contributions toward conventional, it would not increase the amount I can contribute toward tax sheltered vehicles (TSP and IRA).  So my feeling at the time was to just start shifting all I could into Roth, since I could do so while still making the maximum contribution limits.

 

I will no doubt rethink all this as time goes on.  Thanks for your input!

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Re: Budgeting for a home


tacpoly wrote:

OP, if you have been saving such a big part of your income for a while, surely you can come up with a big enough down payment to make your mortgage payment manageable within your current take home amount. 

 

If that isn't the case, then it's simply a matter of shifting money to align with your priorities. If what you really want is a home in Boston, then you'll need to lower your savings rate to pay for it. That seems to be what a lot of people do, although I wouldn't recommend going below a 15% savings rate. 

 

But here's a question:  it seems you already have a house (you list a very low mortgage payment). Why not just stay there?


Our current mortgage has an LTV of 37%, so we have been doing exactly what you're suggesting. I also mention in my post I'm looking at putting at least $300,000 down. From what I've read, not many people put down 50% (or more) for a down payment, though we are ready to do exactly that. Even at the target $800,000 amount, that's almost a 40% down payment. We've discussed increasing our down payment to $500,000, but that would still leave us with a mortgage that's almost double what we have now and with higher tax/HOA payments on top of that.

 

To explain this and answer your second question, the problem is in our area home prices are a bit higher than in other parts of the country. We own now, and have a low mortgage payment (because of such a low LTV) though we also live in 650 sq. ft. of space. It's fine for two of us but we're looking at having kids, and 650 sq. ft. may be a challenge for that. We believe we can make it work until the kids are about 3-4, but after that, it'll get interesting. We have discussed it and think 1,000 sq. ft. would be enough space to raise up to 2 children comfortably. However, 1,000 sq. ft. where we live goes for about $800,000 on average. Therefore, our choices are:

 

1. Cash out some investments and buy a place for ~$800,000. This would mean I would have to postpone retirement (target is 70 now, this would push to 73-74). Also note the $1,900 currently going to extra savings/investments would get wiped out when we have kids - we estimate daycare is around $1,500/month and the other $400 would go toward food/supplies/etc for the kid, so while we've already padded in the costs of having a kid into our budget, we also know around a third of our retirement savings will stop as soon as we have children. Our HOA/tax payments would also go up so we have to factor that in to the budget.

 

2. Stay where we are. If we end up not having children, this is fine, but if we do it won't work long-term.

 

3. Move further away. It looks like once we get into the suburbs, home prices come down to the point where we could buy 1,000 sq. ft. for $600,000. We could make that work in our budget, but then have to factor in new costs with living in the burbs (commuting, lawn care, and snow removal immediately come to mind). However, a lot of these properties are also single-family so we would likely have little/no HOA payment to offset some of this (and we would likely put the remainng "HOA" funds into an account for home repairs and the like). This would also be a significant lifestyle change for us, but so is having kids. Right now, this is looking like the most doable option, but we have time yet so we're trying to see if we can make option 1 work somehow.

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Re: Budgeting for a home

[ Edited ]

Revelate wrote:
As tacpoly has suggested elsewhere this does vary by location somewhat (though I still remain a bit dubious as the amount of the variance) but I think the salient difference is that the vast majority of humanity doesn't view a mortgage as a straight loss which it sounds like you are?

 

 

Anyway I went on the cheap for now as my life wasn't fixed, if you and your wife are happy where you're at stay with it... my life is still in flux so cheapish (which would admittedly be a real home somewhere else besides Los Angeles at the 345K buy price) works still for me; however, if it improves your quality of life to move, then consider it.  Anyway I thought I saved a bunch of money comparitively per month at ~3K + mortgage when employed: I know you're doing this on dual incomes but color me impressed and massive kudos for you and your partner being on the same page financially.... absolutely winning on that front.


Have you inquired about getting a mortgage in Manhattan?   Keep in mind average price is $2M although there is a putative slowdown.  I'd be curious what terms you get.

 

Cheap isn't always the right answer with real estate.  Sometimes, specially when the timeframe is short, it's better to go with the safe bet:  something that will be easy to offload and high likelihood of appreciation. 

 


CreditGuyInDixie wrote:

I work for the federal govt.  So our 401k is called the TSP, though the contribution limits are the same.  So in 2016, the TSP contribution limits were 18,000 but also an additional 6000 for people over the age of 50.  Starting a few years ago =, federal workers were allowed to make some or all of their TSP contributions as Roth, rather than conventional.  So that's 24k Roth.

 

Additionally, there is the 6500 I am allowed for my Roth IRA.

So the total is actually $30,500.

 

My gross income is a little over 100k.  My highest federal tax bracket is 25% (I am solidly in the middle of that).

 

You are absolutely right that as I get older, the advantage of electing Roth contributions over conventional will be less.  On the other hand, I am able to contribute the maximum now (as well as save an additional amount in cash each month).  If I shifted my contributions toward conventional, it would not increase the amount I can contribute toward tax sheltered vehicles (TSP and IRA).  So my feeling at the time was to just start shifting all I could into Roth, since I could do so while still making the maximum contribution limits.

 

I will no doubt rethink all this as time goes on.  Thanks for your input!


I'm not quite sure what you're saying with the bold -- I believe you'll be able to contribute the same amount toward conventional TSP/401K + IRA that you're contributing now to the Roth and Roth IRA.

 

I think the easy way to determine whether the Roth is right is to ask:  do I expect to have the same or higher income in my retirement than I am making now?  Do I expect to be paying a higher tax rate in my retirement than I am paying now.  If your answer to either one of the those questions is "no", then you'll need to rethink your Roth strategy. 

 

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Re: Budgeting for a home


iced wrote:

Our current mortgage has an LTV of 37%, so we have been doing exactly what you're suggesting. I also mention in my post I'm looking at putting at least $300,000 down. From what I've read, not many people put down 50% (or more) for a down payment, though we are ready to do exactly that. Even at the target $800,000 amount, that's almost a 40% down payment. We've discussed increasing our down payment to $500,000, but that would still leave us with a mortgage that's almost double what we have now and with higher tax/HOA payments on top of that.

 

To explain this and answer your second question, the problem is in our area home prices are a bit higher than in other parts of the country. We own now, and have a low mortgage payment (because of such a low LTV) though we also live in 650 sq. ft. of space. It's fine for two of us but we're looking at having kids, and 650 sq. ft. may be a challenge for that. We believe we can make it work until the kids are about 3-4, but after that, it'll get interesting. We have discussed it and think 1,000 sq. ft. would be enough space to raise up to 2 children comfortably. However, 1,000 sq. ft. where we live goes for about $800,000 on average. Therefore, our choices are:

 

1. Cash out some investments and buy a place for ~$800,000. This would mean I would have to postpone retirement (target is 70 now, this would push to 73-74). Also note the $1,900 currently going to extra savings/investments would get wiped out when we have kids - we estimate daycare is around $1,500/month and the other $400 would go toward food/supplies/etc for the kid, so while we've already padded in the costs of having a kid into our budget, we also know around a third of our retirement savings will stop as soon as we have children. Our HOA/tax payments would also go up so we have to factor that in to the budget.

 

2. Stay where we are. If we end up not having children, this is fine, but if we do it won't work long-term.

 

3. Move further away. It looks like once we get into the suburbs, home prices come down to the point where we could buy 1,000 sq. ft. for $600,000. We could make that work in our budget, but then have to factor in new costs with living in the burbs (commuting, lawn care, and snow removal immediately come to mind). However, a lot of these properties are also single-family so we would likely have little/no HOA payment to offset some of this (and we would likely put the remainng "HOA" funds into an account for home repairs and the like). This would also be a significant lifestyle change for us, but so is having kids. Right now, this is looking like the most doable option, but we have time yet so we're trying to see if we can make option 1 work somehow.


1.  I personally wouldn't cash out investments if they are meant for retirement.  Not only will you have to start over, you also lose any compounded earnings you could have had if you just left the money there.  I would rather let that money grow untouched and reduce future contributions. 

 

I think you could benefit from seeing a financial adviser/planner to give you some medium and long-term perspective.  Just be careful with the possible rollback of some of the fiduciary regulations. 

 

3.  I wouldn't rule out a move to the suburbs. 

 

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Re: Budgeting for a home


tacpoly wrote:
 

CreditGuyInDixie wrote:

I work for the federal govt.  So our 401k is called the TSP, though the contribution limits are the same.  So in 2016, the TSP contribution limits were 18,000 but also an additional 6000 for people over the age of 50.  Starting a few years ago =, federal workers were allowed to make some or all of their TSP contributions as Roth, rather than conventional.  So that's 24k Roth.

 

Additionally, there is the 6500 I am allowed for my Roth IRA.

So the total is actually $30,500.

 

My gross income is a little over 100k.  My highest federal tax bracket is 25% (I am solidly in the middle of that).

 

You are absolutely right that as I get older, the advantage of electing Roth contributions over conventional will be less.  On the other hand, I am able to contribute the maximum now (as well as save an additional amount in cash each month).  If I shifted my contributions toward conventional, it would not increase the amount I can contribute toward tax sheltered vehicles (TSP and IRA).  So my feeling at the time was to just start shifting all I could into Roth, since I could do so while still making the maximum contribution limits.



I'm not quite sure what you're saying with the bold -- I believe you'll be able to contribute the same amount toward conventional TSP/401K + IRA that you're contributing now to the Roth and Roth IRA.


 


Right.  I will be able to contribute the same.  Shifting to conventional, however, won't increase the amount I can contribute, which is what I was talking about. 

 

One of the typical tradeoffs that a person has between Roth vs. Conventional is that, with a Roth, he'll be putting away less per year in raw dollars, because he has to spend some of his paycheck paying taxes on it.  But on the other hand, once he does, he'll never have to pay taxes on all the future growth that occurs on it.

 

So for example suppose we have a guy who can put away 12k a year if he uses the conventional tax-deductible coventional approach.  Although he is legally entitled to put away far more, to do so would stress his finances too much (rent, groceries, car payment, medical bills, daycare for the kids, etc.).  12k is the most he can realistically save.  He then tries to decide whether a 5k Roth might be right for him.  What he'll need to do is realize that he will not be able to put the difference (7k) into the conventional vehicle, because he'll also have to pay taxes on the Roth contribution.  So he'll have to make a decision between say a 5 + 5 approach (Roth + Conventional) or a 12k approach (Conventional).

 

Switching to a Roth will decrease the amount he can effectively put into his tax sheltered retirement accounts.

 

That's a typical tradeoff.  Occasionally, however, you get somebody who has so much disposable cash from his annual income that he can afford to put all of it into a pure Roth and still be at the very maximum he's legally allowed to contribute as a dollar figure.  The common advantage of a conventional tax-deferred vehicle (namely that he'll have more to put into it at the end of the day) doesn't apply to such a person.  I am that unusual case.

 

That's what I was getting at.

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Re: Budgeting for a home


CreditGuyInDixie wrote:

Right.  I will be able to contribute the same.  Shifting to conventional, however, won't increase the amount I can contribute, which is what I was talking about. 

One of the typical tradeoffs that a person has between Roth vs. Conventional is that, with a Roth, he'll be putting away less per year in raw dollars, because he has to spend some of his paycheck paying taxes on it.  But on the other hand, once he does, he'll never have to pay taxes on all the future growth that occurs on it.

So for example suppose we have a guy who can put away 12k a year if he uses the conventional tax-deductible coventional approach.  Although he is legally entitled to put away far more, to do so would stress his finances too much (rent, groceries, car payment, medical bills, daycare for the kids, etc.).  12k is the most he can realistically save.  He then tries to decide whether a 5k Roth might be right for him.  What he'll need to do is realize that he will not be able to put the difference (7k) into the conventional vehicle, because he'll also have to pay taxes on the Roth contribution.  So he'll have to make a decision between say a 5 + 5 approach (Roth + Conventional) or a 12k approach (Conventional).

Switching to a Roth will decrease the amount he can effectively put into his tax sheltered retirement accounts.

That's a typical tradeoff.  Occasionally, however, you get somebody who has so much disposable cash from his annual income that he can afford to put all of it into a pure Roth and still be at the very maximum he's legally allowed to contribute as a dollar figure.  The common advantage of a conventional tax-deferred vehicle (namely that he'll have more to put into it at the end of the day) doesn't apply to such a person.  I am that unusual case.

That's what I was getting at.


Your use case makes sense, but only to a narrow range of income earners (and certainly not those with excessive levels of disposable income). To extend on your example, take someone who makes 125k per year and is single. The maximum income one can earn and contribute to a Roth IRA is $117,000. This person also has access to contributing up to $18,000/year into either a traditional 401k or a Roth 401k. This person could therefore:

 

1. Contribute $18,000 into a Roth (or traditional) 401k, or

2. Contribute $8,000 into a traditional 401k, $10,000 into a Roth 401k, and $5,500 into a Roth IRA for a total of $23,500.

 

In case 2, the traditional contributions are used to lower AGI to the point where he/she then makes him/herself eligible to also contribute to an IRA he/she would not otherwise be eligible for. My wife and I use this approach to push our AGI down to the point where we can still contribute to Roth (our target number as married filing jointly is $184,000). Traditinal 401k is not the only way to decrease AGI but it is a valuable one as it can shave off as much as $36,000/year for a married couple ($48,000 for a couple over 50).

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Re: Budgeting for a home

Yup, Iced.  You are absolutely right.  My situation is an uncommon one.  My AGI (Adjusted gross income) is high enough (> 100k) so that I am generating a good deal of money I can save, while at the same time being low enough (< 117k) that there are no income restrictions for a Roth IRA.  That's uncommon.  Even for people within my precise income range, most of them are not able to reduce their spending to low enough levels that they can save 30k per year in after-tax money into Roth retirement vehicles.

 

I am actually placing the absolute legal maximum (30.5k) and then saving several thousand extra each year in cash which I will use for my house DP (my DP fund already has a lot of cash in it).

 

Your observation, however, is very sound: that as a person's AGI moves up and crosses over into the > 117k range, he should strongly consider contributing enough to a conventional vehicle so that he lowers his AGI back to under the 117k limit.  (in 2017 it became 118k, I believe.)  If my income does break 118k in the next three years, that will be a delightful problem to have!  LOL.  Very unlikely though, given my salary trajectory, which is probably going to increase in real dollars 1-2% per year (if that).

 

Thanks much for your feedback!  Probably a good idea to move this thread away from my situation, however, and back to our OP's.  As you say mine is pretty unusual.

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Re: Budgeting for a home

i agree with TAC, would be reluctant to cash out investments.

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