WHAT TO DO for family of 5, tiny house, extra $: Mortage payoff vs. 529 vs. taxable retirement

[lauren]

Have been thinking about and researching this topic for days and keep going around and around in circles. Would be grateful for the advice and input of my trusted Bogleheads...

Have been saving up for a bigger house for 11 years now but we are still in our 1590 sq. ft. 3 BR/2 BA house with 3 kids (we live in Charleston, SC, and have to live in a particular area to keep the kids in their school, and I refuse to live in a flood zone...thus we haven't been able to find a house to buy...I feel like we need more room for our three boys AND I am very grateful for our cozy house and low expenses, which have helped us prioritize our savings).

There is now $292k in the house fund, but I feel like it's too much $ and it's been sitting there for too long (only earning b/w .25 - 1.25% interest). Do I:
a. Pay off our mortgage ($132k remaining at 3.875%; 14 years left on 15-year loan, we refinanced last year) - this would free up ~$1100/month that I could invest in 529 savings and still leave us with money leftover for down payment if we found something
b. Invest $132k directly in 529s either in a lump sum or over time ($44,000/child)
c. Invest in taxable retirement account
d. Other?

Me: 41
Husband: 42
Kids: 11, 9, 2
- 11YO 529: $20k
- 9YO 529: $16k
- 2YO 529: $4k
Emergency savings: 12 months
Retirement accounts: 1.47M
Currently maxing out 401k, 457, 403b, ROTHs

What am I missing? Thank you so much for your time and any thoughts you might have.

[megabad]

When are you planning on buying the new house? In general, I don’t like paying off the mortgage if you are leaving soon but it may make sense to pay off or maybe refi if you are going to remain there. I also don’t love the idea of putting quite that much into 529 that I assume would not be state tax deductible. I would need to be 100% sure it would all get spent. Just my thoughts.

[lauren]

When are you planning on buying the new house? In general, I don’t like paying off the mortgage if you are leaving soon but it may make sense to pay off or maybe refi if you are going to remain there. I also don’t love the idea of putting quite that much into 529 that I assume would not be state tax deductible. I would need to be 100% sure it would all get spent. Just my thoughts.

529 contributions are state tax deductible in SC. My goal is to have $120k in college savings for each kid.

And I was *planning* on buying a new house years ago (esp. after 3rd kid arrived!), but at this point I feel like we're not going to be able to find something that allows our kids to stay in their school AND that is not in a flood zone. My husband and I keep consoling ourselves with how much earlier we'll be able to retire if we just stay put!

Thank you!

[Tamarind]

Porque no los dos? If there's no firm timeline for the house, I would suggest modestly increasing 529 contributions. You could pay a little extra towards the mortgage. And the bulk of the house fund could be invested in a taxable account so it can grow for house payment in future years or, if you never find the right house to buy, for renovations or retirement.

Do a little of each to avoid the regret of picking a less optimal choice when all of the choices are good.

[7eight9]

Why not use some of the money to build an addition? Solves the problem of too little house and too much money in house fund.

[dandinsac]

I would pay off the mortgage since you may buy a different house at some point. If you do find one, this equity would then transfer to the new house.

Another option may be to enlarge your existing house. If so, it might be worth a discussion with an architect. Real estate commission and moving expenses would then be applied your renovations. Since you'll likely be in your house for 15+ years until your youngest is out of school, this seems like it could be worth the trouble.

[megabad]

When are you planning on buying the new house? In general, I don’t like paying off the mortgage if you are leaving soon but it may make sense to pay off or maybe refi if you are going to remain there. I also don’t love the idea of putting quite that much into 529 that I assume would not be state tax deductible. I would need to be 100% sure it would all get spent. Just my thoughts.

529 contributions are state tax deductible in SC. My goal is to have $120k in college savings for each kid.

And I was *planning* on buying a new house years ago (esp. after 3rd kid arrived!), but at this point I feel like we're not going to be able to find something that allows our kids to stay in their school AND that is not in a flood zone. My husband and I keep consoling ourselves with how much earlier we'll be able to retire if we just stay put!

Thank you!

Had no idea SC had such a high limit. That is great and almost unheard of. I would still urge some caution since overfunding would be awful. Maybe split the difference between a couple strategies like suggested above? I own a property near myrtle and go to Charleston regularly (mainly for restaurants). I know it has gotten insane price wise. Not sure what the future holds though with the current situation (limited tourism and manufacturing slow down). I suspect in the short run, the city might get hit pretty hard and you might find slightly lower prices but what do I know.

[lauren]

Why not use some of the money to build an addition? Solves the problem of too little house and too much money in house fund.

We have been around and around on this as well. Have met with architects and contractors. The renovation would be $200-250k, and the rub is that we would need to move out of our house for a minumum of 6 months, so it winds up being a rather intimidating/labor-intensive option. I just get exhausted and think AH well why not just keep it like it is... (hence, I am like we're NEVER going to move and we're NEVER going to add on, so let's put this $ to better use...)

[lauren]

I would pay off the mortgage since you may buy a different house at some point. If you do find one, this equity would then transfer to the new house.

Another option may be to enlarge your existing house. If so, it might be worth a discussion with an architect. Real estate commission and moving expenses would then be applied your renovations. Since you'll likely be in your house for 15+ years until your youngest is out of school, this seems like it could be worth the trouble.

If we find a new house to buy, my plan is to keep this house and rent it out. Houses in this neighborhood are renting for ~$600/month above what our current mortgage payment is.

And see the above response about a potential renovation (yes, yes, yes, it *seems* like the perfect solution, but alas...).

[MastersChampion]

Just to give you a data point on the other side.
We were in a similar situation as you 16 years ago: early 40s with small, paid-off house in good school district, 3 kids, saving like crazy, not sure where to put money.

We decided to prioritize funding housing, then college.
We added onto our existing house after a really long search for larger near-school housing.
We moved into an apartment for 6 months. The kids loved it, and my wife met a couple new friends through it.
We funded maybe half of college from Coverdells and 529s, paying the other half from salary. Last kid starts college this fall and isn't sure she wants to go for 4 years, so I'm glad we didn't fully fund it. Plus she has a 2-year scholarship, so I'm not sure what we have saved will get spent soon.

I'm REALLY glad we decided to stay in the same school, like you are planning. All 3 kids have stayed close with their grade-school friends, even into their 20s. I love that. From my experience, that outcome is worth extra money you might pay for your new housing.

[lauren]

Just to give you a data point on the other side.
We were in a similar situation as you 16 years ago: early 40s with small, paid-off house in good school district, 3 kids, saving like crazy, not sure where to put money.

We decided to prioritize funding housing, then college.
We added onto our existing house after a really long search for larger near-school housing.
We moved into an apartment for 6 months. The kids loved it, and my wife met a couple new friends through it.
We funded maybe half of college from Coverdells and 529s, paying the other half from salary. Last kid starts college this fall and isn't sure she wants to go for 4 years, so I'm glad we didn't fully fund it. Plus she has a 2-year scholarship, so I'm not sure what we have saved will get spent soon.

I'm REALLY glad we decided to stay in the same school, like you are planning. All 3 kids have stayed close with their grade-school friends, even into their 20s. I love that. From my experience, that outcome is worth extra money you might pay for your new housing.

Thank you! I love hearing tales from the other side!

Was there a decision point when you decided to pay off your house? Or did you just aggressively/consistently pay down until it was gone?

Thank you also for the tale of surviving (and thriving in!) a home renovation scenarious complete with a 6-month move out!

[Watty]

...and have to live in a particular area to keep the kids in their school, and I refuse to live in a flood zone...thus we haven't been able to find a house to buy...
.....
Kids: 11, 9, 2
.....
What am I missing?

A couple of things you may be missing;

1) One option you might be missing is that you could rent a large house even if it is in flood zone since you could just evacuate if it floods. Your oldest kid will likely head off to college in about 7 years so you may not need the larger house for a long time.

2) If you can find a empty lot or a 'tear down" house in the school district you could also have a larger home built on that lot.

3) You cold buy a small non-tear down house and expand it before you move in.

I totally get what you are saying about not buying a house in a flood zone. I once had about $20,000 in flood damage to a home. Even though I had flood insurance it was still very stressful and if the water had been six inches higher the damage would have been an order of magnitude higher. When I moved for a job a few years later not being in a flood zone was on my "must have" list when I bought my next house.

The kicker was that the house was not in a flood zone when I bought it. They redrew the flood maps and I had to buy flood insurance when I refinanced about two years before the flood. Even if you are not officially in a flood zone be sure to still research the risk and consider getting flood insurance.

If we find a new house to buy, my plan is to keep this house and rent it out.

When people post about doing this it rarely makes sense and one of the big reasons is that you would lose the homeowners capital gains exemption.

[Watty]

we live in Charleston, SC,

One more thought, also consider getting earthquake insurance and make sure your next home is designed to be earthquake resistant. Charleston has as much risk as many of the worst parts of California.

https://www.usgs.gov/media/images/2018- ... hazard-map

[MastersChampion]

Was there a decision point when you decided to pay off your house? Or did you just aggressively/consistently pay down until it was gone?

IIRC, there were a couple events that contributed to that decision other than the fact that DW and I dislike debt.

First, we received a small inheritance about 3 years into our homeownership. We decided to honor that relative by putting that money into the mortgage (he designed my childhood home). We saw how this sped up the schedule, and decided to put salary increases toward additional principal until the balance was gone.

Second, about the same time, I was working toward a career change from engineering to education. I thought a paid-off house would help us transition to the reduced earnings I faced. I never made the career switch.

[jjface]

1590 sq ft is not a tiny house

[grabiner]

If you don't pay off the mortgage, refinancing again makes sense; 3.875% is a high rate for a 15-year mortgage.

If you plan to keep this home as a rental after moving out, then it's probably best to keep the refinanced mortgage, because rates on rental mortgages are higher than rents on owner-occupied mortgages. In addition, once you make the place a rental, you can deduct the mortgage interest against the rental income even if you don't itemize deductions.

[justsomeguy2018]

1590 sq ft is not a tiny house

I think it's small with 3 kids in the picture.

Ours is 3br/2ba 1750 sq ft with 1 kid and I am already ready for more space...

[StealthRabbit]

Definitely hearing from the 'other side' here... (BTDT about 20 yrs ago (kids been out of college for ~15 yrs) Single earner family never made over $60k lived in a HCOL area. - often overseas.

(I'm missing something... your annual salary / budget % discretionary / fixed spending)
a, (Mortgage) I don't pay off low interest mortgages (yours is not as low as it could be, but not terrible) CHEAP money. I use Real Estate monies and equity to keep a segment of my investments in properties (speculation view / commercial / rental homes) ~ 30% of my wealth has come from RE ventures in my free time, 100% of my income has come from my RE investments (since retiring from wage income @ age 49 about 15 yrs ago, I went back to college (for free and for fun) when my kids were in college)

b. 529's... I am a STRONG believer in 'Pay-Your-Own Way' money is really easy and CHEAP for students to get... you can STAY fully invested... help them pay off their interest deferred loans AFTER they graduate!Give them more 'skin-in-the-game' (and quality of outcome and process of growing UP!) Didn't seem to hurt ours... they graduated Magna in STEM before age 20 with < $12k debt, and nearly $100k in available college funds (Went to college instead of HS for FREE in our state). https://en.wikipedia.org/wiki/Running_Start
b.1 - they became bogleheads at age 12. I matched their earnings 100% into Roths until age 18, they had about $20k in Roths by college age.
b.2 - they had $80k in home equity by age 16 (They designed and built their own homes in Jr Hi as homeschool projects) It is good for boys to be busy with their hands and energy while adolescent. (I bought their rural view property and they paid me back when homes were complete and finance-able)
b.3 - they had their own businesses while in Jr Hi and HS (college)
b.4 - they had GREAT paying jobs while in college (Firefighting and Alaska fishing ~ $30 - $40k in 6 weeks of very hard and dangerous work) Boys like that and keeps them safe ! (better than partying all summer with peers (and girls)).
b.5 - they were every good with managing money, time, and responsibility by age 16. We had that purpose in mind just in case they had to leave home or get drafted into military, or chose to escape home. They had paid 100% for cars / insurance / clothes / fuel & their entertainment by age 16.

c. Your retirement seems to be on track, I would use the $292k for something more important than a retirement you may never live to see. (My dad went down at age 49. I was a senior in HS.)

d. other?... consider ALL your priorities and LIFE...& Living it.
for us
... Living (and working / volunteering) overseas with kids was a huge PLUS in their lives and ours. Terrible on the career / earnings, but oh so rich of an experience (We lived in 5 countries). Didn't kill our plan, but was a lot of disruption / risk / stress, but did not have to be so tough. Really opened our kid's perspective to other cultures and opportunities. Other cultures really are engaged with kids. Ours gained wonderful relationships with adults in countries we lived and visited. Everyone wanted to know why our kids weren't in school LIFE is school, everyday learning something new and exciting and useful. Museum curators would often take our kids on all-day 'back-stage' tours to show them the archives and tell stories (especially in WWII museums in France, UK and Belgium). Even in DC our kids got the royal treatment / personal private tours.

College... (in 8 yrs... )
Personally... I think there are / will be a WHOLE lot more and better and less expensive and more functional educational opportunities than traditional USA EXPENSIVE college. (?)

Like this (FREE colleges in Europe for even USA students... (I have a 17 YO friend who is currently studying German so he can go for free)
https://www.valuecolleges.com/internati ... education/
https://www.degreequery.com/free-intern ... versities/
https://www.finder.com/international-un ... study-free
http://acharterschool.com/top-10-tuitio ... -students/ (We visited these USA 'free' colleges last yr and talked at length with students and staff)
I also highly recommend some of the inexpensive USA U's. Such as U of WY ($3000 in-state tuition). I hire any engineers I can get from U of WY, they are GREAT trained engineers! and good work ethic (Tough to hire, as they are highly sought after. School of EDU is good too). It's good experience for your kid to move to WY for a 'gap yr and get a $80k / yr TOUGH job while gaining residency! I did that, was exciting (and very long hours and harsh climate), but great for boys!, they will love it and apply themselves and energies.

For housing... Keep it simple and very functional, especially if you can host international students and families. (Our home has been open (free) to others for over 30 yrs). I would rather have something great to share with others, than to keep for myself. (Ugh... high taxes and maint, for what value?) homes are terrible 'investments' / performance. Just have a place you really like to REST and RECHARGE and enjoy and share.

Enjoy the journey. soon the kids will be POOF - GONE! and you will be left 'wondering'... was that the best I could have done?

[whunter3333]

My gut says that you must like your current house quite a bit or you would have moved already. Also, your 11 year old will be 18 in 7 years. If you don't move in the next year or so, you will be halfway through those 7 years. At that point your current house will start getting bigger and bigger as your children move out. Or maybe you are planning on having more children.....

[EFF_fan81]

Could you add on something like this: https://www.studio-shed.com/home-office ... skQAvD_BwE

[Iorek]

I would probably put $40k per child into 529s— I think that’s unlikely to over-fund them and it’s a great feeling to have money set aside for college.

I would probably also start putting $20k/year into i-bonds for a few years— supersafe, liquid (after the first year), tax-deferred, better interest than you are getting in online savings, and depending on your income interest may be tax-free when used for education (without the restrictions on using it for non-education expenses).

PS I do think it’s choices like not continually stretching on house payments that end up making household finances much easier. Also I’d look into refinancing— you could even consider a 10 year, or a HELOC/ARM if you know you have the savings to pay it off.

[EFF_fan81]

Definitely hearing from the 'other side' here... (BTDT about 20 yrs ago (kids been out of college for ~15 yrs) Single earner family never made over $60k lived in a HCOL area. - often overseas.

(I'm missing something... your annual salary / budget % discretionary / fixed spending)
a, (Mortgage) I don't pay off low interest mortgages (yours is not as low as it could be, but not terrible) CHEAP money. I use Real Estate monies and equity to keep a segment of my investments in properties (speculation view / commercial / rental homes) ~ 30% of my wealth has come from RE ventures in my free time, 100% of my income has come from my RE investments (since retiring from wage income @ age 49 about 15 yrs ago, I went back to college (for free and for fun) when my kids were in college)

b. 529's... I am a STRONG believer in 'Pay-Your-Own Way' money is really easy and CHEAP for students to get... you can STAY fully invested... help them pay off their interest deferred loans AFTER they graduate!Give them more 'skin-in-the-game' (and quality of outcome and process of growing UP!) Didn't seem to hurt ours... they graduated Magna in STEM before age 20 with < $12k debt, and nearly $100k in available college funds (Went to college instead of HS for FREE in our state). https://en.wikipedia.org/wiki/Running_Start
b.1 - they became bogleheads at age 12. I matched their earnings 100% into Roths until age 18, they had about $20k in Roths by college age.
b.2 - they had $80k in home equity by age 16 (They designed and built their own homes in Jr Hi as homeschool projects) It is good for boys to be busy with their hands and energy while adolescent. (I bought their rural view property and they paid me back when homes were complete and finance-able)
b.3 - they had their own businesses while in Jr Hi and HS (college)
b.4 - they had GREAT paying jobs while in college (Firefighting and Alaska fishing ~ $30 - $40k in 6 weeks of very hard and dangerous work) Boys like that and keeps them safe ! (better than partying all summer with peers (and girls)).
b.5 - they were every good with managing money, time, and responsibility by age 16. We had that purpose in mind just in case they had to leave home or get drafted into military, or chose to escape home. They had paid 100% for cars / insurance / clothes / fuel & their entertainment by age 16.

c. Your retirement seems to be on track, I would use the $292k for something more important than a retirement you may never live to see. (My dad went down at age 49. I was a senior in HS.)

d. other?... consider ALL your priorities and LIFE...& Living it.
for us
... Living (and working / volunteering) overseas with kids was a huge PLUS in their lives and ours. Terrible on the career / earnings, but oh so rich of an experience (We lived in 5 countries). Didn't kill our plan, but was a lot of disruption / risk / stress, but did not have to be so tough. Really opened our kid's perspective to other cultures and opportunities. Other cultures really are engaged with kids. Ours gained wonderful relationships with adults in countries we lived and visited. Everyone wanted to know why our kids weren't in school LIFE is school, everyday learning something new and exciting and useful. Museum curators would often take our kids on all-day 'back-stage' tours to show them the archives and tell stories (especially in WWII museums in France, UK and Belgium). Even in DC our kids got the royal treatment / personal private tours.

College... (in 8 yrs... )
Personally... I think there are / will be a WHOLE lot more and better and less expensive and more functional educational opportunities than traditional USA EXPENSIVE college. (?)

Like this (FREE colleges in Europe for even USA students... (I have a 17 YO friend who is currently studying German so he can go for free)
https://www.valuecolleges.com/internati ... education/
https://www.degreequery.com/free-intern ... versities/
https://www.finder.com/international-un ... study-free
http://acharterschool.com/top-10-tuitio ... -students/ (We visited these USA 'free' colleges last yr and talked at length with students and staff)
I also highly recommend some of the inexpensive USA U's. Such as U of WY ($3000 in-state tuition). I hire any engineers I can get from U of WY, they are GREAT trained engineers! and good work ethic (Tough to hire, as they are highly sought after. School of EDU is good too). It's good experience for your kid to move to WY for a 'gap yr and get a $80k / yr TOUGH job while gaining residency! I did that, was exciting (and very long hours and harsh climate), but great for boys!, they will love it and apply themselves and energies.

For housing... Keep it simple and very functional, especially if you can host international students and families. (Our home has been open (free) to others for over 30 yrs). I would rather have something great to share with others, than to keep for myself. (Ugh... high taxes and maint, for what value?) homes are terrible 'investments' / performance. Just have a place you really like to REST and RECHARGE and enjoy and share.

Enjoy the journey. soon the kids will be POOF - GONE! and you will be left 'wondering'... was that the best I could have done?

I'm a 35 year old with a boring office job. Can you adopt me? LOL.

It sounds like your sons had a very memorable childhood and that you did a great job as a parent.

I'm used to it now and older but I had an office job in my 20s and just sitting in an office 70 hours a week (and a nice office too) looking at paperwork was just... soul crushing. I don't think any humans were designed to do that but certainly not healthy, active 25 year old men. I definitely want my sons to achieve, but I want them to explore the world and stay fit and healthy at the same time.

[MillennialFinance19]

Why not use some of the money to build an addition? Solves the problem of too little house and too much money in house fund.

We have been around and around on this as well. Have met with architects and contractors. The renovation would be $200-250k, and the rub is that we would need to move out of our house for a minumum of 6 months, so it winds up being a rather intimidating/labor-intensive option. I just get exhausted and think AH well why not just keep it like it is... (hence, I am like we're NEVER going to move and we're NEVER going to add on, so let's put this $ to better use...)

Understand the expense and complication of an addition. Have you thought of building a pool and then a "pool house" that is an extra bedroom suite? In a couple of years that would be a feasible place for your oldest to stay while opening up some space in the house. This would also add a pool, and completely eliminate the inconvenience of being forced out of your house during the addition

[Mr. Rumples]

Most folks I know who have kids and large house really don't use the extra space, the families still congregate in the kitchen and open living area except of course for sleep.

Since you live in SC, perhaps just a screened porch will work giving you extra space for three seasons if it has glass inserts.

By the time the two year old is 11, the oldest will be away from home most of the time.

[Watty]

1590 sq ft is not a tiny house

I think it's small with 3 kids in the picture.

Ours is 3br/2ba 1750 sq ft with 1 kid and I am already ready for more space...

Part of how it large or small a house feels could have lot to do with schools being closed and many adults working from at home with the pandemic.

If they have been in the house 24/7 for the last month any size house could start to seem small.

[papito23]

Do a little of each to avoid the regret of picking a less optimal choice when all of the choices are good.

I'm beginning to simple copy+paste this advice everywhere (and write it to myself). Another application of diversification.

[RevFran]

I’d also like to chime in for staying put in the house. My one significant financial regret was upgrading the house. You will have so much more financial flexibility/freedom if you stay put. And you’ll have more cushion and less financial pressure if there is a job loss.

If you’re truly cramped, I’d think about the shed/pool house idea, with one caveat and one suggestion. Caveat: almost everyone I know who has added a pool has regretted it... they wind up expensive to keep up, used way less than people expected, and often make resale harder rather than easier. The suggestion: consider, if you build something, whether you want to spend the extra money to build something that could, if you wish, be rented out — or a half bath would let you rent the space out as an office; a whole bath plus kitchen nook would let you rent out as an apartment. If you’re unlikely to rent it out, it’s probably not worth the expense to go the full bath plus kitchen book area but might at least be worth pricing the half bath. Full bath plus kitchen also raises the prospect of a grown kid coming back to live there, which could be a plus or could be a minus depending on your thoughts about an empty nest...

[Toons]

Pay Off The Mortgage.
Digest that for a good while.
You will have other fruitful productive thoughts
After that is done
One Step At A Time.