Reduce retirement contributions or take out a mortgage?

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femmefire
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Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 10:55 am

I'm at a crossroads and I'm not sure what is the smartest approach in regards to what to do with our money. In less than one year we will have to move our family of four (Me (40s), Him(30s) and two toddlers) to wherever my husband matches for medical residency. Chances are very good that we will have to move to a city with HCOL. My current yearly finances are:

****** Removed finance breakdown for privacy*******

We have a lot of expenses related to med school coming up that are going to potentially put a small dent in our savings. So far I've been able to pay for daycare, med school, and retirement contributions. However, I estimate that we are going to need a little bit more than $500K in the future for a small sized house that doesn't need a ton of work (yes, I've thought about renting but I'm too old to deal with stuffing my family of four in a small apartment that was last updated in the 1990s and the rent is too high for something nicer). I've become accustomed (maybe addicted?) to maxing our retirement contributions and not having to pay a mortgage or rent, but I've realized that I can't do both anymore while preserving a six month emergency fund moving forward. What should I do? I could reduce my 2019 retirement contributions to the mandatory 401a and the 403b and delay my Roth and 403b contributions in 2020 to potentially later in the year (risking that I might not be able to max out those contributions). Or, I could take a small mortgage out. My guess is that someone in the family would loan us the money at slightly below current market rates (we've done this before and it worked out well). In the future, my husband will make about $60K/year for the next three years of residency and then a regular doctor's salary afterwards. We would not be able to pay the mortgage off early due to the increase costs of daycare.

Any other tips about our finances would be appreciated.

Edited to add - I will take my job with me so I won't be able to remove money from the 457
Last edited by femmefire on Wed Aug 07, 2019 10:54 am, edited 1 time in total.

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Nate79
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Re: Reduce retirement contributions or take out a mortgage?

Post by Nate79 » Wed May 29, 2019 11:08 am

If you do not plan to be in the new city more than 5 years then I would rent including renting an appropriately sized apartment or house. If your spouse is going to be in residency isn't there a high chance you will move again? That's a really good way to take a bath in the housing market.

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 11:21 am

There is nothing preventing him from looking for a job in the same city he does his residency.

mhalley
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Re: Reduce retirement contributions or take out a mortgage?

Post by mhalley » Wed May 29, 2019 11:33 am

Why do you have to move to a hcol area? I suppose there are some sub specialties that might require that, but just normal residency’s are everywhere. I agree that buying and selling a home within 5 years sets you up for potential loss. There are more things to rent than crappy apartments. Cutting back on retirement contributions for a couple years until spouse becomes an attending seems fine to me. Are you planning on moving with spouse to the new residency city and looking for a job there? I am averse to family loans, I would just get a student loan.

CommitmentDevice
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Re: Reduce retirement contributions or take out a mortgage?

Post by CommitmentDevice » Wed May 29, 2019 11:54 am

  • Seriously consider rent vs buy. The NYTimes calculator is a good starting point https://www.nytimes.com/interactive/201 ... lator.html.
  • You've got an impressive track record of saving and your household earnings are about to jump through the roof. Great!
  • I would definitely fund enough to get the employer match (free $) and max out the Roth IRAs (once the funding window has passed they can't be funded, plus funding them gets more expensive as household income [tax rate] goes up).
  • Personally, I would feel just fine about getting a mortgage and maxing retirement accounts, not maxing retirement accounts for a year or two, or perhaps even tapping into the emergency fund a bit (as it sounds like you've got good family support, duel incomes, good job prospects). Maybe negotiate a "if I lose my job" line of credit from family?)

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 12:12 pm

@mhalley - I see there are some misunderstandings that I would like to clear up.
<I suppose there are some sub specialties that might require that, but just normal residency’s are everywhere.>
We would like to stay in the West where both our families are from. That gives us one residency program per state for Washington, Oregon, Nevada, Utah, New Mexico, a couple in Arizona, and several in California. We don't get to choose which program we go to, and honestly I'm not sure we would rank Las Vegas or Arizona high on our list, which means we are likely moving to a city with higher real estate costs than where we currently live.
<I am averse to family loans, I would just get a student loan.>
Residents are not students.

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 12:23 pm

@CommitmentDevice
Great site! Totally bookmarked it. It put us at $1695/month or less for renting an equivalent dwelling. I feel pretty safe when I say that's not realistic. Of course, that doesn't mean anything if the housing market crashes, but if it does we will just try to stay put longer.

Good point using the emergency fund and borrowing if the need arises. Likely we would be able to build up an emergency fund in a few years.

niceguy7376
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Re: Reduce retirement contributions or take out a mortgage?

Post by niceguy7376 » Wed May 29, 2019 12:44 pm

femmefire wrote:
Wed May 29, 2019 10:55 am
yes, I've thought about renting but I'm too old to deal with stuffing my family of four in a small apartment that was last updated in the 1990s and the rent is too high for something nicer
You can live in an independent house by renting it out.
Trying to tie up the future employment offers because you bought a home is fundamentally and emotionally wrong.

Rent a good independent house where your spouse gets residency and you will know about the area and the traffic and such during residency.
You will also not tied by school districts till residency is complete. Thus you will have more choices.

veindoc
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Re: Reduce retirement contributions or take out a mortgage?

Post by veindoc » Wed May 29, 2019 1:11 pm

I don’t see what the issue is. Rent a single family home. Rental does not equal tiny apartment. We rented a SFH and it was a very nice house. Or are you afraid you won’t be able to pay rent with existing cash flow. Remember your husband will have income now and won’t be dead weight. :greedy

So is your husband entering his fourth year now? You will have expenses such as airplanes and hotels for residency interviews. And trust me it adds up.

Plus you have a home to sell in short order. Basically hubby graduates end of May and has to be there by July 1. That means you need to close on house 1 and 2 in June. Oh and then move all your crap in that time.

Sounds needlessly complicated. Just wait for the match in March. List home. Find apartment in April. Move into rental early June. Settle in. Sell home whenever. You can always buy the dream home once you have decided on permanent doc job.

At 40 I wouldn't be so cavalier about stopping retirement contributions. Could you use equity plus the CD to buy the new home? But that means you need to sell old home first and nothing is guaranteed. Unless you used efund to pay mortgage until old home sells.
Last edited by veindoc on Wed May 29, 2019 1:29 pm, edited 2 times in total.

mhalley
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Re: Reduce retirement contributions or take out a mortgage?

Post by mhalley » Wed May 29, 2019 1:22 pm

It sounds like spouse is not a resident yet, thus my student loan suggestion. Without knowing what the residency is in, hard to say how many are in each state.

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 3:10 pm

I know the rent vs buy debate is very much "alive" on this site. I was hoping to avoid it so as to not deviate from the original question, but let me run some numbers and see if the consensus is the same.
We are looking for a ~1500 sqft home, 3 bedroom, 2 bath, at least a small outside area, single family home or townhome in a safe neighborhood that isn't a terrible commute for my husband. We must also have access to quality daycare. Since I will work remote and will be in the house all day, I'd like it to be somewhat updated. I don't think this is extravagant. If I look at an example city, I could buy a home for about $500-$550K or rent the equivalent at $2.5 to $3K. After budgeting for away rotations, step II test costs, interview season, and relocation I conservatively estimate we will have about $500K cash for a home. Since most of the cost of a house is covered and we would be rent free and low or no mortgage payment, we would easily be able to go back to aggressively contributing to our retirement. It seems we would be better off buying than spending $30K to $36K a year on rent. Also, renting is no picnic either. Some rental markets are just as burdensome as buying a house.

It's the last $50K to $100K that we may need that I need to come up with that will either come from reducing yearly retirement contributions from the current $62K a year to $31K for a period of one, maybe two years, or taking a mortgage out. The whole reason we can contribute so much to our retirement now is because we don't have a rent or mortgage payment. It's worked very well for us. As for the timing, we've got that covered and our current house is in a very strong seller's market. Could change in the year, but I don't any power over that and I can only move forward with the information I have.

Quirkz
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Re: Reduce retirement contributions or take out a mortgage?

Post by Quirkz » Wed May 29, 2019 4:08 pm

If you're determined to buy, taking a small mortgage to keep up the liquidity and retirement accounts is not unreasonable.

That said, I'm with many of the others who say if there's a chance this is short-term, it may end up being a lot more expensive to buy and sell than just to rent. 6% commission on a $500k house is going to cost you $30k. Even if there's only a 50% chance that you move in a few years, I'd still say $15k in probabilitistic dollars still outweighs the small premium you might pay for rent.

I also think you're consistently over-emphasizing the down sides of renting and glossing over many of the risks of owning, instead of giving them a balanced treatment. I consider it smart to rent for a while when moving to a new town/state, just because you won't know the area well enough to make really informed choices for a few months or a year anyway.

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 4:29 pm

@Quirkz
<6% commission on a $500k house is going to cost you $30k.>
I think you'd be surprised at the number of realtors who are willing to negotiate on that 6% commission. There are also a growing number of realtors that offer their services at a fixed price. We used the latter on one of our previous home sales and it was a great experience. We saved $15,000!!!

<I also think you're consistently over-emphasizing the down sides of renting and glossing over many of the risks of owning, instead of giving them a balanced treatment.>
Guilty. I'm biased about buying a house. I like the freedom I have with a house. Paint is ugly? I can change it. Carpet is old? I can replace it. Own a dog? Doesn't matter. Landlords have less incentive to spruce up their rentals.

If we stay for three years, that's $90K in rent. It's a little more than a premium, no?

I should have mentioned. I've moved around A LOT. I'm already familiar with a few of these areas and am not concerned about selecting a neighborhood.

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Re: Reduce retirement contributions or take out a mortgage?

Post by 747driver » Wed May 29, 2019 4:31 pm

Sounds like your mind is kinda made up. If not, I'd ask again on the WCI forum, just to be sure. WCI himself preaches renting first, but what does he know? :D
A clear conscience is a great pillow.

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 4:44 pm

Yeah, in a sense it is. That's why the question was about the best strategy to take in financing it.

Good idea about asking on WCI.
Last edited by femmefire on Wed May 29, 2019 5:04 pm, edited 1 time in total.

Quirkz
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Re: Reduce retirement contributions or take out a mortgage?

Post by Quirkz » Wed May 29, 2019 5:04 pm

femmefire wrote:
Wed May 29, 2019 4:29 pm
If we stay for three years, that's $90K in rent. It's a little more than a premium, no?
You're going to be paying for housing either way. If you buy, you've either got a large mortgage (roughly equivalent to rent) or you no longer have $500k to invest (whatever that's worth - highly variable, but more than $0). You have to include those costs in the comparison to rent.

But we're still probably only talking about a $10-25k variance between moderately good and moderately bad outcomes with either choice, and that may not be enough to worry about, given the uncertainties.

Per my earlier note, if you do end up buying, I'd probably pick a small mortgage over reducing retirement. You only get so much tax-advantaged space every year.

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 5:20 pm

@Quirkz
<you no longer have $500k to invest>
This. This could change my mind. I suppose that could end up being a lot of money, or not. How do I conservatively approach this? Put it all in a CD? If we don't buy now, we would later so it can't be tied up for too long (such as might happen with a recession).

I think a small mortgage is probably the way to go. Our tax bracket is low, our credits high, and we have no income tax so we are maximizing our post-tax contributions at 100%. Although maybe I shouldn't mention the other contentious topic of pre vs post tax contributions. :D

decapod10
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Re: Reduce retirement contributions or take out a mortgage?

Post by decapod10 » Wed May 29, 2019 5:22 pm

I would echo what others have said that residency is a really bad time to buy a house IMO. A lot of people end up moving to a different area after residency, even if they prefer to stay, it's a lot easier said then done. He could decide to do a fellowship somewhere, he might not be able to find a job in the area (it's not as easy as it sounds, depending on specialty and area), he may find a more attractive offer somewhere else, etc. If he gets a huge salary, you may want to buy a bigger house even if you end up staying in the area. I think it's best just to try to get through residency with as little debt as possible, once you're established, then buy a house. If he does a fellowship and your house loses value, that could be a particularly bad combination, since you'll be trying to sell a house at a loss and his salary will still be relatively low.

That being said, to your actual question:

You'll see a lot of discussions on here on "should I pay off my mortgage or save more for retirement" which you could look for, since they're essentially asking the same situation as you.

It partly depends on the interest rate, partly depends on your personal feelings about debt and risk.

Just based on what I've read here, generally you'll find that interest rate of < 4%, people will tend to favor taking the mortgage and increase retirement savings, 4-5% is more of a grey zone, >5% people tend to pay off the mortgage. But this is a vast over generalization, there's no right answer really. Some people really hate debt and will pay it off no matter what the interest rate is. Some people are super optimistic about the stock market, so they will keep mortgages of 5% or higher.

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femmefire
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Re: Reduce retirement contributions or take out a mortgage?

Post by femmefire » Wed May 29, 2019 5:39 pm

@decapod10

Good arguments.

After having two babies during husband's med school, being the sole breadwinner, and in charge of the kids and household, I'm getting burnt out. That's not likely to change during residency. I just don't want to deal with yucky housing on top of that. I guess that's my personal motivation. I'll do a better cost comparison and figure out a rental rate that is doable. Once we get a match, I'll earnestly look at what that rate can get us versus buying. Current house needs to be sold either way.

What do I do with the $500K cash if we don't buy?

decapod10
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Re: Reduce retirement contributions or take out a mortgage?

Post by decapod10 » Wed May 29, 2019 6:12 pm

femmefire wrote:
Wed May 29, 2019 5:39 pm
@decapod10

Good arguments.

After having two babies during husband's med school, being the sole breadwinner, and in charge of the kids and household, I'm getting burnt out. That's not likely to change during residency. I just don't want to deal with yucky housing on top of that. I guess that's my personal motivation. I'll do a better cost comparison and figure out a rental rate that is doable. Once we get a match, I'll earnestly look at what that rate can get us versus buying. Current house needs to be sold either way.

What do I do with the $500K cash if we don't buy?
Yeah, it's tough being married to a med student/resident. Spouses have to make a lot of sacrifices, just as you describe. A lot of moving and being a single parent, and it will probably get worse during residency compared to medical school, not better unfortunately. But there's a light at the end of the tunnel, so hang in there.

If you choose to rent, I might consider deciding how much money you will need for a down payment and keeping the money in something safe like high yield savings/CDs/bonds, etc (like you've been doing) with the plans to use it as a down payment for a house. Put the rest of it in your retirement accounts.

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Watty
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Re: Reduce retirement contributions or take out a mortgage?

Post by Watty » Wed May 29, 2019 7:08 pm

Three things;

1) If you end up in a high cost of living area it is very likely that the hospital where he is doing his residency is not where you would want to buy a house so he could end up with a long commute. Renting a house with a short commute would be a big plus.

2) A number of times I have seen job offers and promotions go to the person who could relocate the easiest. Not owning a house there could help him get a better position.

3) Don't underestimate how long it can take to sell a house in a bad housing market.

veindoc
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Re: Reduce retirement contributions or take out a mortgage?

Post by veindoc » Fri May 31, 2019 8:21 am

femmefire wrote:
Wed May 29, 2019 5:39 pm
@decapod10

Good arguments.

After having two babies during husband's med school, being the sole breadwinner, and in charge of the kids and household, I'm getting burnt out. That's not likely to change during residency. I just don't want to deal with yucky housing on top of that. I guess that's my personal motivation. I'll do a better cost comparison and figure out a rental rate that is doable. Once we get a match, I'll earnestly look at what that rate can get us versus buying. Current house needs to be sold either way.

What do I do with the $500K cash if we don't buy?
I would invest half of it. You mention the west coast which I know is expensive so 250k should give you a nice down payment on a million dollar home. Isn’t that what it takes to get 3 bedrooms and a bath? :wink: Perhaps a 3 yr CD for the down payment money.

You have been able to do a lot on your one income. Don’t forget your husband will be bringing money to the table as well once he is a resident. I wouldn’t be spooked by taking a mortgage or paying rent. He should net $4000 or so a month enough for housing payment and for his retirement. I’m sure you have been used to just thinking me, me, me with regards to expenses but he is getting close to the point where he can be a contributor as well and take some of that burden off of you.

decapod10
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Re: Reduce retirement contributions or take out a mortgage?

Post by decapod10 » Fri May 31, 2019 10:56 am

veindoc wrote:
Fri May 31, 2019 8:21 am
You mention the west coast which I know is expensive so 250k should give you a nice down payment on a million dollar home. Isn’t that what it takes to get 3 bedrooms and a bath? :wink: Perhaps a 3 yr CD for the down payment money.
In a lot of parts of the Penisula in the CA Bay Area, $1M will barely get you 3 bedrooms (like 3 beds / 1100 sqft). It’s pretty brutal there, not even talking about San Francisco proper.

treadingwater
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Re: Reduce retirement contributions or take out a mortgage?

Post by treadingwater » Fri May 31, 2019 12:06 pm

One cannot go back and make up for missed retirement account contributions. This is unfortunate. Opportunity lost. Ask me how I know.

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