To Risk or not to Risk

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Topic Author
Btreatcpa
Posts: 6
Joined: Thu Feb 13, 2020 8:31 pm

To Risk or not to Risk

Post by Btreatcpa » Thu Apr 16, 2020 12:40 pm

My husband and I are planning on building our forever home in the next two years. We are anticipating the total building cost to be approximately $450,000 to $500,000.

We currently have the following:

Vanguard money market and small amount in vanguard bond funds $350,000 (sold rental property)
Other savings/emergency fund $70,000
Retirement accounts $1.8M
Current House FMV $350K Loan $120K. (Payment required $1800 we pay $2500 includes taxes and insurance)

We are both age 60 and still working and transfer approximately $1500 a month to the Vanguard “House Fund”

We are planning to work until either 62 or 65 depending upon whether my husband wants to retire. If we were to retire we would be receiving approximately 90% of our current take home pay with my husband’s pension, each of our social security, and some other things without touching our retirement funds.

When we build we do not want to take out a loan.

The question is whether we should go into a more risky fund for example VFIAX (S&P 500) with potential of appreciation and a decent dividend or stay in the Prime money market fund earning .83%

My husband is conservative, I’m willing to take a chance.

Would you be willing to risk some of the $350K to potentially not have to dip into emergency funds to build the house?

Thank you in advance

gr7070
Posts: 1146
Joined: Fri Oct 28, 2011 10:39 am

Re: To Risk or not to Risk

Post by gr7070 » Thu Apr 16, 2020 12:44 pm

For a two year term? No

If you need a small loan get one. You'll have plenty of retirement income to pay it down quickly.

mega317
Posts: 4335
Joined: Tue Apr 19, 2016 10:55 am

Re: To Risk or not to Risk

Post by mega317 » Thu Apr 16, 2020 12:49 pm

I am missing something with the math. 350k saved. 1500 a month for 2 years is 36k more. That doesn't get you to 450. So unless I'm missing something you either need a loan or a significant amount of risk and luck, or use emergency fund. Unless you're going to sell your current house and rent while building. But then your savings plus current equity are enough and you wouldn't be asking the question.

I would not buy stocks with money I wanted to spend in 2 years.

It would be so easy for you to pay off a bridge loan, it would be helpful to know more about why you don't want to go that way.
Last edited by mega317 on Thu Apr 16, 2020 12:49 pm, edited 1 time in total.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

dbr
Posts: 32825
Joined: Sun Mar 04, 2007 9:50 am

Re: To Risk or not to Risk

Post by dbr » Thu Apr 16, 2020 12:49 pm

Btreatcpa wrote:
Thu Apr 16, 2020 12:40 pm


My husband is conservative, I’m willing to take a chance.

Would you be willing to risk some of the $350K to potentially not have to dip into emergency funds to build the house?
Would you be willing to risk potentially having to consume all of your emergency fund and more to buy the house out of a stock investment.

It might be nice to assume in the current situation that stock upside is more favorable than downside in the the next two years, but seriously you need to plan a possibility that as much of half of that stock investment could be lost by the time you want it, certainly a loss of 20% could happen.

This is not a risk play that makes any sense at all.

Streptococcus
Posts: 375
Joined: Thu Jan 03, 2013 12:17 am

Re: To Risk or not to Risk

Post by Streptococcus » Thu Apr 16, 2020 12:50 pm

No!
I side with husband
Stock market investment should have long term view >5-10 years
As far as I’m concerned, over the next few months, the economy could very possibly fall into a depression with the market dropping 30-50% for several years

Topic Author
Btreatcpa
Posts: 6
Joined: Thu Feb 13, 2020 8:31 pm

Re: To Risk or not to Risk

Post by Btreatcpa » Thu Apr 16, 2020 12:59 pm

Depending on the housing market in Texas in a couple years we could take a HELOC on our current home. I have researched construction loans and the fees are not worth the price. We are not planning on selling this house until we can move into the new house.

I am not adverse to using the emergency funds because we have over a year take home in them now and we have guaranteed income once we hit 62.

gr7070
Posts: 1146
Joined: Fri Oct 28, 2011 10:39 am

Re: To Risk or not to Risk

Post by gr7070 » Thu Apr 16, 2020 1:05 pm

Btreatcpa wrote:
Thu Apr 16, 2020 12:59 pm
Depending on the housing market in Texas in a couple years we could take a HELOC on our current home. I have researched construction loans and the fees are not worth the price. We are not planning on selling this house until we can move into the new house.

I am not adverse to using the emergency funds because we have over a year take home in them now and we have guaranteed income once we hit 62.
There's HELs and car loans, as well; for easy, cheap, short-term financing options.

Definitely don't need a 12 month EF, either; especially if FI or nearly so.

alex_686
Posts: 6321
Joined: Mon Feb 09, 2015 2:39 pm

Re: To Risk or not to Risk

Post by alex_686 » Thu Apr 16, 2020 1:06 pm

Still confused on where you are going to get the cash to buy your new home. Are you considering raiding your retirement accounts?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

Topic Author
Btreatcpa
Posts: 6
Joined: Thu Feb 13, 2020 8:31 pm

Re: To Risk or not to Risk

Post by Btreatcpa » Thu Apr 16, 2020 1:13 pm

No, raiding the retirement accounts is not part of the plan. We are both fully funding our retirement plans.

Taking part of the emergency fund is probably something we will do and a HELOC is another option.

I wanted your opinions on whether it was a right time to take a chance on the market.

alex_686
Posts: 6321
Joined: Mon Feb 09, 2015 2:39 pm

Re: To Risk or not to Risk

Post by alex_686 » Thu Apr 16, 2020 1:25 pm

2 issues:

1st, I can't make the math work.
-450k requirement
+230k home equity
+70k Emergency Fund
=-150 shortfall.

+18k per year (1.5k per month * 12 months)

18k/150k = 8 years.

If you are 60, and plan to retire at 65, that is 5 years.

2nd - Risk.

In general, I would say risk on in your situation. Pensions and social security are "bond-like" and you are saying that you can meet your minimum required goals with just this. This implies a high ability to take risk.

However, your husband states that he has a low willingness to take risk. The rule of thumb is that willingness always trumps ability or need. The other 2 can be addressed in contingency planing or education. Willingness is kind of fixed.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

frank11
Posts: 29
Joined: Sat Jul 06, 2019 7:32 am

Re: To Risk or not to Risk

Post by frank11 » Thu Apr 16, 2020 1:27 pm

It all depends on your risk tolerance.

You could invest the 350 in the stock market. You can always access the retirement money without penalty if needed.

How important is buying the house without a loan?

Topic Author
Btreatcpa
Posts: 6
Joined: Thu Feb 13, 2020 8:31 pm

Re: To Risk or not to Risk

Post by Btreatcpa » Thu Apr 16, 2020 1:31 pm

We already have $350,000 in the house fund, so our shortfall is only $100K to $150K.

alex_686
Posts: 6321
Joined: Mon Feb 09, 2015 2:39 pm

Re: To Risk or not to Risk

Post by alex_686 » Thu Apr 16, 2020 1:34 pm

Btreatcpa wrote:
Thu Apr 16, 2020 1:31 pm
We already have $350,000 in the house fund, so our shortfall is only $100K to $150K.
Missed that bit of info. Sorry. You can disregard the first point, but I think the second point on risk tolerance still stands.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

Dandy
Posts: 6283
Joined: Sun Apr 25, 2010 7:42 pm

Re: To Risk or not to Risk

Post by Dandy » Thu Apr 16, 2020 1:36 pm

Not a great idea to take market risk for a short term goal. You could do a better job with your money by putting the current house fund in higher yielding FDIC products.

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