Do we have too much house?

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bs010101
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Do we have too much house?

Post by bs010101 » Tue Dec 02, 2014 10:01 pm

We stretched four years ago when we bought our house, which we love, and it definitely pushed us to increase our income, but I still have a nagging feeling that we are making things harder on ourselves than they need to be by being in the house.

Home value: Zestimate 893K, Trulia 802K. Current mortgage just under 550K on a 15-year at 3%. Taxes about 21K a year.

Edited to give some more info: We live in NJ. House is a five-bedroom, about 3500 square feet. Other assets are about 450K in retirement accounts (425K in T-IRA and 25K in Roth 401K), and 100K in cash. Tax bracket of 33% federal plus AMT and 6.37% state.

Income will be about 300K this year. Looking at our expenses, not including payroll deductions, we spent over 200K last year and this year. That just seems crazy to me. We are saving - other than stretching to do the 15-year mortgage plus an extra 200 a month on that, we are putting the max (17500) into a Roth 401K, plus 12000 into a SEP IRA, plus 6200 into 529s across our three kids. So, including principal payments on the mortgage, we are socking away over $60K a year despite the crazy spending (some is double-counted there). We are in our mid-thirties.

Other than the house we live frugally; generally take local vacations, have two paid-for cars (2010 and 2004), occasional take-out but not much of an entertainment budget, basic cable for $10 that we should probably cancel, etc. Our other two major expenses are a babysitter approaching 30K a year and private school at 9K per kid. So, it seems like we spend a lot on the big items, conservatively on the rest, save reasonably, but still when I look at it, just seem to be spending an awful lot of money. In our neighborhood, which we have strong ties to, we could get a decent three-bedroom in the 400K range. Should we make the jump? Or keep on chugging, and if we ever need to or want to slow down, sell at that point?
Last edited by bs010101 on Wed Dec 03, 2014 9:23 pm, edited 1 time in total.

flyingaway
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Re: Do we have too much house?

Post by flyingaway » Tue Dec 02, 2014 10:52 pm

With 3 kids and $300K annual income, I would at least have a 4-bedroom house.

mass_biker
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You'll grow into it

Post by mass_biker » Tue Dec 02, 2014 10:54 pm

Not the most BHer thing to say but we were (are) like you.

...we found the perfect home in the perfect neighborhood.
Bought it for a decent price.
Dropped some more $ into it to make up for some deferred maintenance brought on by the former (40+ year) owners.
Oh yeah, we started with a kid. Then had a kid. And then another. And then the visitors started coming by. And the neighbors. And this big rambling house is full of people to enrich our lives and the lives of our kids.

Long story short - more house than we bargained for, but this is the house that fits our lives now - and I would find it hard to go back.

Our expenditures are like yours - although we are mid 40s. We max out retirements. Do our best with 529s. Give charitably. Feel like $$ is flying out the door...
...but then..if you can swing it, without dipping into principal, you've figured out what things are worth dropping (eating out - heck, either one of us can cook better), worth continuing (education), to still be able to save "despite the crazy spending".

I say you are ahead of the game.

Keep a tight lid on those fixed expenditures. Sock away those occasional windfalls to get your net leverage/PITI to your comfort zone.

EnjoyIt
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Re: Do we have too much house?

Post by EnjoyIt » Tue Dec 02, 2014 11:00 pm

550K mortgage on a 300K/year salary is not too much. It is the 200K yearly spending where you are only saving 29500 for retirement which is below 10% and what is the problem. Starting with 100K in retirement today, at your current savings rate at 5% real return, you will have about 2.5 million saved up in 30 years which will fund a 100K/year lifestyle.

The way I see it, how long do you want to work? If you are comfortable working well into your 60s then you are doing just fine. In 10-11 years mortgage will be paid off, somewhere in there you will need to buy 2-3 more cars for yourselves, and then very likely cars for your kids. Once they are off to college and house is paid off, you will be able to start heavily saving for retirement.

If you want to retire earlier then something will have to change.

freebeer
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Re: Do we have too much house?

Post by freebeer » Tue Dec 02, 2014 11:10 pm

$30K/year for babysitter?? At a (high) $15/hour that would be 2,000 hours/year, which would be 6 hour outings 6 nights every week of the year. What am I missing here?

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Re: Do we have too much house?

Post by TradingPlaces » Tue Dec 02, 2014 11:27 pm

1. What's the zip code or metro area, as that should give a sense if you are stretching or not. Babysitter, private school sounds like high cost area like NY metro, or something. Do you pay for a live-in nanny who is employed from Sunday night to Friday afternoon?

2. Math does not add up. Gross income 300K, and you are spending 200K, saving 60K (is 25K of "forced savings" of principal payment counted in both buckets? If so, I would really encourage you to clean up your accounting).

At 300K, there should be at least 100K of taxes.

I would encourage you to clean-up your math, and write a more detailed summary. Double-counting, overestimating, underestimating, typically leads to errors in your strategy.

Also, 25K "savings" via principal payment to mortgage is not really savings - just MHO. Your carrying cost of interest for your mortgage is essentially 3% * ( 1- tax_rate), or close to 2.1%. I would rather take a 30Yr at a higher interest cost (could have been done via refinance at 3.5-3.62% in the last 1-1.5 years), or a 5/1 ARM for even lower rate. Remaining term on 15 years is 11, 5/1 would lock you for 5 years: not ideal, but drastically lower payments, to the tune of $1.2K a month.

In your situation, I would have opted to actually have money in investments than home equity.

3. Is your federal marginal tax rate 28% or 33%? Do you pay AMT? Why ROTH 401K?

4. 21K taxes on a 800K house. That's over 2.6%; even at 2.3% (21/900) that's high. Very few places have high taxes like that. Time to appeal taxes?

TradingPlaces
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Re: Do we have too much house?

Post by TradingPlaces » Tue Dec 02, 2014 11:41 pm

EnjoyIt wrote:550K mortgage on a 300K/year salary is not too much. It is the 200K yearly spending where you are only saving 29500 for retirement which is below 10% and what is the problem.
I agree with the retirement comment, but I disagree with the mortgage /income ratio. I think the housing expenses are much more expensive than the mortgage indicates.

First, about the taxes. At a typical tax/value ratio of 1.2-1.5%, taxes of $21K a year are more typical of $1.4 to $1.7MM houses. Would you say a family with 2 kids in a high cost of living are can afford a $1.4M house on 300K income?

Second, there are additional expenses which reduce effective income: babysitting and private school. Typically, high taxes indicate a good school district. But private school indicates a bad school district. Similarly, babysitting indicates pre-school age. Babysitting and private school seems like a part-time type of school. Thus, there is a double / triple whammy going on.

The symptom is pretty clear: high spending. But it is unclear where that is coming from, without knowing more details. And a good argument could be made that the house is too pricey for this family.

TradingPlaces
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Re: Do we have too much house?

Post by TradingPlaces » Tue Dec 02, 2014 11:44 pm

flyingaway wrote:With 3 kids and $300K annual income, I would at least have a 4-bedroom house.
Good luck in NYC, DC, San Francisco, and more places.

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BL
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Re: Do we have too much house?

Post by BL » Wed Dec 03, 2014 12:20 am

TradingPlaces wrote:
Second, there are additional expenses which reduce effective income: babysitting and private school. Typically, high taxes indicate a good school district. But private school indicates a bad school district. Similarly, babysitting indicates pre-school age. Babysitting and private school seems like a part-time type of school. Thus, there is a double / triple whammy going on.
I also found this confusing. It seems like you payed extra to get into a good school district and still pay to send kids to a private school.

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LowER
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Re: Do we have too much house?

Post by LowER » Wed Dec 03, 2014 12:44 am

If you are asking the question on a forum, I think you already have the answer.

If you are not sleeping well over this issue, maybe you might have too much house.

If you think that this house may be a brilliant investment, you may not have too much house.

Tincture of time will solve this.

What does your gut tell you?
Last edited by LowER on Wed Dec 03, 2014 9:13 am, edited 1 time in total.

LFKB
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Re: Do we have too much house?

Post by LFKB » Wed Dec 03, 2014 12:56 am

I will never understand the posters that say "if you are asking then you probably know." Clearly the OP is asking because he/she doesn't know and wants feedback from more knowledgable posters.

Agree that the math is fuzzy. Impossible to answer the question without clarifying what the true gross and net of tax income amounts are and clear detail on spending and saving.

zxrst
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Re: Do we have too much house?

Post by zxrst » Wed Dec 03, 2014 2:03 am

The short answer is yes. Your take home income is probably less than $200 K (16.5 K per month) after taxes and pre-tax retirement. Your mortgage payment is 4K/month, property tax is 2K/month, home insurance is another $500/month? The house alone costs you 6.5K/month.

letsgobobby
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Re: Do we have too much house?

Post by letsgobobby » Wed Dec 03, 2014 2:22 am

We are like OP and it is too much house. Going to sell I think, maybe realize a little appreciation, downsize.

The problem is while we definitely don't need 5 bedrooms and 4400 sf, we probably can't do 3 bedrooms and 2500 sf because most stock homes on the market are terribly inefficient. A true custom home with meticulous attention to space and flow would only need 2000 sf and 4 bedrooms to meet our needs 98% of the time, but it would cost as much as our house now currently does, so we're right back to square one.

That said we save a much higher percentage of income so the urgency is not there. We don't have a nanny or private school so that is $50k less spending per year net of our own preschool expenses.
Last edited by letsgobobby on Wed Dec 03, 2014 2:32 am, edited 1 time in total.

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LowER
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Re: Do we have too much house?

Post by LowER » Wed Dec 03, 2014 2:31 am

LFKB wrote:I will never understand the posters that say "if you are asking then you probably know." Clearly the OP is asking because he/she doesn't know and wants feedback from more knowledgable posters.

Agree that the math is fuzzy. Impossible to answer the question without clarifying what the true gross and net of tax income amounts are and clear detail on spending and saving.
I do agree with your declaration about never understanding.

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wander
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Re: Do we have too much house?

Post by wander » Wed Dec 03, 2014 4:38 am

bs010101 wrote:Current mortgage just under 550K on a 15-year at 3%.
I don't think you have too much house but stretching it from 15 to 30 may help.

virgingorda
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Re: Do we have too much house?

Post by virgingorda » Wed Dec 03, 2014 5:40 am

If you switched to a traditional 401k, wouldn't you take home a bit more? Could that also possibly lower your income tax bill?

German Expat
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Re: Do we have too much house?

Post by German Expat » Wed Dec 03, 2014 7:17 am

I don't think you have too much house. We just moved and sold our house in the US, moved to Switzerland and still miss it a lot. It was bigger then what we needed but perfect in every other sense. We plan to return to the US and not sure we will find a similar house again in our next area of living. We had the hosue for 7 years and over time the house got much less expensive with higher incomes, we managed to lower the taxes a bit and refinanced 2 times to a much lower rate.
I personally would not downsize but look at all of your other expenses, we also had a private pre school (Montessori) for 3 years and a Au Pair to help with the kids. As soon as school started all those expenses went away, we had a great school with very good after school care. This immediately raised our savings rate by a large amount.
prox

If I try to add up your house expenses, looks like you have 16.5 in interest, 21k in taxes, probably 2k in insurance and 3-4k in utilities so with some reserve for maintenance, lawn care etc. about 50k is for the house, with a smaller once you might be able to get down to 30k. The house still only accounts for 25% of your expenses. I would have a very good look at all other expenses, e.g. we cut cable and watched Netflix and over the air with an antenna because we barely used it anyway.

Create a full expense plan and look where the money is going to. Based on our experience we really liked our house and still miss it so you might do the same. Over time the house will get cheaper with more money going towards principal (I see this also as a form of saving) and higher income over time.

lululu
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Re: Do we have too much house?

Post by lululu » Wed Dec 03, 2014 7:28 am

EnjoyIt wrote: The way I see it, how long do you want to work? If you are comfortable working well into your 60s then you are doing just fine.
That's assuming they can find work when they are older. Once you're 45-50, if you are laid off, finding a new job is very very difficult for most people.

cherijoh
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Re: Do we have too much house?

Post by cherijoh » Wed Dec 03, 2014 8:11 am

bs010101 wrote:We stretched four years ago when we bought our house, which we love, and it definitely pushed us to increase our income, but I still have a nagging feeling that we are making things harder on ourselves than they need to be by being in the house.

Home value: Zestimate 893K, Trulia 802K. Current mortgage just under 550K on a 15-year at 3%. Taxes about 21K a year.
Income will be about 300K this year. Looking at our expenses, not including payroll deductions, we spent over 200K last year and this year. That just seems crazy to me. We are saving - other than stretching to do the 15-year mortgage plus an extra 200 a month on that, we are putting the max (17500) into a Roth 401K, plus 12000 into a SEP IRA, plus 6200 into 529s across our three kids. So, including principal payments on the mortgage, we are socking away over $60K a year despite the crazy spending (some is double-counted there). We are in our mid-thirties.

Other than the house we live frugally; generally take local vacations, have two paid-for cars (2010 and 2004), occasional take-out but not much of an entertainment budget, basic cable for $10 that we should probably cancel, etc. Our other two major expenses are a babysitter approaching 30K a year and private school at 9K per kid. So, it seems like we spend a lot on the big items, conservatively on the rest, save reasonably, but still when I look at it, just seem to be spending an awful lot of money. In our neighborhood, which we have strong ties to, we could get a decent three-bedroom in the 400K range. Should we make the jump? Or keep on chugging, and if we ever need to or want to slow down, sell at that point?
You are only saving ~10% towards retirement - extra payments to mortgage and deposits into 529s don't count towards that goal. Do you get a match on the 401k? Unless the match is extremely generous, you are definitely not saving enough to maintain your lifestyle in retirement. The issue may not be cash flow as you have posed your post, but that you have opted to value a dream house over your family's financial security - whether you intended to or not.

How much have you socked away into the 401k and SEP IRA? Where do you stand in terms of an emergency fund? Have you got 6 - 12 months of money saved outside of these investments? (You mentioned an SEP so one of you must be self-employed; a larger emergency fund is therefore prudent). What would happen if you or your spouse lost your job? Could you afford the mortgage payment on one income even temporarily? With 3 kids (what are their ages?) you are also are more than likely facing college bills in your future. Where do the 529s stand relative to the ages of the kids?

So while you may meet the realtor-generated rules for home affordability, you could be in serious trouble if faced with a financial shock. The issue that I see with your statement that you could sell in the future "if it is needed" is that you have no control over the housing market. Based on your numbers, it appears you are in a very expensive house for your neighborhood. During an economic downturn, houses that far above the median home price are always slower to sell and show the most price volatility in turbulent economic times. Plenty of people discovered this during the housing crisis in the last decade.

I would check your home affordability using data here. According to this data, my house is at 88% of the median home price in my area. (Having a dream house is clearly not a goal of mine - I'm in a house classified as a "starter" home even though I'm close to retirement :happy). Combined with the fact that its plan is one of the few 1-story houses in the area, it always shows up in the realtor-generated reports as the most likely to sell quickly and closest to the list price. Its value dipped very little during the 2008-9 downturn. However, I think your circumstances would be quite different. Are you adequately prepared for that?

IMO you need to look at the bigger picture and not just whether you are making ends meet on a month-to-month basis.

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Re: Do we have too much house?

Post by Grt2bOutdoors » Wed Dec 03, 2014 8:17 am

OP is the AMT twilight zone. OP needs to save on taxes - stop paying un-necessary taxes - switch from the Roth 401K to the Traditional 401K, right off the bat you'll put more after-tax money in your pocket. It's not uncommon to pay ridiculously high taxes on primary homes and you don't have to live in NYC proper or DC proper to do so, you can live in the immediate surrounding suburbs of say Long Island or New Jersey, can't speak to Maryland locations but I know there are high taxes all around for real estate.

Is a 550K mortgage high? Judging from your commentary you feel it is, but if you need to free up cash flow, stop pre-paying it for now.
Would owning a 450K home make it easier from strictly a financial point of view - yes, but it may impede your quality of life. It really comes down to can you afford making the monthly mortgage payments including taxes, insurance and maintenance, daycare, private school and day to day living (food, heat, insurance, car).

The daycare costs are going to go away at some point, right? When do you forsee that going away? That will save you 30K.
The traditional 401k plan will save you about $5K annually in taxes not paid.
You have to go through your spending with a fine tooth comb - sit down one weekend and review your bank account - inflows and outflows (itemize the outflows so you can categorize necessary spending vs. wants), only then will you really have a handle on where all the money is flowing. I can assure you of one thing though, with the income you are making you are most certainly paying $100K in combined taxes at the minimum - that is Social Security, Medicare, property taxes, state taxes, AMT and don't forget the special Medicare and investment income tax gift you were bestowed with beginning last year.

You should see if the Livesoft "pay no taxes on 200K income" plan will work for you, somehow I think it only works for a very few select individuals, but just the same no harm in viewing it to see if you can pick up some pointers.
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Grt2bOutdoors
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Re: Do we have too much house?

Post by Grt2bOutdoors » Wed Dec 03, 2014 8:25 am

virgingorda wrote:If you switched to a traditional 401k, wouldn't you take home a bit more? Could that also possibly lower your income tax bill?
+1 It most certainly would save the OP money upfront and in the future. Given the OP's assets, it's likely the OP will not be retiring into the 33%+ tax bracket nor should the OP expect to live in this home during retirement. Just that property tax bill alone is close to what the average person takes home in Social Security on a gross basis and that is today, taxes only go one way - UP! short of a severe depression, then they can go up but who will be there to pay the taxes is another story all together - just see today's page A2 in the WSJ on how Detroit's municipal buildings lost power yesterday due to an aged power cable and they don't have the money to do preventive maintenance. :oops:
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Re: Do we have too much house?

Post by dbCooperAir » Wed Dec 03, 2014 8:32 am

lululu wrote:
EnjoyIt wrote: The way I see it, how long do you want to work? If you are comfortable working well into your 60s then you are doing just fine.
That's assuming they can find work when they are older. Once you're 45-50, if you are laid off, finding a new job is very very difficult for most people.
This was my thoughts as well. Plus as we all know saving more and earlier will most likely have a better outcome. If the OP thinks the house is going to be a great investment that could help.

I think the OP's has lot of other areas that some cash could be saved but we are not talking about that. If the OP is not looking to save/make changes in other areas I think the house is to much.
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Re: Do we have too much house?

Post by Impromptu » Wed Dec 03, 2014 8:40 am

bs010101 wrote:Home value: Zestimate 893K, Trulia 802K. Current mortgage just under 550K on a 15-year at 3%. Taxes about 21K a year.
TradingPlaces wrote: 21K taxes on a 800K house. That's over 2.6%; even at 2.3% (21/900) that's high. Very few places have high taxes like that. Time to appeal taxes?
Your mortgage is $550,000, but you say Zillow and Trulia estimate it is worth more. What does your county assessor value your home at to come up with $21,000? With an income of $300,000/year you are making $25,000/month, likely $14,000/month take home after payroll, insurance, and 401(k). That means you are working 1.5 months to simply pay for property taxes.

Here is a nice interactive map with property taxes in each county in the USA, total dollar and percent of home value. Illinois, Nebraska, New Hampshire, New Jersey, New York, Texas, and Wisconsin are very high percentages.

http://money.cnn.com/interactive/real-e ... perty-tax/
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Re: Do we have too much house?

Post by obgyn65 » Wed Dec 03, 2014 8:57 am

To the OP: my answer is yes, sorry.
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Re: Do we have too much house?

Post by KlangFool » Wed Dec 03, 2014 9:23 am

LFKB wrote:I will never understand the posters that say "if you are asking then you probably know." Clearly the OP is asking because he/she doesn't know and wants feedback from more knowledgable posters.

Agree that the math is fuzzy. Impossible to answer the question without clarifying what the true gross and net of tax income amounts are and clear detail on spending and saving.
LFKB,

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Re: Do we have too much house?

Post by KlangFool » Wed Dec 03, 2014 9:33 am

bs010101 wrote:We stretched four years ago when we bought our house, which we love, and it definitely pushed us to increase our income, but I still have a nagging feeling that we are making things harder on ourselves than they need to be by being in the house.
bs010101,

1) You are spending too much on the house. If you spend less on the house, you could spend more money else where. Take a longer and further vacation. Experience lives with your children

2) You spend too much money elsewhere too. And, this is dependent on 300K annual income. Can you consistently make this kind of money over 10, 20, 30 years?? It would be nice if it comes true. What happened if something went wrong??

3) Stay at home nanny is a two edged swords. You spend less time with your children. It becomes too easy. We had those in Asia since cost of labor are low. But, it created distance between parent and children. The children are only young once. When they are older, they do not have time for you. You lose that by having a nanny.

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bs010101
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Re: Do we have too much house?

Post by bs010101 » Wed Dec 03, 2014 10:08 am

Thanks so much for all the thoughtful replies.
freebeer wrote:$30K/year for babysitter?? At a (high) $15/hour that would be 2,000 hours/year, which would be 6 hour outings 6 nights every week of the year. What am I missing here?
Babysitter is not for date night - it is for 40+ hours a week (we still have one child not yet in school, plus she is there before the older ones go to school and after they get home), during which my wife and I go to work and earn 10x what we pay for babysitting.
TradingPlaces wrote:2. Math does not add up. Gross income 300K, and you are spending 200K, saving 60K (is 25K of "forced savings" of principal payment counted in both buckets? If so, I would really encourage you to clean up your accounting).
Point taken. Whether the principal part of the mortgage counts as saving or spending has been debated on this site many times. I consider it spending from the perspective of money I have to pay out every month, but also saving in that it does not decrease my net worth like other spending, and can be accessed in the future by selling the house. The savings for retirement and college is 35K a year, and we also are currently paying a little more than 3K per month towards principal.
TradingPlaces wrote:3. Is your federal marginal tax rate 28% or 33%? Do you pay AMT? Why ROTH 401K?
33% and yes on the AMT.
virgingorda wrote:If you switched to a traditional 401k, wouldn't you take home a bit more? Could that also possibly lower your income tax bill?
Yes, definitely, but I think of using the Roth as increasing the amount I'm saving for retirement. I know this is also a never-ending debate. We currently have about 450K in retirement, of which 425K is in tax-deferred, so I'd like to balance that out a bit. I often remind my wife when we can't find the money in our budget for something that we are in a way pretending to have a lot less than we really have by saving as much as we can before the money comes home.
TradingPlaces wrote:4. 21K taxes on a 800K house. That's over 2.6%; even at 2.3% (21/900) that's high. Very few places have high taxes like that. Time to appeal taxes?
Taxes are just over 2.5%. The town just did a reassessment where the average home value went down 15% (as did ours). I think this is a ploy to reduce appeals, as we'd have to argue that low 700s is too much for our house. Also, with the re-assessment, the tax rate will go up to at least 3%. Welcome to NJ :(
BL wrote:I also found this confusing. It seems like you payed extra to get into a good school district and still pay to send kids to a private school.
The schools are not good, but they do spend an above-average amount of money. As we planned to send to religious schools, this wasn't a factor (as is the case with many in town).
wander wrote:
bs010101 wrote:Current mortgage just under 550K on a 15-year at 3%.
I don't think you have too much house but stretching it from 15 to 30 may help.
Same as above - it would help us spend more and save less - life would be more fun now but we'd be in debt well into our 60s.
EnjoyIt wrote:550K mortgage on a 300K/year salary is not too much. It is the 200K yearly spending where you are only saving 29500 for retirement which is below 10% and what is the problem. Starting with 100K in retirement today, at your current savings rate at 5% real return, you will have about 2.5 million saved up in 30 years which will fund a 100K/year lifestyle.
We have 450K in retirement now, and I've calculated closer to 5M in 25 years at 8% maintaining the same contribution rates. The more I can get of that into Roths, the less I'll need. But to your point, 100K/year may be OK considering we currently spend over 100K on mortgage P&I, babysitter, schools, and commuting.
lululu wrote:
EnjoyIt wrote: The way I see it, how long do you want to work? If you are comfortable working well into your 60s then you are doing just fine.
That's assuming they can find work when they are older. Once you're 45-50, if you are laid off, finding a new job is very very difficult for most people.
This is part of what is concerning me, some due to this thread: viewtopic.php?f=2&t=151716
If we saved a larger percentage now, we would have the option of earning less later. Arguing for the other side are that we will have the mortgage paid of by the time our oldest stars college, and our youngest will graduate before we reach 60, so our expenses will be much lower then. Of course, then the weddings start... We could always sell the house and downsize to fund a better retirement lifestyle as well, though we'll probably miss being able to host our kids and their families.
mass_biker wrote: Oh yeah, we started with a kid. Then had a kid. And then another. And then the visitors started coming by. And the neighbors. And this big rambling house is full of people to enrich our lives and the lives of our kids.
Yes - I can very much relate. We've had lots of family and friends stay over and celebrated milestones in the house. It does bring us joy. But the joy comes at a price.

I see more replies have come in - will read in more detail and reply - but in short it seems we are not totally off the deep end on this, but also making a lot of expensive choices and probably could use to figure out which ones can go. Fair summary?

Rodc
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Re: Do we have too much house?

Post by Rodc » Wed Dec 03, 2014 10:29 am

I live in an area where $800K gets you a medium sized 4 bedroom that needs updating and ongoing maintenance. Thank goodness I bought over 20 years ago. I don't tell my new neighbors what I bought. So, I can relate. That said, one can find more modest houses for less. My house is worth about, say $650K.

I have a rather modest nicer 3 bedroom house without a garage. I would like another bedroom and a garage without having a fixer upper, but that would double my mortgage which is more strain than I am willing to take on. So, I bought a small house years ago because it fit my then budget, but got trapped in a way due to rising house prices. If I had stretched years earlier, subsequent pay raises would have made the mortgage easy by now. I do not know where your home values will go over the next however many years, but you may, or you may not, be glad you stretched now. I am not unhappy, but I would be better off having stretched earlier given how things have worked out (if we had a bout of unemployment or housing prices rose less dramatically things would of course be different).

Your mortgage to income level is modest. Once paid off you will have tons of cash flow if you maintain your current salary level or improve it. You may be able to catch up on savings, though that is a somewhat risky bet.

I have three kids and only modestly less income. We live reasonably well. We eat well, kids get all the various lessons, when little we paid darn near college costs for daycare, we take some nice trips. We don't spend anywhere near what you spend so you might want to look into just what you are spending on and whether or not there are expenses that can be reigned in. This is may be more important than downsizing your home.

This is not a forever type deal. You always have the option of selling and downsizing in the future if later you decide this is not working. This is especially true since you have a decent loan to value ratio.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

kithwang
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Re: Do we have too much house?

Post by kithwang » Wed Dec 03, 2014 11:34 am

I would at least put more money into retirement. The kids can get loans for college.

vital15
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Re: Do we have too much house?

Post by vital15 » Wed Dec 03, 2014 11:45 am

I live in a high cost of living area and can relate. I don't think you are overspending on your house at all. You have a 15 year mortgage and make extra principal payments! That fact alone tells me you are not stretched too much. I might consider switching to a longer term to provide more flexibility.

ResearchMed
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Re: Do we have too much house?

Post by ResearchMed » Wed Dec 03, 2014 12:13 pm

bs010101 wrote: ...
Babysitter is not for date night - it is for 40+ hours a week (we still have one child not yet in school, plus she is there before the older ones go to school and after they get home), during which my wife and I go to work and earn 10x what we pay for babysitting.
...
How many years before the youngest gets to school?
Is there a half-day program option a year in advance?

That will add ~$9k (probably a tuition bump or two along the way?), but what will you do - *need* to do - about the "babysitting" at that point?

$30k is a lot to pay if the only child-care needs are before and after school.
Is the current sitter/nanny flexible about this, or need a full time job?

Also, if you are feeling strapped - and clearly you are - then, as others have said, don't pay extra towards the mortgage.
You've already got a 15 year mortgage, so that gets you paid off faster than with a conventional 30 year time frame.

I also don't think it wise to downsize to where the children will need to share a bedroom at all, given that they aren't accustomed to this, unless it becomes absolutely necessary.
This is a quality of life issue, and one that becomes more important as the children get older. The age differences and sex of the children might make this even more difficult for them.

Also, it's a good idea to save for retirement, as you will not be able to get loans for that, whereas the children have options such as merit scholarships (probably for the most part going the way of the dodo bird, unfortunately), loans, and work-study (which can end up being of value in terms of experience, if the right job match is found).

These are the years when most families DO feel strapped. Housing costs are high, as the house is relatively newly purchased (meaning not much paid off, not a huge amount of appreciation), child-rearing expenses are high... and those will remain high for quite a while yet.
Others may have lower income, lower mortgage, and lesser educational expenses, but it often feels the same way.

I hate to admit it, but at that point, I wasn't saving a thing. I was still paying off the last of my student loans.
Once the children were fledged, what a difference!

And at that point, the equity in my home was also significant. You'll very likely have similar experiences, but it doesn't "feel" that way now.

RM
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Watty
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Re: Do we have too much house?

Post by Watty » Wed Dec 03, 2014 12:43 pm

Do we have too much house?
Maybe but at this stage there may be little that you can do about it. The problem is that to sell a house and buy a different less expensive one could cost up to 10% of the money involved. If downsizing costs $60,000(probably more) it is hard for me to see a way that it would save you anything for many years. the kicker is even if you move to a smaller house now, then in 15 years or so the kids will be off to college so even that house would be to large for you then so you would likely be looking at downsizing again.

Going with a 15 year mortgage was likely too aggressive but rates have gone up since then to refinancing to a new 30 year mortgage would be pretty expensive. An alternative would be to look at the low cost PenFed 5/5 ARM that is now at 2.75% and amortized over 30 years so the required loan payment is pretty low, and in months when you have extra cash you can make extra mayments. As the childcare costs decline or you get raises then you could increase your payments to still get it paid off quickly. I am in a much different situation than you but I am using that loan to get my mortgage paid off in about 7 years before I retire and it is working well for me. I did not have any problems during the refinance but some people have had less than favorable experiences with them so be sure to search the boards for past posts about them. I suspect that any lender would occasionally have similar problems and with a refinance a delay is more of a frustration than a big problem.

https://www.penfed.org/55-Adjustable-Rate-Mortgage/
virgingorda wrote:If you switched to a traditional 401k, wouldn't you take home a bit more? Could that also possibly lower your income tax bill?

+1

You are not saving enough now to be on track to be in a higher tax bracket when you retire so a Roth is very hard to justify. In addition to all the other things that can happen I have seen a number of people run into career and life setbacks that put them into a lower retirement tax bracket. With some very reasonable assumptions a couple can currently retire in the 15% and still have around $100K in income a year so especially with a paid off house many people will decide to retire earlier in a lower tax bracket.

Remember the choice for next year is not if you should put $18,000 in a Roth or the deductible 401K but if you should put the $18,000 into the deductible 401k and about $6,000 into a taxable account. If that $6,000 is invested in a tax efficient mutual fund for several decades it would then be available for paying taxes when the 401k money is eventually withdrawn from the 401K. The taxable account would be taxed a the capital gains tax rate and you would likely be in a lower tax bracket then.

jsandra
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Re: Do we have too much house?

Post by jsandra » Wed Dec 03, 2014 1:18 pm

virgingorda wrote:If you switched to a traditional 401k, wouldn't you take home a bit more? Could that also possibly lower your income tax bill?
Yes, definitely, but I think of using the Roth as increasing the amount I'm saving for retirement. I know this is also a never-ending debate. We currently have about 450K in retirement, of which 425K is in tax-deferred, so I'd like to balance that out a bit. I often remind my wife when we can't find the money in our budget for something that we are in a way pretending to have a lot less than we really have by saving as much as we can before the money comes home.


I can understand pretending you have less money than you really do, as a mechanism for spending less. However, you have already shown you have the discipline to prepay your mortgage. Why not switch from Roth 401k to traditional 401k contributions, and apply the tax savings to a backdoor Roth? Or make automatic extra payments to your mortgage? The Roth is not increasing your retirement savings, it is decreasing it, as long as you have the discipline to save the extra income you would have if you weren't paying so much in taxes.

Admiral
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Re: Do we have too much house?

Post by Admiral » Wed Dec 03, 2014 2:59 pm

IMO, you are wrong to think of your house as an investment...if the r.e. mkt crash taught us anything, it's that. You need to live somewhere, and owning is better than renting (in most cases) but why sink extra money into your (already short) mortgage? You're simple tying up your cash. You could, of course, refi to 4.5% on a 30 year, and you'd save money there. But I would not be putting more toward principle in your situation.

Also, Trulia etc are ballpark estimates at best...don't count on those as actual selling prices.

You're saving on private school, though, I pay $25k/kid so count yourself lucky!! :wink:

Leemiller
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Re: Do we have too much house?

Post by Leemiller » Wed Dec 03, 2014 3:05 pm

I'd stop the extra principal payments on the house, doesn't make sense with the tax break + interest rate and you're already on a 15 year. Your daycare expenses will go down eventually and you could consider an au pair at some point. I'd personally switch to a regular 401k and then add a back door Roth IRA for both of you. I think you should relax somewhat. Your mortgage is only 2x your income, granted the property taxes are high. You're also planning on having no mortgage by the time your kids go to school (or around then), which is great.

Ps working moms are awesome. :)

Twins Fan
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Re: Do we have too much house?

Post by Twins Fan » Wed Dec 03, 2014 3:12 pm

I don't think you have too much house. I see it along the same lines as others... you're child care costs will go down at some point, stop making extra payments on the mortgage principal, and stop contributing to the 529s. If the mortgage is gone around the time the kids go to college, you will have income available to contribute there if needed... plus, you pay for private school now, so that money can go to college at that time. Things just seem tight now, you will be fine.

swaption
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Re: Do we have too much house?

Post by swaption » Wed Dec 03, 2014 3:33 pm

bs010101 wrote:We stretched four years ago when we bought our house, which we love, and it definitely pushed us to increase our income
This is far as I had to read. Tail should not wag dog. Would you not have otherwise pushed to increase your income? If the house looms large in your life, then that is at least part of your answer.

epilnk
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Re: Do we have too much house?

Post by epilnk » Wed Dec 03, 2014 4:04 pm

You left out two key points: how old are your kids, and how big is the house?

We're raising two kids in just under 2000 square feet and even without a basement (nobody has basements here) it was plenty of space - until the oldest hit 12. Now we really really really want a bigger house. Even though we're only a few short years from being empty nesters - this house is ideal for empty nesters - I don't think we're going to make it without a basement to lock the teens in. They're so much bigger than real life now, and even though they are as close as any two siblings I know they are no longer able to share a room without killing each other.

You are saving plenty and paying down the mortgage aggressively (I would probably halt the extra principal payment for now, a 15 is plenty). Plus you are homebodies, so if you are spending more of your time and home and not traveling it makes sense to prioritize the house a bit more.

If you do want to downsize, I would not go down to a 3 br. There's a lot of space between $800K and $400K.

Jack FFR1846
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Re: Do we have too much house?

Post by Jack FFR1846 » Wed Dec 03, 2014 4:54 pm

Yours is a case where I believe the 529 makes sense. You make too much for any need based aid (so no work study). Merit aid may be there, so you can hope for that.
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Grt2bOutdoors
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Re: Do we have too much house?

Post by Grt2bOutdoors » Wed Dec 03, 2014 5:02 pm

Jack FFR1846 wrote:Yours is a case where I believe the 529 makes sense. You make too much for any need based aid (so no work study). Merit aid may be there, so you can hope for that.
OP lives in NJ, so I hope the OP is not using the NJBest program, there are better plans out there where the expense ratios are lower.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

EnjoyIt
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Re: Do we have too much house?

Post by EnjoyIt » Wed Dec 03, 2014 5:30 pm

You said 8% gains. Unfortunately you are not taking inflation into account which is why I use your 8% and deduct 3% for inflation. Which get you to 2.5 million after inflation. I used 100K starting savings. With 450K that number would be higher obviously. How old are you and how many more years do you plan on working?

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DonCamillo
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Re: Do we have too much house?

Post by DonCamillo » Wed Dec 03, 2014 6:09 pm

Whether or not you have too much house may be answered in the financial sense by what happens to real estate prices during your time in the house. In general, a house is a difficult investment due to maintenance and taxes (especially in NJ!) A larger house also increases utility bills.

Let me approach your answer from the other direction. We have too little house. One bathroom is decidedly inconvenient for four adults. There is no spare bedroom, or even better, spare bedrooms, for guests. Occasionally, we will put my grandchildren and their parents up in a nearby motel so that they can stay over on a visit. But it is not the way my children grew up, regularly staying in two guest rooms at my parents' house in Florida with a swimming pool on the screened in patio. I regret that, and I regret not being able to invite friends and family to stay with us. It would have improved my quality of life.

I did have lower housing, maintenance, utilities and taxes. I paid off my mortgage early, and invested the money. After 35 years in this house, I may have an extra $500,000 in my investment accounts due to being under-housed. I am not sure it was worth it.

We Bogleheads believe LBYM; "Live below your means." Sometimes I think we need to put as much emphasis on "Live" :beer as we put on "below your means." :moneybag
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freebeer
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Re: Do we have too much house?

Post by freebeer » Wed Dec 03, 2014 6:56 pm

bs010101 wrote:...
freebeer wrote:$30K/year for babysitter??...
Babysitter is not for date night - it is for 40+ hours a week (we still have one child not yet in school, plus she is there before the older ones go to school and after they get home)
Ah, OK I understand - I'd call that a "nanny"... "babysitter" signifying as-needed/on-occasion kid watching. But maybe this is old fashioned and "babysitter" is now an umbrella term, sorry. Anyway $30K/year for a full-time nanny is certainly not excessive.

virgingorda
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Re: Do we have too much house?

Post by virgingorda » Wed Dec 03, 2014 7:07 pm

kithwang wrote:I would at least put more money into retirement. The kids can get loans for college.
I disagree. As someone else said, you make too much for your kids to get any need-based financial aid already, and there is a limit to how much they can get in loans. If it was me, I would not put extra towards the mortgage. I would put that extra right into the 529s. It is a good deal for people in your situation you because you don't get taxed on the earnings. In-state tuition plus room and board at Rutgers is $25K a year today (someone said you are in NJ). So you are looking at finding $300,000 if they all go there at today's rate. And if you/they want private, well, then you are looking at a lot more.

Colorado13
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Re: Do we have too much house?

Post by Colorado13 » Wed Dec 03, 2014 8:08 pm

I'll play devil's advocate. My income is nowhere near yours, but I contribute much more to my retirement accounts. I expect to retire early though, so our goals may be very different. There's nothing wrong with having a big house if you can afford it, but as others have mentioned, it appears you are under-contributing to retirement. Consider devoting the extra principal payments to retirement funds.

bs010101
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Re: Do we have too much house?

Post by bs010101 » Wed Dec 03, 2014 9:38 pm

Lots more great replies - thanks again. I also edited the original post to add some more info to answer some questions. Sounds like lots of votes for dropping the extra mortgage payment, moving to regular 401K, and saving the difference in taxable accounts or backdoor Roth (though I'll need to get rid of both our IRAs first to do the latter so that's a little more involved).
Impromptu wrote:Here is a nice interactive map with property taxes in each county in the USA, total dollar and percent of home value. Illinois, Nebraska, New Hampshire, New Jersey, New York, Texas, and Wisconsin are very high percentages.

http://money.cnn.com/interactive/real-e ... perty-tax/
Ha ha - yeah, that stuff drives me crazy. Looks like our town is even significantly over the county average, which is significantly over the national average. But the whole family is in NJ, and salaries are presumably higher here as well. I guess it argues for reducing taxes wherever possible elsewhere.

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