How Much Bonds/Cash For Young Person Investing For a Home

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nzahir
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Joined: Mon Jul 27, 2020 11:44 pm

How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

Hi guys I have a hypothetical question.

Say someone is 25/26 years old and they live in an expensive city such as NY/LA and they want to invest a majority of their savings for a home in the next 10-15 years.

Say this person is starting at 0 but he could dca in a few thousand a month for now and even more as the years go on.

What kind of allocation do you think is appropriate to help get growth but to also not have such a large downside where it could be a lost decade like 2000-2009?

The DCA part helps a bit here, but still would suck to see a drop as you get closer.

I would think something like 70/30-80/20 and as you get a couple years out, go to mostly fixed income or cash or even all cash depending on the situation and how much is saved up by then

Or this person could go 100/0 for now since he is starting at 0 and have a dca plan in monthly and as he gets closer to the home purchase/when he has built up a larger position, go down in stocks

Investing for 40-50 years for retirement is easy, go 100% equities but have International and EM for diversity. Lower stocks as you get closer to retirement (also based on goals).

But investing for 10-15 years is so tough b/c of high valuations and we have seen multiple lost decades in history
Topic Author
nzahir
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

Bump..
TexasBorn
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by TexasBorn »

I would recommend doing 70% bonds and 30% stocks (or maybe 60/40) to at least preserve the capital you save but hopefully increase it's value somewhat to stay above inflation.

Personally, I'm super conservative, but if I invested heavier in stocks for something as important as a home, then I would try and be mentally prepared for the inability to purchase a home "when" I want to, even with the long time frame you've suggested.
chassis
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by chassis »

Don’t buy bonds. They don’t return.

For a 0-2 year horizon I would use a low volatility stock, preferably dividend paying. Or use CDs or a HYSA. Or a combination of these three.

For a 10-15 year horizon I would put it all in equities. Index funds if you don’t like to pick stocks or individual shares if you do.
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

nzahir wrote: Fri Sep 10, 2021 11:23 pm Hi guys I have a hypothetical question.

Say someone is 25/26 years old and they live in an expensive city such as NY/LA and they want to invest a majority of their savings for a home in the next 10-15 years.

Say this person is starting at 0 but he could dca in a few thousand a month for now and even more as the years go on.

What kind of allocation do you think is appropriate to help get growth but to also not have such a large downside where it could be a lost decade like 2000-2009?

The DCA part helps a bit here, but still would suck to see a drop as you get closer.

I would think something like 70/30-80/20 and as you get a couple years out, go to mostly fixed income or cash or even all cash depending on the situation and how much is saved up by then

Or this person could go 100/0 for now since he is starting at 0 and have a dca plan in monthly and as he gets closer to the home purchase/when he has built up a larger position, go down in stocks

Investing for 40-50 years for retirement is easy, go 100% equities but have International and EM for diversity. Lower stocks as you get closer to retirement (also based on goals).

But investing for 10-15 years is so tough b/c of high valuations and we have seen multiple lost decades in history
I would tell the person not to buy a house. He/she can't afford the house and most likely lose the house to the bank.

KlangFool
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investorpeter
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by investorpeter »

At that age, the most important determining factor in whether a young person will eventually be able to purchase a long-term "home" in a VHCOL area such as NYC/SF/LA is not savings rate or asset allocation, but income growth. So I would encourage that hypothetical individual to focus on developing the skills, education, and connections that will provide the greatest chance of future income growth rather than focusing on the fine details of re-balancing asset allocation to 80/20 vs. 70/30. The unfortunate reality is that the ability to purchase a "home" (assuming this means something larger than a studio or 1BR apartment) in most major cities will be out of reach of most people living in those cities no matter how long they work and save.

But to answer your question, I would say that person should save as much as they can, live below their means, max out their Roth and retirement account match, and and then allocate remaining 100% to a SP500 index fund in a taxable account, with the expectation that they may or may not be able to eventually purchase a home.
Topic Author
nzahir
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

investorpeter wrote: Mon Sep 13, 2021 10:32 pm At that age, the most important determining factor in whether a young person will eventually be able to purchase a long-term "home" in a VHCOL area such as NYC/SF/LA is not savings rate or asset allocation, but income growth. So I would encourage that hypothetical individual to focus on developing the skills, education, and connections that will provide the greatest chance of future income growth rather than focusing on the fine details of re-balancing asset allocation to 80/20 vs. 70/30. The unfortunate reality is that the ability to purchase a "home" (assuming this means something larger than a studio or 1BR apartment) in most major cities will be out of reach of most people living in those cities no matter how long they work and save.

But to answer your question, I would say that person should save as much as they can, live below their means, max out their Roth and retirement account match, and and then allocate remaining 100% to a SP500 index fund in a taxable account, with the expectation that they may or may not be able to eventually purchase a home.
But what if an investor goes 100% in stocks and then sees a lost decade just to get back to where they were?

That is why I would argue to add International and EM, but those will also fall when the US falls, but they may recover and grow better (such as 2000-2009)
Topic Author
nzahir
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

TexasBorn wrote: Mon Sep 13, 2021 12:36 pm I would recommend doing 70% bonds and 30% stocks (or maybe 60/40) to at least preserve the capital you save but hopefully increase it's value somewhat to stay above inflation.

Personally, I'm super conservative, but if I invested heavier in stocks for something as important as a home, then I would try and be mentally prepared for the inability to purchase a home "when" I want to, even with the long time frame you've suggested.
Would you consider 100% stocks and then as the timeframe becomes next 3-5 years go with less and less stocks
investorpeter
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by investorpeter »

nzahir wrote: Mon Sep 13, 2021 11:00 pm
investorpeter wrote: Mon Sep 13, 2021 10:32 pm At that age, the most important determining factor in whether a young person will eventually be able to purchase a long-term "home" in a VHCOL area such as NYC/SF/LA is not savings rate or asset allocation, but income growth. So I would encourage that hypothetical individual to focus on developing the skills, education, and connections that will provide the greatest chance of future income growth rather than focusing on the fine details of re-balancing asset allocation to 80/20 vs. 70/30. The unfortunate reality is that the ability to purchase a "home" (assuming this means something larger than a studio or 1BR apartment) in most major cities will be out of reach of most people living in those cities no matter how long they work and save.

But to answer your question, I would say that person should save as much as they can, live below their means, max out their Roth and retirement account match, and and then allocate remaining 100% to a SP500 index fund in a taxable account, with the expectation that they may or may not be able to eventually purchase a home.
But what if an investor goes 100% in stocks and then sees a lost decade just to get back to where they were?

That is why I would argue to add International and EM, but those will also fall when the US falls, but they may recover and grow better (such as 2000-2009)
I think that’s totally fine. Adding EM and international and 10-20% bonds is a good idea if it will help you stay the course. If we have a lost decade, so be it. All you can do is expect that a downturn will come eventually and not overreact to it (or overreact to preparing for it). Like Sun Tzu said, “If you know your enemy [ie, unbearable loss] and you know yourself, you need not fear any battles [ie, downturns]. If you know neither yourself nor your enemy, you will succumb to every battle.”
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happenstance
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by happenstance »

How expensive is the house? Starting with asset allocation before articulating the goal is putting the cart before the horse. In NYC, home prices range from $500k to several million+ depending on location, size, quality.

Figure out your price range and any financing down payment amount. Then look at your income/earnings and savings rate. Factor out how much growth you need to hit your goal over a certain timeframe. Choose an asset allocation that gives you that rate of return, knowing that higher rates will likely mean more risk of not achieving the goal. If you want to ensure meeting your timeframe, use a HYSA and save a lot.
hudson
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by hudson »

nzahir wrote: Mon Sep 13, 2021 11:00 pm
investorpeter wrote: Mon Sep 13, 2021 10:32 pm At that age, the most important determining factor in whether a young person will eventually be able to purchase a long-term "home" in a VHCOL area such as NYC/SF/LA is not savings rate or asset allocation, but income growth. So I would encourage that hypothetical individual to focus on developing the skills, education, and connections that will provide the greatest chance of future income growth rather than focusing on the fine details of re-balancing asset allocation to 80/20 vs. 70/30. The unfortunate reality is that the ability to purchase a "home" (assuming this means something larger than a studio or 1BR apartment) in most major cities will be out of reach of most people living in those cities no matter how long they work and save.

But to answer your question, I would say that person should save as much as they can, live below their means, max out their Roth and retirement account match, and and then allocate remaining 100% to a SP500 index fund in a taxable account, with the expectation that they may or may not be able to eventually purchase a home.
But what if an investor goes 100% in stocks and then sees a lost decade just to get back to where they were?

That is why I would argue to add International and EM, but those will also fall when the US falls, but they may recover and grow better (such as 2000-2009)
Your bolded question is a great question!
Where is the answer?
As you know, nobody knows.
Bottom Line: If I was in your shoes I would have a healthy allocation to fixed. That way when the market tanks, you'll be somewhat OK.
I personally wouldn't put a dime in the market until I had a large safe pile of fixed income.
whereskyle
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by whereskyle »

nzahir wrote: Fri Sep 10, 2021 11:23 pm Hi guys I have a hypothetical question.

Say someone is 25/26 years old and they live in an expensive city such as NY/LA and they want to invest a majority of their savings for a home in the next 10-15 years.

Say this person is starting at 0 but he could dca in a few thousand a month for now and even more as the years go on.

What kind of allocation do you think is appropriate to help get growth but to also not have such a large downside where it could be a lost decade like 2000-2009?

The DCA part helps a bit here, but still would suck to see a drop as you get closer.

I would think something like 70/30-80/20 and as you get a couple years out, go to mostly fixed income or cash or even all cash depending on the situation and how much is saved up by then

Or this person could go 100/0 for now since he is starting at 0 and have a dca plan in monthly and as he gets closer to the home purchase/when he has built up a larger position, go down in stocks

Investing for 40-50 years for retirement is easy, go 100% equities but have International and EM for diversity. Lower stocks as you get closer to retirement (also based on goals).

But investing for 10-15 years is so tough b/c of high valuations and we have seen multiple lost decades in history
The best thing for you to do is to identify how much you actually need/want to put down for the house: you might not need to take any market risk at all. If you save $3k/month in a high yield savings account, you'll have $100k in cash for a down payment in fewer than 3 years. That might be your most direct route to home ownership. (I put down just 3% for my house in a HCOLA, and I haven't regretted it... yet, especially because my mortgage payment is about 30% cheaper than what my rent payment would be. I personally don't see why anyone would put down more than 20% for a house in their working years in a HCOLA.)
Last edited by whereskyle on Tue Sep 14, 2021 9:51 am, edited 1 time in total.
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tashnewbie
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by tashnewbie »

I agree with users who said you need to start with the target purchase price. This amount will probably grow over the next 10-15 years, at least with inflation. But doing this exercise gives you a rough idea of how much you need for a 20% down payment.

10-15 years is a long timeframe in my mind, and a lot could change during that time, including no longer wanting to reside in the current area. I would just invest as I would with any other money that's allocated for long-term needs. I would max my traditional 401k and Roth IRA, and any extra cash would go into a taxable account at my desired asset allocation.

With that strategy, you'd have to be comfortable with delaying the desired purchase date, if the market is not favorable at that time. Whether that's tolerable to you is a personal decision.

If there's another "lost decade" (I'm sure there will be over your investing life, but nobody knows when), then I don't think fiddling with your AA is going to save you, unless maybe your AA is weighted more towards fixed income (60/40 might be okay? I don't know.).

Unfortunately, I agree with another user that it's going to continue to be tough for a lot of people to afford homes that are anything more than something like a small condo in VHCOL areas. The best you can do is continue to focus on your career growth, live below your means and invest/save the difference, and enjoy your life along the way (!). Max traditional 401k and Roth IRA (assuming you're at least in the 22% fed marginal tax bracket). Good luck!
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

OP,

Please do not do the following:

Stop contributing or reduce contribution to your Trad 401K and Roth IRAs and put your savings into the taxable account. If you do that, you would be paying a lot of taxes. It makes you even less likely to buy a house down the house.

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
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muffins14
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by muffins14 »

Renting is often better, especially while you’re working.

Have you tried some rent-vs-buy calculators? Often the opportunity cost of your down payment going into a home instead of into the market is a big opportunity cost, such that renting may give you a higher expected final value. Of course, real estate could go up a lot and you could get lucky, or, maybe it won’t

I’m planning to rent until I want to retire, then probably buy as an inflation hedge since I won’t be able to count on my income rising along with inflation
solarcub
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by solarcub »

KlangFool wrote: Tue Sep 14, 2021 9:01 am

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
Then what are you suggesting? Where will the down payment come from if not from taxable?
tashnewbie
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by tashnewbie »

solarcub wrote: Tue Sep 14, 2021 9:29 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
Then what are you suggesting? Where will the down payment come from if not from taxable?
I wouldn't forgo tax-advantaged investing to put money into a taxable account. If OP can't max traditional 401k and Roth IRA, then he shouldn't reduce those contributions to save in taxable for a house. In my opinion, if he can't max those 2 accounts and have surplus to save in taxable for the house, he probably can't afford the house and shouldn't be worried about buying. Just keep renting and investing in tax-advantaged accounts.
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

solarcub wrote: Tue Sep 14, 2021 9:29 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
Then what are you suggesting? Where will the down payment come from if not from taxable?
1) Why worry about the house's down payment when the person cannot afford to buy the house?

2) If the person can afford the house, the person would have enough money to max up the tax-advantaged accounts plus additional investment in the taxable account.

If you disagreed, please show me the calculation.

KlangFool
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solarcub
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by solarcub »

tashnewbie wrote: Tue Sep 14, 2021 9:47 am
solarcub wrote: Tue Sep 14, 2021 9:29 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
Then what are you suggesting? Where will the down payment come from if not from taxable?
I wouldn't forgo tax-advantaged investing to put money into a taxable account. If OP can't max traditional 401k and Roth IRA, then he shouldn't reduce those contributions to save in taxable for a house. In my opinion, if he can't max those 2 accounts and have surplus to save in taxable for the house, he probably can't afford the house and shouldn't be worried about buying. Just keep renting and investing in tax-advantaged accounts.
This just makes no sense to me. Let's say you are just starting out at your first real job. You're saying you should rent, and not save any money for buying a house, until you can save $25k a year in taxable? Many people will never be able to save that much, and for others it might take 5 or 10 years to reach that level.

I bought my first condo when I was only saving 10% in my 401k, nothing in an IRA, and I don't regret it one bit. Eventually I sold that condo, rolled the equity into a bigger one, lost a bit of money on that condo, but rolled what was left into the house I have been living in for the last 15 years. Maxing my 401k would not have helped me have a nice place for me and my family to live.
solarcub
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by solarcub »

KlangFool wrote: Tue Sep 14, 2021 9:50 am
solarcub wrote: Tue Sep 14, 2021 9:29 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
Then what are you suggesting? Where will the down payment come from if not from taxable?
1) Why worry about the house's down payment when the person cannot afford to buy the house?

2) If the person can afford the house, the person would have enough money to max up the tax-advantaged accounts plus additional investment in the taxable account.

If you disagreed, please show me the calculation.

KlangFool
There is no calculation to show, because it's a matter of opinion. I think it makes way more sense to buy a house to live in, and save 10% of your income, than to worry about maxing your retirement accounts and having to always rent. Others will disagree.

I know you often focus on worst-case scenarios, but in most cases people's income will rise for a couple of decades from the start of their careers, and the mortgage doesn't have to get bigger. Sure, if you keep trading up for a more expensive house, that's a problem, but if you don't do that, then stretching a bit at the beginning can make a lot of sense.
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

solarcub wrote: Tue Sep 14, 2021 10:19 am
KlangFool wrote: Tue Sep 14, 2021 9:50 am
solarcub wrote: Tue Sep 14, 2021 9:29 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
Then what are you suggesting? Where will the down payment come from if not from taxable?
1) Why worry about the house's down payment when the person cannot afford to buy the house?

2) If the person can afford the house, the person would have enough money to max up the tax-advantaged accounts plus additional investment in the taxable account.

If you disagreed, please show me the calculation.

KlangFool
There is no calculation to show, because it's a matter of opinion. I think it makes way more sense to buy a house to live in, and save 10% of your income, than to worry about maxing your retirement accounts and having to always rent. Others will disagree.
solarcub,

It is NOT a matter of opinion. It is simple math.

In order for OP to max up the tax-advantaged accounts, OP only need to save 19.5K + 6K = 25.5K per year.

<<I think it makes way more sense to buy a house to live in, and save 10% of your income,>>

How much house can OP buy with an annual mortgage payment of 25.5K per year? Is it enough to buy a house at his location?

If OP cannot afford to pay the mortgage even with a saved down payment, why bother to start?

Please do the math and show us how we are wrong.

KlangFool
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solarcub
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by solarcub »

KlangFool wrote: Tue Sep 14, 2021 10:26 am
solarcub,

It is NOT a matter of opinion. It is simple math.

In order for OP to max up the tax-advantaged account, OP only need to save 19.5K + 6K = 25.5K per year.

<<I think it makes way more sense to buy a house to live in, and save 10% of your income,>>

How much house can OP buy with an annual mortgage payment of 25.5K per year? Is it enough to buy a house at his location?

If OP cannot afford to pay the mortgage even with a saved down payment, why bother to start?

Please do the math and show us how we are wrong.

KlangFool
Suppose the OP saves only $10k per year, all in 401k. They pay about $2500 in extra taxes on the foregone 401k contribution, and nothing for the Roth because that was going to be taxed anyway. They end up with about $12,500 more per year to put towards the mortgage. Maybe that makes it affordable for them. If it does, it's up to them whether owning a house or apartment is worth it compared to renting. It's a valid option.
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

solarcub wrote: Tue Sep 14, 2021 10:38 am
Suppose the OP saves only $10k per year, all in 401k. They pay about $2500 in extra taxes on the foregone 401k contribution, and nothing for the Roth because that was going to be taxed anyway. They end up with about $12,500 more per year to put towards the mortgage. Maybe that makes it affordable for them. If it does, it's up to them whether owning a house or apartment is worth it compared to renting. It's a valid option.
solarcub,

Please explain what kind of house that OP can buy with an annual mortgage payment of 12.5K per year.

<<Maybe that makes it affordable for them. >>

If OP cannot buy a house with 25.5K of mortgage payment, how does 12.5K per year helps?

This is MATH.

<<If it does, it's up to them whether owning a house or apartment is worth it compared to renting. It's a valid option.>.

How can this be a valid option if OP cannot pay the mortgage?

Show us the numbers.

It is very simple.

Mortgage payment has to be less or equal to rent plus current annual savings.

If OP's current annual saving is less than 25.5K per year, how much house can he afford to buy?

KlangFool

P.S.: It will not be 12.5K anyhow. OP has to pay the mortgage with after-tax money. Hence, it is only 10K per year.
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tashnewbie
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by tashnewbie »

solarcub wrote: Tue Sep 14, 2021 10:15 am
tashnewbie wrote: Tue Sep 14, 2021 9:47 am
solarcub wrote: Tue Sep 14, 2021 9:29 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
Then what are you suggesting? Where will the down payment come from if not from taxable?
I wouldn't forgo tax-advantaged investing to put money into a taxable account. If OP can't max traditional 401k and Roth IRA, then he shouldn't reduce those contributions to save in taxable for a house. In my opinion, if he can't max those 2 accounts and have surplus to save in taxable for the house, he probably can't afford the house and shouldn't be worried about buying. Just keep renting and investing in tax-advantaged accounts.
This just makes no sense to me. Let's say you are just starting out at your first real job. You're saying you should rent, and not save any money for buying a house, until you can save $25k a year in taxable? Many people will never be able to save that much, and for others it might take 5 or 10 years to reach that level.

I bought my first condo when I was only saving 10% in my 401k, nothing in an IRA, and I don't regret it one bit. Eventually I sold that condo, rolled the equity into a bigger one, lost a bit of money on that condo, but rolled what was left into the house I have been living in for the last 15 years. Maxing my 401k would not have helped me have a nice place for me and my family to live.
OP said he's not looking to buy for 10-15 years. I don't think OP should be saving money any differently than he does for his long-term portfolio for a purchase that he may or may not make in 10-15 years. I think renting is generally a good option, especially in VHCOL areas, for young people, because it gives them flexibility to go where the job opportunities take them. On average, there's probably going to be more job movement earlier in a career.

If OP can't save $25.5k/year in a VHCOL area, then he probably doesn't have sufficient discretionary cash flow to afford a house in the area. What are average condo prices in his area? Mid-6 figures? If he can't save $25.5k/year, then he's probably making less than $100k. A $500k mortgage is a big lift on $100k income.
Topic Author
nzahir
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

KlangFool wrote: Tue Sep 14, 2021 9:01 am OP,

Please do not do the following:

Stop contributing or reduce contribution to your Trad 401K and Roth IRAs and put your savings into the taxable account. If you do that, you would be paying a lot of taxes. It makes you even less likely to buy a house down the house.

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
This is actually a hypothetical

I am asking the question for someone I know who may want to eventually buy a home in a decade or so and I had a thought of what is the best way to save up for the home

Homes in LA, especially on the west side, are expensive

I feel like most people cant even afford them here without a high paying job AND (for many) decent stock returns

The question is how much risk to take when 10-15 years away

I think if the portfolio is starting at 0 and if someone is DCA'ing, maybe go 100/0 and if markets keep rising and if you are 5-7 years away, drop down to something like 60/40 or 70/30. As you get 2-4 years away, go 20-40% stocks and then as you become a year or so away and you have hit your numbers, go all cash
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

nzahir wrote: Tue Sep 14, 2021 11:17 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am OP,

Please do not do the following:

Stop contributing or reduce contribution to your Trad 401K and Roth IRAs and put your savings into the taxable account. If you do that, you would be paying a lot of taxes. It makes you even less likely to buy a house down the house.

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
This is actually a hypothetical

I am asking the question for someone I know who may want to eventually buy a home in a decade or so and I had a thought of what is the best way to save up for the home

Homes in LA, especially on the west side, are expensive

I feel like most people cant even afford them here without a high paying job AND (for many) decent stock returns

The question is how much risk to take when 10-15 years away

I think if the portfolio is starting at 0 and if someone is DCA'ing, maybe go 100/0 and if markets keep rising and if you are 5-7 years away, drop down to something like 60/40 or 70/30. As you get 2-4 years away, go 20-40% stocks and then as you become a year or so away and you have hit your numbers, go all cash
nzahir,

<<I think if the portfolio is starting at 0 and if someone is DCA'ing, maybe go 100/0 and if markets keep rising and if you are 5-7 years away, drop down to something like 60/40 or 70/30. As you get 2-4 years away, go 20-40% stocks and then as you become a year or so away and you have hit your numbers, go all cash>>

You are asking the wrong question.

A) If the income and annual saving is high enough, the person does not need to save for the house down payment.

B) If the income and annual saving is not high enough, the person cannot pay the mortgage. Saving for the house down payment is not necessary.

In summary, it has NOTHING to do with portfolio return.

Just pick a house and the house's price. And, do the calculation. You would find that (A) and (B) are true.

KlangFool
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solarcub
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by solarcub »

KlangFool wrote: Tue Sep 14, 2021 10:44 am
solarcub wrote: Tue Sep 14, 2021 10:38 am
Suppose the OP saves only $10k per year, all in 401k. They pay about $2500 in extra taxes on the foregone 401k contribution, and nothing for the Roth because that was going to be taxed anyway. They end up with about $12,500 more per year to put towards the mortgage. Maybe that makes it affordable for them. If it does, it's up to them whether owning a house or apartment is worth it compared to renting. It's a valid option.
solarcub,

Please explain what kind of house that OP can buy with an annual mortgage payment of 12.5K per year.

<<Maybe that makes it affordable for them. >>

If OP cannot buy a house with 25.5K of mortgage payment, how does 12.5K per year helps?

This is MATH.

<<If it does, it's up to them whether owning a house or apartment is worth it compared to renting. It's a valid option.>.

How can this be a valid option if OP cannot pay the mortgage?

Show us the numbers.

It is very simple.

Mortgage payment has to be less or equal to rent plus current annual savings.

If OP's current annual saving is less than 25.5K per year, how much house can he afford to buy?

KlangFool

P.S.: It will not be 12.5K anyhow. OP has to pay the mortgage with after-tax money. Hence, it is only 10K per year.
You were suggesting they should save $25k per year in Roth/401k. I was suggesting they drop that down to $10k; stop the $5k Roth contribution, which frees up $5k, and contribute $10k less to the 401k, which frees up about $7.5k after taxes, so total $12.5k per year extra.

You asked "If OP cannot buy a house with 25.5K of mortgage payment, how does 12.5K per year helps?"
That is not the right question. Saving less in Roth/401k freed up $12.5k to put towards a mortgage, which could be another $200,000 or so of mortgage at 3%. Maybe they could afford $300k before, now they can afford $500k instead. That might be just enough to get a starter home/apartment in their area.

Finally, "If OP's current annual saving is less than 25.5k per year, how much house can he afford to buy?"
No way to know. Maybe current rent is $1k per month, maybe $5k per month.
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

solarcub wrote: Tue Sep 14, 2021 1:01 pm
Saving less in Roth/401k freed up $12.5k to put towards a mortgage, which could be another $200,000 or so of mortgage at 3%
solarcub,

And, how does that helps?

A) If OP need to save 12.5K less in order to save this down payment, OP is saving significantly less than 25.5K per year.

B) If OP is saving less than 25.5K per year, even with 200K less in the mortgage loan will not help OP.

1) Start with the price of the house.

2) Assume you have 20% down payment.

3) Calculate the annual mortgage payment.

4) If it is significantly larger than your annual savings plus the rent, you cannot afford the house period.

It is simple math.

How does saving 200K down payment for a 1 million house makes any sense? Aka, the person does not have the money to pay the mortgage of the 800K loan.

KlangFool
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solarcub
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by solarcub »

KlangFool wrote: Tue Sep 14, 2021 1:23 pm
If it is significantly larger than your annual savings plus the rent, you cannot afford the house period.

KlangFool
That is part of my point; we don't know what they pay in rent, so we don't know how much house they can afford. It might still make sense to buy a house even if it means not maxing retirement accounts.
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

solarcub wrote: Tue Sep 14, 2021 1:59 pm
KlangFool wrote: Tue Sep 14, 2021 1:23 pm
If it is significantly larger than your annual savings plus the rent, you cannot afford the house period.

KlangFool
That is part of my point; we don't know what they pay in rent, so we don't know how much house they can afford. It might still make sense to buy a house even if it means not maxing retirement accounts.
But, if the annual savings is less than 25.5K per year, all bets are off.

<<It might still make sense to buy a house even if it means not maxing retirement accounts.>>

That is our point. Aka, if the person cannot afford to save 25.5K per year, it is unlikely that the person can afford to buy a house in this area.

KlangFool
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Topic Author
nzahir
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

KlangFool wrote: Tue Sep 14, 2021 11:22 am
nzahir wrote: Tue Sep 14, 2021 11:17 am
KlangFool wrote: Tue Sep 14, 2021 9:01 am OP,

Please do not do the following:

Stop contributing or reduce contribution to your Trad 401K and Roth IRAs and put your savings into the taxable account. If you do that, you would be paying a lot of taxes. It makes you even less likely to buy a house down the house.

Paying 20+% to 30+% taxes and put the after-tax money into the taxable account is not going to help you at all.

KlangFool
This is actually a hypothetical

I am asking the question for someone I know who may want to eventually buy a home in a decade or so and I had a thought of what is the best way to save up for the home

Homes in LA, especially on the west side, are expensive

I feel like most people cant even afford them here without a high paying job AND (for many) decent stock returns

The question is how much risk to take when 10-15 years away

I think if the portfolio is starting at 0 and if someone is DCA'ing, maybe go 100/0 and if markets keep rising and if you are 5-7 years away, drop down to something like 60/40 or 70/30. As you get 2-4 years away, go 20-40% stocks and then as you become a year or so away and you have hit your numbers, go all cash
nzahir,

<<I think if the portfolio is starting at 0 and if someone is DCA'ing, maybe go 100/0 and if markets keep rising and if you are 5-7 years away, drop down to something like 60/40 or 70/30. As you get 2-4 years away, go 20-40% stocks and then as you become a year or so away and you have hit your numbers, go all cash>>

You are asking the wrong question.

A) If the income and annual saving is high enough, the person does not need to save for the house down payment.

B) If the income and annual saving is not high enough, the person cannot pay the mortgage. Saving for the house down payment is not necessary.

In summary, it has NOTHING to do with portfolio return.

Just pick a house and the house's price. And, do the calculation. You would find that (A) and (B) are true.

KlangFool
I disagree completely or the wording isn't making sense to me

A) You are saying that a person doesn't need to save for a home downpayment? Yet you save annual savings. Do you mean someone wouldn't need to invest to get to the downpayment?

While that could be true, getting 3-5% annually on avg would certainly help speed up that process, especially if you can be flexible with the years.

A home that costs say 3M would require 600k down if you only want to do the minimum 20%. Some people may even need to put more down

B) I don't think you can just say that just because you don't have the down deposit it doesn't mean you can't afford the mortgage

There are people that can afford say a 13k mortgage a month, but they don't have the 600k down
KlangFool
Posts: 22121
Joined: Sat Oct 11, 2008 12:35 pm

Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

nzahir wrote: Tue Sep 14, 2021 3:27 pm
I disagree completely or the wording isn't making sense to me

A) You are saying that a person doesn't need to save for a home downpayment? Yet you save annual savings. Do you mean someone wouldn't need to invest to get to the downpayment?

While that could be true, getting 3-5% annually on avg would certainly help speed up that process, especially if you can be flexible with the years.

A home that costs say 3M would require 600k down if you only want to do the minimum 20%. Some people may even need to put more down

B) I don't think you can just say that just because you don't have the down deposit it doesn't mean you can't afford the mortgage

There are people that can afford say a 13k mortgage a month, but they don't have the 600k down
nzahir,

<<There are people that can afford say a 13k mortgage a month, but they don't have the 600k down>>

Let's think about this for a moment. How does this makes any sense?

In order for someone to afford to pay 13K mortgage per month, the person need to save and invest at least 15K per month now while renting. This means at least 15K X 12 = 180K per year. So, why do this person need to save 600K over 10 to 15 years? It is only around 3 years of annual savings.

It makes perfect sense if you do the calculation.

<<Do you mean someone wouldn't need to invest to get to the downpayment? >>

I mean that the person do not need to invest and save for the down payment. He/she just need to save and invest for his/her retirement/financial independent portfolio. Nothing special or a new bucket is needed.

If you do the math, you would find that if someone needs 10 to 15 years to save for the 20% down payment. They cannot afford the house's mortgage payment.

KlangFool
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Strifey
Posts: 90
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by Strifey »

nzahir wrote: Tue Sep 14, 2021 11:17 am This is actually a hypothetical

I am asking the question for someone I know who may want to eventually buy a home in a decade or so and I had a thought of what is the best way to save up for the home

Homes in LA, especially on the west side, are expensive

I feel like most people cant even afford them here without a high paying job AND (for many) decent stock returns

The question is how much risk to take when 10-15 years away

I think if the portfolio is starting at 0 and if someone is DCA'ing, maybe go 100/0 and if markets keep rising and if you are 5-7 years away, drop down to something like 60/40 or 70/30. As you get 2-4 years away, go 20-40% stocks and then as you become a year or so away and you have hit your numbers, go all cash
I'm someone who has gone through this exact thing.

I live in SoCal, I'm 36, and had a similar time horizon.

In my 20s I just did 100% equities, if the time frame is 5+ years I don't consider it to be a short term decision and should be able to ride out any downturns, especially when you are flexible with a 10-15 year horizon. So I would invest just like you would for anyone under 30, which is be aggressive and go in on equities (VTI/VXUS).

In general if you can ride out 5-6 years you'll be able to recover, any long term crashes would potentially impact real estate as well due to underlying economic issues. https://www.investopedia.com/a-history- ... ts-4582652

Especially in hot markets like CA real estate, if you're too conservative then you're just going to be chasing a moving target while saving, you need growth in your savings that will help you reach your down payment goal.

Once you get a couple years out and you know you want to buy soon, then it makes sense to move a portion i.e. 20% into something more stable like a HYSA. I don't think you should be changing your overall investment strategy (i.e. going down to 60/40 in your 30s), you should invest like normal and let your income and portfolio determine when you can put enough down on the house and afford the mortgage based on your annual income. Unfortunately in HCOL areas, it's not necessarily up to you when you can buy a house, it's when your finances make sense.

I do agree that you should still be maxing 401K match and Roth IRA $6K limits first (and overall saving at least 15% for retirement), then anything after that is more flexible. You should also be flexible in when you cut off taxable, if you see that you have more then enough to put 20% down and afford the subsequent mortgage on your income then you should move back to fully maxing out tax advantaged accounts first.

Ultimately I don't believe in a "hard" rule. I think you should save enough for retirement first (i.e. 15-20%/yr), then consider what your priority is next. This doesn't always necessarily mean you need to put $30K straight to retirement, even starting at $20K retirement/$10K taxable for 10 years puts you in a solid starting point for both retirement and buying a house in HCOL markets and also puts you way ahead of the majority of Americans.

But without knowing income, savings rate, etc. it's hard to say, many people may not even have $30K of flexible income a year. I stuck it out through roommates and being frugal, even when I was 25 in 2010 making $70K a year I contributed $25K to savings overall but split between 401K, Roth IRA, taxable. Then as my income has steadily increased I've continued to save more and naturally max out retirement accounts now.

Investing some in taxable though allowed me to have the downpayment for a $600K condo, the subsequent mortgage supports by annual income, and I have a solid retirement bucket still because I didn't completely ignore it.
gougou
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by gougou »

I'm actually in a similar situation. I'm looking to upgrade and buy a house in a good school district in SF Bay Area in the next 5 to 10 years due to babies growing up to school age. As everybody knows, SF Bay Area is extremely expensive, probably more expensive than LA.

I'm actually 100% in stocks, with all of my taxable investments in pipeline MLPs (such as EPD, MPLX, SHLX). There are a few reasons:
1. I believe they are undervalued as they comfortably pay annual distributions from 8% to 10%.
2. The distributions are mostly tax-deferred so I don't owe much income taxes right now. Since I'm already in a very high tax bracket plus state income tax this is important to me.
3. Since the distributions are tax-deferred return of capital, I'm effectively getting my money back first and anything that's left over is profit. I can reallocate the distributions to some other investments, or put them in a savings account if I plan to use it for down payment, without selling anything and realizing any capital gains tax.
4. I get K-1 forms at tax time. After 2 years, all of the K-1 distributions can help me qualify for a mortgage.

So I know this is very much against Bogleheads principles. I'm picking individual stocks and concentrating in a single sector for all of my taxable investments. But I think it works for my situation so I'm putting it here as food for thought.
Topic Author
nzahir
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

KlangFool wrote: Tue Sep 14, 2021 3:45 pm
nzahir wrote: Tue Sep 14, 2021 3:27 pm
I disagree completely or the wording isn't making sense to me

A) You are saying that a person doesn't need to save for a home downpayment? Yet you save annual savings. Do you mean someone wouldn't need to invest to get to the downpayment?

While that could be true, getting 3-5% annually on avg would certainly help speed up that process, especially if you can be flexible with the years.

A home that costs say 3M would require 600k down if you only want to do the minimum 20%. Some people may even need to put more down

B) I don't think you can just say that just because you don't have the down deposit it doesn't mean you can't afford the mortgage

There are people that can afford say a 13k mortgage a month, but they don't have the 600k down
nzahir,

<<There are people that can afford say a 13k mortgage a month, but they don't have the 600k down>>

Let's think about this for a moment. How does this makes any sense?

In order for someone to afford to pay 13K mortgage per month, the person need to save and invest at least 15K per month now while renting. This means at least 15K X 12 = 180K per year. So, why do this person need to save 600K over 10 to 15 years? It is only around 3 years of annual savings.

It makes perfect sense if you do the calculation.

<<Do you mean someone wouldn't need to invest to get to the downpayment? >>

I mean that the person do not need to invest and save for the down payment. He/she just need to save and invest for his/her retirement/financial independent portfolio. Nothing special or a new bucket is needed.

If you do the math, you would find that if someone needs 10 to 15 years to save for the 20% down payment. They cannot afford the house's mortgage payment.

KlangFool
You are also not accounting for the money they will save now when they don't have to pay say 4k a month on rent

The investing helps speed things up, technically you can just save cash, but then what is the point of investing?

Why do you invest? Why does anyone invest?

Aren't equity premiums a thing b/c people take on risk with their cash?
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

nzahir wrote: Tue Sep 14, 2021 7:28 pm
KlangFool wrote: Tue Sep 14, 2021 3:45 pm
nzahir wrote: Tue Sep 14, 2021 3:27 pm
I disagree completely or the wording isn't making sense to me

A) You are saying that a person doesn't need to save for a home downpayment? Yet you save annual savings. Do you mean someone wouldn't need to invest to get to the downpayment?

While that could be true, getting 3-5% annually on avg would certainly help speed up that process, especially if you can be flexible with the years.

A home that costs say 3M would require 600k down if you only want to do the minimum 20%. Some people may even need to put more down

B) I don't think you can just say that just because you don't have the down deposit it doesn't mean you can't afford the mortgage

There are people that can afford say a 13k mortgage a month, but they don't have the 600k down
nzahir,

<<There are people that can afford say a 13k mortgage a month, but they don't have the 600k down>>

Let's think about this for a moment. How does this makes any sense?

In order for someone to afford to pay 13K mortgage per month, the person need to save and invest at least 15K per month now while renting. This means at least 15K X 12 = 180K per year. So, why do this person need to save 600K over 10 to 15 years? It is only around 3 years of annual savings.

It makes perfect sense if you do the calculation.

<<Do you mean someone wouldn't need to invest to get to the downpayment? >>

I mean that the person do not need to invest and save for the down payment. He/she just need to save and invest for his/her retirement/financial independent portfolio. Nothing special or a new bucket is needed.

If you do the math, you would find that if someone needs 10 to 15 years to save for the 20% down payment. They cannot afford the house's mortgage payment.

KlangFool
You are also not accounting for the money they will save now when they don't have to pay say 4k a month on rent

The investing helps speed things up, technically you can just save cash, but then what is the point of investing?

Why do you invest? Why does anyone invest?

Aren't equity premiums a thing b/c people take on risk with their cash?
nzahir,

<<You are also not accounting for the money they will save now when they don't have to pay say 4k a month on rent>>

And, at 4K per month, it is too small to matter.

<<The investing helps speed things up, technically you can just save cash, but then what is the point of investing?>>

You missed my point. I did not say do not invest the saving. I just said the person does not have to invest for the down payment specifically. And, the person just need to invest for retirement or financial independent. Not for the house down payment.

We still come back to this BASIC point.

A) A person does not have to save and invest for the house down payment for 10 to 15 years.

B) If a person has to do (A), the person cannot afford the house.

C) For people that can afford the house, they do not need to save and invest specifically for the house down payment. Their normal saving and investment is big enough for the house down payment.

It is simple math.

KlangFool
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KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

OP,

A) Rent at 4K per month.

B) Mortgage payment at 13K per month

In order to pay 13K of mortgage per month, the person need to have at least annual saving and investment of 13K - 4K = 9K per month = 108K per year while renting.

Why a person that save and invest at 108K per year need 10 to 15 years to save 600K for the house down payment?

So, it is NOT the down payment that matters. The question is whether the person has ENOUGH annual saving and investment to pay the mortgage.

If the answer is YES, then, there is no problem accumulating the down payment.

If the answer is NO, the person cannot afford the house.

It is simple math.

KlangFool
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Topic Author
nzahir
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by nzahir »

KlangFool wrote: Tue Sep 14, 2021 8:36 pm
nzahir wrote: Tue Sep 14, 2021 7:28 pm
KlangFool wrote: Tue Sep 14, 2021 3:45 pm
nzahir wrote: Tue Sep 14, 2021 3:27 pm
I disagree completely or the wording isn't making sense to me

A) You are saying that a person doesn't need to save for a home downpayment? Yet you save annual savings. Do you mean someone wouldn't need to invest to get to the downpayment?

While that could be true, getting 3-5% annually on avg would certainly help speed up that process, especially if you can be flexible with the years.

A home that costs say 3M would require 600k down if you only want to do the minimum 20%. Some people may even need to put more down

B) I don't think you can just say that just because you don't have the down deposit it doesn't mean you can't afford the mortgage

There are people that can afford say a 13k mortgage a month, but they don't have the 600k down
nzahir,

<<There are people that can afford say a 13k mortgage a month, but they don't have the 600k down>>

Let's think about this for a moment. How does this makes any sense?

In order for someone to afford to pay 13K mortgage per month, the person need to save and invest at least 15K per month now while renting. This means at least 15K X 12 = 180K per year. So, why do this person need to save 600K over 10 to 15 years? It is only around 3 years of annual savings.

It makes perfect sense if you do the calculation.

<<Do you mean someone wouldn't need to invest to get to the downpayment? >>

I mean that the person do not need to invest and save for the down payment. He/she just need to save and invest for his/her retirement/financial independent portfolio. Nothing special or a new bucket is needed.

If you do the math, you would find that if someone needs 10 to 15 years to save for the 20% down payment. They cannot afford the house's mortgage payment.

KlangFool
You are also not accounting for the money they will save now when they don't have to pay say 4k a month on rent

The investing helps speed things up, technically you can just save cash, but then what is the point of investing?

Why do you invest? Why does anyone invest?

Aren't equity premiums a thing b/c people take on risk with their cash?
nzahir,

<<You are also not accounting for the money they will save now when they don't have to pay say 4k a month on rent>>

And, at 4K per month, it is too small to matter.

<<The investing helps speed things up, technically you can just save cash, but then what is the point of investing?>>

You missed my point. I did not say do not invest the saving. I just said the person does not have to invest for the down payment specifically. And, the person just need to invest for retirement or financial independent. Not for the house down payment.

We still come back to this BASIC point.

A) A person does not have to save and invest for the house down payment for 10 to 15 years.

B) If a person has to do (A), the person cannot afford the house.

C) For people that can afford the house, they do not need to save and invest specifically for the house down payment. Their normal saving and investment is big enough for the house down payment.

It is simple math.

KlangFool
So you would say just invest as you normally would and then when it comes to the house, you could just save in cash

The 10-15 year timeframe is b/c the person can't currently afford it but their salary will start to multiply in the future and they have no need for the home for now

The 10-15 year timeframe isn't necessarily for the home, but its that they won't need the home until then
exodusNH
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by exodusNH »

nzahir wrote: Fri Sep 10, 2021 11:23 pm Hi guys I have a hypothetical question.

Say someone is 25/26 years old and they live in an expensive city such as NY/LA and they want to invest a majority of their savings for a home in the next 10-15 years.

Say this person is starting at 0 but he could dca in a few thousand a month for now and even more as the years go on.

What kind of allocation do you think is appropriate to help get growth but to also not have such a large downside where it could be a lost decade like 2000-2009?

The DCA part helps a bit here, but still would suck to see a drop as you get closer.

I would think something like 70/30-80/20 and as you get a couple years out, go to mostly fixed income or cash or even all cash depending on the situation and how much is saved up by then

Or this person could go 100/0 for now since he is starting at 0 and have a dca plan in monthly and as he gets closer to the home purchase/when he has built up a larger position, go down in stocks

Investing for 40-50 years for retirement is easy, go 100% equities but have International and EM for diversity. Lower stocks as you get closer to retirement (also based on goals).

But investing for 10-15 years is so tough b/c of high valuations and we have seen multiple lost decades in history
The allocation of a 2030 target date fund probably gives you a good starting point. 2035 might be a bit too conservative.

Just be prepared to not buy a house when you want because the market is not cooperating.
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

nzahir wrote: Tue Sep 14, 2021 10:27 pm
KlangFool wrote: Tue Sep 14, 2021 8:36 pm
nzahir wrote: Tue Sep 14, 2021 7:28 pm
KlangFool wrote: Tue Sep 14, 2021 3:45 pm
nzahir wrote: Tue Sep 14, 2021 3:27 pm
I disagree completely or the wording isn't making sense to me

A) You are saying that a person doesn't need to save for a home downpayment? Yet you save annual savings. Do you mean someone wouldn't need to invest to get to the downpayment?

While that could be true, getting 3-5% annually on avg would certainly help speed up that process, especially if you can be flexible with the years.

A home that costs say 3M would require 600k down if you only want to do the minimum 20%. Some people may even need to put more down

B) I don't think you can just say that just because you don't have the down deposit it doesn't mean you can't afford the mortgage

There are people that can afford say a 13k mortgage a month, but they don't have the 600k down
nzahir,

<<There are people that can afford say a 13k mortgage a month, but they don't have the 600k down>>

Let's think about this for a moment. How does this makes any sense?

In order for someone to afford to pay 13K mortgage per month, the person need to save and invest at least 15K per month now while renting. This means at least 15K X 12 = 180K per year. So, why do this person need to save 600K over 10 to 15 years? It is only around 3 years of annual savings.

It makes perfect sense if you do the calculation.

<<Do you mean someone wouldn't need to invest to get to the downpayment? >>

I mean that the person do not need to invest and save for the down payment. He/she just need to save and invest for his/her retirement/financial independent portfolio. Nothing special or a new bucket is needed.

If you do the math, you would find that if someone needs 10 to 15 years to save for the 20% down payment. They cannot afford the house's mortgage payment.

KlangFool
You are also not accounting for the money they will save now when they don't have to pay say 4k a month on rent

The investing helps speed things up, technically you can just save cash, but then what is the point of investing?

Why do you invest? Why does anyone invest?

Aren't equity premiums a thing b/c people take on risk with their cash?
nzahir,

<<You are also not accounting for the money they will save now when they don't have to pay say 4k a month on rent>>

And, at 4K per month, it is too small to matter.

<<The investing helps speed things up, technically you can just save cash, but then what is the point of investing?>>

You missed my point. I did not say do not invest the saving. I just said the person does not have to invest for the down payment specifically. And, the person just need to invest for retirement or financial independent. Not for the house down payment.

We still come back to this BASIC point.

A) A person does not have to save and invest for the house down payment for 10 to 15 years.

B) If a person has to do (A), the person cannot afford the house.

C) For people that can afford the house, they do not need to save and invest specifically for the house down payment. Their normal saving and investment is big enough for the house down payment.

It is simple math.

KlangFool
So you would say just invest as you normally would and then when it comes to the house, you could just save in cash

The 10-15 year timeframe is b/c the person can't currently afford it but their salary will start to multiply in the future and they have no need for the home for now

The 10-15 year timeframe isn't necessarily for the home, but its that they won't need the home until then
If and when the income and saving is big enough for them to buy the house, they have the money to buy the house. They don't have to save CASH for the house now.

KlangFool
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tashnewbie
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by tashnewbie »

nzahir wrote: Tue Sep 14, 2021 10:27 pm So you would say just invest as you normally would
That's what I've been saying this whole thread (and I think @KlangFool, too).

10-15 years is a long timeframe. Why would you invest any differently than usual for a purchase you may or may not make in 10-15 years?

Just stick to the current investment plan.

Your friend does have a investment plan, right? At least a rough idea of one? If not, they should prepare one (check the wiki "Investment Policy Statement" for some ideas).

My advice: focus on doing a great job at work and growing the career; live below your means and save/invest the difference; enjoy your life along the way.

In 10-15 years, then you can reassess whether you even want to buy a house, whether you want to buy one in SoCal, and you'll know how much you can afford and how or even if you need to save specifically for the down payment.
KlangFool
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by KlangFool »

tashnewbie wrote: Wed Sep 15, 2021 7:43 am
nzahir wrote: Tue Sep 14, 2021 10:27 pm So you would say just invest as you normally would
That's what I've been saying this whole thread (and I think @KlangFool, too).

10-15 years is a long timeframe. Why would you invest any differently than usual for a purchase you may or may not make in 10-15 years?

Just stick to the current investment plan.

Your friend does have a investment plan, right? At least a rough idea of one? If not, they should prepare one (check the wiki "Investment Policy Statement" for some ideas).

My advice: focus on doing a great job at work and growing the career; live below your means and save/invest the difference; enjoy your life along the way.

In 10-15 years, then you can reassess whether you even want to buy a house, whether you want to buy one in SoCal, and you'll know how much you can afford and how or even if you need to save specifically for the down payment.
Agreed. That is my point too.

KlangFool
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lws
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by lws »

Started out in SoCal. DCA alone would have never made it. Increase in income did the job.
gblack
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Re: How Much Bonds/Cash For Young Person Investing For a Home

Post by gblack »

I find the original posters question / plan completely reasonable. Some of the responses seem like answers to questions the poster isn't really asking. There's nothing wrong with a 25-26 year old having a goal of home ownership in the next 10-15 years in a VHCOL area. That is a lifestyle choice. Not everyone's life goal is to maximize retirement savings or minimize taxes in isolation of other goals.

My suggestion, which is not different from what others have said:

1) 10-20% to tax advantage retirement bucket
2) Save what you can in a "medium term savings" fund (house downpayment/whatever) - I'd use a Target Date with global diversification with an AA ranging from 50/50-90/10 depending on risk tolerance, job security, etc. Balanced fund could work equally well. Or the two funder.

A lot of things change in 10-15 years. Having a substantial amount of non-retirement money available to spend will give your future self options.
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