Windfall in NYC

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huxbnw
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Windfall in NYC

Post by huxbnw »

Hello Bogleheads. I just received a significant windfall. I live in NYC with my wife and two small children. I have read the Bogleheads wiki page on windfalls multiple times and am in no rush to spend. At the appropriate time, however, my wife and I plan to spend a significant portion of the windfall to purchase a home and invest the remainder in Vanguard. Our major question is what percentage of the windfall is too much to invest in a primary residence (knowing that we plan to live in NYC for the next 10-20 years). Does anyone have a recommendation of an advisor, with a Bogleheads outlook and paid by the hour, that we can meet with to discuss. TIA.
livesoft
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Re: Windfall in NYC

Post by livesoft »

I suspect it is not the fraction or percentage of the windfall that would be the limiting criteria for how much to spend on a home. Instead it would be carrying costs of the home: Can you afford the annual costs comfortably in perpetuity? Will you be the Jed Clampett of the neighborhood? Do you want to be?

I have read many instances of folks going out and biting off a bit more than they can chew. We always read about lottery winners, athletes and others who failed to grasp that purchases made now have continuing costs.
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huxbnw
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Re: Windfall in NYC

Post by huxbnw »

Very good question, Livesoft. We are confident that we can pay for all the carrying costs of the home.
awval999
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Re: Windfall in NYC

Post by awval999 »

The question depends on how large the windfall is, if you plan to continue to work, and as mentioned earlier, the carrying costs.

It would be reasonable for Jane and Joe American to spend 100% of a hypothetical $200k windfall that they got from a dying aunt to buy a house outright in middle America. It would eliminate their biggest monthly payment, ie: rent or mortgage, they would have much more liquid cash each month.

So I guess we need more information. However, I don't think it's unreasonable to want to purchase a house outright.
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huxbnw
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Re: Windfall in NYC

Post by huxbnw »

We plan to continue working. Combined we make mid six figures and will hopefully be in the high six figures in 3-5 years. I want to maintain the option of retiring early (in 10-15 years), although I could see myself working in some capacity through my 60's and 70's. I have no desire to stop working in the short to medium term. The question is how much is too much house in NYC, where real estate prices are insane. Spending all or most of the windfall on a home seems unreasonable to me.
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neurosphere
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Re: Windfall in NYC

Post by neurosphere »

huxbnw wrote:Does anyone have a recommendation of an advisor, with a Bogleheads outlook and paid by the hour, that we can meet with to discuss. TIA.
I don't have a specific recommendation, but I have a list of fee-only planners in NYC and their hourly rates and AUM fees. I have no personal experience with any of them. I sent you a private message with more info.

NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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huxbnw
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Re: Windfall in NYC

Post by huxbnw »

Thank you NS, that's very helpful.
manwithnoname
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Re: Windfall in NYC

Post by manwithnoname »

If you live in NYC you will be in combined state /NYC tax bracket of abut 12% (and given what came out in the recent primary campaigns NYC taxes will be going up on higher incomes). Since mortgage interest is deductible on all three returns you should put the minimum down, e.g., 20%, to get the max mortgage interest deduction to reduce your income taxes as well as max out on pre tax retirement savings such as 401k and IRAs. Invest part of windfall in NY tax exempt bond funds to generate tax free income. You should also fund the NYS 529 plan to take additional state and city tax deductions if not doing so already. Also check to see if there is a deduction for long term care ins.

given that NYC residential apt prices as well as mge rates are on the upswing, you should not wait to long to buy.
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neurosphere
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Re: Windfall in NYC

Post by neurosphere »

manwithnoname wrote:If you live in NYC you will be in combined state /NYC tax bracket of abut 12% (and given what came out in the recent primary campaigns NYC taxes will be going up on higher incomes). Since mortgage interest is deductible on all three returns you should put the minimum down, e.g., 20%, to get the max mortgage interest deduction to reduce your income taxes as well as max out on pre tax retirement savings such as 401k and IRAs. Invest part of windfall in NY tax exempt bond funds to generate tax free income. You should also fund the NYS 529 plan to take additional state and city tax deductions if not doing so already. Also check to see if there is a deduction for long term care ins.

given that NYC residential apt prices as well as mge rates are on the upswing, you should not wait to long to buy.
Yes, but....

Only mortgage interest on balances below 1 million dollars are deductible. So there is no point from a federal tax reason to get a mortgage larger than that. Given the price of many homes in the NYC area, it is not at all unreasonable to assume the OP could be looking at homes well above $1M, especially since the OP has two children and title of the post has "windfall" in it. :D

But otherwise, yes, maxing out retirement accounts, 529s and utilizing NY and/or national municipal bonds in taxable accounts should almost certainly be part of his strategy.
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damjam
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Re: Windfall in NYC

Post by damjam »

huxbnw wrote:We plan to continue working. Combined we make mid six figures and will hopefully be in the high six figures in 3-5 years. I want to maintain the option of retiring early (in 10-15 years), although I could see myself working in some capacity through my 60's and 70's. I have no desire to stop working in the short to medium term. The question is how much is too much house in NYC, where real estate prices are insane. Spending all or most of the windfall on a home seems unreasonable to me.
In NYC it might not be unreasonable to spend all or most of the windfall on a home. Depending on the size of the windfall of course. I wouldn't think of it in terms of what percentage of the windfall to spend on a home. I would think of it as: What multiple of income do I want to spend on a home?

As another poster alluded to, you don't want to be in too "big" of a house given what your ongoing income will be. It is the situation talked about in the book the Millionaire Next Door. The parents give the children an expensive oriental rug. Well, now they need to buy furniture that measures up to that rug and so on. Moving to a more upscale neighborhood or building usually has the same effect. Eventually you are trying to keep up a lifestyle that may beyond your means.

If it were me, I would first project what amount of savings I needed for retirement first. Once retirement needs are taken care of, then I would consider using the remaining funds for a home. But in no case would I spend more than about 10x my ongoing income on a home.
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Re: Windfall in NYC

Post by stan1 »

I think it is important to keep liquidity. Given your income levels (even in NYC) I would expect you would have a seven figure taxable account now in addition to your maxed out tax deferred accounts (or well on track to get there). If you have $1M-$2M in a taxable account then I think its fine to buy a $3-4M apartment with a $1-2M mortgage (as an example). What I would not do is put $3M into an apartment and leave $50K in a taxable account; that's not enough liquidity (again as an example). I'm using imaginary numbers because you didn't give us much to work with. :wink:
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
manwithnoname
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Re: Windfall in NYC

Post by manwithnoname »

neurosphere wrote:
manwithnoname wrote:If you live in NYC you will be in combined state /NYC tax bracket of abut 12% (and given what came out in the recent primary campaigns NYC taxes will be going up on higher incomes). Since mortgage interest is deductible on all three returns you should put the minimum down, e.g., 20%, to get the max mortgage interest deduction to reduce your income taxes as well as max out on pre tax retirement savings such as 401k and IRAs. Invest part of windfall in NY tax exempt bond funds to generate tax free income. You should also fund the NYS 529 plan to take additional state and city tax deductions if not doing so already. Also check to see if there is a deduction for long term care ins.

given that NYC residential apt prices as well as mge rates are on the upswing, you should not wait to long to buy.
Yes, but....

Only mortgage interest on balances below 1 million dollars are deductible. So there is no point from a federal tax reason to get a mortgage larger than that. Given the price of many homes in the NYC area, it is not at all unreasonable to assume the OP could be looking at homes well above $1M, especially since the OP has two children and title of the post has "windfall" in it. :D

But otherwise, yes, maxing out retirement accounts, 529s and utilizing NY and/or national municipal bonds in taxable accounts should almost certainly be part of his strategy.
With 20% down, that's a $1,250,000 residence. If he pays more than $1.25M, he can put more $ down instead of investing in NYC bonds. Since we don't know how much his windfall / housing needs are, its speculative to discuss such limits which is why I didn't mention it.
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neurosphere
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Re: Windfall in NYC

Post by neurosphere »

manwithnoname wrote: With 20% down, that's a $1,250,000 residence. If he pays more than $1.25M, he can put more $ down instead of investing in NYC bonds. Since we don't know how much his windfall / housing needs are, its speculative to discuss such limits which is why I didn't mention it.
Agreed. We need more info. But given the information we have, it's entirely reasonable and/or likely the home will be well above $1M. But in any case, the OP now is aware that a limit exists, and can use that information if it applies to his situation.
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chaz
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Re: Windfall in NYC

Post by chaz »

Buy in New Jersey.
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Valuethinker
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Re: Windfall in NYC

Post by Valuethinker »

huxbnw wrote:We plan to continue working. Combined we make mid six figures and will hopefully be in the high six figures in 3-5 years. I want to maintain the option of retiring early (in 10-15 years), although I could see myself working in some capacity through my 60's and 70's. I have no desire to stop working in the short to medium term. The question is how much is too much house in NYC, where real estate prices are insane. Spending all or most of the windfall on a home seems unreasonable to me.
Buy the home you want to live in, that is not excessive to your needs.

If there's anything left over, invest the rest.

NYC is like London (some people have even now said NYC is *cheaper* than London-- like for like, I don't believe it, but London is nuts). A decent 3-4 bedroom Victorian home in a reasonable suburb can set you back £800,000, easy (perfectly possible to pay £1m for it ie USD 1.6m). It's very easy to get into a situation where 2/3rds or more of your wealth is in your house-- not a desirable situation but that is not with an excessive standard of living.

So say set a goal of $1m and see whether the location and quality of home that you get for that are sufficient. I doubt it buys a nice 3 bed in Manhattan? Nor a townhouse in Park Slope?

Aim so that in 10 years say your home equity will only be worth 1/3rd of your total wealth. I have a slightly Talmudic view that one should aim to have 1/3rd in one's home, 1/3rd in one's business, 1/3rd in one's financial investments. Even if you don't own a business, then no more than 40% in the home (and yes, I break that living in London, quite badly).
livesoft
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Re: Windfall in NYC

Post by livesoft »

Don't forget that there is more to NYC than Manhattan.
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neurosphere
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Re: Windfall in NYC

Post by neurosphere »

livesoft wrote:Don't forget that there is more to NYC than Manhattan.
Yes, but even most Brooklynites call Manhattan "The City". :wink:

NS (who lives in Manhattan because walking to work is worth a lot to me)
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huxbnw
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Re: Windfall in NYC

Post by huxbnw »

Thanks all, this is helpful information.

To give some more details, because it sounds like many of you have more good ideas but need more info, the windfall is in the 4-6M range. We currently own our apartment that is worth around 1M, but are looking at buying a house. Houses in the areas we want to live range from 2M (for a small house in need of a gut renovation) to well over 5M. We are looking mostly at homes in the 2.5-4M range, because that is what is most available (though to be honest there is not much available, and it seems to get more and more expensive by the week!). These are "typical" 4-5 bedroom townhouses in a nice neighborhood, but not giant mansions. We want space for our family (not necessarily finished growing), occasional guests, etc., and to be near our kids school and transportation.

We currently max out 401Ks, IRAs and 529s, and would plan to continue that (until that saving is no longer required). The last thing we would want to do is put all our money in a house and have nothing saved. Should we plan to buy outright, or does it make more sense to take out a mortgage (say $1M if that is the maximum deductible amount) for a portion?

Any other questions? Thanks!
livesoft
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Re: Windfall in NYC

Post by livesoft »

i'm kinda curious why you all aren't "out of there" already. You know, retired philanthropists. There is a whole world out there beyond NYC. Fear of the unknown?
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Re: Windfall in NYC

Post by Tarkus »

First, congratulations on the windfall!

I recently sold 60% of my business and got a similar-sized windfall myself. But I live in the Midwest, so I'm not sure if I can really appreciate your housing issues. My house represents about 10% of my net worth now. I don't want to move again, but if I did I could see buying 2X the house. If you move quickly you can probably lock a 15 year fixed-rate mortgage at 3.5% if you keep the mortgage below $417K. Jumbos are a bit more expensive. I would probably finance up to $1 million if I could support it with my ongoing income. Because on an after-tax basis, the mortgage is very very cheap. You will likely win by taking the mortgage and investing the $1 million in low cost index funds and municipal bond funds.

Be sure you have a will. If you want to leave a legacy for your children, you could set up a trust fund for them and contribute up to $28K per year to your children, free of the gift tax. (Better to give to a trust fund than over-fund a 529, IMO.)

Once you have significant appreciated stock assets in a taxable account (and you may already), I would also consider pre-funding a Vanguard donor-advised charitable fund at https://www.vanguardcharitable.org. You can make your charitable dollars go much farther by taking not only the charitable contribution tax benefit, but you can also save on cap gains taxes. You can start for as little as $25K. Never write another charitable contribution out of your standard checking account! This also gives you a path to pre-fund charitable contributions during years where you would really like the tax break.
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Re: Windfall in NYC

Post by Watty »

Our major question is what percentage of the windfall is too much to invest in a primary residence (knowing that we plan to live in NYC for the next 10-20 years).
The fact the money came from a windfall dosn't make it any differnt than if you had saved and invested to build up the funds.

I would look at the "how much" question in terms of percentages of your net worth. What I would be concerned about is buying a expensive house with a large mortage where the cost of the house is very high relative to your net worth.
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Re: Windfall in NYC

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huxbnw wrote:Thanks all, this is helpful information.

To give some more details, because it sounds like many of you have more good ideas but need more info, the windfall is in the 4-6M range. We currently own our apartment that is worth around 1M, but are looking at buying a house. Houses in the areas we want to live range from 2M (for a small house in need of a gut renovation) to well over 5M. We are looking mostly at homes in the 2.5-4M range, because that is what is most available (though to be honest there is not much available, and it seems to get more and more expensive by the week!). These are "typical" 4-5 bedroom townhouses in a nice neighborhood, but not giant mansions. We want space for our family (not necessarily finished growing), occasional guests, etc., and to be near our kids school and transportation.

We currently max out 401Ks, IRAs and 529s, and would plan to continue that (until that saving is no longer required). The last thing we would want to do is put all our money in a house and have nothing saved. Should we plan to buy outright, or does it make more sense to take out a mortgage (say $1M if that is the maximum deductible amount) for a portion?

Any other questions? Thanks!
4-6m sounds like Manhattan itself rather than Brooklyn but count that as a naive foreigner's view. Even in modern London, that would buy you a pretty nice house (but not in the dead centre). Housing prices in Prime Central London run c. £1500/ square foot (ie say USD 2250).

Well on that basis I'd look for a 4m house that suited, and invest the rest.

Would I want a mortgage? It's 'cheap' money, and it's nice to have flexibility, but life debt free is a wonderful thing.

You could borrow $1m and invest it in the stock market. Say your after tax interest rate is 3%, then your after tax return on investment has to be 3%. It's a reasonably bet, but anything but certain, that in the next 25 years your average pa after tax return on stocks will exceed 3%. The main thing about a long term fixed interest rate debt is that it is an inflation hedge.

A mortgage gives someone else a legal claim on your affairs. I know from sorting out my Dad's affairs (his death was sudden, and unexpected) that you want *simplicity* in life, and a mortgage is a legal encumbrance on an asset- less simple.

Oddly, even in your shoes, if I did have a mortgage for $1m, I'd life insure to that amount- -for say 20 years. That way if I died suddenly, my spouse could just pay off the mortgage and get on with life. That's even though that $1m life insurance is neither here nor there to you (but always I remember Cantor Fitzgerald and 911: some of the wives sued the government, because the offered $1m or so settlement was just not enough, relative to what their husbands had been making-- from an external perspective that sounds appaling, but having lived in London for 20 years and knowing City people, I kind of get where they were coming from).

From personal experience this has proven helpful. If you die making $250k a year, even though you have savings, that leaves a big hole for your spouse and family. Don't forget disability insurance either! ie don't self insure to the extent you are theoretically capable of.

As other posters have pointed out, even maxxed tax deferred savings aren't going to pay for a retirement at the standard of living you probably have come to expect (especially not in New York ;-)). You are going to have to build up a taxable portfolio. University tuition by the time your kids get to college will probably be in the range of c. $500k for a 4 year private college, and then there's law/ medicine/ B School ;-).

And houses *cost*. This I know. Taxes, utilities, maintenance. And wait til you renovate. I had no idea what one can pay for a 'nice but not extraordinary' kitchen ;-).

I'd aim for c. 3.5m if I could, and have some spare cash.
Last edited by Valuethinker on Sun Sep 15, 2013 10:39 am, edited 1 time in total.
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damjam
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Re: Windfall in NYC

Post by damjam »

huxbnw wrote:We currently max out 401Ks, IRAs and 529s, and would plan to continue that (until that saving is no longer required). The last thing we would want to do is put all our money in a house and have nothing saved. Should we plan to buy outright, or does it make more sense to take out a mortgage (say $1M if that is the maximum deductible amount) for a portion?
You may already know this, but I'll just put it out there that maxing out your 401ks and IRAs will undoubtedly not be enough to meet your retirement needs.
I would suggest you read Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle by Wade Pfau. Make note of Table 1 which shows safe minimum savings rates needed to replace various levels of preretirement income.
I would begin running some simulations using the Retirement Calulators listed in the WIKI. I personally like FIREcalc.

I live in Brooklyn and know that the price range you are talking about will not get you a palace. However it will get you a very very nice Brownstone here. I'm a little worried that you have begun to look in that range and anything "less" will now be unacceptable. You are right to pose the question you originally started with. Take the time to do the research and make the projections.
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Re: Windfall in NYC

Post by Valuethinker »

huxbnw wrote:Hello Bogleheads. I just received a significant windfall. I live in NYC with my wife and two small children. I have read the Bogleheads wiki page on windfalls multiple times and am in no rush to spend. At the appropriate time, however, my wife and I plan to spend a significant portion of the windfall to purchase a home and invest the remainder in Vanguard. Our major question is what percentage of the windfall is too much to invest in a primary residence (knowing that we plan to live in NYC for the next 10-20 years). Does anyone have a recommendation of an advisor, with a Bogleheads outlook and paid by the hour, that we can meet with to discuss. TIA.
Interesting how far we have drifted from your original question.

I cannot say I know any advisers in USA. You could email Larry Swedroe (ex Wall Street, lives in St. Louis area I think) and see if he has any recommendations?

Also William Bernstein.

What I would say is I think with that much money, ex the house purchase (and I totally understand that in NYC $4m might not buy you a palace-- only London seems to match it in insanity), you are probably going to want an adviser who deals in DFA funds.

Mostly, Vanguard Funds can do the heavy lifting. What DFA offers is factor tilted funds (eg Small Cap Value) that use 'active' strategies to exploit those factors (eg minimize trading costs). For some things (SCV, Emerging Markets etc.) that's probably worth paying their fees.
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huxbnw
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Re: Windfall in NYC

Post by huxbnw »

Thanks for all the responses. We want to make a very reasonable choice here, in terms of a home that can serve our family for the next 20 years, while also saving a significant portion for retirement (and, as some have said, our childrens' education).

One significant concern is the fact that the market for nice townhouses in desirable locations of Manhattan and Brooklyn have increased up to 25% in the last 6-9 months, while we cannot predict the future, there is every reason to believe that trend will continue, and a home currently priced at 3M will quickly escalate up to 5M. At this point we both want to continue working and have no desire to retire, or leave the city. We have made our "home" here, with friends, jobs and school we intend to stick with for the long term - we just need the right house.

One additional question: What would be a very safe total amount to invest in retirement at this point, i.e. that we would not touch. We are in our mid-30s and the last thing we want to do is make an unwise financial decision, buying too much house and not saving enough.
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Re: Windfall in NYC

Post by neurosphere »

huxbnw wrote: One additional question: What would be a very safe total amount to invest in retirement at this point, i.e. that we would not touch. We are in our mid-30s and the last thing we want to do is make an unwise financial decision, buying too much house and not saving enough.
Hmm. "Very safe" total amount?

One way to get at this question is to start at the end and work your way back. You need to determine two things, at minimum. 1) How much in after-tax spending you do want to have in retirement and 2) how long to do expect to live.

Once you get estimates for these parameters, then you can work your way back to calculate who much money you would need to put away each year, making reasonable assumptions (i.e. wild a-- guesses) on your future investment returns, and the annual amount you need to put away, which will get you to the "number" you need to reach by your desired retirement age.

There are few somewhat easier rules-of-thumb which may give you an quicker estimate. First, determine how much you want to be able so spend during retirement, divide that number by 0.03. This will give you a general ballpark of where you need to get to have a portfolio which is likely to last you 30 years. But you want a "very safe" amount. So take your retirement spending and divide by 0.02. I.e. a 2% withdrawal rate. Depending on your current savings, and you future income desires, you might either be pleasantly surprised, or perhaps shocked, at what you will end up needing to have saved prior to retirement.

Another crude method is to take your current income, and multiply by 25. When you have that amount in retirement savings, you can retire with roughly your current standard of living.

Note, there a LOT of nuances to all of these methods and rules of thumb. I just want to be clear that this provides a REALLY rough number that can serve as a starting point while you spend the next few months or so doing additional research. Alternately, you can work with an hourly planner to walk you though all the steps needed to figure out what it's going to take in annual savings to reach your goals, whatever those goals may be.

NS
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Re: Windfall in NYC

Post by Savvy »

huxbnw wrote: One significant concern is the fact that the market for nice townhouses in desirable locations of Manhattan and Brooklyn have increased up to 25% in the last 6-9 months, while we cannot predict the future, there is every reason to believe that trend will continue, and a home currently priced at 3M will quickly escalate up to 5M. .
Be very, very careful.

Let's think of a very extreme example. Let's say your current neighbor told you "Hux, in one month I will give you $100,000,000 for your current condo." And let's assume that he/she was good for it. If the market value of your current condo is $500,000 and someone gave you a very generous offer of $1,000,000 for the condo, you would say NO because you expect to be offered a much higher value in a short amount of time. All this to say...it's priced in, it's priced in, it's priced in.

Savvy
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Watty
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Re: Windfall in NYC

Post by Watty »

the windfall is in the 4-6M range. .........

We currently own our apartment that is worth around 1M, but are looking at buying a house. Houses in the areas we want to live range from 2M (for a small house in need of a gut renovation) to well over 5M. We are looking mostly at homes in the 2.5-4M range, because that is what is most available
If you buy a $3M house I would guess that your property taxes, insurance, and other housing costs would increase by somewhere around $50,000 a year so. Instead of assuming you will pay the additional $50K out of your income another way to look at it is that you will need to commit an amount that can be invested and generate $50K a year in income to pay the additional housing expenses. It would probably require more but a million might be a good place to start.

That means that to buy the $3 million dollar house that is in effect committing a total of $4 million dollars ($1M in current house that would be sold, $2m additional +$1M expense fund).

The question about if this is a reasonable or smart financial decision is really a trick question, since it is not a financial decision. If it was just a financial decision then the right answer would be to move somewhere a lot more affordable unless you have some million dollar salary for a job that requires you to live there. If that is the case then buying one even without the windfall could make sense.

Since it not a financial decision then these are the three questions I would look at;

1) Can you afford it? ---- yes

2) If it goes badly wrong will you be in dire straits? --- I don’t think so. Say a few years from now you are fired and cannot find another job and you are forced to sell your house for a 75% loss(it could happen). Reading between the lines I would think that you would still have enough to move someplace affordable and still have a much higher than average lifestyle even if you never worked again.

3) If you did not spend the money on the house, then what would you likely spend it on? (Note: the money might be invested and not be spent for decades, but it will eventually be spent by you or your heirs.) The question that only you can answer is if the house is worth the tradeoff of not getting whatever else the money could buy.

If you do buy it paying cash for it might not be the mathematically optimal strategy but that would allow you to get through any rough spots in the future easier and you could also save a lot each year since you would not have a mortgage payment.

Personally I before I would decide I would take a few trips to check out other areas of the country to have a good comparison to living in NYC. If you have lived there a long time you likely don't have a realistic view of what other areas are really like. You might very well find that living in the best area of a lessor city is a lot better than living in a less prime area of NYC.

One problem with staying in an expensive area that you might want to factor into your decision is that when your kids grow up they will have a heck of time affording a place to live there, especially if housing prices go up a lot more like you are expecting. I saw that was a problem when I lived in silicon valley.

Ask your older friends or coworkers how their kids that are in their 20's are doing, be sure to find out how ALL their kids are doing and not just the ones that are doing unusually well. For contrast here in Atlanta you can get a nice modest house in decent area for $150K so it is not unusual for people in their 20's to be able to comfortably buy houses so there is no financial need for them to move away.
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HomerJ
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Re: Windfall in NYC

Post by HomerJ »

huxbnw wrote:Thanks for all the responses. We want to make a very reasonable choice here, in terms of a home that can serve our family for the next 20 years, while also saving a significant portion for retirement (and, as some have said, our childrens' education).

One significant concern is the fact that the market for nice townhouses in desirable locations of Manhattan and Brooklyn have increased up to 25% in the last 6-9 months, while we cannot predict the future, there is every reason to believe that trend will continue, and a home currently priced at 3M will quickly escalate up to 5M. At this point we both want to continue working and have no desire to retire, or leave the city. We have made our "home" here, with friends, jobs and school we intend to stick with for the long term - we just need the right house.

One additional question: What would be a very safe total amount to invest in retirement at this point, i.e. that we would not touch. We are in our mid-30s and the last thing we want to do is make an unwise financial decision, buying too much house and not saving enough.
We really need to know the numbers... How much do you think you need to save to enjoy your current lifestyle in retirement? $8 million??

Now, what if you buy a 3 million dollar house? How much more will your expenses go up? Will you now need $12 million to retire someday?

Every dollar you increase your lifestyle counts double against you. One, that's less dollars you can save, Two, that more dollars you need to save in order to finance that more expensive lifestyle. The best thing my wife and I did was determine when we had "enough", and we stopped increasing our lifestyle. Every raise after that went to savings.

I can't tell you what a very safe total amount is to invest in retirement, because I don't know what your needs are. What will your expenses be with the new house? $300k a year? $500k a year? Multiply that by 25, and you'll know what you need to retire (in today's dollars) in NYC in that house. Say it's 10 million, and you have 20 years until retirement. If you can invest $3 million of that windfall, and save $100k a year, you'll be fine. If you need 15 million, you might not be.

I would think spending $2 million of your $4-$6 million windfall on a hard asset like a house, and saving the rest is fairly reasonable, but it depends on how much you will be spending each year.
z3r0c00l
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Re: Windfall in NYC

Post by z3r0c00l »

livesoft wrote:i'm kinda curious why you all aren't "out of there" already. You know, retired philanthropists. There is a whole world out there beyond NYC. Fear of the unknown?
People who live in NYC can travel too.
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MP173
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Re: Windfall in NYC

Post by MP173 »

Not to be flippant, but I sure am glad to be living in the Midwest, particularly in a medium sized town an hour from Chicago.

The housing values are extremely opposed (figure 10x for a comparable home). Yeah, we don't have the cultural features of NYC, but this is a pretty good life.

Best of luck to you on planning and executing this. Having been thru this myself, not to your degree, but still pretty significant, it is considerable planning. Sometimes it is best to do nothing for awhile, but I understand your situation with housing prices rising. But I would caution you about chasing performance...and home prices.

I have no suggestions for a fee only advisor, but would would agree with earlier suggestion about contacting Larry. He might even take you on as a client.

Ed
livesoft
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Re: Windfall in NYC

Post by livesoft »

z3r0c00l wrote:
livesoft wrote:i'm kinda curious why you all aren't "out of there" already. You know, retired philanthropists. There is a whole world out there beyond NYC. Fear of the unknown?
People who live in NYC can travel too.
As a former New Yorker, I have used all the airports: JFK, LGA, EWR, ISP, and Republic. Maybe some new ones have been added?
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huxbnw
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Re: Windfall in NYC

Post by huxbnw »

[quote="livesoft"] i'm kinda curious why you all aren't "out of there" already. You know, retired philanthropists. There is a whole world out there beyond NYC. Fear of the unknown? [/quote]

Good question (although not sure this is enough to be a philanthropist). We are in our early to mid-30s, have jobs with a high earning potential that require proximity to New York, have two small children, have developed a community of friends, and genuinely love being in New York (in particular, the cultural scene). I've asked myself the same question, but don't feel as though we've reached the moment when we are ready to leave the city.

We are incredibly fortunate to be in this position and just want to make smart financial decisions.[/quote]
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HomerJ
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Re: Windfall in NYC

Post by HomerJ »

huxbnw wrote:We are incredibly fortunate to be in this position and just want to make smart financial decisions.
Just don't increase your lifestyle so much that you're trapped in those high-paying jobs. That's really the only way you can lose at this point...
Valuethinker
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Re: Windfall in NYC

Post by Valuethinker »

huxbnw wrote:Thanks for all the responses. We want to make a very reasonable choice here, in terms of a home that can serve our family for the next 20 years, while also saving a significant portion for retirement (and, as some have said, our childrens' education).

One significant concern is the fact that the market for nice townhouses in desirable locations of Manhattan and Brooklyn have increased up to 25% in the last 6-9 months, while we cannot predict the future, there is every reason to believe that trend will continue, and a home currently priced at 3M will quickly escalate up to 5M. At this point we both want to continue working and have no desire to retire, or leave the city. We have made our "home" here, with friends, jobs and school we intend to stick with for the long term - we just need the right house.

One additional question: What would be a very safe total amount to invest in retirement at this point, i.e. that we would not touch. We are in our mid-30s and the last thing we want to do is make an unwise financial decision, buying too much house and not saving enough.
From an investment point of view, take it as given with the house that when you buy it, you hope to get back what you put into it.

And if you are really lucky you get that plus inflation.

In other words, houses are lousy investments. Yes when NYC was on the verge of bankruptcy you could probably pick up an apartment on the Upper West Side for maybe $100k that is now worth $3m say. (Notting Hill in London was a famous area of drug dealing, clashes between police and blacks in the 1970s. A flat that would have cost you £30k then would now set you back a couple of million, easy-- general inflation has risen maybe 3x, and house prices there have risen maybe 60x).

But, generally, houses make lousy investments-- think the good burghers in those lovely Victorians in Buffalo NY or Detroit MI. Nisiprius has posted the longest series of price data we have (Herengracht Canal, Amsterdam, 1630s to present day). You see periods when houses are very expensive, and when they are very cheap. There is no sustained long term upward trend. Neil Monnery's 'Safe as Houses: 8 centuries of housing prices' makes the same point looking at many different countries.

So:

- it's good to get the house you want, and prices may well keep going up

- once you have it, you have to not think of it as an investment, but as consumption (an investment in consumption, if you will). With a hope that you get out the purchase price + inflation (but less maintenance repairs renovations, and believe me these *cost*: you live in a place like London or New York, they cost even more). By no means, even in the 20th century, have house prices always kept up with inflation

I'd say you are looking at 3-4 million, you probably want to move fast, and then you are done and dusted until the next big life change (illness, career, divorce, death etc.). And the metric of $50k pa in costs is not a bad one.

Price comparisons with the rest of the country are somewhat irrelevant. For your career, you need to live in NYC. And you like the place. So the price of a house is the price of a house-- just make sure you buy some place you like living, where you don't get 'neighbour envy'.
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