Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

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Lynx310650
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Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Lynx310650 » Mon Nov 13, 2017 11:40 am

I was playing around with online calculators and my numbers last night. I have saved enough money so far so that if I didn't contribute an additional dime, my current savings would grow to my needed retirement number by age 60 (my desired retirement age), assuming 5% annual growth (very conservative according to most historical figures based on the AA of my portfolio) and 3% annual inflation. I built in a 25% cushion in my "number" for potential taxes and unforeseen costs.

I've been doing what most BHs probably do. Max 401ks, IRAs, HSAs, and some taxables.

I suddenly have the desire to focus completely on saving for a home down payment instead. I already have about 150k cash earmarked for this purpose, but I live in a very HCOL area, and personally I'd feel more comfortable with more than 20% DP anyways. Also tempting is saving enough cash so that I could potentially buy a home without a mortgage if we were to move somewhere cheaper.

So I was thinking of drastically cutting back retirement savings, maybe just enough to capture 401k match from my employer, and nothing else. Save the rest into a savings account and balloon up that down payment fund, and look to buy a home in the next 2-3 years. And of course after that, I can continue to save more $$$ for retirement.

Does this plan sound okay?

KlangFool
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by KlangFool » Mon Nov 13, 2017 11:52 am

OP,

1) How old are you?

2) How long before you reached 60 years old?

3) Who guaranteed you that you will be fully-employed until 60 years old?

4) What is your marginal tax rate? -> X

5) Do you pay state income tax? -> Y

6) You are paying X+Y tax for any dollar that you do not put into your 401K account. Unless you like paying the tax instead of spending your own money, why would you stop contributing to your Trad. 401K account?

7) It is a bad plan to assume that your life will be sunny and nothing could go wrong over the next 20 to 30 years. If you have a few million now and you are FI, then, go ahead.

KlangFool

flyingaway
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by flyingaway » Mon Nov 13, 2017 11:59 am

What is the difference between saving for retirement and saving for down payment? Maybe you need to save the down payment in an after-tax account, but that is not a huge difference, as long as you are saving. You may change your mind later.

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Pajamas
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Pajamas » Mon Nov 13, 2017 12:04 pm

Sounds okay if you are 55 but maybe not so okay if you are 35 because of the length of time involved. If it is just a temporary shift from long-term goals to short- to intermediate-term goals, that's okay. But I wouldn't forego investing for retirement just to buy a bigger place or not to carry a mortgage, since expected investment returns are probably higher than what you would save by not having a mortgage or by having a smaller mortgage.

cherijoh
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by cherijoh » Mon Nov 13, 2017 12:37 pm

Lynx310650 wrote:
Mon Nov 13, 2017 11:40 am
I was playing around with online calculators and my numbers last night. I have saved enough money so far so that if I didn't contribute an additional dime, my current savings would grow to my needed retirement number by age 60 (my desired retirement age), assuming 5% annual growth (very conservative according to most historical figures based on the AA of my portfolio) and 3% annual inflation. I built in a 25% cushion in my "number" for potential taxes and unforeseen costs.

I've been doing what most BHs probably do. Max 401ks, IRAs, HSAs, and some taxables.

I suddenly have the desire to focus completely on saving for a home down payment instead. I already have about 150k cash earmarked for this purpose, but I live in a very HCOL area, and personally I'd feel more comfortable with more than 20% DP anyways. Also tempting is saving enough cash so that I could potentially buy a home without a mortgage if we were to move somewhere cheaper.

So I was thinking of drastically cutting back retirement savings, maybe just enough to capture 401k match from my employer, and nothing else. Save the rest into a savings account and balloon up that down payment fund, and look to buy a home in the next 2-3 years. And of course after that, I can continue to save more $$$ for retirement.

Does this plan sound okay?
I recommend that you review the assumptions and fine print for the online calculator you used.
  • Is the amount of your nest egg at 60 based on 2017 dollars or in 20xx dollars (i.e., the year you turn 60). If the latter, you are probably grossly underestimating the amount of money you need.
  • Also is your 5% annual growth nominal (I.e., before inflation is subtracted) or real (i.e., after inflation is subtracted)? Five percent nominal growth with 3% inflation IS very conservative - 5% real growth may be too optimistic in my opinion.
  • Lastly, if most of your retirement savings is in traditional IRAs and 401ks then you also need to account for taxes upon withdrawal, so you may need more money than you estimated.
You don't mention your age, but I suspect it is rather young if you will be a first-time homebuyer in a couple of years. Therefore I am leery that you actually have enough saved and can put retirement funding on auto-pilot. That is not to say that you can't reduce your retirement savings to focus on raising a down-payment for a house, but be sure when deciding how much house you can afford that you do NOT assume that you can ignore adding to your retirement savings. As Klangfool points out, you may not have the option of working to 60 either because of your health or age discrimination. Older workers are often the first to be laid off, generally have a longer job search, and rarely find a new job at the same salary as the old one. I speak from experience and am very grateful that I front-loaded my retirement savings and bought less house that I could afford. Peace of mind in turbulent financial times is priceless.

letsgobobby
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by letsgobobby » Mon Nov 13, 2017 12:42 pm

Lynx310650 wrote:
Mon Nov 13, 2017 11:40 am
I was playing around with online calculators and my numbers last night. I have saved enough money so far so that if I didn't contribute an additional dime, my current savings would grow to my needed retirement number by age 60 (my desired retirement age), assuming 5% annual growth (very conservative according to most historical figures based on the AA of my portfolio) and 3% annual inflation. I built in a 25% cushion in my "number" for potential taxes and unforeseen costs.

I've been doing what most BHs probably do. Max 401ks, IRAs, HSAs, and some taxables.

I suddenly have the desire to focus completely on saving for a home down payment instead. I already have about 150k cash earmarked for this purpose, but I live in a very HCOL area, and personally I'd feel more comfortable with more than 20% DP anyways. Also tempting is saving enough cash so that I could potentially buy a home without a mortgage if we were to move somewhere cheaper.

So I was thinking of drastically cutting back retirement savings, maybe just enough to capture 401k match from my employer, and nothing else. Save the rest into a savings account and balloon up that down payment fund, and look to buy a home in the next 2-3 years. And of course after that, I can continue to save more $$$ for retirement.

Does this plan sound okay?
Just so I am clear, your currents savings, excluding a very healthy emergency fund, will meet your future needs beginning at age 60 assuming a 2% real return, and you have a 25% buffer built in?

Then yes, feel free to save for a house and redirecting some of your savings.

We are in a similar position and this year saved less than usual and bought some toys instead.

By doing the heavy lifting early in life and letting the magic of compounding work for, say 40 years rather than 20, you can increase your lifetime standard of living substantially.

randomguy
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by randomguy » Mon Nov 13, 2017 12:46 pm

How big is your taxable account today? Can you just use it to buy your house/downpayment? I would be a bit hesitant to pay more taxes now versus later (or give up ROTH space). You can also always split the difference (i.e. only save 10k instead of 18k in the 401(k)).

Nate79
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Nate79 » Mon Nov 13, 2017 12:51 pm

I do not see anything wrong with redirecting some of your money towards buying a house as long as the house is a reasonable purchase for your income and expenses. In effect you are, by buying a house, are purchasing future housing costs for your retirement.

Lynx310650
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Lynx310650 » Mon Nov 13, 2017 12:55 pm

letsgobobby wrote:
Mon Nov 13, 2017 12:42 pm
Just so I am clear, your currents savings, excluding a very healthy emergency fund, will meet your future needs beginning at age 60 assuming a 2% real return, and you have a 25% buffer built in?
Yes, this is the more concise way to put it, thanks.

itstoomuch
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by itstoomuch » Mon Nov 13, 2017 12:58 pm

OP, Our son ( now 32 ) did this, Seattle. Suspended 401k/Roth for 2 years prior and 1 year after purchase 2014.
Home prices in Seattle region +12% for last 6 years.
Even with very substantial pay increases, catchup increases, and bonuses, he would today be hard pressed to buy the home he bought in 2014.
Your future savings rate + appreciation of that house fund > target house dpay cost. You may find it better to buy now to fix appreciation rate and then upgrade a couple years later. Your first house secures the future house(s).
Numb. YMMV.
GL :beer
Last edited by itstoomuch on Mon Nov 13, 2017 1:50 pm, edited 3 times in total.
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letsgobobby
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by letsgobobby » Mon Nov 13, 2017 1:01 pm

Lynx310650 wrote:
Mon Nov 13, 2017 12:55 pm
letsgobobby wrote:
Mon Nov 13, 2017 12:42 pm
Just so I am clear, your currents savings, excluding a very healthy emergency fund, will meet your future needs beginning at age 60 assuming a 2% real return, and you have a 25% buffer built in?
Yes, this is the more concise way to put it, thanks.
My personal preference on how to go about this would be to keep saving in the 401k because of the tax break (I assume you are in a higher tax bracket) while redirecting other savings toward your house to get at least a 20% down payment. After you buy the house you can reassess your expenses (hint: they will be higher), and then make a more informed choice to pay off your house earlier/more aggressively or not. But it really is just a personal choice.

Lynx310650
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Lynx310650 » Mon Nov 13, 2017 1:10 pm

letsgobobby wrote:
Mon Nov 13, 2017 1:01 pm
Lynx310650 wrote:
Mon Nov 13, 2017 12:55 pm
letsgobobby wrote:
Mon Nov 13, 2017 12:42 pm
Just so I am clear, your currents savings, excluding a very healthy emergency fund, will meet your future needs beginning at age 60 assuming a 2% real return, and you have a 25% buffer built in?
Yes, this is the more concise way to put it, thanks.
My personal preference on how to go about this would be to keep saving in the 401k because of the tax break (I assume you are in a higher tax bracket) while redirecting other savings toward your house to get at least a 20% down payment. After you buy the house you can reassess your expenses (hint: they will be higher), and then make a more informed choice to pay off your house earlier/more aggressively or not. But it really is just a personal choice.
Thanks. Our income is about $200k. General rule seems to be 3X income for a mortgage, so we don't want to borrow any more than 600k. We already have 150k in a separate down payment fund, so that would mean 750k. However, we want the option to get into a smaller SFH instead of a condo, which around here means $1 million and/or have a larger down payment so our offer is more competitive and we have more cushion in our monthly outlays.

So your personal preference would be to continue to max 401ks (2, since married), but suspend retirement savings elsewhere (including IRAs)?

mega317
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by mega317 » Mon Nov 13, 2017 2:08 pm

Rules of thumb are very gross estimates. That may be even low in a high cost of living, and more reasonable if you have dual income. But it might also be inappropriate for you. I think having to suspend all other savings in order to get a large enough down payment to reach an arbitrary loan value is a red flag.

You need to carefully estimate expenses after the purchase, and look to see what happens in one spouse loses a job, for example.

A million dollar house with 200k income is a stretch IMO.

letsgobobby
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by letsgobobby » Mon Nov 13, 2017 3:08 pm

Lynx310650 wrote:
Mon Nov 13, 2017 1:10 pm
letsgobobby wrote:
Mon Nov 13, 2017 1:01 pm
Lynx310650 wrote:
Mon Nov 13, 2017 12:55 pm
letsgobobby wrote:
Mon Nov 13, 2017 12:42 pm
Just so I am clear, your currents savings, excluding a very healthy emergency fund, will meet your future needs beginning at age 60 assuming a 2% real return, and you have a 25% buffer built in?
Yes, this is the more concise way to put it, thanks.
My personal preference on how to go about this would be to keep saving in the 401k because of the tax break (I assume you are in a higher tax bracket) while redirecting other savings toward your house to get at least a 20% down payment. After you buy the house you can reassess your expenses (hint: they will be higher), and then make a more informed choice to pay off your house earlier/more aggressively or not. But it really is just a personal choice.
Thanks. Our income is about $200k. General rule seems to be 3X income for a mortgage, so we don't want to borrow any more than 600k. We already have 150k in a separate down payment fund, so that would mean 750k. However, we want the option to get into a smaller SFH instead of a condo, which around here means $1 million and/or have a larger down payment so our offer is more competitive and we have more cushion in our monthly outlays.

So your personal preference would be to continue to max 401ks (2, since married), but suspend retirement savings elsewhere (including IRAs)?
The “3x income for a mortgage” is not necessarily relevant to you. If you get a mortgage for 4x income but have 1x income sitting in the bank, that’s not really any different than a 3x income mortgage. That’s why I recommend getting enough to get 20% down, but not necessarily more. The rest you can accumulate in taxable or Roth IRA accounts until you’ve actually purchased the home and assessed your new expense level. Then you can pay it off, optimize taxes/retirement, or some mix of both, depending on the details at the time. In other words, preserving a larger mortgage gives you options which paying up front in cash does not.

You’re safely within the 28% federal tax bracket assuming you are MFJ. Any state tax brackets to be aware of?

But yes, I think continuing to save pretax between $18k and $36k is plenty for now. Use the rest to get that 20% down, and beyond that as a cushion.

aristotelian
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by aristotelian » Mon Nov 13, 2017 3:32 pm

When would you like to move? If you are making the move in retirement, the optimal strategy would be to save for the down payment in your 401k and/or IRA.

cherijoh
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by cherijoh » Mon Nov 13, 2017 3:35 pm

Lynx310650 wrote:
Mon Nov 13, 2017 1:10 pm
letsgobobby wrote:
Mon Nov 13, 2017 1:01 pm
Lynx310650 wrote:
Mon Nov 13, 2017 12:55 pm
letsgobobby wrote:
Mon Nov 13, 2017 12:42 pm
Just so I am clear, your currents savings, excluding a very healthy emergency fund, will meet your future needs beginning at age 60 assuming a 2% real return, and you have a 25% buffer built in?
Yes, this is the more concise way to put it, thanks.
My personal preference on how to go about this would be to keep saving in the 401k because of the tax break (I assume you are in a higher tax bracket) while redirecting other savings toward your house to get at least a 20% down payment. After you buy the house you can reassess your expenses (hint: they will be higher), and then make a more informed choice to pay off your house earlier/more aggressively or not. But it really is just a personal choice.
Thanks. Our income is about $200k. General rule seems to be 3X income for a mortgage, so we don't want to borrow any more than 600k. We already have 150k in a separate down payment fund, so that would mean 750k. However, we want the option to get into a smaller SFH instead of a condo, which around here means $1 million and/or have a larger down payment so our offer is more competitive and we have more cushion in our monthly outlays.

So your personal preference would be to continue to max 401ks (2, since married), but suspend retirement savings elsewhere (including IRAs)?
Did you base your "have enough already" retirement calculation based on your current situation or your "own a $1MM house" scenario?

I'm curious - why do you think having a larger down payment would make your offer more competitive? An "all cash" offer is definitely more competitive, but I wouldn't think the amount of your down payment comes into play and isn't even something you would tell the seller. Unless you are planning on getting into a bidding war and are worried the house might sell for more than the appraised value and you'd get stuck putting down the extra money. That isn't something I'd feel comfortable with, but I also don't live in a HCOL area.

Lynx310650
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Lynx310650 » Mon Nov 13, 2017 3:42 pm

letsgobobby wrote:
Mon Nov 13, 2017 3:08 pm
Lynx310650 wrote:
Mon Nov 13, 2017 1:10 pm
letsgobobby wrote:
Mon Nov 13, 2017 1:01 pm
Lynx310650 wrote:
Mon Nov 13, 2017 12:55 pm
letsgobobby wrote:
Mon Nov 13, 2017 12:42 pm
Just so I am clear, your currents savings, excluding a very healthy emergency fund, will meet your future needs beginning at age 60 assuming a 2% real return, and you have a 25% buffer built in?
Yes, this is the more concise way to put it, thanks.
My personal preference on how to go about this would be to keep saving in the 401k because of the tax break (I assume you are in a higher tax bracket) while redirecting other savings toward your house to get at least a 20% down payment. After you buy the house you can reassess your expenses (hint: they will be higher), and then make a more informed choice to pay off your house earlier/more aggressively or not. But it really is just a personal choice.
Thanks. Our income is about $200k. General rule seems to be 3X income for a mortgage, so we don't want to borrow any more than 600k. We already have 150k in a separate down payment fund, so that would mean 750k. However, we want the option to get into a smaller SFH instead of a condo, which around here means $1 million and/or have a larger down payment so our offer is more competitive and we have more cushion in our monthly outlays.

So your personal preference would be to continue to max 401ks (2, since married), but suspend retirement savings elsewhere (including IRAs)?
The “3x income for a mortgage” is not necessarily relevant to you. If you get a mortgage for 4x income but have 1x income sitting in the bank, that’s not really any different than a 3x income mortgage. That’s why I recommend getting enough to get 20% down, but not necessarily more. The rest you can accumulate in taxable or Roth IRA accounts until you’ve actually purchased the home and assessed your new expense level. Then you can pay it off, optimize taxes/retirement, or some mix of both, depending on the details at the time. In other words, preserving a larger mortgage gives you options which paying up front in cash does not.

You’re safely within the 28% federal tax bracket assuming you are MFJ. Any state tax brackets to be aware of?

But yes, I think continuing to save pretax between $18k and $36k is plenty for now. Use the rest to get that 20% down, and beyond that as a cushion.
California, so I think it's around 9% marginal

KlangFool
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by KlangFool » Mon Nov 13, 2017 3:45 pm

OP,

You cannot afford 1 million dollar house with a 200K income. It is as simple as that. This is independent of how much you save for a down payment. The only exception is if you have above 3 million now and you are paying for the 1 million house with cash.

KlangFool

wrongfunds
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by wrongfunds » Mon Nov 13, 2017 4:30 pm

Just put the popcorn in the microwave and eagerly awaiting for the upcoming drama!!!

Slacker
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Slacker » Mon Nov 13, 2017 4:35 pm

$1 million dollar home on $200K income?

That is a huge stretch.

In that case, you should do enough downpayment to have maybe a $400K to $500K mortgage max.

That house gets you about $10,000 - $12,000 per year in property taxes right?
Now we add on about 1% of home value for maintenance $10K.
Your income tax would rocket up as well. If you only get the match you add back taxed dollars at the 28% federal bracket + 9.3% cali bracket (so if you now only contribute 5% into 401Ks you have $26K taxed at 37.3% giving you additional take home pay of 16K --- you pay $10K more in taxes).

However, it doesn't really seem reasonable nor prudent to own a $1million property unless you have significantly more than $1 million in other accounts, after your down payment based on your current income.

Slacker
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Slacker » Mon Nov 13, 2017 4:47 pm

wrongfunds wrote:
Mon Nov 13, 2017 4:30 pm
Just put the popcorn in the microwave and eagerly awaiting for the upcoming drama!!!
KlangFool loves a good "can I afford it" real estate thread. :twisted:

randomguy
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by randomguy » Mon Nov 13, 2017 4:57 pm

Slacker wrote:
Mon Nov 13, 2017 4:35 pm
$1 million dollar home on $200K income?

That is a huge stretch.

In that case, you should do enough downpayment to have maybe a $400K to $500K mortgage max.

That house gets you about $10,000 - $12,000 per year in property taxes right?
Now we add on about 1% of home value for maintenance $10K.
Your income tax would rocket up as well. If you only get the match you add back taxed dollars at the 28% federal bracket + 9.3% cali bracket (so if you now only contribute 5% into 401Ks you have $26K taxed at 37.3% giving you additional take home pay of 16K --- you pay $10K more in taxes).

However, it doesn't really seem reasonable nor prudent to own a $1million property unless you have significantly more than $1 million in other accounts, after your down payment based on your current income.
What if there mortgage and tax payment is 5k/month while their rent is 6k/month?:) The maintaince on the house is more like 2k/year. It is a 200k hour on 800k of land in most cases:) 4x mortgages are pretty affordable these days from a percentage of income point of view. Obviously their is a huge risk if house prices crash or you need to sell.

Slacker
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Slacker » Mon Nov 13, 2017 5:18 pm

randomguy wrote:
Mon Nov 13, 2017 4:57 pm
Slacker wrote:
Mon Nov 13, 2017 4:35 pm
$1 million dollar home on $200K income?

That is a huge stretch.

In that case, you should do enough downpayment to have maybe a $400K to $500K mortgage max.

That house gets you about $10,000 - $12,000 per year in property taxes right?
Now we add on about 1% of home value for maintenance $10K.
Your income tax would rocket up as well. If you only get the match you add back taxed dollars at the 28% federal bracket + 9.3% cali bracket (so if you now only contribute 5% into 401Ks you have $26K taxed at 37.3% giving you additional take home pay of 16K --- you pay $10K more in taxes).

However, it doesn't really seem reasonable nor prudent to own a $1million property unless you have significantly more than $1 million in other accounts, after your down payment based on your current income.
What if there mortgage and tax payment is 5k/month while their rent is 6k/month?:) The maintaince on the house is more like 2k/year. It is a 200k hour on 800k of land in most cases:) 4x mortgages are pretty affordable these days from a percentage of income point of view. Obviously their is a huge risk if house prices crash or you need to sell.
Then they are renting too much home too.

Mortgage on the proposed $600K could be $2950/month on 30yr loan @4.25% with $1000 prop tax.
How much is the HOA?
How much is the insurance?
Lets use your $2k/yr maintenance number (didn't realize labor was that cheap in California).

Now we are looking at $4167 before insurance and HOA with an extra $833 in federal & state income tax costs due to stopping retirement accounts other than the 401K match (which I am using 5% for since no numbers were provided).

That looks like a stressful situation. We have more income and pay about $600 less in state income taxes. Looking at the information OP provided they are paying about $110,000/yr in total taxes, retirement accounts (401Kx2, HSAx2, Rothx2) and I'd presume they pay at least $3000 or so for medical insurance per year leaving them with about $90k/yr, some of which goes into taxable accounts. $6,000/month rent is $72,000 in just rent alone - so your suggestion is that they may be living a less than $18K/yr lifestyle (after paying rent but before all other living costs)? The follow on is that they should leap in for a $1,000,000 home while living said less than $18k/yr lifestyle? Less than $1500/month seems quite low for covering utilities, food, going out, travel, gifts, insurance, car maintenance, etc in a $200K / yr income household. I suggest this is hard to believe coming from a slightly higher income with a fairly frugal lifestyle and we still spend $2000/month not including rent and we don't have to commute to our workplace).

letsgobobby
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by letsgobobby » Mon Nov 13, 2017 5:39 pm

KlangFool wrote:
Mon Nov 13, 2017 3:45 pm
OP,

You cannot afford 1 million dollar house with a 200K income. It is as simple as that. This is independent of how much you save for a down payment. The only exception is if you have above 3 million now and you are paying for the 1 million house with cash.

KlangFool
He can afford it because they will save up 20-50% down payment and never have to save again for retirement using extremely conservative assumptions.

Don’t hate.

OP - I don’t know CA brackets, but if there’s any way to optimize 401ks to get yourself into a meaningfully lower bracket, that would be worth doing.

KlangFool
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by KlangFool » Mon Nov 13, 2017 5:58 pm

letsgobobby wrote:
Mon Nov 13, 2017 5:39 pm
KlangFool wrote:
Mon Nov 13, 2017 3:45 pm
OP,

You cannot afford 1 million dollar house with a 200K income. It is as simple as that. This is independent of how much you save for a down payment. The only exception is if you have above 3 million now and you are paying for the 1 million house with cash.

KlangFool
He can afford it because they will save up 20-50% down payment and never have to save again for retirement using extremely conservative assumptions.

Don’t hate.

OP - I don’t know CA brackets, but if there’s any way to optimize 401ks to get yourself into a meaningfully lower bracket, that would be worth doing.
letsgobobby,

<< never have to save again for retirement using extremely conservative assumptions.>>

1) How old is OP?

2) Is assuming full-employment over the next 20 to 30 years conservative?

3) How do you know that OP calculated correctly?

A) How much is OP's current net worth?

B) How much will OP save per year after buying the house?

KlangFool

letsgobobby
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by letsgobobby » Mon Nov 13, 2017 7:50 pm

1. Doesn't matter.
2. Mostly irrelevant for this question.
3. I don't; his responsibility.
A. Doesn't matter.
B. None.

I wonder if you even read his post. He calculated a 2% real return will meet all his future needs with no need to save any more and with a 25% buffer built in. He has already addressed all your stated concerns. But I'm sure you'll come up with some more.

KlangFool
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by KlangFool » Mon Nov 13, 2017 8:58 pm

letsgobobby wrote:
Mon Nov 13, 2017 7:50 pm
1. Doesn't matter.
2. Mostly irrelevant for this question.
3. I don't; his responsibility.
A. Doesn't matter.
B. None.

I wonder if you even read his post. He calculated a 2% real return will meet all his future needs with no need to save any more and with a 25% buffer built in. He has already addressed all your stated concerns. But I'm sure you'll come up with some more.
letsgobobby,

OP assumed that he will be fully-employed until 60 years old. Hence, he could spend all his current income. If this is not true, then, he would need to use his savings/retirement fund to support his current lifestyle for an extended period of time. If OP is 35 years old, is this a safe assumption?

KlangFool

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Watty
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Watty » Mon Nov 13, 2017 9:38 pm

Lynx310650 wrote:
Mon Nov 13, 2017 11:40 am
Also tempting is saving enough cash so that I could potentially buy a home without a mortgage if we were to move somewhere cheaper.
I've been chastised by another poster for repeatedly suggesting this on things like this. I was in a much different situation but I was living in the Bay Area when I was ready to buy my first house. I didn't have anywhere near enough to pay cash for a house but I moved to a much less expensive area where I could buy a nice house for maybe a fifth of what it would have cost in the Bay Area. I got a better lifestyle too. That was one of the best financial and life decisions that I have ever made.

In probably 80% of the country you can buy a very nice home for cash for what a down-payment would be in an expensive area. With a paid off house and your retirement savings more or less taken care of your disposable income could soar even if you made a bit less in a different part of the country.

When I moved I was able to find a job with the same salary. That is anecdotal but my impression is that the regional price differences don't come anywhere near making you come out ahead in a high cost of living area unless your are a high level executive or in some special niche. This is not just housing, almost everything is more expensive in a high cost of living area.

I've moved around and I am in Atlanta now. The housing here varies a lot by area because of the commute and schools but you can get a nice basic house here for the low 200's, or a McMansion for $400K.

Here an example of what you could buy for around $400K in desirable suburb near many tech companies with great schools. Some areas closer to downtown can be a lot more expensive.

https://www.realtor.com/realestateandho ... 3397-42383

I'm not saying that Atlanta is Nirvana but if you look around there are lots of very nice affordable areas. At one point I was looking at college town and a lot of them are reasonably priced and they have a lot of activities that can make them an interesting place to live.

Nate79
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Nate79 » Mon Nov 13, 2017 9:42 pm

Purchasing a home IS as form of retirment savings so substituting some 401k savings vs home equity is fine. I contend that putting money towards purchasing a reasonable home where expenses vs renting do not increase much sets one up for a much more successful retirement than being a life long renter. This can also help in the case OP has a paid off house and can worry less about whether they are employed all the way until retirement. Over spending on a house increasing expenses on the other hand is not a good choice regardless of the situation.

Cue the pro rent rants.

itstoomuch
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by itstoomuch » Mon Nov 13, 2017 9:52 pm

^
Cue the pro rent rants.
New purchases for rentals in the Seattle and Eastside (Bellevue/Redmond) have negative Cap Rates. IOW, rental prices have max'd out. It is cheaper to rent than to purchase for this area. :x :mrgreen:
YMMV
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by avalpert » Mon Nov 13, 2017 9:52 pm

Nate79 wrote:
Mon Nov 13, 2017 9:42 pm
Purchasing a home IS as form of retirment savings so substituting some 401k savings vs home equity is fine.
No it most certainly is not any form of savings - it is a form of consumption. Assuming you have made the decision of how much house you want to buy - whether it makes sense to forgo the tax-savings associated with a 401k in exchange for a smaller mortgage payment is a financial optimization question that will depend on your tax rate, mortgage interest rate and liquidity risk.

But to confuse spending on a house with saving for a retirement is a great way to end up house poor.

As for the buy vs. rent arguments - I'll let your pro-buy rant stand alone for now.

Lonestarz
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Lonestarz » Mon Nov 13, 2017 10:20 pm

I think Klangfool has it right. Lots of unknowns on finances depending on time horizon - kids/accidents/employment may turn that 2% real growth into a big loss (at unknown timing - maybe during a market crash)

Seems unrealistic that you can reach a number with 2% growth that’s 35 years to double. Is it realistic to say you won’t experience lifestyle inflation >2%/yr?

Besides that, owning a $1mil house on just 200k is way too much - as mentioned, taxes and other costs will eat your income. Those aren’t the neighborhoods where your fence gets old and falls down and you and the neighbors open a 12 pack of bud light and build a new one yourselves. You hire a landscaper to put up cedar boards.

I think if I was 50 and was 80% to my number with 25% cushion built in, I’d be fine buying a million dollar house and stopping savings. If I was 30-40 I would be looking for something in the half a mill mark and if I was <30 I would be looking for a basement to rent.

furnace
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by furnace » Mon Nov 13, 2017 10:56 pm

Watty wrote:
Mon Nov 13, 2017 9:38 pm
Lynx310650 wrote:
Mon Nov 13, 2017 11:40 am
Also tempting is saving enough cash so that I could potentially buy a home without a mortgage if we were to move somewhere cheaper.
I've been chastised by another poster for repeatedly suggesting this on things like this. I was in a much different situation but I was living in the Bay Area when I was ready to buy my first house. I didn't have anywhere near enough to pay cash for a house but I moved to a much less expensive area where I could buy a nice house for maybe a fifth of what it would have cost in the Bay Area. I got a better lifestyle too. That was one of the best financial and life decisions that I have ever made.

In probably 80% of the country you can buy a very nice home for cash for what a down-payment would be in an expensive area. With a paid off house and your retirement savings more or less taken care of your disposable income could soar even if you made a bit less in a different part of the country.

When I moved I was able to find a job with the same salary. That is anecdotal but my impression is that the regional price differences don't come anywhere near making you come out ahead in a high cost of living area unless your are a high level executive or in some special niche. This is not just housing, almost everything is more expensive in a high cost of living area.

I've moved around and I am in Atlanta now. The housing here varies a lot by area because of the commute and schools but you can get a nice basic house here for the low 200's, or a McMansion for $400K.

Here an example of what you could buy for around $400K in desirable suburb near many tech companies with great schools. Some areas closer to downtown can be a lot more expensive.

https://www.realtor.com/realestateandho ... 3397-42383

I'm not saying that Atlanta is Nirvana but if you look around there are lots of very nice affordable areas. At one point I was looking at college town and a lot of them are reasonably priced and they have a lot of activities that can make them an interesting place to live.

Watty - let me share some real numbers with the High Cost of Living crowd:

1. my cousin recently bought a house in low 200's - put down 20%
2. location is suburb of Atlanta - in "A" schools
3. monthly payment (including amortizing mortgage, property taxes, home insurance, water, gas, electric, 2-car insurance) = $1380*
4. size of house is over 3000 square feet - over 1/2 acre of land - the deer visit his yard a few times a year
5. commute distance to city job is 45-60 min one way. People who live 4 miles away from his office say it takes them 30 min in traffic.

*I threw in the cost 2-car insurance because the number would be unbelievably low without it.

Family from California gasped when they heard the monthly figure. The fact is - these low cost of living places exist ALL OVER AMERICA. No reason for anyone to be trapped under a mountain of housing debt. Just pick up and move.

Bastiat
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by Bastiat » Mon Nov 13, 2017 11:09 pm

flyingaway wrote:
Mon Nov 13, 2017 11:59 am
What is the difference between saving for retirement and saving for down payment? Maybe you need to save the down payment in an after-tax account, but that is not a huge difference, as long as you are saving. You may change your mind later.
There is only limited retirement space available to each person, and retirement savings confer tax benefits that a down payment does not. For OP the difference is 37.3%, plus tax-free or tax-deferred growth, which is significant. I'd take $100 plus tax-advantaged growth over $62.7 minus dividend and capital gains taxes just about every time.

JGoneRiding
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by JGoneRiding » Mon Nov 13, 2017 11:35 pm

Watty wrote:
Mon Nov 13, 2017 9:38 pm
Lynx310650 wrote:
Mon Nov 13, 2017 11:40 am
Also tempting is saving enough cash so that I could potentially buy a home without a mortgage if we were to move somewhere cheaper.
I've been chastised by another poster for repeatedly suggesting this on things like this. I was in a much different situation but I was living in the Bay Area when I was ready to buy my first house. I didn't have anywhere near enough to pay cash for a house but I moved to a much less expensive area where I could buy a nice house for maybe a fifth of what it would have cost in the Bay Area. I got a better lifestyle too. That was one of the best financial and life decisions that I have ever made.

Not chastising you but you really should just have a post stating this that you copy into every SF/Seattle post on house buying (it would save you so much time) cause we all have read several vs by now! :P 8-)

aaronl
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by aaronl » Tue Nov 14, 2017 12:47 am

furnace wrote:
Mon Nov 13, 2017 10:56 pm
Watty - let me share some real numbers with the High Cost of Living crowd:

1. my cousin recently bought a house in low 200's - put down 20%
2. location is suburb of Atlanta - in "A" schools
3. monthly payment (including amortizing mortgage, property taxes, home insurance, water, gas, electric, 2-car insurance) = $1380*
4. size of house is over 3000 square feet - over 1/2 acre of land - the deer visit his yard a few times a year
5. commute distance to city job is 45-60 min one way. People who live 4 miles away from his office say it takes them 30 min in traffic.

*I threw in the cost 2-car insurance because the number would be unbelievably low without it.

Family from California gasped when they heard the monthly figure. The fact is - these low cost of living places exist ALL OVER AMERICA. No reason for anyone to be trapped under a mountain of housing debt. Just pick up and move.
There are plenty of reasons to live in a booming large city instead of an exurb. I'm tired of these threads.

msk
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Re: Actually might have "enough", thinking of suspending retirement savings in favor of saving for down payment

Post by msk » Tue Nov 14, 2017 2:09 am

OK, these threads keep coming up and my response is invariably to share the rules-of-thumb I picked up during my student days back in the 1960s (so plenty of financial disruptions since):

1. Save and invest 30% of after-tax income. You can include paying off principal (not interest!) on a home mortgage.
2. Never purchase a home worth more than 3x income. Expensive homes come with high maintenance costs. Just because you can afford the monthly mortgage payments does not mean that you will be financially comfortable at a higher multiple. As your investment income builds up, so does that 3x equivalent, so future home upgrades are very probable.
3. Never acquire a car or cars (either purchase or on lease) that are worth more than 6 months income.

These non-complicated rules enabled me, an engineer-type, to live at a much higher than a middle-class standard from my 40s onwards, till early retirement at age 55, now age 73. Went through the whole shebang: luxury cars (Mercedes/Lexus/Porsche/BMW/Jaguar), home theater nonsense, ever larger MacMansions (currently at 14,000 sq ft), etc. Youngsters: these "rules" do work! Whatever you do, do not skip 1. That's the super critical one. With a good dollop of luck, by age 45 your investment income may well eclipse your job income. The BH board gives you excellent ideas as regards tax efficiency and how to invest, but no need to get distracted into endless detailed calculations. Nothing wrong with treating equity in your home as "investing". Unless you are very unlucky, it will normally keep up with inflation. You can also be lucky and experience a significant upside, especially in a HCOLA environment. So go ahead and live. YOLO.

The mortgage and equity in your own home is far better invested than typical RE-for-rent investing. So please do not confuse the two. You have an excellent, reliable tenant who takes exquisite care of the home, with prompt maintenance as regards leaky pipes/roof, etc. The home is located in a highly desirable location (your DW will not allow you to go elsewhere :annoyed ) and should be an easy sell when it comes to upgrade. YOLO! :beer

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