Safe withdrawal rate to pay for housing expenses

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Topic Author
fi2020
Posts: 4
Joined: Tue Jan 31, 2017 11:39 pm

Safe withdrawal rate to pay for housing expenses

Post by fi2020 » Thu Jan 10, 2019 1:13 am

I have been considering the possibility of using a safe withdrawal rate from taxable accounts to pay housing costs. In essence, I would pay a large portion of my housing costs (mortgage, property tax, insurance, maintenance) from a quarterly withdrawal from taxable accounts that amounts to a <3% withdrawal rate. I plan to stay employed and continue to fund these accounts for at least the next 5 years. Is this a good idea?

The details:
- 33M/33F, married with two kids
- Yearly income $500-$600K
- Taxable accounts: $1.83M
- Retirement accounts: $450K
- Cash: $230K

Housing estimates:
- $1.3M purchase price
- 30 year fixed, 20% down, 4.25% APR
- $5,100 monthly mortgage, $900 monthly property tax, $100 monthly insurance, $1,000 monthly maintenance (total: $7,100 monthly)

In this hypothetical scenario, I’d pay $3000 out of pocket monthly, and withdraw the remaining $4,100 x 3 = $12,300 on a quarterly basis from taxable funds in a tax-efficient manner. On a yearly basis that amounts to $49K, which is a 2.9% withdrawal rate, very safe over a 30 year term. Of course, I could buy the house outright with my current taxable funds, but that doesn’t seem like a very good diversification strategy.

Am I missing something or is this a reasonable strategy?

123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Safe withdrawal rate to pay for housing expenses

Post by 123 » Thu Jan 10, 2019 1:36 am

I think most people in your income and asset situation would get put 20% down, get a mortage and make the mortgage payments out of your regular income. With annual income of $500K-$600K a house of $1.3M would seem to be within range. There's no reason to withdraw from savings to pay for housing expenses at your income level.

With annual income of $500K - $600K you shouldn't need to withdraw from savings to pay monthly expenses. If you are you need to review your monthly/annual budget and re-establish your priorities.

If your plan turns out to be working only another 5 years you may need a significant rethinking of everything. You don't mention college savings for the kids, maybe your plan is to cover those from your taxable accounts. But drawing down taxable accounts for college expenses might significantly reduce the viability of early retirement plans. It might work if your kids will go to inexpensive in-state schools, but high income families tend to send their kids to expensive universities, I'm not saying it's good or bad, that's just what I've observed.

Edited to add:
You didn't mention childcare or private school costs or (frequent) vehicle expenditures. Those can be signficant drains on a high-income budget that may only provide little or no marginal value beyond perceived "status".
Last edited by 123 on Thu Jan 10, 2019 1:57 am, edited 1 time in total.
The closest helping hand is at the end of your own arm.

msk
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Re: Safe withdrawal rate to pay for housing expenses

Post by msk » Thu Jan 10, 2019 1:43 am

I never understood why anyone would borrow to pay for his home if he can pay cash. A home is next to food in urgency. Once your home is paid off the only thing to worry about is food and other stuff that are waaay less urgent. Basically my first rule of thumb has always been:

Save and invest at least 30% of after tax income. Paying for a home can be considered as investing (even if a quite lousy one, it does tend to keep up with inflation). Cars and all other consumables are not saving and investing.

After tax income is around $400k? Pay off home at $120k p.a. If you find that excessive then ask yourself if you are purchasing too much house. But my 2nd rule is:

Never buy a home worth more 3x income (2.5x combined income). Looks OK.

Topic Author
fi2020
Posts: 4
Joined: Tue Jan 31, 2017 11:39 pm

Re: Safe withdrawal rate to pay for housing expenses

Post by fi2020 » Thu Jan 10, 2019 10:09 am

123 wrote:
Thu Jan 10, 2019 1:36 am
I think most people in your income and asset situation would get put 20% down, get a mortage and make the mortgage payments out of your regular income. With annual income of $500K-$600K a house of $1.3M would seem to be within range. There's no reason to withdraw from savings to pay for housing expenses at your income level.

With annual income of $500K - $600K you shouldn't need to withdraw from savings to pay monthly expenses. If you are you need to review your monthly/annual budget and re-establish your priorities.

If your plan turns out to be working only another 5 years you may need a significant rethinking of everything. You don't mention college savings for the kids, maybe your plan is to cover those from your taxable accounts. But drawing down taxable accounts for college expenses might significantly reduce the viability of early retirement plans. It might work if your kids will go to inexpensive in-state schools, but high income families tend to send their kids to expensive universities, I'm not saying it's good or bad, that's just what I've observed.

Edited to add:
You didn't mention childcare or private school costs or (frequent) vehicle expenditures. Those can be signficant drains on a high-income budget that may only provide little or no marginal value beyond perceived "status".
I should have qualified my income. It’s based on a salary of $215K, bonuses of $40K and RSUs (between $300K and $400K). This has been consistent for multiple years. I sell RSUs immediately upon vesting (twice a year) and invest in index funds, and bonuses are invested as well. 10% of my salary goes to an employee stock purchase plan, and I fully fund IRAs and 401(k). After savings, taxes & other payroll deductions we are working with about $10K per month for monthly expenses. My wife is currently a stay at home mom so I am providing all income.

The main reasons I am pursuing this line of inquiry are that I don’t feel comfortable banking on future equity income, which is harder to estimate, and I want to figure out whether I could potentially significantly reduce the largest monthly expense from my budget if I were to take a position that pays less generously (say, in five years’ time). We currently rent for $3800 a month and that fits well within our current budget.

You bring up good points on college savings. I have 529 plans for the children but not a clear target for dollar amounts at college age. Fortunately they’re both young (3 and 1). I’ll do some more planning around this. Day care is a significant expense ($13K yearly now, to rise when second one goes as well). We have one car payment (400 monthly). We’re not big into purchasing cars, we’re more into travel.

aristotelian
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Re: Safe withdrawal rate to pay for housing expenses

Post by aristotelian » Thu Jan 10, 2019 10:18 am

You have one big portfolio. It doesn't matter if you have a separate account or how you calculate withdrawal rate. That said, 25x expenses (or 30x) to be safe, is a standard to use for any expense including housing.

One argument for purchasing a house is inflation protection. Many retirees do not want to have their rental payment going up every year depending on the qhims of the market. Buying a house as a forever house ties up your money in one asset, but locks that cost in and greatly reduces your expenses.

quantAndHold
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Re: Safe withdrawal rate to pay for housing expenses

Post by quantAndHold » Thu Jan 10, 2019 11:20 am

What I did in pretty much this exact situation was make a large enough down payment that I could pay regularly occurring expenses from base salary. Then when the RSU’s vested, the money simply was invested. My income at the time was heavily influenced by the value of the RSU’s. I didn’t want to be locked into the job because of monthly expenses that I couldn’t pay otherwise, and I didn’t want to be caught out if the job ended suddenly. Which is what happened in the end.

barnaclebob
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Re: Safe withdrawal rate to pay for housing expenses

Post by barnaclebob » Thu Jan 10, 2019 11:50 am

I dont see why it matters? Why cant you just pay the housing expenses with your income? Are you spending all of your income or something?

Topic Author
fi2020
Posts: 4
Joined: Tue Jan 31, 2017 11:39 pm

Re: Safe withdrawal rate to pay for housing expenses

Post by fi2020 » Thu Jan 10, 2019 12:01 pm

barnaclebob wrote:
Thu Jan 10, 2019 11:50 am
I dont see why it matters? Why cant you just pay the housing expenses with your income? Are you spending all of your income or something?
See my response above. To clarify my original numbers, my salary is $215K, the rest is bonus or RSU income. So it would not be affordable on my salary alone.

barnaclebob
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Re: Safe withdrawal rate to pay for housing expenses

Post by barnaclebob » Thu Jan 10, 2019 12:28 pm

fi2020 wrote:
Thu Jan 10, 2019 12:01 pm
barnaclebob wrote:
Thu Jan 10, 2019 11:50 am
I dont see why it matters? Why cant you just pay the housing expenses with your income? Are you spending all of your income or something?
See my response above. To clarify my original numbers, my salary is $215K, the rest is bonus or RSU income. So it would not be affordable on my salary alone.
Then personally I'd make enough of a down payment so that the mortgage was affordable on my income. If the bonus's and RSU's are as good as you predict then you'll have the taxable replenished pretty quick. It might also get you out of jumbo loan territory and save you some interest.

randomguy
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Re: Safe withdrawal rate to pay for housing expenses

Post by randomguy » Thu Jan 10, 2019 12:43 pm

msk wrote:
Thu Jan 10, 2019 1:43 am
I never understood why anyone would borrow to pay for his home if he can pay cash. A home is next to food in urgency. Once your home is paid off the only thing to worry about is food and other stuff that are waaay less urgent. Basically my first rule of thumb has always been:

Save and invest at least 30% of after tax income. Paying for a home can be considered as investing (even if a quite lousy one, it does tend to keep up with inflation). Cars and all other consumables are not saving and investing.

After tax income is around $400k? Pay off home at $120k p.a. If you find that excessive then ask yourself if you are purchasing too much house. But my 2nd rule is:

Never buy a home worth more 3x income (2.5x combined income). Looks OK.
I have never understood why anyone would pay cash for a house when they can get insanely cheap credit. Do they just hate money and liquidity that much?:)

Realistically the OP is only going to be paying out of the portfolio when the RSU funds don't show up (i.e. stop getting grants or the stock drops by 75% and you go from getting 400k/year to 100k and you don't want to sell). Seems like the plan of using the portfolio as a back stop is a solid one. Selling the funds, incurring taxes and having an undiversified portfolio doesn't seem that appealing. Portfolio wise the only thing to think about is if this move means you need to hold more bonds.

Now if your income drops to 215k and stays roughly therefore ever, this house might be pretty unaffordable over say a 20+ year period if we have a bad 10 years in the market early on. Thats a lot of bad things to go wrong.

msk
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Re: Safe withdrawal rate to pay for housing expenses

Post by msk » Fri Jan 11, 2019 4:13 am

randomguy wrote:
Thu Jan 10, 2019 12:43 pm
msk wrote:
Thu Jan 10, 2019 1:43 am
I never understood why anyone would borrow to pay for his home if he can pay cash. A home is next to food in urgency. Once your home is paid off the only thing to worry about is food and other stuff that are waaay less urgent.
I have never understood why anyone would pay cash for a house when they can get insanely cheap credit. Do they just hate money and liquidity that much?:)
LoL :D That insanely cheap credit basically comes from people owning bonds that pay insanely low interest rates. Hence I never adopted the BH passion for bonds either :oops: I did make use of mortgages on rental RE (after paying off my home mortgage) but all the rest of my investments went into 100% stocks. Sold off all the rental RE around 2000 and now 100% in stocks. Yes, you will laugh at me during the next 50% market drop, but I have lived through all of those too since the 1980s. No bonds, no home mortgage, no tensions. Each to his own. Some people, like me, find monthly payments to a lender irritating, many are quite comfortable with that, for decades.

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Watty
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Re: Safe withdrawal rate to pay for housing expenses

Post by Watty » Fri Jan 11, 2019 7:32 am

fi2020 wrote:
Thu Jan 10, 2019 1:13 am
Am I missing something or is this a reasonable strategy?

You are missing the sequence of returns risk. Here is an simplistic example that I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
As long as your other income continues you could cover the mortage with that and in reality it really does not matter which account you are paying it from(as long as your income continues) since money is fungible(Google this).

Actually withdrawing the money from the portfolio to make the mortage payments would also be less tax efficient. There is a good chance that you will just pay it out of your income anyway so you may be kidding yourself to think that you would be paying it out of the portfolio.

There is a wiki on investing vs debt that might help.

https://www.bogleheads.org/wiki/Paying_ ... _investing

When you use debt to fund your investing using that leverage increases your risk and I don't see any need for you to take more risk. Using the mortage to leverage your investments is little different than using margin loans to leverage your investing and few people would suggest that.

Doing something like making a 50% down payment might be a less extreme choice than either paying cash or making the minimum 20% down payment.

You likely will not be in the house for 30 years. You could get a 5 to 10 year ARM to get a lower interest rate and then pay it off before the rate adjusts for the first time.

runner540
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Re: Safe withdrawal rate to pay for housing expenses

Post by runner540 » Fri Jan 11, 2019 9:27 am

barnaclebob wrote:
Thu Jan 10, 2019 12:28 pm
fi2020 wrote:
Thu Jan 10, 2019 12:01 pm
barnaclebob wrote:
Thu Jan 10, 2019 11:50 am
I dont see why it matters? Why cant you just pay the housing expenses with your income? Are you spending all of your income or something?
See my response above. To clarify my original numbers, my salary is $215K, the rest is bonus or RSU income. So it would not be affordable on my salary alone.
Then personally I'd make enough of a down payment so that the mortgage was affordable on my income. If the bonus's and RSU's are as good as you predict then you'll have the taxable replenished pretty quick. It might also get you out of jumbo loan territory and save you some interest.
Bingo. Do this. I also have a lot of variable comp and want my housing expense to be affordable on a lower income. Don't do gymnastics with pulling money monthly out of savings while you're making $500k. Do you have life insurance and disability insurance?

btenny
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Re: Safe withdrawal rate to pay for housing expenses

Post by btenny » Fri Jan 11, 2019 11:46 am

I suspect this whole debate is for naught. I do not think you can get that big a loan. I do not think your mortgage provider will finance a loan based on RSU income. So I suggest you change your plan and figure out how big a down payment you want to make. Are you willing to spend $800K of your cash for a home? That would leave you with $900K in taxable investments. Then with that data see how much house you can buy and pay for based on your base salary and your bonus. I bet you can still buy that $1.3M home and have much better house payments. Say $4K or so.

Good Luck.

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