Lower AA after purchasing forever home?

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Topic Author
jfmiii
Posts: 56
Joined: Fri Apr 25, 2014 1:36 pm

Lower AA after purchasing forever home?

Post by jfmiii » Tue Sep 10, 2019 9:01 am

My wife and I (both 35) are looking to purchase our forever home (at least we hope!) in one of the best school districts in the country and certainly in the state. Price of home is $850-900k, with $19k tax bill (!!). HHI is $475k gross (his: 400k, hers 75k). Current porfolio is ~90/10 across all accounts. I have 500k sitting in a money market fund and will use $300k of that for a down payment on new home. PITI will be ~$4500/mo on a 600k mortgage. I work in finance and am susceptible to boom/bust cycles. I have been with my firm for 13 years, have good job security, but income could be variable in a recession. Going to 250k is not unreasonable. Wife is a teacher and tenured and can expect steady, small increases in salary.

Fidelity MM: 500k
His VG Taxable: 283k
His VG rIRA: 36k
His 401k: 305k
Her 403b: $45k
Her VG rIRA: $20k
Current Home Equity: ~$235k (490k property/255k rem mortgage)

After selling current home and purchasing new home, I will have ~400k in the my MM account. If I leave that uninvested as my emergency fund, should I lower my AA (80/20 or 70/30). If I lost my job tomorrow and wanted to pay off mortgage I could, but if I lost my job, it is probably coinciding with a massive downturn in the stock market. Am I being too conservative in my thinking? Ive ran the numbers and even if my income gets cut to 200-250k, we can afford the house, expenses, retirement savings, and college savings.

barnaclebob
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Re: Lower AA after purchasing forever home?

Post by barnaclebob » Tue Sep 10, 2019 9:11 am

Why do you think you need a 400k emergency fund? You need to be able to handle emergencies, that does not mean you need a dedicated emergency fund. At some point of taxable investment accumulation an emergency fund becomes redundant and you can just roll the money into your normal investments but maybe up your bond % to compensate.

Topic Author
jfmiii
Posts: 56
Joined: Fri Apr 25, 2014 1:36 pm

Re: Lower AA after purchasing forever home?

Post by jfmiii » Tue Sep 10, 2019 9:13 am

barnaclebob wrote:
Tue Sep 10, 2019 9:11 am
Why do you think you need a 400k emergency fund? You need to be able to handle emergencies, that does not mean you need an emergency fund. At some point of taxable investment accumulation an emergency fund becomes redundant and you can just roll the money into your normal investments but maybe up the bond portion a little to compensate.
Perhaps I'm being too conservative but I lived through 2008-2009 (kept my finance job but saw a big income cut, albeit at much lower comp). I work in a very niche area of finance and replacing my current income due to job loss would be difficult.

barnaclebob
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Re: Lower AA after purchasing forever home?

Post by barnaclebob » Tue Sep 10, 2019 9:18 am

jfmiii wrote:
Tue Sep 10, 2019 9:13 am
barnaclebob wrote:
Tue Sep 10, 2019 9:11 am
Why do you think you need a 400k emergency fund? You need to be able to handle emergencies, that does not mean you need an emergency fund. At some point of taxable investment accumulation an emergency fund becomes redundant and you can just roll the money into your normal investments but maybe up the bond portion a little to compensate.
Perhaps I'm being too conservative but I lived through 2008-2009 (kept my finance job but saw a big income cut, albeit at much lower comp). I work in a very niche area of finance and replacing my current income due to job loss would be difficult.
I guess my philosophy is to optimize my finances for things going right but be able to handle things going bad vs optimizing for a downturn. Your income is so high right now that each year we don't have a crash your situation gets dramatically better. Be sure to factor that into how much you have sitting in a MM.

retiredjg
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Re: Lower AA after purchasing forever home?

Post by retiredjg » Tue Sep 10, 2019 9:51 am

Rather than having $400k sitting around doing little, have you considered putting enough down on the house so that you can pay your mortgage even if you do have a significant drop in income?

Or only keep enough to pay 2 years of mortgage payments?

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Wiggums
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Re: Lower AA after purchasing forever home?

Post by Wiggums » Tue Sep 10, 2019 10:13 am

retiredjg wrote:
Tue Sep 10, 2019 9:51 am
Rather than having $400k sitting around doing little, have you considered putting enough down on the house so that you can pay your mortgage even if you do have a significant drop in income?

Or only keep enough to pay 2 years of mortgage payments?
That was the same advice my father gave to me, many years ago. I think it is a great option.

Good luck to you...

Topic Author
jfmiii
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Re: Lower AA after purchasing forever home?

Post by jfmiii » Tue Sep 10, 2019 10:57 am

retiredjg wrote:
Tue Sep 10, 2019 9:51 am
Rather than having $400k sitting around doing little, have you considered putting enough down on the house so that you can pay your mortgage even if you do have a significant drop in income?
I think I'm there. At 4500 a month and a drop to 275k HHI gross, im at 20% of monthly gross assuming I'm keeping expenses and retirement/529 contributions the same as they are today.

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grabiner
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Re: Lower AA after purchasing forever home?

Post by grabiner » Tue Sep 10, 2019 8:53 pm

You have two competing factors. Owning a home increases your risk tolerance, as the home provides you a place to live which will not lose value when your portfolio income declines. However, you have a mortgage on the home, which increases your living expenses until it is paid off.

One way to combine the two factors is to change to a more aggressive asset allocation, but count the mortgage as a negative bond in the allocation. This is what I did when I bought my home; I went from 90% stock to 100% net stock, holding enough bonds to pay off my mortgage but no more. (I did not use the bonds to pay off the mortgage because the bonds were in my employer plan. To pay off the mortgage, I would have needed to sell stock in my taxable account for a huge capital gain, then move bonds to stock in the employer plan.)
Wiki David Grabiner

rascott
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Re: Lower AA after purchasing forever home?

Post by rascott » Tue Sep 10, 2019 9:04 pm

Seems too conservative by far, to me. Your portfolio looks like it would be over 50% cash! You could pay your mortgage payment for a decade out of that.... that's not an emergency fund..... that's just a road to having to work forever.

Either pay for the house in cash and then rebuild your investments like crazy with no house payment, or invest it in an age appropriate allocation.

Doing this in between thing is no good.

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