Investment Ideas

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Topic Author
juvenho
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Investment Ideas

Post by juvenho » Wed Nov 06, 2019 3:47 pm

Hello,
My friend has the following situation and asking some advises.
He refinanced his house and got $100,000 cash out. He kept the same mortgage payment Just extended loan years to got that cash out. That was a good move and he was lucky to have that much equity and take the cash out without changing mortgage payment.
He is not planning to get another house. He just wants to invest that money. He Is investing for retirement 401 k plan already (Although he didn’t max it out) and also he would have government pension. He is just thinking to have extra money when he needs, use that money to support his life in 3 years, 5 years, 7 years, etc...
He is 22% tax bracket.
He doesn’t know match about investing and I have him many advised and provided him different sources to explore. Of course I followed Bogleheads advises as well😀
Please share the best options he could do.

lakpr
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Re: Investment Ideas

Post by lakpr » Wed Nov 06, 2019 3:52 pm

I don't think that's a good move. He paid a lot of refinancing fees for what I see essentially as a no benefit. He's taking a risk with the stock market with the $100k, when it could have been safely paid off his mortgage.

Please suggest that your friend register on this site and ask for advice, using the below format:
Asking Portfolio Questions

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Wed Nov 06, 2019 4:22 pm

Thanks for your respond. Wouldn’t you be happy to get good refinancing rate and have worth of $100,000 home equity on your hand?
He doesn’t wanna put that money all in stock market and expose himself to the high risk. That was opportunity for him to get lump sum on the hand with no effect on his monthly mortgage payment. Then he wants to consider different options how can he use that money to get the highest benefits.

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ruralavalon
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Re: Investment Ideas

Post by ruralavalon » Wed Nov 06, 2019 4:23 pm

juvenho wrote:
Wed Nov 06, 2019 3:47 pm
Hello,
My friend has the following situation and asking some advises.
He refinanced his house and got $100,000 cash out. He kept the same mortgage payment Just extended loan years to got that cash out. That was a good move and he was lucky to have that much equity and take the cash out without changing mortgage payment.
He is not planning to get another house. He just wants to invest that money. He Is investing for retirement 401 k plan already (Although he didn’t max it out) and also he would have government pension. He is just thinking to have extra money when he needs, use that money to support his life in 3 years, 5 years, 7 years, etc...
He is 22% tax bracket.
He doesn’t know match about investing and I have him many advised and provided him different sources to explore. Of course I followed Bogleheads advises as well😀
Please share the best options he could do.
lakpr wrote:
Wed Nov 06, 2019 3:52 pm
Please suggest that your friend register on this site and ask for advice, using the below format:
Asking Portfolio Questions
I agree. More details are necessary for any specific investing suggestions.

It's important to make full use of available tax-advantaged accounts.

One thing your friend could do is increase contributions to the 401k to the maximum permitted, if the funds offered in the plan are decent.

Another thing for your friend to consider is to open and contribute to an IRA at a low cost provider like Vanguard or Fidelity.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

alex_686
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Re: Investment Ideas

Post by alex_686 » Wed Nov 06, 2019 4:30 pm

juvenho wrote:
Wed Nov 06, 2019 4:22 pm
Thanks for your respond. Wouldn’t you be happy to get good refinancing rate and have worth of $100,000 home equity on your hand?
He doesn’t wanna put that money all in stock market and expose himself to the high risk. That was opportunity for him to get lump sum on the hand with no effect on his monthly mortgage payment. Then he wants to consider different options how can he use that money to get the highest benefits.
Think of the mortgage as a negative bond. The logical answer here is to invest the low yielding negative bond into a higher yielding investment. You are using leverage here. There are many threads on the use of leverage and margin here. It is hotly debated. However, if you are going to use leverage, this is probably the best type.

Here is the problem that your friend is in. Return and risk are linked. The only reasonable answer here is the stock market - which does offer higher returns. Any other investment is probably going to have lower returns. Your friend is going to win 7 out of 10 times if he invests in the market over the long term. I would take those odds - not everybody would.

If he does not want to put all of his money in the stock market then he probably made a mistake.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Wed Nov 06, 2019 4:41 pm

Thanks for your respond, but it is too risky.

I am trying at least offer him very balanced and risk reducing portfolio.

Although there might be different options too .

lakpr
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Re: Investment Ideas

Post by lakpr » Wed Nov 06, 2019 5:22 pm

juvenho wrote:
Wed Nov 06, 2019 4:22 pm
Thanks for your respond. Wouldn’t you be happy to get good refinancing rate and have worth of $100,000 home equity on your hand?
He doesn’t wanna put that money all in stock market and expose himself to the high risk. That was opportunity for him to get lump sum on the hand with no effect on his monthly mortgage payment. Then he wants to consider different options how can he use that money to get the highest benefits.
I'd jump on the refinancing offer if it lowered the mortgage rate, but pulling out the Home Equity is a bad move.

I am not sure if you or your friend is itemizing deductions or taking standard deduction, but if he's itemizing deductions, then he should be aware that the portion of interest he's now paying to the mortgage company on the additional $100k, is not tax-deductible. [ Recent Tax Cuts and Jobs Act code ]

So unless he's taking the standard deduction only, he's made his life a whole lot complicated since it's the taxpayer who should keep track of what interest is applicable to the pre-refinanced amount and what is applicable to the additional $100k.

And if he IS taking the standard deduction, the mortgage rate he's paying is after-tax rate (no tax benefit). Any investments he would make with the $100k, he would have to pay taxes on the earnings / interest. Which means, just to break even, he needs to earn at least 25% more than the interest rate he's paying. (so if his mortgage rate is 4%, he should earn risk-free 5% just to break even, and there is NO instrument in the market that gives you a 5% return without risk).

That aside, he should have either refinanced to a lower rate only the existing balance, or chosen a shorter term rather than pulling out equity.

Now that the deed is done, though, the best option at this point, to me, seems like a 50:50 allocation to total stock market and total bond market. Or, repay that $100k into the mortgage principal now.
Last edited by lakpr on Wed Nov 06, 2019 5:38 pm, edited 1 time in total.

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Brianmcg321
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Re: Investment Ideas

Post by Brianmcg321 » Wed Nov 06, 2019 5:34 pm

WOW. Not a good move at all. I would tell him to put the money back.

He needs to get on a budget and learn some basic personal finance.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

Tal-
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Re: Investment Ideas

Post by Tal- » Wed Nov 06, 2019 5:43 pm

A few things:

* The refi may not have been a great move. But, at this point, it is what it is.
* The timeframe of when he would need the money is important. The plan for a 3 year vs 7 year vs 20 year timing is important.
* The rest of his financial situation is also important. The right answer to virtually any financial question is, "it depends." In this case, it depends on his income, expenses, pension details, age, retirment plans, investment accounts, current account allocations, risk tolerance, etc.
* Be careful of creative ideas such as gold, real estate, bitcoin, investment grade life insurance, individual companies/private companies, tulips, etc. Not all of these are "bad" investments, but they are all super risky investments disguised as nice safe investments. They are also all far more risky than a 100% stock portfolio. Reading between the lines, you may have been hoping for an option like this, so I would cauation you to be very careful.
*If we simplify the question to: looking for high return with an optional 7 year time horizon, but less risk than a pure stock portfolio - I would suggest something like a 50/50 stock/bond portfolio. Or, if he wants to hold zero stock, the correct answer may simply be a bond index fund.
Debt is to personal finance as a knife is to cooking.

BlueCable
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Re: Investment Ideas

Post by BlueCable » Wed Nov 06, 2019 5:51 pm

I'd I had $100k that I didn't want to risk in the stock market and no specific need for it, I would use it to pay down my mortgage.

If I knew I needed it sometime in the next the years, I would open a No Penalty CD or use a money market fund.

There really is nothing much better to do with money you'll use in a few years with no risk.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Wed Nov 06, 2019 6:34 pm

Thanks everybody for sharing their opinion.

There are opinions I agree and some I don’t. But here is the truth:
He is gonna continue to live his life as he used to (same income, same expenses). He is satisfied what he gets and he is the person with gratitude.

The only change in his life that he has $100,000 as a result of 3.5% refinancing and making his loan from $210,000 to $310,000. Of course the cons here is that his loan got extended from 17 years to 30 years. But please keep in mind that not all debts are bad, debt can be very good thing as week if you control it wisely.

In his case he did everything wise at this point. Please check my calculations out:
- if he wouldn’t do refinancing his loan would be paid of in 17 years. The total interest of current mortgage from now to 2036 would have been $70,039
- with the refinancing he did his mortgage would be paid in 30 years. The total interest of the mortgage will be $210,000
- now: if we deduct 70,039 (when the mortgage was left without refinancing) from 210,000 (with refinancing) we will have about 140,000 more of total interest he would pay as a result of refinancing.
- he already got $100,000 as a result of refinancing leaving him only total of $40,000 more paid in 30 years.

And all those moves doesn’t effect in his lifestyle and he sleeps well and comfortable without thinking that he would miss his mortgage payment (cause it is the same amount he always paid before refinancing).

I think this is great move and I just put this matter here to get more ideas and advises.

Honestly I didn’t expect any negative comment.

Thank all of you and please feel free to comment. Regardless I agree or not, I enjoy hearing opinions. Thanks

snailderby
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Re: Investment Ideas

Post by snailderby » Wed Nov 06, 2019 6:43 pm

juvenho wrote:
Wed Nov 06, 2019 6:34 pm
The only change in his life that he has $100,000 as a result of 3.5% refinancing and making his loan from $210,000 to $310,000. Of course the cons here is that his loan got extended from 17 years to 30 years. But please keep in mind that not all debts are bad, debt can be very good thing as week if you control it wisely.

In his case he did everything wise at this point. Please check my calculations out:
- if he wouldn’t do refinancing his loan would be paid of in 17 years. The total interest of current mortgage from now to 2036 would have been $70,039
- with the refinancing he did his mortgage would be paid in 30 years. The total interest of the mortgage will be $210,000
- now: if we deduct 70,039 (when the mortgage was left without refinancing) from 210,000 (with refinancing) we will have about 140,000 more of total interest he would pay as a result of refinancing.
- he already got $100,000 as a result of refinancing leaving him only total of $40,000 more paid in 30 years.
As a result of the refinance, he also owes $100,000 more in principal payments, right? Because he now owes the bank $310,000 instead of $210,000. Doesn't that mean (1) he now has $100,000 more in cash; (2) he now owes the bank $100,000 more in principal payments; and (3) over the life of the loan, he will pay the bank $140,000 more in interest?

At any rate, we can't turn back the clock. I think your friend's options now are to (1) use the $100,000 to pay off the mortgage more quickly, thus reducing the total amount of interest that he will have to pay over the life of the loan; or (2) invest the money in a tax-advantaged account (like a 401(k) or an IRA) or taxable account. If he puts the money in a tax-advantaged account, there may be limitations on when he can withdraw that money. But the tax benefits could be significant compared to a taxable account.

surfstar
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Re: Investment Ideas

Post by surfstar » Wed Nov 06, 2019 6:48 pm

We recently refinanced. Got a lower rate, lowered our monthly payment, kept a 30 yr, which extended our loan by 30 months. We are investing the difference of our lower payments in a taxable account - after analyzing that we should, vs pay off the 3.5% loan early.

Took out $0. Thought that was normal. Its not.

Apparently your friend is in the majority:

In fact, 78% of our millennial and boomer customers who refinanced opted for cash-outs in 2018, and 58% did so far this year. Among our direct-to-consumer segment (as in, non-branch or in-person service), about half of our customers are using the cash for home improvements, university fees, wedding costs, etc. The other half is choosing to pay off other debt obligations that carry higher interest rates. In other words, refinancing helps our customers bring their overall debt costs down.

https://www.marketwatch.com/story/mille ... 2019-09-10

Very weird to take out 100k with no prior thoughts on what to do with it, though. :oops:

There are those who advocate for that - utilizing your equity while you can. Never know when a housing crash might come and "take" your equity away! Borrow all you can, while you can!

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Thu Nov 07, 2019 6:40 pm

Please take a look and comment my above conclusion.

DesertDiva
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Re: Investment Ideas

Post by DesertDiva » Thu Nov 07, 2019 8:27 pm

Is this the same friend from your earlier post? You know, the one where Taylor Larimore recommended the three-fund portfolio.

BTW, your friend isn’t lucky. His loan officer is.

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MNGopher
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Re: Investment Ideas

Post by MNGopher » Thu Nov 07, 2019 8:39 pm

Your friend effectively borrowed $100k from their future self, for no apparent reason.

Grt2bOutdoors
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Re: Investment Ideas

Post by Grt2bOutdoors » Thu Nov 07, 2019 8:44 pm

juvenho wrote:
Wed Nov 06, 2019 4:22 pm
Thanks for your respond. Wouldn’t you be happy to get good refinancing rate and have worth of $100,000 home equity on your hand?
He doesn’t wanna put that money all in stock market and expose himself to the high risk. That was opportunity for him to get lump sum on the hand with no effect on his monthly mortgage payment. Then he wants to consider different options how can he use that money to get the highest benefits.
A cash-out refinance, your friend just extended the mortgage out by how many more years? There is no free lunch. Further, your friend essentially has leveraged the house so he can have some extra spending money? If current interest rates on savings accounts are 2%, why would you borrow money at a higher rate? Effectively, your friend is losing money. He should have thought of those different options prior to the cash out refinance, now he's in hock for an additional 100K + interest and over how many more years when he could have paid off his mortgage with no risk in a shorter period of time.

Who advised him to take the cash out of the home? Bad move.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

alex_686
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Re: Investment Ideas

Post by alex_686 » Thu Nov 07, 2019 8:48 pm

juvenho wrote:
Wed Nov 06, 2019 6:34 pm
... as a result of 3.5% refinancing and making his loan ...
This is the crux of the issue. He now has a negative bond at 3.5%. In order to come out ahead he needs a investment that generates more than 3.5% after tax. So what is he going to invest that 100k that is going to get that yield? The standard "risk free" security in this situation is the 10 year treasuries have a 2% yield. So he is going to have to pick up some risk somewhere to get that 3.5%+ yield.

Once again, I think this is a decent deal if he puts in the stock market. Or maybe something else - but it is got to have roughly the same return as the stock market to make this works, which means it probably has about the same risk.

Grt2bOutdoors
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Re: Investment Ideas

Post by Grt2bOutdoors » Thu Nov 07, 2019 8:54 pm

juvenho wrote:
Thu Nov 07, 2019 6:40 pm
Please take a look and comment my above conclusion.
Your conclusion is off kilter. Your friend went from owing the bank $210,000 to now owing them $310,000 in principal payments.
Your friend went from owing the bank $70,000 over the next 17 years to now owing the bank $210,000 in total interest payments over the next 30 years. Instead of having a fully paid off home in the year 2036, your friend will be making payments until the year 2049.

How does that sound like a cash out refinance was a good move? Especially since the friend has no real guaranteed return on that $100,000 except to burn a hole in his pocket so he can "live it up over the next 3,5,7 years"?

Ask your friend if this sounds like a good deal? I'll give you $1; 100,000 times, you give me $2.40; 100,000 times?
The $1 you give me, washes out $1 I gave you, but I will still have an extra $1.40 in my pocket whilst your friend is $1.40 poorer each and every month over the next 30 years.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

anonsdca
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Re: Investment Ideas

Post by anonsdca » Thu Nov 07, 2019 9:08 pm

To the OP, I would tell your friend to start looking at their financial life like a business. In this case, a balance sheet. All that was done here was create a liability of $100,000 @ 3.5% = to annual payment of $3,500. This liability also came with some fees I am sure.

They also created an asset of $100,000 so the net gain is zero. Now the chore is to find a way to earn more than that annual $3,500 and cover the fees, which means they are seeking an investment of 4%-5%. As folks are saying they are taking on considerable risk for what essentially is a wash to their Net Worth.

I would also put it back on the mortgage and use their income to save/invest that $100K. My $0.02

mary1492
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Re: Investment Ideas

Post by mary1492 » Thu Nov 07, 2019 10:00 pm

juvenho wrote:
Wed Nov 06, 2019 6:34 pm
The only change in his life that he has $100,000 as a result of 3.5% refinancing and making his loan from $210,000 to $310,000. Of course the cons here is that his loan got extended from 17 years to 30 years. But please keep in mind that not all debts are bad, debt can be very good thing as week if you control it wisely.
You previously mentioned that he intends to stay in the house and not buy another.

What I would have done is refinance to 15 years, for an even lower rate, shaving 2 years off and likely keeping the payments the same or slightly lower. It would save a lot more money over the remaining period of the mortgage. This is a guaranteed return - no risk of whether your stock investments perform or not.

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juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 10:15 am

Thanks again for all your comments.
I am really shocked how some of you criticize the guy who never did anything wrong. He didn’t take $100,000 with the intention to buy luxury car or take luxury vacation. He just took the opportunity to take advantage of his home equity and use that money to his and his family well being.
I don’t understand some of the points made in the comments. I hope you read my calculations above and I would ask to pay a little more attention to the numbers.
If you read my postings regarding this topic from the beginning, you would notice that the guy would keep the same payment and lifestyle and his monthly payment will stay the same, just for longer time. Here is the key here SAME. So is already investing in his 401k (about $8000 a year) and he can’t afford to put more. According some of your comments it was better not to take that cash out loan. How does that make sense? I already mentioned his original loan would be paid off in 17 years. So you are suggesting to wait 17 years and have the loan paid off is better? And then after 17 years when he is 53 years old, start put that extra money (the money that was using to paid off the loan) for investments? If that is what you think we need to talk and I would really recommend to read and explore more materials regarding the topic.
I would understand your concern if ones take out the cash out loan, make his/her payment higher and risk to lose the house I. The future due to not being able to pay. But this is not that, as you might know I mentioned that the guy kept exact same payment and lifestyle.
It seems like some folks are very afraid about debt, please don’t. Debt can be your best friend and can be big time leverage. Please take your time and read articles from super star financial and business people who tell that (not me).
This became hot topic and I am glad that it went in this way, so a lot of people on the same situation can read and learn.
Thank you all.

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Wiggums
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Re: Investment Ideas

Post by Wiggums » Fri Nov 08, 2019 10:48 am

Please suggest that your friend register on this site and ask for advice, using the below format: Asking Portfolio Questions

It’s difficult to provide a detailed response without all the facts.

The total cost of the new loan should be offset by something that would leverage this cash. The goal should be If think to beat the mortgage rate, interest plus taxes. Consider the index fund or maxing retirement accounts or funding college, I would love to hear what the vision or goal is. Those would be worthy uses of this money.
Last edited by Wiggums on Fri Nov 08, 2019 10:59 am, edited 4 times in total.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 10:50 am

I am doing that for him as he is asked me to do so and advise him about results

surfstar
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Re: Investment Ideas

Post by surfstar » Fri Nov 08, 2019 10:51 am

Now that you mention that he is not max'ing out his 401k - that is the perfect place to put this money. Tell "your friend" to maximize his 401k, his spouses (if available) and both Roth IRAs too, if possible. Take any shortfall of monthly funds from this $100k. After a few years the 100k will be invested in tax-favorable accounts, while hopefully they can deduct their mortgage interest.

THIS actually makes sense. Again, just taking out $100k of equity b/c you can - wasn't a plan. A plan for the money should have come first. Otherwise they could have lowered their monthly mortgage payment and taken the extra cashflow and put that into the 401k.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 11:22 am

Thank you surfstar.

That was the first and simple suggestion I gave to him.

Please check this out:
As I mentioned he is putting only $8000 on his 401k (the limit will be $19,500) for 2020. So he still can put $11,500 in there. He can’t afford to do it from his paycheck. So he could use that cash out money here. I suggested him to put that $100,000 on money market account (about 2% APY) and then take about $1000 a month and try to max out his 401k. In this scenario that $100,000 will last him about 8-9 years a, meanwhile his taxable income would be reduced by $11,500 during those years (that would save him about $2000 if not more just from the taxes).
Of course he can also do the same thing for his spouse (the spouse is about same situation, contributing to 401K about $8000 a month) but in that case that $100,000 will last about 4-5 years. On the other hand as they filling the joint tax returns, their income will be significantly reduce, which will save them a lot of money just from the taxes (about $4000 or more a year).

I think either of this is perfect situation to take advantage of. And I hope a lot of people who has that opportunity and never thought about it would get benefits from this post.

As always please feel free to comment

snailderby
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Re: Investment Ideas

Post by snailderby » Fri Nov 08, 2019 11:58 am

1. Has he considered other tax-advantaged vehicles, like an IRA or an HSA (if he has a high-deductible health plan)? Between his 401(k), his wife's 401(k), his IRA, and his wife's IRA, he could invest that $100,000 pretty quickly.

2. As lakpr and ruralavalon have suggested, if you and your friend can reformat your original post using this template (viewtopic.php?t=6212), you may get more helpful (and specific) responses.
Last edited by snailderby on Fri Nov 08, 2019 12:03 pm, edited 2 times in total.

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 12:02 pm

Thanks. I love hearing Bogleheads advices in addition of the knowledge I have and can help him out.
I just put this topic here to get more ideas and help. Also some other people with the same situation can take advantage of it.

surfstar
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Re: Investment Ideas

Post by surfstar » Fri Nov 08, 2019 12:27 pm

I might have missed the earlier discussion of using the funds to max the 401k, but that seems to be the best way by far to utilize the money.
As you note, the reduction in taxable income will also be beneficial.

Sounds like a solid plan.

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juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 12:40 pm

What do you think is best? Maxing out only his 401k (the money will last about 8-9 years m) or do the same thing with both him and his wife(the money will last about 4 years)
Thanks.

lakpr
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Re: Investment Ideas

Post by lakpr » Fri Nov 08, 2019 12:46 pm

juvenho wrote:
Fri Nov 08, 2019 12:40 pm
What do you think is best? Maxing out only his 401k (the money will last about 8-9 years m) or do the same thing with both him and his wife(the money will last about 4 years)
Thanks.
What is his family’s combined income? If it is possible to drop to the 12% tax bracket, that is what I would suggest. If the combined income is say $130k, if between them they can contribute $17k to 401k their income would drop to $103k. This is the magic number. Less a $24,400 standard deduction, their taxable income becomes about $78,600 and $78,950 is the top if 12% bracket.

I don’t think we would see a 12% bracket beyond 2025, when this tax rate would revert to 15%.

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ruralavalon
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Re: Investment Ideas

Post by ruralavalon » Fri Nov 08, 2019 12:55 pm

juvenho wrote:
Fri Nov 08, 2019 12:40 pm
What do you think is best? Maxing out only his 401k (the money will last about 8-9 years m) or do the same thing with both him and his wife(the money will last about 4 years)
Thanks.
You said that your friend is in the 22% tax bracket. Making full use of available tax-advantaged accounts is important.

If the funds offered in the 401k plans are decent with low or moderate expense ratios, then I suggest using the money to enable maximum annual contributions to both plans.

What are the 4-5 funds in each plan with the lowest expense ratios? Please give fund names, tickers and expense ratios.

Is there an employer match the 401ks? If so what is the employer match in each plan?

Do your friend and spouse also contribute to IRAs?

Wiki article, "Prioritizing Investments ".
Last edited by ruralavalon on Fri Nov 08, 2019 1:10 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 1:09 pm

They always do married filling jointly. They both are government workers and have good 401k offered. It has choices of US large, kid, small caps, international stocks, bonds, TIPS, etc with the very low expense rates. Their total gross income is about $150,000. Each of them contribute about $8000 to that 401k plan. They don’t contribute to any IRA.

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ruralavalon
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Re: Investment Ideas

Post by ruralavalon » Fri Nov 08, 2019 1:19 pm

juvenho wrote:
Fri Nov 08, 2019 1:09 pm
They always do married filling jointly. They both are government workers and have good 401k offered. It has choices of US large, kid, small caps, international stocks, bonds, TIPS, etc with the very low expense rates. Their total gross income is about $150,000. Each of them contribute about $8000 to that 401k plan. They don’t contribute to any IRA.
I suggest maximum annual contributions to the work-based plans of both your friend and spouse. (Do they have 401k plans, or instead are the plans 403bs, 457bs, or the TSP?)

I suggest also maximum annual contributions to an IRA for each at a low cost provider like Vanguard or Fidelity.

Do their work-based plans permit Roth contributions?

Are your friend and spouse eligible for significant pensions?

What are their ages?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 1:27 pm

Please be advised that they have 457 plan. They are 36 and 45 years old. They won’t be able to max out the plans you mentioned. The amounts I mentioned is the max they could put. That is the reason he wants to use cash out money

StealthRabbit
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Re: Investment Ideas

Post by StealthRabbit » Fri Nov 08, 2019 2:06 pm

having watched my parents and inlaws go broke AFTER retirement... I tend to be a tad more conservative.

I do however use my home equity for investment leverage because I do not like the hassle of banks and loans.

I ONLY use RE equity (home equity) for equivalent secure RE investments, of which there is NO risk of a loss of equity (maybe a long delay in recapture, but not a loss) much like a home (if bought for right price to sustain market fluctuations.)

I do not have the equal faith in my stock / equity investments, tho historically the investment returns have proven to be equal or higher. (~50% of my wealth building has come from RE, (usually Commercial or rural view props).

Thus, I might take 30% home equity and buy farmland, or building lots in high demand rural view property. (Guaranteed resell). I buy a lot of those and flip them or use for rentals, so I am comfortable with that risk. Others may not be.

There is no way I would buy stocks directly with home equity, a good friend did so and lost everything (Family, home, cash reserves, job, future murky)

Adding pain to the process, many of us friends had spent hundreds of hours to help him build his beautiful country home (for his now ex-wife and ex-kids (they were a tad upset to lose it)).

Be wise, (bad) stuff can happen.

I always keep at least one decent home paid off, and never exceed LTV ratio to 50%, and keep accessible cash options to pay off home equity loan / mortgage if a crisis arises.

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ruralavalon
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Re: Investment Ideas

Post by ruralavalon » Fri Nov 08, 2019 2:50 pm

juvenho wrote:
Fri Nov 08, 2019 1:27 pm
Please be advised that they have 457 plan. They are 36 and 45 years old. They won’t be able to max out the plans you mentioned. The amounts I mentioned is the max they could put. That is the reason he wants to use cash out money
You said that your friend is in the 22% tax bracket. It is important make full use of available tax-advantaged accounts.

They could increase their payroll deductions to make the maximum annual 457 account contributions ($19k each) and then use the "cash out money" to pay living expenses that they would otherwise have paid from their paychecks.

This has the effect of putting the "cash out money" into the 457 accounts.

They could also make IRA contributions with the cash out money.

. . . . .

Do they currently have IRAs?

Do their 457 plans permit Roth contributions?

How much do they currently have in traditional tax-deferred accounts?

Are they eligible for significant pensions, in addition to Social Security?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 4:02 pm

That is what I offered to him and I think he would great great benefits of it. There is just one problem I see here:
If he maxes out both him and his wife’s 491k-s that $100,000 would last only about 4 years. And after exhausted that money he wouldn’t be able to continue maxing out.
Any suggestions regarding this ?

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ruralavalon
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Re: Investment Ideas

Post by ruralavalon » Fri Nov 08, 2019 4:39 pm

juvenho wrote:
Fri Nov 08, 2019 4:02 pm
That is what I offered to him and I think he would great great benefits of it. There is just one problem I see here:
If he maxes out both him and his wife’s 491k-s that $100,000 would last only about 4 years. . . . . .

The annual contribution limits are on a use-it-or-lose-it basis. If they don't max the accounts in a given year, they cannot later retroactively make the contributions.

It's probably a good idea to have money invested, rather than sitting idle in a bank checking account. In a bank savings account about the maximum they can earn is 2% interest. So it's probably best to get the money contributed to a tax-advantaged account and invested in something expected to give a good return.


juvenho wrote:
Fri Nov 08, 2019 4:02 pm
. . . . And after exhausted that money he wouldn’t be able to continue maxing out.
Any suggestions regarding this ?
Increase earnings, or decrease living expenses, or both, in order to enable larger contributions to investing.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 4:52 pm

He knows that he can’t do retroactive contribution. And that is fine. He would start increasing the contributions for both himself and wife to max it out. And as you mentioned he is gonna use the cash out $100,000 for living expenses. My concern is what is he gonna do if he exhausts that $100,000 ? After that he won’t be able to max the 401k out any more.

CheepSkate
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Re: Investment Ideas

Post by CheepSkate » Fri Nov 08, 2019 5:18 pm

1) Use it to max out the 401(k) plus a traditional IRA. Collect the tax savings.

2) Invest in a money market fund or short-term bond ETF. Yes, the yield will be lower than interest on the debt by 1-2% per year.

3) At a net cost of only 1-2% a year, hide and wait. Market corrections of 20% or more tend to occur every couple of years. Oh, and we’ve now passed a long yield curve inversion, productivity is slowing, and unemployment cannot go much lower so it must go... Set IPS to go long VTI with the funds if markets drop 20% or to go long in an intermediate bond fund if yields reach 5.5%.

The value of this 100k is being able to wait years if necessary at a low net cost for the chance to pounce - even if credit dries up.

Now does not strike me as a good time to play risk arbitrage with junk bonds or tech stocks. Hide and wait.

If the planned 1-2% annual losses are too much to bear, your friend could make a few trades a year selling far-ATM puts and either quickly offset the 3.5% interest rate or be forced to buy investments at a steep discount - a relatively good deal either way.

surfstar
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Re: Investment Ideas

Post by surfstar » Fri Nov 08, 2019 5:38 pm

juvenho wrote:
Fri Nov 08, 2019 4:02 pm
That is what I offered to him and I think he would great great benefits of it. There is just one problem I see here:
If he maxes out both him and his wife’s 491k-s that $100,000 would last only about 4 years. And after exhausted that money he wouldn’t be able to continue maxing out.
Any suggestions regarding this ?
Budget review.
Use Mint or other budgeting software, review what areas can easily be trimmed.
Their mortgage isn't that high for a $150k salary to not be able to max out contributions. Where is the money going? Cars? Kids? College? Eating out? Etc

The benefits of trimming your budget now, is 2-fold.
1. You save money every month that can be freed up to invest.
2. Your ongoing living expenses have been reduced, which means you need less money in retirement!
Bonus -- you also have savings that can compound, and will go even further to help pay for your now reduced retirement.

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juvenho
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Re: Investment Ideas

Post by juvenho » Fri Nov 08, 2019 6:10 pm

$150,000 is the gross salary and the take home actually is much less then that. Anyways he doesn’t live luxury life and there is no much to cut off. He is spending decent life and he enjoys few things like vacations and get aways with kids. He can’t just survive today and save for retirement and I think not everyone would do that.

snailderby
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Re: Investment Ideas

Post by snailderby » Fri Nov 08, 2019 6:18 pm

+1 to surfstar and ruralavalon's comments. Even if your friends don't want to cut back on their spending (they have to decide for themselves how to balance spending, saving, and giving), won't they still have a $100,000 surplus from the cash-out refinance? Why would they wait to invest that over the course of 5-10 years, instead of using that money to max out their work accounts and Roth IRAs over the course of two years ($50,000 in the first year, and another $50,000 in the second year)?

This is assuming, of course, that they are saving for retirement. If they need to use some of this money before they turn 59, then they might want to leave some of that money in a taxable account. But then they should expect to pay thousands of dollars more in taxes.

Alternatively, if they don't want to run the risk of investing that $100,000, and they want a more guaranteed return, they could use that $100,000 to prepay their mortgage and reduce the amount of interest that they have to pay on that mortgage over the life of the loan.
Last edited by snailderby on Sat Nov 16, 2019 5:49 pm, edited 1 time in total.

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juvenho
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Re: Investment Ideas

Post by juvenho » Sat Nov 09, 2019 12:04 am

Thanks for all your comments.
Basically I think this would be the perfect solution in this situation and would be very smart move for everybody who has the same opportunity that my friend does:

Max both his and his wife’s 401k contributions by using his $100,000 cash out money (put that money to the money market account which would give him about 2% yield, still something) That would let that money last about 4 years. During that time they would get tax benefits:
1. They don’t pay any tax for the cash out $100,000, cause it consider debt
2. They would reduce their taxable income by about $20,000 a year, which would save them a lot of money
3. They would put that money to tax-advantaged account and would increase their balance by extra $100,000 and would have opportunity to reach their goals faster

As I mentioned the only problem is when they exhaust that $100,000 they won’t be able to keep maxing out the contributions. But in that case they can reduce the contributions to the amount they can afford. And that $100,000 would already be there anyways.

I think this is very smart and wise decision and whoever read all those comments would take the advantage if has similar situation or opportunity to take cash out refinancing.

Thank you.

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juvenho
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Re: Investment Ideas

Post by juvenho » Sun Nov 10, 2019 3:14 pm

Dead Bogleheads

I am going to give the plan to my friend to implement.

Please give your final approval.

Thanks all if you for help.

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ruralavalon
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Re: Investment Ideas

Post by ruralavalon » Sun Nov 10, 2019 3:38 pm

juvenho wrote:
Wed Nov 06, 2019 3:47 pm
My friend has the following situation and asking some advises.
He refinanced his house and got $100,000 cash out. He kept the same mortgage payment Just extended loan years to got that cash out. . . .
. . . . .
He Is investing for retirement 401 k plan already (Although he didn’t max it out) and also he would have government pension. . . . .
. . . . .
He is 22% tax bracket.
. . . . .
juvenho wrote:
Fri Nov 08, 2019 1:09 pm
They always do married filling jointly. They both are government workers and have good 401k offered. It has choices of US large, kid, small caps, international stocks, bonds, TIPS, etc with the very low expense rates. Their total gross income is about $150,000. Each of them contribute about $8000 to that 401k plan. They don’t contribute to any IRA.
juvenho wrote:
Sat Nov 09, 2019 12:04 am
Thanks for all your comments.
Basically I think this would be the perfect solution in this situation and would be very smart move for everybody who has the same opportunity that my friend does:

Max both his and his wife’s 401k contributions by using his $100,000 cash out money (put that money to the money market account which would give him about 2% yield, still something) That would let that money last about 4 years. During that time they would get tax benefits:
1. They don’t pay any tax for the cash out $100,000, cause it consider debt
2. They would reduce their taxable income by about $20,000 a year, which would save them a lot of money
3. They would put that money to tax-advantaged account and would increase their balance by extra $100,000 and would have opportunity to reach their goals faster

As I mentioned the only problem is when they exhaust that $100,000 they won’t be able to keep maxing out the contributions. But in that case they can reduce the contributions to the amount they can afford. And that $100,000 would already be there anyways.

I think this is very smart and wise decision and whoever read all those comments would take the advantage if has similar situation or opportunity to take cash out refinancing.

Thank you.
juvenho wrote:
Sun Nov 10, 2019 3:14 pm
Dead Bogleheads

I am going to give the plan to my friend to implement.

Please give your final approval.

Thanks all if you for help.
I did not join in debate about the wisdom of the cash out refinancing, because your first post said that the friend had already "refinanced his house and got $100,000 cash out. "

Has the friend already done the $100k cash out refinancing?

If so then putting the $100k into a money market fund temporarily, and then transferring to the 401k accounts over 4 years is a good plan in my opinion.

In the 401k accounts invest in a combination of both (1) a diversified stock fund with a low expense ratio and (2) a diversified intermediate-term or total market bond fund, with good credit quality and a low expense ratio.
Last edited by ruralavalon on Sun Nov 10, 2019 4:04 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Sun Nov 10, 2019 3:59 pm

That is what I told him to do. To put that money on Money Market Account and start pouring slowly from there. And yes it would take about 4 years for his and his wife. Meanwhile he would get some percentage yield from money market account and he would decrease their annual taxable account, which would save them a lot of money.
I advised him to diversify and get balanced and low risk portfolio. He is gonna do the following within his 401k
- 20% US large cap fund
- 5% US mid cap fund
- 5% US small cap fund
- 10% non-US equity fund
-20% Inflation protection fund
- 40% Bond fund

This is very good diversification and has a lot of caution in any situation.

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juvenho
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Re: Investment Ideas

Post by juvenho » Mon Nov 11, 2019 12:22 pm

I told the plan to my friend.

He felt powered by knowing that a lot of Bogleheads approved it and it is really good opportunity he had to take that cash out money and use it for his benefits.

He asked me to thank everyone.

Please post any comments and I would appreciate that

Topic Author
juvenho
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Re: Investment Ideas

Post by juvenho » Wed Nov 13, 2019 7:43 pm

Just keeping you posted.

My friend did appreciate all your comments very much. I showed him all discussions here.

He just asked me to ask for final Bogleheads approval to start his plan right away.

Please give any final advise about current situation or changes if necessary.

Thanks

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