Turning 40! Can we buy a house one day? Portfolio advice please

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Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

It's been 6 years since I posted here for the first time. I'm turning 40 very soon and I'd like to get some advice on our modest financial setup. While I am content with what I have, I cannot help but compare myself with others and get worried about our financial future. We are married but we've never found ourselves financially stable enough to have a kid or a house. We live in CA and it seems like people who can afford to buy a house are high income earners and/or those with inheritance/family money. Neither of us are from a well-off family so there won't be much money coming in as we get old. (We love them and as I get old I truly understand how much they had to put up while raising us!) My husband and I dream about owning a house somewhere one day and hopefully retire when most people retire, but how are we going to make it happen? :| I guess a proper question to Bogleheads here would be, what could we do with our portfolio to get closer to our goal? :idea: Thank you in advance!

Emergency funds: yes (12 months of living cost in checking, savings, and CDs)
Debt: none (student debt paid off, good credit status)
Tax Filing Status: Married Filing Jointly
Tax Rate: 12-22% Federal, 6% State
State of Residence: CA
She: 39
He: 39

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20%? I don't know

Total portfolio: 200k

Taxable (excluding emergency funds)
5% checking
41% Savings (most of it used to be in CDs)
22% CDs

His OPR (401a from a previous job, considered rolling it over but haven't got around doing so)
1% MFS Value R6 (MEIKX) (0.47%)
1% Vanguard Total Intl Stock Index I (VTSNX) (0.08%)
1% Vanguard Small Cap Value Index I (VSIIX) (0.06%)
1% American Funds Europacific Growth R6 (RERGX) (0.46%)

His Roth IRA at Vanguard
5% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

His IRA at Vanguard
6% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

Her Roth IRA at Vanguard
6% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

Her IRA at Vanguard
4%Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)
7% Vanguard Target Retirement 2045 Fund (VTIVX) (0.15%)
_______________________________________________________________
Annual contributions
$3000-6000 his IRA/Roth IRA
$3000-6000 her IRA/Roth IRA
Figaro
Posts: 94
Joined: Sun Mar 24, 2019 9:34 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Figaro »

It's difficult to answer without knowing what your financial goal targets are. For example, if you want to be homeowners, how much are you looking at for a home? If you want to retire - what are your expenses going to be?

Your portfolio and net worth appears to be 200k with no debt. That is really good already, you just need to focus on saving and investing according to your 70/30 asset allocation then. Max out your deferred retirement space for retirement. If you're not in a hurry for the home (which by the post sounds like fomo, and purely emotional), then don't bother with going anymore liquid than you have to be - saving the 22% +6% now is really worth it down the line to grow your portfolio.

If you're in the 22%, then your income exceeds $105k - so how much are you saving each year and how much are your expenses?

Personally, I don't care much for intl allocation, so I'd focus on the Vanguard total Market for stocks.. your fund expense ratios are not too bad. Other than that, not too much to comment on just based on %'s.
Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

Figaro wrote: Sat Nov 27, 2021 2:50 pm It's difficult to answer without knowing what your financial goal targets are. For example, if you want to be homeowners, how much are you looking at for a home? If you want to retire - what are your expenses going to be?

Your portfolio and net worth appears to be 200k with no debt. That is really good already, you just need to focus on saving and investing according to your 70/30 asset allocation then. Max out your deferred retirement space for retirement. If you're not in a hurry for the home (which by the post sounds like fomo, and purely emotional), then don't bother with going anymore liquid than you have to be - saving the 22% +6% now is really worth it down the line to grow your portfolio.

If you're in the 22%, then your income exceeds $105k - so how much are you saving each year and how much are your expenses?

Personally, I don't care much for intl allocation, so I'd focus on the Vanguard total Market for stocks.. your fund expense ratios are not too bad. Other than that, not too much to comment on just based on %'s.
Our combined income hangs around the 12-22% brackets. If we each earn 50k, it's a good year saving 30k-40k. It's only been for the last several years we have been able to save. We cannot afford a starter house around where we live which go beyond half a million so we are not in a hurry at all. We don't have any taxable investment accounts so I'm wondering if it makes sense for us to start something at this point.
Could I ask what you mean by "saving the 22% +6% now is really worth it down the line to grow your portfolio"?
tashnewbie
Posts: 4283
Joined: Thu Apr 23, 2020 12:44 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by tashnewbie »

Congrats on being out of debt and having a good-sized nest egg!!

Is it possible to move to a lower cost of living area? That might be a way to make your money go further, especially if you can maintain same incomes.

You have a big percentage of your portfolio in cash. That’s not helping with growth. Are you holding that much cash for a possible future home purchase?
User avatar
Watty
Posts: 28859
Joined: Wed Oct 10, 2007 3:55 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Watty »

kinks wrote: Sat Nov 27, 2021 2:37 pm My husband and I dream about owning a house somewhere one day and hopefully retire when most people retire, but how are we going to make it happen?
Your post did not have a critical factor which is how much housing costs where you live now, but I would assume that they cost a lot there.

A big question is if you are open to moving to a lower cost of living area.

After college I was living in the Bay Area which has always been expensive and I moved to a less expensive area when I was about 30 when I was ready to buy my first house. The place I moved to had housing that cost maybe a fifth of what it would have cost in the Bay Area and also had a higher quality of life. That worked out very well for me.

Here is a PDF with the median home prices in different metropolitan areas.

https://cdn.nar.realtor/sites/default/f ... -11-10.pdf

Here is is ranked by median home price.

https://cdn.nar.realtor/sites/default/f ... -11-10.pdf

There are a lot of metropolitan areas where the median home price is still below $300k and in those areas you can likely still get a very acceptable home for the low two hundreds.

It is from this web site.

https://www.nar.realtor/research-and-st ... ordability

It looks like you have over $100K in your taxable accounts so if you are open to moving there are lots of places where you could easily afford a nice house with a modest mortgage that could be paid off at a reasonable retirement age.

You might want to take some trips to see if you can find an area that you would be excited about moving to.

Many companies are having a hard time hiring employees so now it could be a good time to find new jobs in a different city too.

If I was going to look for a different place to live I would take a hard look at college towns since they often have a lot going on and may be nice place to live.

https://en.wikipedia.org/wiki/List_of_c ... ted_States

I have moved around and I am in Atlanta now but there are several college towns that are a short drive from Atlanta that seem to be nice places, but I have never lived in one of them. Here is a sample of a house in one of those college towns.

https://www.realtor.com/realestateandho ... 3022-53199
Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

tashnewbie wrote: Sat Nov 27, 2021 3:42 pm Congrats on being out of debt and having a good-sized nest egg!!

Is it possible to move to a lower cost of living area? That might be a way to make your money go further, especially if you can maintain same incomes.

You have a big percentage of your portfolio in cash. That’s not helping with growth. Are you holding that much cash for a possible future home purchase?
If there's any job prospects we would. We used to have most of our cash in CDs when the rates were good. I can say that we won't be buying anything in the next 5 years (unless our income somehow goes up or we move somewhere). Any suggestions with the cash? Thank you!
Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

Watty wrote: Sat Nov 27, 2021 3:49 pm Your post did not have a critical factor which is how much housing costs where you live now, but I would assume that they cost a lot there.

A big question is if you are open to moving to a lower cost of living area.
Thank you for the links! I have to learn to think practically about this. We do think about moving like many people living in big cities these days. Atlanta seems like a nice city for sure. And the house looks amazing!
Ron Ronnerson
Posts: 3563
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Ron Ronnerson »

If you’re saving $30k-$40k/year on an income of $100k or thereabouts, you're on a good path. Keep it up and also see if you can improve your situation further by either increasing income, decreasing expenses, or a combination of both.

The expense ratios on your investments are mostly great. The two funds with expense ratios at 0.47% and 0.46% comprise only 2% of your portfolio but you may want to switch out those funds for something with lower fees. The main issue I’m seeing is that you have a lot in cash and not all that much invested in equities. If you’re saving that money for a down payment, it makes sense that you’d want to have the cash on hand. However, if you don’t think you’ll need it for a while, consider putting some of it into total stock market index funds.

As for your hopes of owning a home, you should do a careful budget to see what you can afford. Interest rates are so low right now that you might be surprised by how that affects the math in terms of monthly mortgage payments. How much do you pay in rent?

By the way, I live in California as well and have a similar income to you (around $115k). On my 39th birthday, we had $197k saved between investments and cash. My wife and I are 47 now and the balance has grown to a bit over $1m. Returns have been generous over the past few years but to take advantage of that generosity, we had to have money invested and we made it a priority to put money into the stock market. I’d recommend setting aside the money you need for a down payment some place safe but investing the rest soon. If you keep up a healthy savings rate and keep investing regularly, you will likely be in pretty good shape for retirement.
MrCheapo
Posts: 1468
Joined: Tue Dec 22, 2020 2:43 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by MrCheapo »

What is your current rental payment? Living in CA as well for us the biggest challenge was coming up with the downpayment. The rental expense vs mortgage expense was minimal as I recall $2000 vs $2x00 but that was 10 years ago.
kinks wrote: Sat Nov 27, 2021 2:37 pm It's been 6 years since I posted here for the first time. I'm turning 40 very soon and I'd like to get some advice on our modest financial setup. While I am content with what I have, I cannot help but compare myself with others and get worried about our financial future. We are married but we've never found ourselves financially stable enough to have a kid or a house. We live in CA and it seems like people who can afford to buy a house are high income earners and/or those with inheritance/family money. Neither of us are from a well-off family so there won't be much money coming in as we get old. (We love them and as I get old I truly understand how much they had to put up while raising us!) My husband and I dream about owning a house somewhere one day and hopefully retire when most people retire, but how are we going to make it happen? :| I guess a proper question to Bogleheads here would be, what could we do with our portfolio to get closer to our goal? :idea: Thank you in advance!

Emergency funds: yes (12 months of living cost in checking, savings, and CDs)
Debt: none (student debt paid off, good credit status)
Tax Filing Status: Married Filing Jointly
Tax Rate: 12-22% Federal, 6% State
State of Residence: CA
She: 39
He: 39

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20%? I don't know

Total portfolio: 200k

Taxable (excluding emergency funds)
5% checking
41% Savings (most of it used to be in CDs)
22% CDs

His OPR (401a from a previous job, considered rolling it over but haven't got around doing so)
1% MFS Value R6 (MEIKX) (0.47%)
1% Vanguard Total Intl Stock Index I (VTSNX) (0.08%)
1% Vanguard Small Cap Value Index I (VSIIX) (0.06%)
1% American Funds Europacific Growth R6 (RERGX) (0.46%)

His Roth IRA at Vanguard
5% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

His IRA at Vanguard
6% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

Her Roth IRA at Vanguard
6% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

Her IRA at Vanguard
4%Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)
7% Vanguard Target Retirement 2045 Fund (VTIVX) (0.15%)
_______________________________________________________________
Annual contributions
$3000-6000 his IRA/Roth IRA
$3000-6000 her IRA/Roth IRA
Figaro
Posts: 94
Joined: Sun Mar 24, 2019 9:34 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Figaro »

kinks wrote: Sat Nov 27, 2021 3:29 pm
Figaro wrote: Sat Nov 27, 2021 2:50 pm It's difficult to answer without knowing what your financial goal targets are. For example, if you want to be homeowners, how much are you looking at for a home? If you want to retire - what are your expenses going to be?

Your portfolio and net worth appears to be 200k with no debt. That is really good already, you just need to focus on saving and investing according to your 70/30 asset allocation then. Max out your deferred retirement space for retirement. If you're not in a hurry for the home (which by the post sounds like fomo, and purely emotional), then don't bother with going anymore liquid than you have to be - saving the 22% +6% now is really worth it down the line to grow your portfolio.

If you're in the 22%, then your income exceeds $105k - so how much are you saving each year and how much are your expenses?

Personally, I don't care much for intl allocation, so I'd focus on the Vanguard total Market for stocks.. your fund expense ratios are not too bad. Other than that, not too much to comment on just based on %'s.
Our combined income hangs around the 12-22% brackets. If we each earn 50k, it's a good year saving 30k-40k. It's only been for the last several years we have been able to save. We cannot afford a starter house around where we live which go beyond half a million so we are not in a hurry at all. We don't have any taxable investment accounts so I'm wondering if it makes sense for us to start something at this point.
Could I ask what you mean by "saving the 22% +6% now is really worth it down the line to grow your portfolio"?
When I made the comment of 22%+6% it was referring to the taxes that you'd pay if you didn't max out the deferred retirement accounts. Contrary to what people think, when you withdraw funds or Roth convert with no additional income streams in retirement, you will be withdrawing at 0% and 10% brackets. So the government actually subsidizes your retirement if you defer it away now.

It seems like it will be material in your case since you're on the borderline. MFJ with 100k combined income you're still in the 12% bracket. Even so, it'll still be worthwhile to save in the deferred accounts vs taxable or Roth in my opinion. Being that you'll likely be able to defer SS until a later age and start doing Roth conversions prior to your max SS age. You've alot of time left fortunately - your saving rate is pretty good comparative to income.

At this stage, focus on automating your savings into your retirement accounts. I would say even increasing it to continue maxing out both your employer based plans at about $20k per account + 6k each in T-IRA. With a healthy emergency fund, you could evaluate if it's risk adjusted enough to possibly reduce the cash position and save more into the retirement accounts (going into cash flow deficit until it's halved). Based on your expenses per month, unemployment would cover about 2-3 months of that. You might as well keep your money working for you.
sandan
Posts: 629
Joined: Wed Apr 03, 2013 12:48 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by sandan »

kinks wrote: Sat Nov 27, 2021 3:29 pm Our combined income hangs around the 12-22% brackets. If we each earn 50k, it's a good year saving 30k-40k. It's only been for the last several years we have been able to save. We cannot afford a starter house around where we live which go beyond half a million so we are not in a hurry at all. We don't have any taxable investment accounts so I'm wondering if it makes sense for us to start something at this point.
Could I ask what you mean by "saving the 22% +6% now is really worth it down the line to grow your portfolio"?
Since you already have a portfolio allocation of 70/30 it seems reasonable to have a taxable account with equity investments. Outside of I-bonds and EE bonds, most of my assets in non tax advantaged accounts are stock (with tax advantaged accounts holding a higher concentration of bonds). I think most bogleheads including myself, do this to manage taxes better and take advantage of capital gains tax rates. Overall, I'm not certain how the taxable investment account discussion is relevant to the home purchase.
Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

Ron Ronnerson wrote: Sat Nov 27, 2021 4:44 pm As for your hopes of owning a home, you should do a careful budget to see what you can afford. Interest rates are so low right now that you might be surprised by how that affects the math in terms of monthly mortgage payments. How much do you pay in rent?
MrCheapo wrote: Sat Nov 27, 2021 5:25 pm What is your current rental payment? Living in CA as well for us the biggest challenge was coming up with the downpayment. The rental expense vs mortgage expense was minimal as I recall $2000 vs $2x00 but that was 10 years ago.
Our rent is $1600, which allows us to save. I guess it really depends on the price of the house but the downpayment could easily be the entirety of our current cash savings... so that leaves nothing to invest. What I'm gathering is that buying a house that would require the entirety of our savings for the downpayment is beyond our range so we should figure out where/what we can afford.

Ron, thank you for sharing your experience back when you were at my age, which isn't that long ago!
Last edited by kinks on Sat Nov 27, 2021 11:32 pm, edited 1 time in total.
Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

Figaro wrote: Sat Nov 27, 2021 5:30 pm At this stage, focus on automating your savings into your retirement accounts. I would say even increasing it to continue maxing out both your employer based plans at about $20k per account + 6k each in T-IRA. With a healthy emergency fund, you could evaluate if it's risk adjusted enough to possibly reduce the cash position and save more into the retirement accounts (going into cash flow deficit until it's halved). Based on your expenses per month, unemployment would cover about 2-3 months of that. You might as well keep your money working for you.
Thank you for the tips. Neither of us got employer based plans. My husband had it just for a year in the past. Traditional IRA and Roth is all we got. We'll be maxing out our T-IRA or Roth for sure.
Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

sandan wrote: Sat Nov 27, 2021 7:00 pm Since you already have a portfolio allocation of 70/30 it seems reasonable to have a taxable account with equity investments. Outside of I-bonds and EE bonds, most of my assets in non tax advantaged accounts are stock (with tax advantaged accounts holding a higher concentration of bonds). I think most bogleheads including myself, do this to manage taxes better and take advantage of capital gains tax rates. Overall, I'm not certain how the taxable investment account discussion is relevant to the home purchase.
Thank you for your feedback. I have a large portion of my portfolio in cash, entirety of which may go to a downpayment in not so near future but hopefully one day, so that's why I'm wondering if I should put some of that in a taxable investment account or keep it in a safe spot.
onourway
Posts: 3778
Joined: Thu Dec 08, 2016 2:39 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by onourway »

Owning a home in most areas of California will be a stretch for you, but not entirely impossible. You ask the question "what could we do with our portfolio to get closer to our goal?" Yet, the primary question, in your shoes, is not related to your portfolio. You somewhat gloss over your income and expenses which will really be the deciding factor. I gather from your follow-up comments that you make ~$100k combined and save $30-40k. Do you run a tight budget - preferably a zero-based budget that accounts for every penny in and out to be absolutely sure of that number? How long have you been at this income and savings rate?

Other information we'd need includes what price range houses you are considering and what the monthly carrying cost of that mortgage would be? You don't necessarily need to put down 20% to buy these days - especially in VHCOL areas - but you should have a rock-solid grasp of your budget and be able to show the math, in advance, of how you are going to pay for the new expenses out of your current budget. On paper, if you were to take $100k out of your savings for a down-payment on a $650k house, you should have, depending on your tax rates and insurance, something around a $3,000/month mortgage payment on a $550k loan. At your current savings rate, you should have ~$3,000/month extra cashflow coming in that could be diverted from savings to house payments. At $1,600 current rent, you'd need $1,400 of that $3k to cover the new mortgage, and say another $600/month to put aside for maintenance and emergencies. That still allows you to save $1,000/month.

I don't know the California market well, and perhaps $650k is no longer even the bottom of the market in your area - but the above is the sort of calculation you need to do. Adjust for your actual buying price (and do a more accurate calculation with mortgage rate, tax, and insurance numbers) and you should be able to figure out exactly how much more you need to save in order to make it feasible.

On your portfolio, others have touched on this, but you are currently 68% cash which is extremely conservative and has hampered your growth dramatically - especially over the past few years when the market has been rising 20% or more a year. It is absolutely a truism that you should be holding money that you intend to spend in the short term in cash - however it doesn't sound like this has been the case for you. When many of the other people competing for housing have had their money in the market and seen a 50, 60, 70% rise in value over the past several years, it is very difficult for someone saving slowly but surely in cash to keep up.

Good luck and I hope we can offer further advice of use here.
YeahBuddy
Posts: 2499
Joined: Tue Oct 31, 2017 12:55 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by YeahBuddy »

To me it sounds like you could purchase a house in most low to moderate cost of living areas of the country. Debt free with $200k and no kids? Either use some of that portfolio (cash) to buy a house or reallocate to be more in line with your risk tolerance.

For us, home ownership was a top priority from our late 20s to early 30s. But we were somewhat broke. I both decreased spending a bit and increased my income and bought at the top of our price range. I borrowed from my old 401k to put down the 20%. I was actually surprised the mortgage company approved our loan. Oh and we had 2 young children, 1 unplanned. But then I went on to make much more money, as planned, and the mortgage is now cheaper than rent locally. And in 9 years I focused on retirement contributions and I've caught up nicely. And the house has appreciated some 80%.

All I'm saying is prioritize what's most important to you. If it's buying a house, then buy a house. I think you can afford it. If you want children, have children. But if you prefer to wait and increase your portfolio then do that in a diversified manner. Boglehead lazy 3 fund portfolio is a good one.

Cheers!
Light weight baby!
sandan
Posts: 629
Joined: Wed Apr 03, 2013 12:48 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by sandan »

kinks wrote: Sat Nov 27, 2021 11:26 pm
sandan wrote: Sat Nov 27, 2021 7:00 pm Since you already have a portfolio allocation of 70/30 it seems reasonable to have a taxable account with equity investments. Outside of I-bonds and EE bonds, most of my assets in non tax advantaged accounts are stock (with tax advantaged accounts holding a higher concentration of bonds). I think most bogleheads including myself, do this to manage taxes better and take advantage of capital gains tax rates. Overall, I'm not certain how the taxable investment account discussion is relevant to the home purchase.
Thank you for your feedback. I have a large portion of my portfolio in cash, entirety of which may go to a downpayment in not so near future but hopefully one day, so that's why I'm wondering if I should put some of that in a taxable investment account or keep it in a safe spot.
Strong recommendations are difficult to give since everyone's scenario is different, but I will use myself as an example.

I have also set aside money for a home purchase in a not so near future. When I purchase the home, most of the money will come from selling equity investments in my taxable accounts. On the same day, I will reallocate stocks to bonds in my tax-advantaged accounts to maintain a similar portfolio allocation. Similarly, when I sold my previous house, I put all the proceeds directly into taxable equity and reallocated equity to bonds in my tax-advantaged accounts.

I consider my savings account / CDs as emergency funds.

Overall, I prefer equity in taxable accounts because there are years where my income can dip into the 12% bracket and that qualifies me for 0% capital gains tax rate. This may be useful for couples during re-location or child birth years where there might be only 1 person in the household earning income.
Ron Ronnerson
Posts: 3563
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Ron Ronnerson »

kinks wrote: Sat Nov 27, 2021 10:42 pm
Ron Ronnerson wrote: Sat Nov 27, 2021 4:44 pm As for your hopes of owning a home, you should do a careful budget to see what you can afford. Interest rates are so low right now that you might be surprised by how that affects the math in terms of monthly mortgage payments. How much do you pay in rent?
MrCheapo wrote: Sat Nov 27, 2021 5:25 pm What is your current rental payment? Living in CA as well for us the biggest challenge was coming up with the downpayment. The rental expense vs mortgage expense was minimal as I recall $2000 vs $2x00 but that was 10 years ago.
Our rent is $1600, which allows us to save. I guess it really depends on the price of the house but the downpayment could easily be the entirety of our current cash savings... so that leaves nothing to invest. What I'm gathering is that buying a house that would require the entirety of our savings for the downpayment is beyond our range so we should figure out where/what we can afford.

Ron, thank you for sharing your experience back when you were at my age, which isn't that long ago!
You’re welcome. You mentioned that houses cost beyond half a million dollars in your area. Could you buy one for just above $500k that would meet your needs? The reason I ask is that if you use $100k toward a down payment on a $500k home (putting down 20%), you’d have a mortgage payment that is just about the same as your current rent if you get a 30 year loan at 3%. There would be additional expenses such as property taxes, insurance, and maintenance which might take your total monthly housing cost up another $1k or so to somewhere in the $2500-$3k range but, during the first year, roughly $700/month of your payments would go toward principal and is a form of savings.

As time goes on, more and more of the payment would go toward principal instead of interest. If you count mortgage principal as savings (which I really believe you should since this portion of the payment adds to your net worth), your current expenses go up maybe $500 or so from what you’re currently spending on rent. The $100k that you put toward the down payment won’t be available to invest in the market. However, unlike rent, your mortgage payments will stay fixed in the years ahead. Due to inflation, the real cost of the mortgage payments would go down over time. The value of the house may go up as well, though this isn’t guaranteed by any means. Importantly, you get to actually live in the house too.

You have to do a careful budget to determine if the numbers world work for you but one of the reasons prices on homes are so high at the moment is that the low rates which currently exist make payments smaller than they would have in the past when rates were higher.

Also, whether you choose to direct a big chunk of your savings into a house is a personal decision. It’s neither a good nor bad decision. It’s just a matter of priorities and choices.

Anyhow, run the actual numbers. That will likely provide greater clarity in terms of what is feasible.
Topic Author
kinks
Posts: 46
Joined: Mon Aug 10, 2015 7:23 pm

Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

onourway wrote: Sun Nov 28, 2021 5:16 am I gather from your follow-up comments that you make ~$100k combined and save $30-40k. Do you run a tight budget - preferably a zero-based budget that accounts for every penny in and out to be absolutely sure of that number? How long have you been at this income and savings rate?
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On your portfolio, others have touched on this, but you are currently 68% cash which is extremely conservative and has hampered your growth dramatically - especially over the past few years when the market has been rising 20% or more a year. It is absolutely a truism that you should be holding money that you intend to spend in the short term in cash - however it doesn't sound like this has been the case for you. When many of the other people competing for housing have had their money in the market and seen a 50, 60, 70% rise in value over the past several years, it is very difficult for someone saving slowly but surely in cash to keep up.
Thank you for your comments! It's only been for the last 3-4 years that we've been able to save that much and our job situations aren't stable enough to sustain that. I'm aware that our situations aren't stable enough to keep up with owning a house in CA but I guess I needed someone else to say it clearly. Relocating might increase our chance of owning a house but our jobs won't move with us. As for 68% cash, a lot of it was making a small progress in CDs until last year, and besides IRAs, we didn't think we were fit to invest in the market so we've been missing out. :|
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kinks
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

RobLyons wrote: Sun Nov 28, 2021 5:46 am All I'm saying is prioritize what's most important to you. If it's buying a house, then buy a house. I think you can afford it. If you want children, have children. But if you prefer to wait and increase your portfolio then do that in a diversified manner. Boglehead lazy 3 fund portfolio is a good one.

Cheers!
Thanks for writing in! People here are so wise.
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kinks
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

Ron Ronnerson wrote: Sun Nov 28, 2021 10:58 am
You’re welcome. You mentioned that houses cost beyond half a million dollars in your area. Could you buy one for just above $500k that would meet your needs? The reason I ask is that if you use $100k toward a down payment on a $500k home (putting down 20%), you’d have a mortgage payment that is just about the same as your current rent if you get a 30 year loan at 3%. There would be additional expenses such as property taxes, insurance, and maintenance which might take your total monthly housing cost up another $1k or so to somewhere in the $2500-$3k range but, during the first year, roughly $700/month of your payments would go toward principal and is a form of savings.

As time goes on, more and more of the payment would go toward principal instead of interest. If you count mortgage principal as savings (which I really believe you should since this portion of the payment adds to your net worth), your current expenses go up maybe $500 or so from what you’re currently spending on rent. The $100k that you put toward the down payment won’t be available to invest in the market. However, unlike rent, your mortgage payments will stay fixed in the years ahead. Due to inflation, the real cost of the mortgage payments would go down over time. The value of the house may go up as well, though this isn’t guaranteed by any means. Importantly, you get to actually live in the house too.

You have to do a careful budget to determine if the numbers world work for you but one of the reasons prices on homes are so high at the moment is that the low rates which currently exist make payments smaller than they would have in the past when rates were higher.

Also, whether you choose to direct a big chunk of your savings into a house is a personal decision. It’s neither a good nor bad decision. It’s just a matter of priorities and choices.

Anyhow, run the actual numbers. That will likely provide greater clarity in terms of what is feasible.
Thank you very much for breaking it down for me. All these years we've been caught up other stuff life throws at us and putting aside a lot of decision making that other people go through. Anyhow, there's a lot to think here. We are probably not fit to live with a $3000 housing cost for a long period especially as we age. It's been eye opening and helpful to hear people's inputs.
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Wiggums »

First let me say that you are doing better than the average person. I’m not sure what the best advice for you is. You are definitely holding too much cash that is losing ground to inflation. I get the impression that your income is variable (or unstable)? I’m not sure which is true. My gut feeling is that you should look for employment that pays more. That will position you better for a house and retirement.
"I started with nothing and I still have most of it left."
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Alto Astral
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Alto Astral »

You have 2 goals that you are trying to achieve. In my opinion, the order of priority is (1) Retirement, say, no later than 65 (2) Home.

I would make sure one goal does not put the other at risk. For example, do not over-extend on a mortgage that will need you to work beyond 65. Also, I would not save everything towards an aggressive portfolio and not have a downpayment.
kinks wrote: Sat Nov 27, 2021 2:37 pm Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20%? I don't know

Total portfolio: 200k

Taxable (excluding emergency funds)
5% checking
41% Savings (most of it used to be in CDs)
22% CDs
This is 68% of your portfolio or $136k. Per your desired asset allocation this much amount should be in equities.

Let's first get this money working for you. Put 10k in each of your names right away towards i bonds before the end of the year. Repeat in January 2022. This would add up-to $40k and could come from the 41% in your checking account. Do it again in 2023 and 2024. Note that you cannot access this fund for one year. However, it's very flexible beyond that. It could double-up as your emergency fund or even be used for a future downpayment. My favorite use of this to let them grow tax-free for 30 years as the bond portion of your portfolio and use them in retirement.
kinks wrote: Sat Nov 27, 2021 2:37 pm His OPR (401a from a previous job, considered rolling it over but haven't got around doing so)
1% MFS Value R6 (MEIKX) (0.47%)
1% Vanguard Total Intl Stock Index I (VTSNX) (0.08%)
1% Vanguard Small Cap Value Index I (VSIIX) (0.06%)
1% American Funds Europacific Growth R6 (RERGX) (0.46%)
At 4% of your portfolio, this is $8k. I would just rebalance everything into Vanguard Total Intl Stock Index I. You could do this today. This simplifies things when you eventually decide to rollover.
kinks wrote: Sat Nov 27, 2021 2:37 pm His Roth IRA at Vanguard
5% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

His IRA at Vanguard
6% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

Her Roth IRA at Vanguard
6% Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)

Her IRA at Vanguard
4%Vanguard LifeStrategy Moderate Growth Fund (VSMGX) (0.13%)
7% Vanguard Target Retirement 2045 Fund (VTIVX) (0.15%)
The IRAs make 28% of your portfolio. This is 56k. I would simplify this and put all of these funds in Vanguard Total Stock Market Index Admiral (VTSAX).

With the changes to old 401k+IRAs, your tax sheltered accounts would account for all the equities in your portfolio. This is a decent 32%. Now we need to increase this to 70% while saving towards a downpayment.
kinks wrote: Sat Nov 27, 2021 2:37 pm _______________________________________________________________
Annual contributions
$3000-6000 his IRA/Roth IRA
$3000-6000 her IRA/Roth IRA
If you are able to save $30-40k each year, I recommend making our 12k towards your tIRAs first. This will reduce your taxable income. Next, put 12k into your Roth IRAs. The Roth IRA could double-up as your emergency fund as you could withdraw the contributions (not earnings) without penalty.[Edit: as teen persuation pointed out "They can't put $12k into tIRA and another $12k into Roth IRA in the same year. It's a max of $6k each person per year, across both kinds of IRA."] If you've not maxed these out this year, I would use what is left of the Savings account after funding i bonds. This should bring your asset allocation closer to 70/30 in a reasonable way.
kinks wrote: Sat Nov 27, 2021 2:37 pm I'm turning 40 very soon...We live in CA ...Neither of us are from a well-off family...My husband and I dream about owning a house somewhere one day and hopefully retire when most people retire
kinks wrote: Sat Nov 27, 2021 3:29 pm Our combined income hangs around the 12-22% brackets. If we each earn 50k, it's a good year saving 30k-40k. It's only been for the last several years we have been able to save. We cannot afford a starter house around where we live which go beyond half a million so we are not in a hurry at all.
kinks wrote: Sat Nov 27, 2021 10:42 pm Our rent is $1600, which allows us to save. I guess it really depends on the price of the house but the downpayment could easily be the entirety of our current cash savings... so that leaves nothing to invest. What I'm gathering is that buying a house that would require the entirety of our savings for the downpayment is beyond our range so we should figure out where/what we can afford.
Spending only $1600 on housing in California is awesome. Heck, I used to spend this in Illinois 5 years back. Since you are willing to wait 5 years, I believe you should be able to find a reasonable place and buy something in the 500k range. However expect your housing cost to at least double after mortgage, property tax and home owners insurance.

You have a plan and an asset allocation. This is half the battle. All you need now is 10-15 years to let your savings and asset allocation make your portfolio grow. Overall, you have a decent shot at both stable retirement and home ownership
Last edited by Alto Astral on Sun Nov 28, 2021 7:22 pm, edited 1 time in total.
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kinks
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

Thank you very much for sorting it all out! It's like seeing someone makes you an awesome meal out of what I thought was just some food bits.
Alto Astral wrote: Sun Nov 28, 2021 4:51 pm Let's first get this money working for you. Put 10k in each of your names right away towards i bonds before the end of the year. Repeat in January 2022. This would add up-to $40k and could come from the 41% in your checking account. Do it again in 2023 and 2024. Note that you cannot access this fund for one year. However, it's very flexible beyond that. It could double-up as your emergency fund or even be used for a future downpayment. My favorite use of this to let them grow tax-free for 30 years as the bond portion of your portfolio and use them in retirement.
I know very little about I Bonds or bonds in general... I'm trying to understand why you'd recommend I Bonds over those other bonds included in my current all-index funds like VSMGX? I see that you are making it all clean and effective by doing this way. What's gonna happen after laddering them for four years? [edit; sorry now I understand -- you are talking about making the $40k work until we possibly use it for a downpayment.]
Alto Astral wrote: Sun Nov 28, 2021 4:51 pm If you are able to save $30-40k each year, I recommend making our 12k towards your tIRAs first. This will reduce your taxable income. Next, put 12k into your Roth IRAs. The Roth IRA could double-up as your emergency fund as you could withdraw the contributions (not earnings) without penalty. If you've not maxed these out this year, I would use what is left of the Savings account after funding i bonds. This should bring your asset allocation closer to 70/30 in a reasonable way.
Right now I have no taxable investment account. Some people say put equities in taxable accounts and bonds in a tax advantaged account, or the contrary for mid-low income folks who are going to be in a low tax bracket when they retire etc. I'm trying to wrap my head around that. Would you have anything to add to that? As for this year's IRA/Roth contribution, which we haven't made any yet, we might be on the borderline again, meaning $12000 in T-IRA would put us in 12% but $6000 would put us in 22%. Numbers are not quite set. I only ran a rough estimate but the maximum tax difference would be saving $3k-ish if we do all T-IRA and stay in the 12%.
Last edited by kinks on Sun Nov 28, 2021 7:12 pm, edited 1 time in total.
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teen persuasion
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by teen persuasion »

Alto Astral wrote: Sun Nov 28, 2021 4:51 pm
If you are able to save $30-40k each year, I recommend making our 12k towards your tIRAs first. This will reduce your taxable income. Next, put 12k into your Roth IRAs. The Roth IRA could double-up as your emergency fund as you could withdraw the contributions (not earnings) without penalty. If you've not maxed these out this year, I would use what is left of the Savings account after funding i bonds. This should bring your asset allocation closer to 70/30 in a reasonable way.
They can't put $12k into tIRA and another $12k into Roth IRA in the same year. It's a max of $6k each person per year, across both kinds of IRA. So if you max tIRA with $6k, that's $0 Roth IRA space left. If you contribute $3k tIRA, then you have $3k Roth IRA space left. Etc.
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Alto Astral »

kinks wrote: Sun Nov 28, 2021 6:23 pm Thank you very much for sorting it all out! It's like seeing someone makes you an awesome meal out of what I thought was just some food bits.
Alto Astral wrote: Sun Nov 28, 2021 4:51 pm Let's first get this money working for you. Put 10k in each of your names right away towards i bonds before the end of the year. Repeat in January 2022. This would add up-to $40k and could come from the 41% in your checking account. Do it again in 2023 and 2024. Note that you cannot access this fund for one year. However, it's very flexible beyond that. It could double-up as your emergency fund or even be used for a future downpayment. My favorite use of this to let them grow tax-free for 30 years as the bond portion of your portfolio and use them in retirement.
I know very little about I Bonds or bonds in general... I'm trying to understand why you'd recommend I Bonds over those other bonds included in my current all-index funds like VSMGX? I see that you are making it all clean and effective by doing this way. What's gonna happen after laddering them for four years?
See the I Bond Manifesto, which our very own Mel Lindauer helped craft. Answers to your questions:
  1. Why I Bonds over other bonds?
    • I believe I Bonds are like no other financial instrument out there. The US Treasury issues it so it is very low risk. You cannot lose money as the interest rate will never go below 0%. Right now the interest rate is at 7.12%. If inflation increases, this interest rate will increase.
    • The goal of any bond component in your portfolio is to provide stability and minimize risk due to volatility, inflation etc. Even cash could be the bond component of your portfolio. The beauty of I Bonds is that it is very versatile. It can be cash if you want it to be, CDs if your want it to be.
    • If you squint your eyes a bit and look sideways, it even looks like a tax-sheltered account. Meaning, you have to pay yearly tax over earnings on a CD/Savings but not on an I Bond interest. You can defer interest payments till you redeem it, which could be up to 30 year (and maybe in a lower tax bracket)
  2. Why not VSMGX?
    • This is a fine fund it has 80% equities and 20% bonds (source). It just makes a wee bit harder to calculate the bond percentage of your portfolio. I would recommend Vanguard Total Bond Market Index Fund so you have a simpler portfolio and better control over your asset allocation.
    • All bonds carry risk. Right now the yields on bonds are low, which is fine, since the goal is not to get returns on it. The goal instead is stability. The low yields is simply the price we choose to pay for the stability.
    • You cannot buy 100k of I Bonds today, even if you wanted to. There is an annual limit of 10k/person (you can create a trust each to add another 10k and get 5k in tax returns too, but those may not apply to you yet. You need a lawyer or software to create a trust etc). So everyone will have some other bond component. After I Bonds, I would recommend Vanguard Total Bond Market Index Fund for a simpler portfolio
  3. What happens after laddering?
    • I believe you are comparing it to a CD ladder, which is another way to look at it. Say you had 100k in i Bonds today, from Nov-Apr you would've earned a rate of 7.12% or 7120/2=$3,560.
    • Of course this interest rate would not stay this high over many years but it gives you an option to pull it out and re-invest elsewhere. Or make a downpayment on a house or car.
    • If you are able to keep it for 30 years, then you can just cash it out for expenses the first few years of your retirement while you let your portfolio grow. You could also cash it in retirement during the years the stock market is down, thereby not needing to sell stocks when they are low
kinks wrote: Sun Nov 28, 2021 6:23 pm
Alto Astral wrote: Sun Nov 28, 2021 4:51 pm If you are able to save $30-40k each year, I recommend making our 12k towards your tIRAs first. This will reduce your taxable income. Next, put 12k into your Roth IRAs. The Roth IRA could double-up as your emergency fund as you could withdraw the contributions (not earnings) without penalty. If you've not maxed these out this year, I would use what is left of the Savings account after funding i bonds. This should bring your asset allocation closer to 70/30 in a reasonable way.
Right now I have no taxable investment account. Some people say put equities in taxable accounts and bonds in a tax advantaged account, or the contrary for mid-low income folks who are going to be in a low tax bracket when they retire etc. I'm trying to wrap my head around that. Would you have anything to add to that? As for this year's IRA/Roth contribution, which we haven't made any yet, we might be on the borderline again, meaning $12000 in T-IRA would put us in 12% but $6000 would put us in 22%. Numbers are not quite set. I only ran a rough estimate but the maximum tax difference would be saving $3k-ish if we do all T-IRA and stay in the 12%.
I recommend to max out tax-sheltered account such as tIRAs/Roths before taxable. If you have money left over, you could invest in taxable and the recommendations apply (equities in taxable). However, I don't believe you are there yet. In a few years when you have more cash than you can stash tIRA and Roth IRAs, you could invest in a taxable account according to your asset allocation.

Whether you are in the 12 or 24% tax bracket, it still makes sense to reduce your taxable income. Remember, taxes are likely your biggest "expense". For example, in the 24% tax bracket, you would roughly pay 3k less in taxes (12*24%). In the 12% tax bracket you would pay 1.5k less in taxes. Not only that, you would've put those amounts instead towards your own retirement and it would grow tax-deferred and compound over many years. The miracle of compounding
Last edited by Alto Astral on Sun Nov 28, 2021 7:24 pm, edited 1 time in total.
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by Alto Astral »

teen persuasion wrote: Sun Nov 28, 2021 6:48 pm
Alto Astral wrote: Sun Nov 28, 2021 4:51 pm
If you are able to save $30-40k each year, I recommend making our 12k towards your tIRAs first. This will reduce your taxable income. Next, put 12k into your Roth IRAs. The Roth IRA could double-up as your emergency fund as you could withdraw the contributions (not earnings) without penalty. If you've not maxed these out this year, I would use what is left of the Savings account after funding i bonds. This should bring your asset allocation closer to 70/30 in a reasonable way.
They can't put $12k into tIRA and another $12k into Roth IRA in the same year. It's a max of $6k each person per year, across both kinds of IRA. So if you max tIRA with $6k, that's $0 Roth IRA space left. If you contribute $3k tIRA, then you have $3k Roth IRA space left. Etc.
Thank you for the correction. I incorrectly assumed that the tIRA limit was separate like the 401k. I will correct this in my earlier post as well
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teen persuasion
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by teen persuasion »

Alto Astral wrote: Sun Nov 28, 2021 7:15 pm
teen persuasion wrote: Sun Nov 28, 2021 6:48 pm
Alto Astral wrote: Sun Nov 28, 2021 4:51 pm
If you are able to save $30-40k each year, I recommend making our 12k towards your tIRAs first. This will reduce your taxable income. Next, put 12k into your Roth IRAs. The Roth IRA could double-up as your emergency fund as you could withdraw the contributions (not earnings) without penalty. If you've not maxed these out this year, I would use what is left of the Savings account after funding i bonds. This should bring your asset allocation closer to 70/30 in a reasonable way.
They can't put $12k into tIRA and another $12k into Roth IRA in the same year. It's a max of $6k each person per year, across both kinds of IRA. So if you max tIRA with $6k, that's $0 Roth IRA space left. If you contribute $3k tIRA, then you have $3k Roth IRA space left. Etc.
Thank you for the correction. I incorrectly assumed that the tIRA limit was separate like the 401k. I will correct this in my earlier post as well
401k limits are also combined, not separate.
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by tashnewbie »

OP: I've seen different numbers throughout the thread and want to confirm -- how much (in dollars) are you roughly able to save each year?

Your original post lists $6k to $12k total (divided between 2 IRAs). I've seen other posts about $30k-40k.
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kinks
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Re: Turning 40! Can we buy a house one day? Portfolio advice please

Post by kinks »

tashnewbie wrote: Mon Nov 29, 2021 10:21 am OP: I've seen different numbers throughout the thread and want to confirm -- how much (in dollars) are you roughly able to save each year?

Your original post lists $6k to $12k total (divided between 2 IRAs). I've seen other posts about $30k-40k.
$30k-40k is the entire annual saving in a very good year and it doesn't happen every year. Only for several years in the past. Out of that, $12k go to IRAs.
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