Complex situation, but 90k to play...sort of

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Topic Author
Humility101
Posts: 9
Joined: Sat Jun 02, 2018 6:39 am

Complex situation, but 90k to play...sort of

Post by Humility101 » Wed Jan 09, 2019 10:56 pm

Alright Bogleheads, appreciate your insight and opinions as always. Here is the breakdown:

Assets:
-90k in the combined savings and checking accounts (THIS IS WHERE I NEED HELP)
-100k in my Roth (100% S&P 500 Index)
-3k in Rollover IRA former employer (Vanguard Emerging Markets)
-40k in brokerage (20k Vanguard International div appreciation, 20k reits)
-11k in wife's ROTH (100% S&P 500 index)

Liabilities:
No car loans
No outstanding balances on credit cards
Recent $456,000 Mortgage, 10% equity (Appx. 50k) currently paying $750 annual PMI. I live in HCOL area (D.C) and bought a decent size fixer upper house on .5 acre. I know this is large but my thought process was a large house on half acre will hold its value better in Chantilly, VA than the half million dollar cookie cutter, fast build townhouses they are putting up everywhere in this area. Also, no HOA. :wink:

BIO: 31 and 32 Years Old, one 9 YO with college paid for. Combined pre-tax income of 125K (split me 85k, wife 40k).

SCENARIO: Wife currently works full time but wants to cut back to part time or less if we have another kid. My job is very stable (gov) and will likely have significant salary increases over the course of 20 years. She will likely have limited income potential in the short term. What do I do with that 90k?
-Pay down 10% to remove PMI
-Be more aggressive in the market
-Gradually add it to both ROTHs?
-Hold as cash or CD for security (I'm concerned about death by a thousand cuts with a $3k monthly mortgage and $7200 after tax income, likely to be less soon if she goes part time) I am well aware that are ratios for mortgage to income will be way out of balance.
-Buy a rental property for supplemental income
-Renovate the house (to make my wife happy, but a Terrible idea in my opinion)

Thank you for your insight!

k3vb0t
Posts: 186
Joined: Mon Jun 02, 2014 4:42 pm

Re: Complex situation, but 90k to play...sort of

Post by k3vb0t » Wed Jan 09, 2019 11:06 pm

So is your emergency fund part of that $90k? Considering you’re going to go one income for at least a while I would bank 12 months of living expenses to cover you becoming unemployed, house stuff breaking, etc.

How much would they leave you?

If I’m doing my math right here you’d need to pay $50k to remove PMI, right? To get to 20%? So paying $50k to save $750/year sounds like a very poor 1.5% return.

Edit: also, you’re saying $3k mortgage on $7200 after tax income, her income is what... $2k of that after tax amount? Leaving you at 3k of 5.2k being house. That’s... a very very very high percentage of your income going to the house.

JBTX
Posts: 4476
Joined: Wed Jul 26, 2017 12:46 pm

Re: Complex situation, but 90k to play...sort of

Post by JBTX » Wed Jan 09, 2019 11:12 pm

Humility101 wrote:
Wed Jan 09, 2019 10:56 pm
Alright Bogleheads, appreciate your insight and opinions as always. Here is the breakdown:

Assets:
-90k in the combined savings and checking accounts (THIS IS WHERE I NEED HELP)
-100k in my Roth (100% S&P 500 Index)
-3k in Rollover IRA former employer (Vanguard Emerging Markets)
-40k in brokerage (20k Vanguard International div appreciation, 20k reits)
-11k in wife's ROTH (100% S&P 500 index)

Liabilities:
No car loans
No outstanding balances on credit cards
Recent $456,000 Mortgage, 10% equity (Appx. 50k) currently paying $750 annual PMI. I live in HCOL area (D.C) and bought a decent size fixer upper house on .5 acre. I know this is large but my thought process was a large house on half acre will hold its value better in Chantilly, VA than the half million dollar cookie cutter, fast build townhouses they are putting up everywhere in this area. Also, no HOA. :wink:

BIO: 31 and 32 Years Old, one 9 YO with college paid for. Combined pre-tax income of 125K (split me 85k, wife 40k).

SCENARIO: Wife currently works full time but wants to cut back to part time or less if we have another kid. My job is very stable (gov) and will likely have significant salary increases over the course of 20 years. She will likely have limited income potential in the short term. What do I do with that 90k?
-Pay down 10% to remove PMI
-Be more aggressive in the market
-Gradually add it to both ROTHs?
-Hold as cash or CD for security (I'm concerned about death by a thousand cuts with a $3k monthly mortgage and $7200 after tax income, likely to be less soon if she goes part time) I am well aware that are ratios for mortgage to income will be way out of balance.
-Buy a rental property for supplemental income
-Renovate the house (to make my wife happy, but a Terrible idea in my opinion)

Thank you for your insight!
Not really enough info.

How much do you spend each year?

How much do you save each year?

What is rate on mortgage?

The following are all good ideas:

- establish a liquidity fund 3-6 mo expenses
- put as much as you can in retirement accounts
- pay off pmi portion of mortgage

But we don't have enough info to know enough to prioritize.

As far as remodeling, the quandary is you have absorbed much of your spending capacity just on the mortgage. You may be forced to do some maintenance but I'd wait until you have more money coming in before plowing yet more money into the home.

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Watty
Posts: 14927
Joined: Wed Oct 10, 2007 3:55 pm

Re: Complex situation, but 90k to play...sort of

Post by Watty » Wed Jan 09, 2019 11:22 pm

k3vb0t wrote:
Wed Jan 09, 2019 11:06 pm
If I’m doing my math right here you’d need to pay $50k to remove PMI, right? To get to 20%? So paying $50k to save $750/year sounds like a very poor 1.5% return.
The mortage rate was not listed but if it was 4.5% then that would be a combined 6% return. A risk free 6% return is pretty dang good.

They might also be able to do a "mortage recast"(Goggle this) and pay the loan down by 10% and also have their required mortage payment reduced by 10%.

The terms to stop PMI vary with the loan type and the rules have changed over the years so the first thing to do would be to confirm that you could get out of the PMI by paying it down by 10%

If they can do that then that would sound good to me.

Humility101 wrote:
Wed Jan 09, 2019 10:56 pm
....bought a decent size fixer upper house....
There are fixes and there are updates. Since money is tight I would only do the actual fixes for now.

How are you going to pay for the needed fixes? You may need the rest of the money for that.

MotoTrojan
Posts: 2973
Joined: Wed Feb 01, 2017 8:39 pm

Re: Complex situation, but 90k to play...sort of

Post by MotoTrojan » Thu Jan 10, 2019 12:47 am

Not what you asked but do some reading on here about tax-efficient fund placement. Int Div Growth isn’t a great option in taxable, but a REIT is very poor choice tax-efficiency wise given its unqualified dividend status. If these are down (losses) by any chance I’d sell and transition to broad US/Ex-US index funds personally. At a minimum I’d stop reinvesting dividends.

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BL
Posts: 8573
Joined: Sun Mar 01, 2009 2:28 pm

Re: Complex situation, but 90k to play...sort of

Post by BL » Thu Jan 10, 2019 2:16 am

MotoTrojan wrote:
Thu Jan 10, 2019 12:47 am
Not what you asked but do some reading on here about tax-efficient fund placement. Int Div Growth isn’t a great option in taxable, but a REIT is very poor choice tax-efficiency wise given its unqualified dividend status. If these are down (losses) by any chance I’d sell and transition to broad US/Ex-US index funds personally. At a minimum I’d stop reinvesting dividends.

+1 Not tax-efficient.

If you really want them, a Roth would be a better place due to higher taxable dividends from these funds. Total Stock Market, Total International are more tax-efficient. (There is a tax-efficiency chart in the Wiki you could search for.)

I would check into paying off PMI and perhaps mortgage recast. Hang onto the rest for now. You have a new house and various possible expenses.

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8foot7
Posts: 947
Joined: Mon Jan 05, 2015 7:29 pm

Re: Complex situation, but 90k to play...sort of

Post by 8foot7 » Thu Jan 10, 2019 8:23 am

The first or second thing I did would be to get rid of PMI

Topic Author
Humility101
Posts: 9
Joined: Sat Jun 02, 2018 6:39 am

Re: Complex situation, but 90k to play...sort of

Post by Humility101 » Fri Jan 11, 2019 9:49 pm

MotoTrojan wrote:
Thu Jan 10, 2019 12:47 am
Not what you asked but do some reading on here about tax-efficient fund placement. Int Div Growth isn’t a great option in taxable, but a REIT is very poor choice tax-efficiency wise given its unqualified dividend status. If these are down (losses) by any chance I’d sell and transition to broad US/Ex-US index funds personally. At a minimum I’d stop reinvesting dividends.
Thank you for the suggestion. My thought process was that if my wife leaves her job having high dividend paying investments in brokerage would offset that loss of income...if we needed to tap into it (I usually just reinvest div). Is that thought process off the mark? What other suggestions do you have that I can apply that money to for supplemental income now, or should I not even be looking for income now in the first place?

k3vb0t
Posts: 186
Joined: Mon Jun 02, 2014 4:42 pm

Re: Complex situation, but 90k to play...sort of

Post by k3vb0t » Fri Jan 11, 2019 10:06 pm

Humility101 wrote:
Fri Jan 11, 2019 9:49 pm
Thank you for the suggestion. My thought process was that if my wife leaves her job having high dividend paying investments in brokerage would offset that loss of income...if we needed to tap into it (I usually just reinvest div). Is that thought process off the mark? What other suggestions do you have that I can apply that money to for supplemental income now, or should I not even be looking for income now in the first place?
Walk me through what kind of dividend on $40k total in brokerage is going to make up for $40k of your wife's income disappearing... and then think about paying tax on those dividends as well. On the other hand if you had a tax-efficient holding you could just sell off chunks of the investment if you absolutely had to. But either way isn't going to make up for your wife not working. Not even close. Even if she was earning $20k, nothing is going to give you 50% dividend.

You never said anything about emergency funds, etc. so it is hard to give you advice.

If my numbers are right -- if you're $5.2k of the $7.2k income, and your wife is $2k -- then right now you are borderline house poor.

When your wife stops working you will be house poor. Can you live off of $5.2k - $3k mortgage = $2.2k/month? If so, no problem. If not, problem.

The house appreciation is an unknown, seems like it would appreciate over time based on what you said, but that appreciation doesn't help you unless you plan on moving.

I wouldn't touch a cent of the $90k -- get it into a money market fund to try and maximize the interest on it, and only fix what absolutely needs fixing on the house in the meantime.

There's no way you can renovate.

There's no way you can buy a rental AND have a cash cushion for yourself AND have a cash cushion for when the rental needs fixing, or it's vacant, etc. And buying a rental when your wife stops working and you're stressed out from having a new kid to the family... also a bad idea.

Not trying to be harsh and if you provide more info I might feel differently, but it seems like that $90k is in a good spot doing nothing but being a cushion until you figure out everything else and whether or not your wife is going to be contributing significantly less income.

delamer
Posts: 6707
Joined: Tue Feb 08, 2011 6:13 pm

Re: Complex situation, but 90k to play...sort of

Post by delamer » Fri Jan 11, 2019 10:43 pm

k3vb0t wrote:
Fri Jan 11, 2019 10:06 pm
Humility101 wrote:
Fri Jan 11, 2019 9:49 pm
Thank you for the suggestion. My thought process was that if my wife leaves her job having high dividend paying investments in brokerage would offset that loss of income...if we needed to tap into it (I usually just reinvest div). Is that thought process off the mark? What other suggestions do you have that I can apply that money to for supplemental income now, or should I not even be looking for income now in the first place?
Walk me through what kind of dividend on $40k total in brokerage is going to make up for $40k of your wife's income disappearing... and then think about paying tax on those dividends as well. On the other hand if you had a tax-efficient holding you could just sell off chunks of the investment if you absolutely had to. But either way isn't going to make up for your wife not working. Not even close. Even if she was earning $20k, nothing is going to give you 50% dividend.

You never said anything about emergency funds, etc. so it is hard to give you advice.

If my numbers are right -- if you're $5.2k of the $7.2k income, and your wife is $2k -- then right now you are borderline house poor.

When your wife stops working you will be house poor. Can you live off of $5.2k - $3k mortgage = $2.2k/month? If so, no problem. If not, problem.

The house appreciation is an unknown, seems like it would appreciate over time based on what you said, but that appreciation doesn't help you unless you plan on moving.

I wouldn't touch a cent of the $90k -- get it into a money market fund to try and maximize the interest on it, and only fix what absolutely needs fixing on the house in the meantime.

There's no way you can renovate.

There's no way you can buy a rental AND have a cash cushion for yourself AND have a cash cushion for when the rental needs fixing, or it's vacant, etc. And buying a rental when your wife stops working and you're stressed out from having a new kid to the family... also a bad idea.

Not trying to be harsh and if you provide more info I might feel differently, but it seems like that $90k is in a good spot doing nothing but being a cushion until you figure out everything else and whether or not your wife is going to be contributing significantly less income.
I agree with all of the above.

If you lose 1/3 of your income, you will be house poor.

MotoTrojan
Posts: 2973
Joined: Wed Feb 01, 2017 8:39 pm

Re: Complex situation, but 90k to play...sort of

Post by MotoTrojan » Fri Jan 11, 2019 11:59 pm

Humility101 wrote:
Fri Jan 11, 2019 9:49 pm
MotoTrojan wrote:
Thu Jan 10, 2019 12:47 am
Not what you asked but do some reading on here about tax-efficient fund placement. Int Div Growth isn’t a great option in taxable, but a REIT is very poor choice tax-efficiency wise given its unqualified dividend status. If these are down (losses) by any chance I’d sell and transition to broad US/Ex-US index funds personally. At a minimum I’d stop reinvesting dividends.
Thank you for the suggestion. My thought process was that if my wife leaves her job having high dividend paying investments in brokerage would offset that loss of income...if we needed to tap into it (I usually just reinvest div). Is that thought process off the mark? What other suggestions do you have that I can apply that money to for supplemental income now, or should I not even be looking for income now in the first place?
Research total return investing, but even a broad equity fund would not be a good option for near-term needs (<3-5 years) like that. There is no difference, taxes aside, between taking a dividend and selling shares, but equity funds will give you qualified dividends and potentially long-term capital gains when you need to draw on it.

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