Where to invest after maxing out, with a twist

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finance_learner
Posts: 8
Joined: Mon Aug 14, 2017 12:44 am

Where to invest after maxing out, with a twist

Post by finance_learner » Mon Aug 14, 2017 1:37 am

Hi all,

I’m new to this forum and read the The Bogleheads' Guides 4 years ago and have worked steadily on my finances. I have a been given a raise recently and I was wondering where I should put my additional cashflow (~$1500/mo). The options that I am considering are paying down mortgage, 529, saving for down payment for second house (we may be moving for another job), investment in taxable account.

Emergency funds: 6 months of expenses in savings
Debt: Mortgage, $350,000, 3.375% 30 year fixed
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 0% State
Residence: West Coast
Age: Wife and I are mid 30’s, 1 young child, another on the way
Desired Asset allocation: 100% stocks ("retirement" accounts only; excludes savings/emergency fund) 80/20 between VOO and VEU
No desired style tilt

Current portfolio: $80k, excluding savings/emergency fund split 80/20 between VOO and VEU

Contributions
We currently max out on contributions to 401K ($18K x2), roth IRA ($5.5K x2), and Coverdell ($2K). No HAS available for either of us.
Additional Variables
Another child on the way. Wife intends to return to work but who knows for the future.
I’m putting out feelers for other jobs in other west coast cities. Whether we move in the next 3 years is 60/40.


Questions:

1. Where should I put my additional income?
2. Paying down mortgage:
a. Seems quite safe but we will probably never see a 3.375% mortgage again
3. 529
a. Saving too much for children?
4. Down payment (in savings account) for second house in case we relocate
a. Our current house is in a city that is quite “hot” for the foreseeable future given demographics and it seems to make sense to keep the house even if we move (I realize it’s unbogolian to think this)
b. Wherever we land, given the work we do, housing will likely not be cheap in that city/region
c. But it does seem scary to have that much leverage, with 2 homes (if we keep our current and buy in new city) and not knowing whether wife will work in the long term
5. Investment in taxable account
a. I’m hesitant here since we seem to be quite concentrated in stocks and it seems like we’ve had quite a historically long market run (I realize it’s unbogolian to think this)

My inclination is somewhat at the 2 extremes, either pay down the mortgage or save for a down payment. But I really need some help reasoning this through.

Thank you!
Learner

Tamarind
Posts: 604
Joined: Mon Nov 02, 2015 2:38 pm

Re: Where to invest after maxing out, with a twist

Post by Tamarind » Mon Aug 14, 2017 6:06 am

Welcome to the forum!

If you feel like you're likely to move, I'd save for the down payment rather than prepay the mortgage.

You could also establish a taxable account for retirement, since you've exhausted tax-advantaged options. No rule that you can only have as much for retirement as fits in tax-advantaged accounts.

CurlyDave
Posts: 186
Joined: Thu Jul 28, 2016 11:37 am

Re: Where to invest after maxing out, with a twist

Post by CurlyDave » Mon Aug 14, 2017 6:42 am

1. I think paying down a 3.75% mortgage early is not the best use of your money.

2. I would put anything available a taxable account. Limiting your retirement savings to the amount the government tells you you can have is a sure-fire way to have less than you would like. ETFs are very tax-efficient.

CnC
Posts: 152
Joined: Thu May 11, 2017 12:41 pm

Re: Where to invest after maxing out, with a twist

Post by CnC » Mon Aug 14, 2017 12:43 pm

We currently put quite a bit into our taxable account.


Don't do what we did, just bank $2k a month untill you have over 200,000 in the bank/CDs then say wow... We need to invest. It was a good problem to have but it pushed our retirement back to likely 50 rather than 45 if we invested everything from the onset.


If you are able to max both 401k's and can contribute to a Roth IRA I would definitely start putting money in a taxable, expecially if you want to retire early. Because you are in trouble if you end up with 3+mil in your 401k's at 55 because you can't touch them without a big penalty.

Bacchus01
Posts: 1049
Joined: Mon Dec 24, 2012 9:35 pm

Re: Where to invest after maxing out, with a twist

Post by Bacchus01 » Mon Aug 14, 2017 12:57 pm

I did something similar a few years back. You are already ahead from a planning stage. We had moved several times, and sold a house, cashed some options, etc and pretty soon we're sitting on like $400K thinking "what the heck?" We had a mess of investments but no rhyme or reason and we had done nothing for 529, Roth, etc.

Then came Bogleheads and our situation is so much cleaner.

Assuming you have your emergency fund squared away, I'd make sure you are maxing your tax advantaged space first (401k up to match, HSA, Roth, remaining 401k space - in that order) then look at 529s then look at paying off the mortgage. I only like 529s if there is a state tax deduction, so check that out first.

finance_learner
Posts: 8
Joined: Mon Aug 14, 2017 12:44 am

Re: Where to invest after maxing out, with a twist

Post by finance_learner » Mon Aug 14, 2017 11:57 pm

Thank you all for your input. It seems the opinions are either taxable account or save for potential down payment in a new location. Any thoughts on 1 versus the other? The other factor is that if we move and make our current residence a rental, then we would hire a management company which would eat into our profits.

JBTX
Posts: 1202
Joined: Wed Jul 26, 2017 12:46 pm

Re: Where to invest after maxing out, with a twist

Post by JBTX » Tue Aug 15, 2017 12:33 am

finance_learner wrote:
Mon Aug 14, 2017 1:37 am
Hi all,

I’m new to this forum and read the The Bogleheads' Guides 4 years ago and have worked steadily on my finances. I have a been given a raise recently and I was wondering where I should put my additional cashflow (~$1500/mo). The options that I am considering are paying down mortgage, 529, saving for down payment for second house (we may be moving for another job), investment in taxable account.

Emergency funds: 6 months of expenses in savings
Debt: Mortgage, $350,000, 3.375% 30 year fixed
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 0% State
Residence: West Coast
Age: Wife and I are mid 30’s, 1 young child, another on the way
Desired Asset allocation: 100% stocks ("retirement" accounts only; excludes savings/emergency fund) 80/20 between VOO and VEU
No desired style tilt

Current portfolio: $80k, excluding savings/emergency fund split 80/20 between VOO and VEU

Contributions
We currently max out on contributions to 401K ($18K x2), roth IRA ($5.5K x2), and Coverdell ($2K). No HAS available for either of us.
Additional Variables
Another child on the way. Wife intends to return to work but who knows for the future.
I’m putting out feelers for other jobs in other west coast cities. Whether we move in the next 3 years is 60/40.


Questions:

1. Where should I put my additional income?
2. Paying down mortgage:
a. Seems quite safe but we will probably never see a 3.375% mortgage again
With only $80k in long term savings, two kids and you are young paying off mortgage I would think would be a low priority
3. 529
a. Saving too much for children?
Not sure what you mean by too much. You only have $2000'in coverdell. 529 would not be top priority but is definitely better idea than paying down mortgage.
4. Down payment (in savings account) for second house in case we relocate
a. Our current house is in a city that is quite “hot” for the foreseeable future given demographics and it seems to make sense to keep the house even if we move (I realize it’s unbogolian to think this)
b. Wherever we land, given the work we do, housing will likely not be cheap in that city/region
c. But it does seem scary to have that much leverage, with 2 homes (if we keep our current and buy in new city) and not knowing whether wife will work in the long term
This one kind of overrides everything. Are you going to turn house one into rental house and be a landlord? Are you going to sit on it and hope the future appreciation exceeds the ongoing out of pocket mortgage and taxes? Where will you get the money to pay for two mortgages and 2 property taxes? Presumably going this route would absorb all of your additional income and possibly more. Seems you have a choice - either invest in home properties or invest in more traditional investment vehicles. I'm not "Rich Dad"'so I'm not much help here.



5. Investment in taxable account
a. I’m hesitant here since we seem to be quite concentrated in stocks and it seems like we’ve had quite a historically long market run (I realize it’s unbogolian to think this)

My inclination is somewhat at the 2 extremes, either pay down the mortgage or save for a down payment. But I really need some help reasoning this through.

Thank you!
Learner
If it were me I'd probably split the money in taxable account in fairly conservative tax efficient balanced fund and the rest in 529. But I'm not you.

User avatar
celia
Posts: 6920
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Where to invest after maxing out, with a twist

Post by celia » Tue Aug 15, 2017 12:36 am

If you move, you should sell your house.
1) It's too risky to be a landlord on a property you can't visit occasionally.
2) Two mortgages may stress you out. What if the rental is not occupied for several months?
3) What if one of you stops working?
4) What if you need liquid assets for something in the future?
5) Rentals usually end up looking more "worn" when the tenants move out compared to an owner moving out. So you are likely to get a better price now.

How about saving for another down payment in a taxable account?

aristotelian
Posts: 2795
Joined: Wed Jan 11, 2017 8:05 pm

Re: Where to invest after maxing out, with a twist

Post by aristotelian » Tue Aug 15, 2017 12:38 am

Consider starting a bond allocation. If you move this could ensure you don't necessarily sell stocks in a bear market. If you don't move, you would be reducing risk while still getting some return. You could buy total stock market in taxable while building the bond position in one of the retirement accounts. Alternatively, buy Muni bonds in the taxable account.

Tamarind
Posts: 604
Joined: Mon Nov 02, 2015 2:38 pm

Re: Where to invest after maxing out, with a twist

Post by Tamarind » Tue Aug 15, 2017 5:38 am

finance_learner wrote:
Mon Aug 14, 2017 11:57 pm
Thank you all for your input. It seems the opinions are either taxable account or save for potential down payment in a new location. Any thoughts on 1 versus the other? The other factor is that if we move and make our current residence a rental, then we would hire a management company which would eat into our profits.
You can do both. It depends on if you feel you are on track for retirement goals, if you have enough equity in the current house to cover the down payment for the next house, both, or neither.

I also would not advise you to keep your current house as a rental. We have a lot of people here saying that recently because they have seen huge price appreciation where they live. That is different from having done the analysis to figure out if the property would be cash flow positive as a rental, especially with the cost of a management company. Most people, who don't have a business goal of running multiple rental properties, should skip the part time job and just retrieve the equity when they move by selling.

finance_learner
Posts: 8
Joined: Mon Aug 14, 2017 12:44 am

Re: Where to invest after maxing out, with a twist

Post by finance_learner » Wed Aug 16, 2017 1:07 am

Thank you all. To clarify, in the case of if I move to another region and we rent our previous property (using a property management company) and buy in the new city, based on rough estimates, the equity in the home is such that rental income should at least break even if not contribute to net positive cashflow. Is there some source for more formal analysis where I can think through renting out previous property and the associated burdens, both psychological and financial? Someone mentioned part time job and perils or being a landlord living another region. Is that true regardless whether I use a rental management company? Thanks! This is complicated!

FogCity
Posts: 3
Joined: Fri Aug 18, 2017 1:34 pm
Location: SF Bay Area

Re: Where to invest after maxing out, with a twist

Post by FogCity » Thu Oct 05, 2017 3:00 pm

I just came across your posting as I was searching for discussions about rental properties. I thought that I would share with you some of my experience as a property owner and a landlord in the SF Bay Area. I never did hire a property manager, as I live very close to my rental house, and I'm a bit of a do it yourselfer. I had one rental unit in my first house that was downstairs from me in an in-law apartment; now that building is a two unit rental. All in all, I've been a landlord for twenty years. I never in my wildest dreams had any intention to be a landlord, much less own a house in California, but in hindsight it has worked out to my benefit.

After I purchased my second house that I now live in, I posted an ad on Craigslist and interviewed potential tenants. Once I moved out, I had them ready to move in and start renting. Depending on the condition of your property, you may need to give lots, or a little, attention to your rental. This could influence your decision of whether to hire a property manager or not. In your case, with one kid and another on the way, you may not want to deal with the property management issues.

Another thing to consider is how owning a rental can affect your ability to obtain a loan for your 2nd house. I bought my 2nd home in 2005, back when banks were handing out mortgages like the candy man, so it wasn't too difficult. Nowadays, the banks are more hesitant to take on the added risk, especially if the properties are located in different states.

I took out a home equity line on the first house, and used $200k as a down payment on the 2nd home. The equity line had an adjustable interest rate, and like a fool I just made payments on the interest for 10 years. It was like doubling down on the blackjack table when I became the owner of two homes, complete with the risk of having to sell the rental if interest rates went through the roof, or if I couldn't rent the property. Looking back on it, it was a bold move; but I was single and had no kids, so I could handle the cost of failure if it came. As luck would have it, interest rates went down, the rental market went up, and I managed eventually to refinance the rental property and fold the $200k debt into that mortgage.

Previous members have recommended that you sell your home if you move to a different city; that is probably the best scenario, but ultimately the choice is yours.

If you move hundreds of miles away and decide to rent out your property, I would recommend choosing a property management company that you are comfortable with. If after six months there haven't been lots of issues with the tenants, you could discontinue the management service and assume those duties yourself (unless they make you sign an extended contract for their services; in that case you are stuck with them). From my experience, the biggest issues of landlording come about when tenants move out; such as inspecting the property for damages, deductions from the security deposit, and negotiating all of this with the outgoing tenants. Lots of renters act differently towards you when they are on their way out, than they did on their way in! When they move in they are usually easy going (usually I say), so the demands on your time are minimal. Once they are in, if problems like a broken toilet or a pilot light goes out on the stove, etc... you can have them hire someone to fix it, then reimburse them. Most tenants are cool with this, and you can write it into the lease if you want.

I hope this has been of some help to you. Good Luck.

User avatar
ruralavalon
Posts: 11283
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Where to invest after maxing out, with a twist

Post by ruralavalon » Thu Oct 05, 2017 3:53 pm

finance_learner wrote:
Mon Aug 14, 2017 1:37 am
Hi all,

I’m new to this forum and read the The Bogleheads' Guides 4 years ago and have worked steadily on my finances. I have a been given a raise recently and I was wondering where I should put my additional cashflow (~$1500/mo). The options that I am considering are paying down mortgage, 529, saving for down payment for second house (we may be moving for another job), investment in taxable account.

Emergency funds: 6 months of expenses in savings
Debt: Mortgage, $350,000, 3.375% 30 year fixed
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 0% State
Residence: West Coast
Age: Wife and I are mid 30’s, 1 young child, another on the way
Desired Asset allocation: 100% stocks ("retirement" accounts only; excludes savings/emergency fund) 80/20 between VOO and VEU
No desired style tilt

Current portfolio: $80k, excluding savings/emergency fund split 80/20 between VOO and VEU

Contributions
We currently max out on contributions to 401K ($18K x2), roth IRA ($5.5K x2), and Coverdell ($2K). No HAS available for either of us.
Additional Variables
Another child on the way. Wife intends to return to work but who knows for the future.
I’m putting out feelers for other jobs in other west coast cities. Whether we move in the next 3 years is 60/40.



Questions:

1. Where should I put my additional income?
2. Paying down mortgage:
a. Seems quite safe but we will probably never see a 3.375% mortgage again
3. 529
a. Saving too much for children?
4. Down payment (in savings account) for second house in case we relocate
a. Our current house is in a city that is quite “hot” for the foreseeable future given demographics and it seems to make sense to keep the house even if we move (I realize it’s unbogolian to think this)
b. Wherever we land, given the work we do, housing will likely not be cheap in that city/region
c. But it does seem scary to have that much leverage, with 2 homes (if we keep our current and buy in new city) and not knowing whether wife will work in the long term

5. Investment in taxable account
a. I’m hesitant here since we seem to be quite concentrated in stocks and it seems like we’ve had quite a historically long market run (I realize it’s unbogolian to think this)

My inclination is somewhat at the 2 extremes, either pay down the mortgage or save for a down payment. But I really need some help reasoning this through.

Thank you!
Learner
finance_learner wrote:
Mon Aug 14, 2017 11:57 pm
Thank you all for your input. It seems the opinions are either taxable account or save for potential down payment in a new location. Any thoughts on 1 versus the other? The other factor is that if we move and make our current residence a rental, then we would hire a management company which would eat into our profits.
finance_learner wrote:
Wed Aug 16, 2017 1:07 am
Thank you all. To clarify, in the case of if I move to another region and we rent our previous property (using a property management company) and buy in the new city, based on rough estimates, the equity in the home is such that rental income should at least break even if not contribute to net positive cashflow. Is there some source for more formal analysis where I can think through renting out previous property and the associated burdens, both psychological and financial? Someone mentioned part time job and perils or being a landlord living another region. Is that true regardless whether I use a rental management company? Thanks! This is complicated!
I suggest saving for a down payment. You will soon have two children. It's uncertain whether the family will have two incomes. It sounds like a move in 3 years is more likely than not.

Saving for a down payment gives you good flexibility. $1,500 per month over 3 years will be $54k. In a moderate or high cost of living area you might need more than that for a decent down payment. If it starts to seem that a move is unlikely, then you can switch the $2,500 per month to a taxable account for long-term investing. If you don't move, then you can throw that money into a taxable account for long-term investing.

I suggest not turning the current residence into a rental. Long distance landlording can be difficult, and the fees of a management company might turn the cash flow negative.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

AnonJohn
Posts: 82
Joined: Wed Oct 07, 2015 2:45 pm

Re: Where to invest after maxing out, with a twist

Post by AnonJohn » Thu Oct 05, 2017 4:22 pm

My approach in a similar situation was to view taxable / down payment as somewhat equivalent. I maintain an allocation of muni-bonds in my taxable account to mitigate the risk of taxable equities. I then factor both in to my overall, long term (retirement) asset allocation.

I realize that this makes my downpayment fund unpredictable. But, like you, I don't have a specific time horizon for buying the next home, and I might be able to sell my current home to make the downpayment. So I think this is reasonable and it helps me move to getting more invested.

It may help you to take equity risk in taxable if you think about tax loss harvesting. A big sell off would mean a government subsidy for your losses!

For myself, I plan to start contributing to a 529 (I get a tax break) AND paying down my (even cheaper mortgage) roughly when 1/2 of my taxable account is equal to the mortgage balance at which I'd stop itemizing because the standard deduction would be more valuable. I have a reason for the bizarrely specific formula - but the idea may be useful to you. There may be a point at which your taxable is big enough that you want to deleverage a little bit.

John

Slacker
Posts: 295
Joined: Thu May 26, 2016 8:40 am

Re: Where to invest after maxing out, with a twist

Post by Slacker » Thu Oct 05, 2017 4:42 pm

finance_learner wrote:
Wed Aug 16, 2017 1:07 am
Thank you all. To clarify, in the case of if I move to another region and we rent our previous property (using a property management company) and buy in the new city, based on rough estimates, the equity in the home is such that rental income should at least break even if not contribute to net positive cashflow. Is there some source for more formal analysis where I can think through renting out previous property and the associated burdens, both psychological and financial? Someone mentioned part time job and perils or being a landlord living another region. Is that true regardless whether I use a rental management company? Thanks! This is complicated!
Rent income from your property at a MINIMUM should cover:
1. PITI
2. HOA fees
3. Property management fees (don't forget to account for the acquisition of new tenant fee - total outlay may be as high as 1/2 of the first month's rent + 10% of each month's rent after the first month).
4. Reserve fund for maintenance (10% of rent)
5. Reserve fund for vacancy (10% of rent)
6. Reserve fund for large capital expenditures (5-10% of rents depending on the age of the water heater, appliances, hvac, roof)

The property management should be interviewed just as you would any manager type employee who will be running your business for you (get references, have a list of questions, get referrals from local real estate investment groups).

If, after all the above fees are accounted for, you still come up cashflow positive and the single family home rental vacancy rate is low it may work out for you, have you done much reading about becoming a landlord? You should have all your reserves go to an account just for that property (so you don't spend it on anything else as that is your rental property "emergency fund").

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