Portfolio review / Can we afford this house?

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Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Portfolio review / Can we afford this house?

Post by dvvader »

Hello Bogleheads! I first discovered this forum in 2017 and have learned so much from this group. I've read numerous portfolio review posts on this site and have seen some wonderful advice and knowledge be shared. My spouse and I recently received some good but surprising news, and are in need of some of that same external perspective and wisdom. Full disclosure, the focus of this post is actually more of a housing question rather than a straight up portfolio review, though any and all advice will be greatly appreciated. Please consider the information provided below.


Summary of the basics:

Age: 35, spouse is 34

Tax Filing Status: MFJ

Tax Rate: 24% Federal, 9.3% State

State of Residence: CA

Assets: ~$935,000 invested (details below), ~$80,000 "operating cash" and emergency funds, ~$400,000 home equity

Debt: Mortgage, ~$225,000 remaining @ 2.625%

Annual Household Income: Conservatively assume $265,000/year for planning, but varies (somewhat wildly and mostly upward) month to month and year to year.

Annual Investment Contributions/Savings: ~$65,000 (+ employer match, details below)

Annual Expense: ~$200,000 (some details below)


Invested Assets Detail:

His 401k at Fidelity
33.8% Fidelity Total Market Index Fund (FSKAX) (0.015%)
1.9% Fidelity Global ex U.S. Index Fund (FSGGX) (0.06%)
9.2% Fidelity Investment Grade Bond Fund (FBNDX) (0.45%)

His HSA at Fidelity
3.3% Fidelity Total Market Index Fund (FSKAX) (0.015%)
0.6% Fidelity Total International Index Fund (FTIHX) (0.06%)

His Roth IRA at Vanguard
13.8% Vanguard Total World Stock Index Fund (VTWAX) (0.10%)

Her Roth IRA at Vanguard
8.3% Vanguard Total World Stock Index Fund (VTWAX) (0.10%)

His Treasury Direct
3.4% iBonds, 10k purchased 8/2022, 12/2023, 1/2024

Her Treasury Direct
3.4% iBonds, 10k purchased 8/2022, 12/2023, 1/2024

Total 529 at Vanguard
4.8% Vangaurd Growth (0.15%)

Joint Taxable
5.2% Vanguard Total Stock Index Fund (VTSAX) (0.04%)
9.8% Vanguard Total International Stock Index Fund (VTIAX) (0.11%)
2.5% cash (VMFXX)

Total = 100.0%


Annual Investment Contributions/Savings Detail:

$23,000 his 401k
$26,500 his 401k (expected employer contribution)
$8,300 his HSA
$14,000 his/her Roth IRA
$6,000+ total 529
$12,000+ joint taxable

We've also been fortunate to be able to purchase $20,000 in iBonds each of the past 3 years, but are not currently planning to do so in 2025, regardless of whether we purchase a new house or not.


Annual Expense Detail:

Income Taxes: ~$60,000+/year
Health Insurance: ~$19,000/year (pre-tax through employer)
Current PITI: ~$18,000/year
Current Utilities: ~$8,000/year
All the Rest: ~$95,000+/year


My spouse and I bought our house ~10 years ago as newlyweds. It is a nice house in a good location, but we have been feeling a space crunch the past year or so. We have been casually shopping over this time period, and have declined to offer on some really nice houses because we previously determined we could make do and that the cost wasn't worth the upgrade. Well the inputs to this equation are changing...and we need to wrap our heads around affording an upgrade in the next year or two. Before anyone asks, a renovation of the current house is not really feasible due to the way the house and lot are oriented unless we build up (yeah right) or completely gut/redo our current layout (yeah right). We are focused on purchasing a new larger house in the same area.

To keep things relatively simple, see the sample house below, which represents a somewhat typical house in our area that would meet our needs and wants.

Purchase Price: $800,000
Down Payment: $350,000 (assuming rolling over all existing equity, minus transaction fees and sales prep)
Loan Amount: $450,000 at ~6% for 30 years
New PITI: ~$43,000/year
New Utilities: ~$12,000/year
First Year Interest Paid: ~$27,000 (allowing us to itemize every year, currently itemize every other year when we lump charitable contributions)
Estimated Annual Cost Increase: ~$29,000 (PITI plus utilities)


Questions:

Can we afford this sample house? I believe this answer is technically yes as we could cut taxable, 529, and Roth contributions to account for increased costs, though this admittedly makes my stomach turn a bit.

Should we afford this sample house (i.e. is it "smart", or too much of a stretch)? I am not expecting any significant changes to income, or any type of windfall.

If your answer is no to either or both questions above, what can we currently afford (in your opinion)?

Should we sell assets to increase the down payment if we did purchase a house similar to the sample above? We have at least ~$220,000 that could be used for this purpose (~$160,000 taxable brokerage + ~$60,000 iBonds). We would of course need to account for taxes in this scenario as there are gains.

What are we not considering in our initial analysis?

Any anecdotes or advice from those who faced a similar decision?

Thanks in advance! :sharebeer
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
lakpr
Posts: 12520
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio review / Can we afford this house?

Post by lakpr »

$450k mortgage on a $265k income is definitely affordable. But WHETHER to do it is debatable, your PITI is increasing from $26k to $55k, more than a twofold jump.

If you do spring for the sample home, get rid of the 9.2% investment in bonds in His 401(k). Move that to equities, sell exact amount of equities in taxable for additional down payment. You will have essentially exchanged bonds yielding aggregate 4% pretax, to a single bond yielding 6% pretax. The difference in yield is worth it to take the liquidity risk.
invest4
Posts: 2220
Joined: Wed Apr 24, 2019 2:19 am

Re: Portfolio review / Can we afford this house?

Post by invest4 »

Fully agree with lakpr in regard to affordability given your income. The metric I use for this purpose is no more than 3x income....$795K (close enough).

It's simply about choices and potential trade-offs. For example, for the privilege of having the home you want, you may save less and simply need to work longer to achieve financial independence. We also chose a larger house some years ago...significant increase in overall cost of ownership vs previous house. Alas, we did not exceed 3x income, continue to live beneath our means, and we are happy. It is worth it for us...I just need to to keep "making the donuts" a bit longer.

Best wishes.
Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Re: Portfolio review / Can we afford this house?

Post by dvvader »

lakpr wrote: Thu Oct 31, 2024 12:23 am $450k mortgage on a $265k income is definitely affordable. But WHETHER to do it is debatable, your PITI is increasing from $26k to $55k, more than a twofold jump.

If you do spring for the sample home, get rid of the 9.2% investment in bonds in His 401(k). Move that to equities, sell exact amount of equities in taxable for additional down payment. You will have essentially exchanged bonds yielding aggregate 4% pretax, to a single bond yielding 6% pretax. The difference in yield is worth it to take the liquidity risk.
Thanks for the input. We are definitely having a hard time wrapping our heads around (at least) doubling our housing costs. Not to mention "hidden costs" like furniture, upkeep, etc. It's a big change, but perhaps a necessary one.

I'm not sure I understand the bond idea you proposed. Wouldn't that significantly increase portfolio risk, especially as we would be taking on more debt (I've seen that referred to as an "inverse bond")?
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
bonesly
Posts: 2124
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Portfolio review / Can we afford this house?

Post by bonesly »

dvvader wrote: Wed Oct 30, 2024 11:18 pm Can we afford this sample house? I believe this answer is technically yes as we could cut taxable, 529, and Roth contributions to account for increased costs, though this admittedly makes my stomach turn a bit.
Using the 30% Rule for Housing, $265K (gross income) x 30% (PITI-to-income ratio) = $79.5K, which is greater than your sample-home PITI of $43K, so yes you can technically afford this. The 30% rule is not the only guide, but they're all likely to say "yes" to this questions (see a variety of metrics lenders might consider in this BankRate article).
dvvader wrote: Wed Oct 30, 2024 11:18 pm Should we afford this sample house (i.e. is it "smart", or too much of a stretch)? I am not expecting any significant changes to income, or any type of windfall.
Nobody can answer this for you definitely, since there's some personal risk acceptance involved, but we can suggest ways to quantify that risk and then you can decide if that's a reasonable quantification and if it's an acceptable risk for you and your spouse. This is how your "net" disposable income changes.

Image

You did not explicitly state your savings (it likely falls in the "Other" category) and it's probably helpful to identify other mandatory expenses so that "Other" is 100% discretionary spending. As it stands a reduction in discretionary spending (i.e., "Other) from $65K to $36K would likely be acceptable to me and my spouse if we were so set on upgrading to a more spacious home (feeling cramped in the current one) as the mortgage & utilities cost is well within reach. However, without a big consistent raise in salary, that means cutting down $29K of discretionary spending (less eating out, fewer vacations, less bling impulse purchases, etc.). If you put retirement & 529 savings into a mandatory line item (removed from "Other"), the discretionary cut is a bigger percentage of the current discretionary amount and might explain why your stomach turns at managing this home upgrade, despite that it's within your budget.

You absolutely can do this, but you have to really, really want this new house and that means adhering to a much stricter monthly budget for spending; verifying your checking account debits and credit card usage every week to make sure you're not creeping up to your prior spending habits for a few months until you both adjust to the new lower spend rate.

I also agree with @lakpr that taking on a $450K mortgage at 6% would likely not be the last priority to reduce (i.e., you should perhaps reduce other savings to pre-pay this note, until you can refinance at around 3%) per the Wiki topic on Priortizing Investments (a low-interest mortgage at <3% is typically last priority).
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Re: Portfolio review / Can we afford this house?

Post by dvvader »

invest4 wrote: Thu Oct 31, 2024 5:47 am Fully agree with lakpr in regard to affordability given your income. The metric I use for this purpose is no more than 3x income....$795K (close enough).

It's simply about choices and potential trade-offs. For example, for the privilege of having the home you want, you may save less and simply need to work longer to achieve financial independence. We also chose a larger house some years ago...significant increase in overall cost of ownership vs previous house. Alas, we did not exceed 3x income, continue to live beneath our means, and we are happy. It is worth it for us...I just need to to keep "making the donuts" a bit longer.

Best wishes.
Thanks for the input. I am familiar with the 3x metric, and have applied it loosely in determining what our approximate price range is. When we bought our current house, we stretched a bit and the purchase price was closer to 4x our income at the time. The idea was that our income was going to rapidly increase (and it did), making it more affordable. But those first few years were relatively miserable and tight, we were house poor. Is the 3x metric still a good one to use if income isn't expected to increase much (besides COLA raises) in the near future? Of course on the flip side we are pre-qualified for something like 5x income which is absolutely crazy to me, though I have acquaintances who have likely stretched that far to buy a house.
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
lakpr
Posts: 12520
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio review / Can we afford this house?

Post by lakpr »

dvvader wrote: Thu Oct 31, 2024 12:31 pm I'm not sure I understand the bond idea you proposed. Wouldn't that significantly increase portfolio risk, especially as we would be taking on more debt (I've seen that referred to as an "inverse bond")?
Right, a mortgage is a negative bond. Thus, you have "positive bonds" that is 9.8% in your 401(k), but offset by a $465k negative bond. No the portfolio risk wouldn't increase, whether or not you retain the bonds in your 401(k), it remains exactly the same.

Same is the case with your existing mortgage, but the 2.625% rate, even after-tax (and it IS after-tax since the SALT limit + mortage interest on your existing mortgage balance is less than the MFJ standard deduction) it is less than what bond funds are yielding (4% * (1 - 24%) = 3.02%). Therefore it makes sense to keep carrying THIS negative bond, but when you do switch houses, the equation reverses itself. You would be borrowing at 6% but then turning around and lending about half that money at 4%, losing 2% yield in the process.
Last edited by lakpr on Thu Oct 31, 2024 12:59 pm, edited 1 time in total.
cbs2002
Posts: 818
Joined: Thu Feb 27, 2020 1:10 pm

Re: Portfolio review / Can we afford this house?

Post by cbs2002 »

sure you can afford it, if you adjust lifestyle and savings plan accordingly.

You propose to spend $107000 on "all the rest" + utilities ($12K seems very high to me) which dwarfs your spending on PITI and health care. it's more than 40% of your gross. Plus as you wisely note this will likely increase with a larger house.

I would analyze that spending in great detail and be super clear with your partner on which wants are going to take priority. Something has to give.

If you are moving because of children and plan to send them to public school, take your time to truly understand the district you are moving to so you are confident it's a good fit for your needs, wants and values.

You are currently saving $63K/year on an income of $265K. This is good. From your post it sounds like you want to reduce that?

If you had to cut savings to buy the house, I would not. I think being in your 30s with a high income is a great opportunity to save for the long haul, which is what we did. Now we have a smaller home and big portfolio, and could go buy a bigger house if we wanted to. Others do it differently.
Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Re: Portfolio review / Can we afford this house?

Post by dvvader »

bonesly wrote: Thu Oct 31, 2024 12:40 pm
dvvader wrote: Wed Oct 30, 2024 11:18 pm Can we afford this sample house? I believe this answer is technically yes as we could cut taxable, 529, and Roth contributions to account for increased costs, though this admittedly makes my stomach turn a bit.
Using the 30% Rule for Housing, $265K (gross income) x 30% (PITI-to-income ratio) = $79.5K, which is greater than your sample-home PITI of $43K, so yes you can technically afford this. The 30% rule is not the only guide, but they're all likely to say "yes" to this questions (see a variety of metrics lenders might consider in this BankRate article).
dvvader wrote: Wed Oct 30, 2024 11:18 pm Should we afford this sample house (i.e. is it "smart", or too much of a stretch)? I am not expecting any significant changes to income, or any type of windfall.
Nobody can answer this for you definitely, since there's some personal risk acceptance involved, but we can suggest ways to quantify that risk and then you can decide if that's a reasonable quantification and if it's an acceptable risk for you and your spouse. This is how your "net" disposable income changes.

Image

You did not explicitly state your savings (it likely falls in the "Other" category) and it's probably helpful to identify other mandatory expenses so that "Other" is 100% discretionary spending. As it stands a reduction in discretionary spending (i.e., "Other) from $65K to $36K would likely be acceptable to me and my spouse if we were so set on upgrading to a more spacious home (feeling cramped in the current one) as the mortgage & utilities cost is well within reach. However, without a big consistent raise in salary, that means cutting down $29K of discretionary spending (less eating out, fewer vacations, less bling impulse purchases, etc.). If you put retirement & 529 savings into a mandatory line item (removed from "Other"), the discretionary cut is a bigger percentage of the current discretionary amount and might explain why your stomach turns at managing this home upgrade, despite that it's within your budget.

You absolutely can do this, but you have to really, really want this new house and that means adhering to a much stricter monthly budget for spending; verifying your checking account debits and credit card usage every week to make sure you're not creeping up to your prior spending habits for a few months until you both adjust to the new lower spend rate.

I also agree with @lakpr that taking on a $450K mortgage at 6% would likely not be the last priority to reduce (i.e., you should perhaps reduce other savings to pre-pay this note, until you can refinance at around 3%) per the Wiki topic on Priortizing Investments (a low-interest mortgage at <3% is typically last priority).
Thanks for the input. My savings is listed above, and essentially equates to the Net row in your table. The Other row in your table includes everything from groceries to auto insurance to medical expenses to home maintenance to kid's activities. So some discretionary, some not. I didn't list out every line item in the budget because I don't necessarily want this to become a budget critique thread, but I could've as my spouse and I use YNAB and maintain a fairly strict budget (i.e. our spending is known).

A 29k cut in "discretionary" expenses (~$2500/month) is probably not possible, certainly very far from desirable. Then we're miserable in a bigger house, rather than just very very cramped in our current house. A 29k cut in savings also hurts but would be the path we would likely take. We of course realize that it will probably not just be a 29k reduction due to other "hidden costs" like furniture, upkeep, etc.

That's what I'm looking for in this thread, some insight to other hidden costs we may not be considering, references to tools to plan out the future consequences of reduced savings, where to reduce savings, someone to tell us "it'll be ok" or "you're absolutely crazy", etc. We've talked about it, we've discussed, we're both waffling and feel like we're white knuckling it, or like we're missing the forest from the trees. Just looking for a second (or third, fourth, fifth) set of eyes to give some perspective.
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Re: Portfolio review / Can we afford this house?

Post by dvvader »

cbs2002 wrote: Thu Oct 31, 2024 12:59 pm sure you can afford it, if you adjust lifestyle and savings plan accordingly.

You propose to spend $107000 on "all the rest" + utilities ($12K seems very high to me) which dwarfs your spending on PITI and health care. it's more than 40% of your gross. Plus as you wisely note this will likely increase with a larger house.

I would analyze that spending in great detail and be super clear with your partner on which wants are going to take priority. Something has to give.

If you are moving because of children and plan to send them to public school, take your time to truly understand the district you are moving to so you are confident it's a good fit for your needs, wants and values.

You are currently saving $63K/year on an income of $265K. This is good. From your post it sounds like you want to reduce that?

If you had to cut savings to buy the house, I would not. I think being in your 30s with a high income is a great opportunity to save for the long haul, which is what we did. Now we have a smaller home and big portfolio, and could go buy a bigger house if we wanted to. Others do it differently.
Thank you for the input. Regarding the 12k utilities, California...not much else to say. 12k/year might be low depending on the electric utility serving the specific house/neighborhood we eventually buy in. It will be a major factor in our house selection criteria.

And yes, the idea we're kicking around is to cut savings to pay for the new house. I have similar reservations to what you expressed in your last paragraph, but at what point can you take the foot off the gas, so to speak?
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
majiaknight
Posts: 264
Joined: Tue Jan 26, 2016 1:55 pm

Re: Portfolio review / Can we afford this house?

Post by majiaknight »

dvvader wrote: Wed Oct 30, 2024 11:18 pm
Annual Household Income: Conservatively assume $265,000/year for planning, but varies (somewhat wildly and mostly upward) month to month and year to year.

Annual Expense Detail:

Income Taxes: ~$60,000+/year
Health Insurance: ~$19,000/year (pre-tax through employer)
Current PITI: ~$18,000/year
Current Utilities: ~$8,000/year
All the Rest: ~$95,000+/year

To keep things relatively simple, see the sample house below, which represents a somewhat typical house in our area that would meet our needs and wants.

Purchase Price: $800,000
Down Payment: $350,000 (assuming rolling over all existing equity, minus transaction fees and sales prep)
Loan Amount: $450,000 at ~6% for 30 years
New PITI: ~$43,000/year
New Utilities: ~$12,000/year
First Year Interest Paid: ~$27,000 (allowing us to itemize every year, currently itemize every other year when we lump charitable contributions)
Estimated Annual Cost Increase: ~$29,000 (PITI plus utilities)
You need take-home pay to cover estimated living expenses of ~$150K after the new house purchase. For a mid-career couple (34yo) earning $265K HHI, you might need to evaluate your job security, any early retirement desires and how you would cover the expenses with single income for an extended period and whether it's easy for find a job local w/o relocation. Kid's K12 education could also be become very expensive if you want to send your kids to private school.
bonesly
Posts: 2124
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Portfolio review / Can we afford this house?

Post by bonesly »

dvvader wrote: Thu Oct 31, 2024 1:21 pm A 29k cut in "discretionary" expenses (~$2500/month) is probably not possible, certainly very far from desirable. Then we're miserable in a bigger house, rather than just very very cramped in our current house. A 29k cut in savings also hurts but would be the path we would likely take. We of course realize that it will probably not just be a 29k reduction due to other "hidden costs" like furniture, upkeep, etc.

That's what I'm looking for in this thread, some insight to other hidden costs we may not be considering, references to tools to plan out the future consequences of reduced savings, where to reduce savings, someone to tell us "it'll be ok" or "you're absolutely crazy", etc. We've talked about it, we've discussed, we're both waffling and feel like we're white knuckling it, or like we're missing the forest from the trees. Just looking for a second (or third, fourth, fifth) set of eyes to give some perspective.
You should likely have an idea of other costs, from when you acquired your current home (new furniture or cost of moving existing furniture, any new HOA fees that you didn't have before, added cost of lawn maintenance if your new lawn is bigger along with the floor space, etc.).

On the future consequences of reduced savings...

A $29K cut to savings seems more likely but if that's the only option (your discretionary is already low, so not possible to cut further to make up $29K), then I wouldn't buy this house until rates come down and I have a higher down-payment, but that's just me. However, if you're waffling and feel like you're white-knuckling it, then listen to your gut. This is too much house for to sustain your current lifestyle and retirement plan, at least at this time.

You have an $890K portfolio (not counting the 529s which are for college not retirement) and you're contributing $59K/yr (again not counting the $6K/yr to the 529s). Given your description of holdings it looks like you're AA is about 80% stocks & 20% bonds.

Image
As an aside, you might want to look at your 401k choices for a lower-cost bond fund like FXNAX and deploy the cash in Taxable into VTSAX and/or VTIAX, since cash is not tax-friendly in a Taxable account. If this is "emergency fund" cash, then it should not be counted in the "retirement" portfolio.

A template for the sheet above (not your data) is in the link below so you can do annual assessment/rebalance of your unified portfolio allocation.
Asset Allocation Sheet
AA Current and Proposed

Assuming you glide down from 80/20 to 70/30 from ages 57-62, then this is the range for your balance at retirement, also assuming an average ER of 0.10% and that contributions are increasing by +3%/yr for raises/inflation:

End-Bal Percentile
$6,725.4K 5th
$12,077.8K 25th
$18,213.1K 50th
$27,307.6K 75th
$48,815.0K 95th

Image

That 5th percentile result of $6.7M (bad sequence of returns) supports a 4% initial draw of $121.1K in today's dollars (assuming flat +3%/yr inflation). If you halt 529 funding ($6K) and reduce retirement contributions to $36K/yr ($6K + $23K = $29K cut to savings), then the retirement balance range looks like this:

End-Bal Percentile
$5,257.4K 5th
$9,912.2K 25th
$15,092.8K 50th
$22,792.6K 75th
$42,906.3K 95th

That 5th percentile result of $5.4M supports a 4% initial draw of $94.7K in today's dollars; a reduction of $26.4K/yr in retirement draw. So if you can live with that, then you can still buy this house (although you might have a cash-flow crunch when college starts that will last until the youngest graduates). Given the plan to fully fund college, I'd still probably wait for lower mortgage rates and a bigger down-payment, but again that's me. There's also the silver lining that the 5th percentile is an unlikely outcome that is used to plan for worst case bad sequence of returns (e.g., retiring in 1969 and never seeing your assets appreciate the rest of your life) and that there's a 95% chance you'll have a bigger balance at retirement (perhaps much bigger).

The image above is from my Accumulation Monte Carlo, which is linked below along with other tools I like if you don't have Excel (or just don't care to figure out Excel).

Data and Models I use for Monte Carlo:
NYU Data Set 1928-2017 with Model Fits
Accumulation Monte Carlo
Withdrawal Monte Carlo

You'll need a MS Excel license; download to your local machine and enable macros (required for the 1,000 random trials and results aggregation).

I'm using my own model as I like to know what's under the hood, but there are other models I like that have public facing website interfaces:
Portfolio Visualizer's Monte Carlo (with distribution modeling rather than the historical returns array),
FiCalc (easy interface, but only historical data array),
TPAW (historical data, but adjusted to avoid limitations of a random index into the historical array),
and many others here seem to like FireCalc (also historical data, but lots more inputs to tailor to your situation).

I don't care for a random index into the historical array of returns, compared to distribution modeling, as noted in this thread HERE.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
cbs2002
Posts: 818
Joined: Thu Feb 27, 2020 1:10 pm

Re: Portfolio review / Can we afford this house?

Post by cbs2002 »

dvvader wrote: Thu Oct 31, 2024 1:33 pm but at what point can you take the foot off the gas, so to speak?
The eternal question. At your age, before kids, we had less. However those dollars ended up being powerful in that they grew and grew after 2008-09. Having $900K at your age, properly invested, should turn out to be a great boon to your wealth in 20 years.

What Bonesly's helpful simulation above shows me is that the greatest value from increasing your annual savings amount comes when market returns are poor for an extended time. Once you get to the 25th percentile, market behavior dwarfs the impact of your annual savings. A simpler view is that a 5% real return over 20 years turns $1MM into $2.6MM in today's dollars without any additional savings. No one knows if 5% real will happen over the next 20 years. The worst historic real return of the SP500 over 20 years was just under 0%, with a median of 6.7%. Don't Quit Your Day Job says the SP500 beat 5% annual real return in more than 70% of 20-year periods, and more than 80% of 30-year periods.

I personally do not plan for being wealthy in the absolute worst market, but to have enough that I am not in a bread line. I try to be conservative but optimistic. For me that 25% floor is reasonable. If things are worse than that I will have to make lifestyle adjustments, and I will have plenty of company.
Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Re: Portfolio review / Can we afford this house?

Post by dvvader »

bonesly wrote: Thu Oct 31, 2024 3:10 pm
dvvader wrote: Thu Oct 31, 2024 1:21 pm A 29k cut in "discretionary" expenses (~$2500/month) is probably not possible, certainly very far from desirable. Then we're miserable in a bigger house, rather than just very very cramped in our current house. A 29k cut in savings also hurts but would be the path we would likely take. We of course realize that it will probably not just be a 29k reduction due to other "hidden costs" like furniture, upkeep, etc.

That's what I'm looking for in this thread, some insight to other hidden costs we may not be considering, references to tools to plan out the future consequences of reduced savings, where to reduce savings, someone to tell us "it'll be ok" or "you're absolutely crazy", etc. We've talked about it, we've discussed, we're both waffling and feel like we're white knuckling it, or like we're missing the forest from the trees. Just looking for a second (or third, fourth, fifth) set of eyes to give some perspective.
You should likely have an idea of other costs, from when you acquired your current home (new furniture or cost of moving existing furniture, any new HOA fees that you didn't have before, added cost of lawn maintenance if your new lawn is bigger along with the floor space, etc.).

On the future consequences of reduced savings...

A $29K cut to savings seems more likely but if that's the only option (your discretionary is already low, so not possible to cut further to make up $29K), then I wouldn't buy this house until rates come down and I have a higher down-payment, but that's just me. However, if you're waffling and feel like you're white-knuckling it, then listen to your gut. This is too much house for to sustain your current lifestyle and retirement plan, at least at this time.

You have an $890K portfolio (not counting the 529s which are for college not retirement) and you're contributing $59K/yr (again not counting the $6K/yr to the 529s). Given your description of holdings it looks like you're AA is about 80% stocks & 20% bonds.

Image
As an aside, you might want to look at your 401k choices for a lower-cost bond fund like FXNAX and deploy the cash in Taxable into VTSAX and/or VTIAX, since cash is not tax-friendly in a Taxable account. If this is "emergency fund" cash, then it should not be counted in the "retirement" portfolio.

A template for the sheet above (not your data) is in the link below so you can do annual assessment/rebalance of your unified portfolio allocation.
Asset Allocation Sheet
AA Current and Proposed

Assuming you glide down from 80/20 to 70/30 from ages 57-62, then this is the range for your balance at retirement, also assuming an average ER of 0.10% and that contributions are increasing by +3%/yr for raises/inflation:

End-Bal Percentile
$6,725.4K 5th
$12,077.8K 25th
$18,213.1K 50th
$27,307.6K 75th
$48,815.0K 95th

Image

That 5th percentile result of $6.7M (bad sequence of returns) supports a 4% initial draw of $121.1K in today's dollars (assuming flat +3%/yr inflation). If you halt 529 funding ($6K) and reduce retirement contributions to $36K/yr ($6K + $23K = $29K cut to savings), then the retirement balance range looks like this:

End-Bal Percentile
$5,257.4K 5th
$9,912.2K 25th
$15,092.8K 50th
$22,792.6K 75th
$42,906.3K 95th

That 5th percentile result of $5.4M supports a 4% initial draw of $94.7K in today's dollars; a reduction of $26.4K/yr in retirement draw. So if you can live with that, then you can still buy this house (although you might have a cash-flow crunch when college starts that will last until the youngest graduates). Given the plan to fully fund college, I'd still probably wait for lower mortgage rates and a bigger down-payment, but again that's me. There's also the silver lining that the 5th percentile is an unlikely outcome that is used to plan for worst case bad sequence of returns (e.g., retiring in 1969 and never seeing your assets appreciate the rest of your life) and that there's a 95% chance you'll have a bigger balance at retirement (perhaps much bigger).

The image above is from my Accumulation Monte Carlo, which is linked below along with other tools I like if you don't have Excel (or just don't care to figure out Excel).

Data and Models I use for Monte Carlo:
NYU Data Set 1928-2017 with Model Fits
Accumulation Monte Carlo
Withdrawal Monte Carlo

You'll need a MS Excel license; download to your local machine and enable macros (required for the 1,000 random trials and results aggregation).

I'm using my own model as I like to know what's under the hood, but there are other models I like that have public facing website interfaces:
Portfolio Visualizer's Monte Carlo (with distribution modeling rather than the historical returns array),
FiCalc (easy interface, but only historical data array),
TPAW (historical data, but adjusted to avoid limitations of a random index into the historical array),
and many others here seem to like FireCalc (also historical data, but lots more inputs to tailor to your situation).

I don't care for a random index into the historical array of returns, compared to distribution modeling, as noted in this thread HERE.
Wow thank you! I have a spreadsheet similar to your asset allocation sheet already, but I'm really looking forward to playing with the other one. That will be very helpful visualizing the impact of a drastic savings cut.
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Re: Portfolio review / Can we afford this house?

Post by dvvader »

majiaknight wrote: Thu Oct 31, 2024 3:03 pm
dvvader wrote: Wed Oct 30, 2024 11:18 pm
Annual Household Income: Conservatively assume $265,000/year for planning, but varies (somewhat wildly and mostly upward) month to month and year to year.

Annual Expense Detail:

Income Taxes: ~$60,000+/year
Health Insurance: ~$19,000/year (pre-tax through employer)
Current PITI: ~$18,000/year
Current Utilities: ~$8,000/year
All the Rest: ~$95,000+/year

To keep things relatively simple, see the sample house below, which represents a somewhat typical house in our area that would meet our needs and wants.

Purchase Price: $800,000
Down Payment: $350,000 (assuming rolling over all existing equity, minus transaction fees and sales prep)
Loan Amount: $450,000 at ~6% for 30 years
New PITI: ~$43,000/year
New Utilities: ~$12,000/year
First Year Interest Paid: ~$27,000 (allowing us to itemize every year, currently itemize every other year when we lump charitable contributions)
Estimated Annual Cost Increase: ~$29,000 (PITI plus utilities)
You need take-home pay to cover estimated living expenses of ~$150K after the new house purchase. For a mid-career couple (34yo) earning $265K HHI, you might need to evaluate your job security, any early retirement desires and how you would cover the expenses with single income for an extended period and whether it's easy for find a job local w/o relocation. Kid's K12 education could also be become very expensive if you want to send your kids to private school.
Early retirement desires are what lead me to find this forum and get on the track we're on. Early retirement has become less of priority/reality as we've accumulated blessings (kids). :D
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
Topic Author
dvvader
Posts: 301
Joined: Fri Nov 22, 2019 6:07 pm

Re: Portfolio review / Can we afford this house?

Post by dvvader »

cbs2002 wrote: Thu Oct 31, 2024 3:59 pm
dvvader wrote: Thu Oct 31, 2024 1:33 pm but at what point can you take the foot off the gas, so to speak?
The eternal question. At your age, before kids, we had less. However those dollars ended up being powerful in that they grew and grew after 2008-09. Having $900K at your age, properly invested, should turn out to be a great boon to your wealth in 20 years.

What Bonesly's helpful simulation above shows me is that the greatest value from increasing your annual savings amount comes when market returns are poor for an extended time. Once you get to the 25th percentile, market behavior dwarfs the impact of your annual savings. A simpler view is that a 5% real return over 20 years turns $1MM into $2.6MM in today's dollars without any additional savings. No one knows if 5% real will happen over the next 20 years. The worst historic real return of the SP500 over 20 years was just under 0%, with a median of 6.7%. Don't Quit Your Day Job says the SP500 beat 5% annual real return in more than 70% of 20-year periods, and more than 80% of 30-year periods.

I personally do not plan for being wealthy in the absolute worst market, but to have enough that I am not in a bread line. I try to be conservative but optimistic. For me that 25% floor is reasonable. If things are worse than that I will have to make lifestyle adjustments, and I will have plenty of company.
I appreciate your comment about planning for the 25th percentile (not great) instead of the 5th percentile (doom). I guess we need to decide what we're comfortable with.
Bogleheads® emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
bonesly
Posts: 2124
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Portfolio review / Can we afford this house?

Post by bonesly »

dvvader wrote: Thu Oct 31, 2024 5:15 pm I appreciate your comment about planning for the 25th percentile (not great) instead of the 5th percentile (doom). I guess we need to decide what we're comfortable with.
I think this is exactly right. Without an understanding of a poster's personal risk-tolerance, I tend to go with 5th percentile as a worst case, and then offset that by saying "there's a 95% chance of a better outcome." However, choosing an acceptable percentile for future planning is a risk-tolerance/acceptance decision and if you and your spouse are comfortable with 10th percentile, 20th percentile, or even 30th percentile, then that's the associated future balance you should plan around (realizing that 5th percentile is 95% chance of a better outcome, while 30th percentile has a lower 70% chance of a better outcome).

I choose 5th percentile because if your plan holds up to that and your actual return sequence delivers more than that, it's a bonus! On the other hand if assumed 30th percentile because "that's more optimistic" and your actual return sequence delivers LESS than that (30% chance this could happen), then you have to adjust your retirement plans by spending less or working longer (perhaps both if that 5th percentile kind of awful sequence is realized for you like it was for those looking for appreciation in the "lost decade" from 1969-1979).

So "what your comfortable with" is a likelihood that your retirement plans need to be adjusted (reality is a little below your risk acceptance) or if your plan is wrecked (a lot below your risk acceptance); you choose a likelihood you both agree on is an acceptably low risk for adjustment (including delayed retirement).
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
invest4
Posts: 2220
Joined: Wed Apr 24, 2019 2:19 am

Re: Portfolio review / Can we afford this house?

Post by invest4 »

dvvader wrote: Thu Oct 31, 2024 12:41 pm
invest4 wrote: Thu Oct 31, 2024 5:47 am Fully agree with lakpr in regard to affordability given your income. The metric I use for this purpose is no more than 3x income....$795K (close enough).

It's simply about choices and potential trade-offs. For example, for the privilege of having the home you want, you may save less and simply need to work longer to achieve financial independence. We also chose a larger house some years ago...significant increase in overall cost of ownership vs previous house. Alas, we did not exceed 3x income, continue to live beneath our means, and we are happy. It is worth it for us...I just need to to keep "making the donuts" a bit longer.

Best wishes.
Thanks for the input. I am familiar with the 3x metric, and have applied it loosely in determining what our approximate price range is. When we bought our current house, we stretched a bit and the purchase price was closer to 4x our income at the time. The idea was that our income was going to rapidly increase (and it did), making it more affordable. But those first few years were relatively miserable and tight, we were house poor. Is the 3x metric still a good one to use if income isn't expected to increase much (besides COLA raises) in the near future? Of course on the flip side we are pre-qualified for something like 5x income which is absolutely crazy to me, though I have acquaintances who have likely stretched that far to buy a house.
I believe 3x remains valid. The mortgage company is not looking out for your interests. You said it yourself, you managed with 4x and it was miserable…imagine if you also had a period of unemployment. While you may not be able to predict such things, you can certainly help yourself by not borrowing more than you should…regardless of what the lender is offering you.
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