5-7 year investment with yearly withdrawal?

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Topic Author
ColHeights
Posts: 13
Joined: Sat Jun 24, 2017 6:09 pm

5-7 year investment with yearly withdrawal?

Post by ColHeights »

Hi Bogleheads!

So I bought a house, but rather than put enough down to make my mortgage/taxes $3500 a month, I put down enough to make the mortgage 4k/mo and would like to subsidize my income with about 50k i have saved (and saved from having to put down the mortgage). I'm also doing a 7/1 ARM but i don't really think i'll be there more than 5 years as my income is on the upswing so...i really need 6k a year from the 50.

Since this would all be in a taxable account. I'm thinking that in the beginning i would do

10k Vanguard Prime MM VMMXX
20K Vanguard Intermediate Tax Exempt Bonds Admiral - VWIUX
20K Vanguard Total Stock Market Admiral Funds - VTSAX

And every year I'd withdraw 6k.

My rationale being -

1) I'm in the 33% tax bracket - not the 40%+ effective ones where Tax Managed funds start to beat VTSAX.
2) This gives me more control to change the allocation if i want to rather than buying Tax Managed Balanced funds
3) I can still take advantage of tax loss harvesting if bonds suffer in the bull market.
4) Even if I lose 40% of the value in one year I still have 30k to pay.
5) I get far more yield and return than just sticking it in Cash, MM, CD, etc.
6) Intermediate Tax Exempt Bonds do not have the .25% purchase fee that VTEAX does and since I'd be rebalancing/engaging in TLH I probably don't want that.

Thoughts? Love this site - been super helpful over the years and I'm psyched to participate!
jfave33
Posts: 3287
Joined: Thu Mar 19, 2015 6:18 pm

Re: 5-7 year investment with yearly withdrawal?

Post by jfave33 »

Finance the extra through your income - force yourself to make savings elsewhere if you have to.

"4) Even if I lose 40% of the value in one year I still have 30k to pay." - falling back on the idea of selling low is never a good plan. Why take that risk?

Or if you really can't then you could set aside $6k x 5 years = $30k in CDs or something and put the rest in with your main retirement or whatever allocation. That would be fine. I guess that is what you really meant by 4)
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jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 11:00 am
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: 5-7 year investment with yearly withdrawal?

Post by jimb_fromATL »

ColHeights wrote:Hi Bogleheads!

So I bought a house, but rather than put enough down to make my mortgage/taxes $3500 a month, I put down enough to make the mortgage 4k/mo and would like to subsidize my income with about 50k i have saved (and saved from having to put down the mortgage). I'm also doing a 7/1 ARM but i don't really think i'll be there more than 5 years as my income is on the upswing so...i really need 6k a year from the 50.

Since this would all be in a taxable account. I'm thinking that in the beginning i would do

10k Vanguard Prime MM VMMXX
20K Vanguard Intermediate Tax Exempt Bonds Admiral - VWIUX
20K Vanguard Total Stock Market Admiral Funds - VTSAX

And every year I'd withdraw 6k.

My rationale being -

1) I'm in the 33% tax bracket - not the 40%+ effective ones where Tax Managed funds start to beat VTSAX.
2) This gives me more control to change the allocation if i want to rather than buying Tax Managed Balanced funds
3) I can still take advantage of tax loss harvesting if bonds suffer in the bull market.
4) Even if I lose 40% of the value in one year I still have 30k to pay.
5) I get far more yield and return than just sticking it in Cash, MM, CD, etc.
6) Intermediate Tax Exempt Bonds do not have the .25% purchase fee that VTEAX does and since I'd be rebalancing/engaging in TLH I probably don't want that.

Thoughts? Love this site - been super helpful over the years and I'm psyched to participate!
I'm having a hard time reconciling how it's an advantage to pay taxes on earnings in your investment plan and take the risk that it won't earn as much as you can guarantee to save in interest by paying the extra lump sum on the mortgage.

How much did you actually pay down; how much did you finance; and what rate?

What is the payment for P&I alone? (The escrow for taxes and insurance are not related to the cost of the mortgage, since you'd have to set that amount aside even if you did not have a mortgage.)

Do you also have a state income tax?

jimb
Topic Author
ColHeights
Posts: 13
Joined: Sat Jun 24, 2017 6:09 pm

Re: 5-7 year investment with yearly withdrawal?

Post by ColHeights »

Hi Jimb - the purchase was 929k, the financing was 637k with a 3.5% 7/1 ARM.

So P+I = $2,860

So 4.11% after tax return is my break even point (yes i guess I am getting some mortgage interest deduction). But again why would I want to pay to borrow the money? If I put down ALL of my remaining capital ($120k or so) it would reduce my mortgage by about the $500 i'm seeking to subsidize it. But then I wouldn't even have anything left and i'm paying the bank when i could have my money working for me.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: 5-7 year investment with yearly withdrawal?

Post by dbr »

ColHeights wrote:Hi Jimb - the purchase was 929k, the financing was 637k with a 3.5% 7/1 ARM.

So P+I = $2,860

So 4.11% after tax return is my break even point (yes i guess I am getting some mortgage interest deduction). But again why would I want to pay to borrow the money? If I put down ALL of my remaining capital ($120k or so) it would reduce my mortgage by about the $500 i'm seeking to subsidize it. But then I wouldn't even have anything left and i'm paying the bank when i could have my money working for me.
The calculation is not about how much money you make but rather how much risk to take to gain more money. If you orrow money to invest in stocks you have effectively added a negative bond and a positive stock allocation with a result you are more balanced to stocks than before. This may be a valid choice if you like the actual asset allocation. I am less clear on wny to take on a negative bond to invest in a positive bond.

There can be a general discussion on the subject of "Should I pay off my mortgage?"
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