So much of retirement planning is based on the assumption that your retirement income will be less than your pre-retirement income. Then, bam, you end up with a required distribution that changes that assumption completely.
2 Likes
Doubling in price may sounds like a large gain, but doubling in price over a period of 15 years is equivalent to a 4.7% annualized increase â roughly the historical average for increase in home value. In contrast from mid 2008 to present, the S&P 500 had an annualized return of ~11.5% (exact value could be +/- 2% depending on when in 2008 comparison begins).
Of course when considering net financial return, one needs to consider more than just annualized increase of home/stock value.
2 Likes
Sure but as I stated, our real estate doubled in 2 years - those are real dollars as we both bought and sold in that time frame. You just cannot use national averages. Itâs an interesting exercise, but as I said, your standard deviation is just too low - you canât use a national average as real estate is local and the swings are absolutely local.
Real estate is so unpredictable. We bought a house in 1984, sold it in 1988 for double what we paid. That was a great return on investment. Bought our current house in 1988. Now 35 years later itâs worth double (probably 2.25 times) what we paid for it. That is not a great return on investment.
3 Likes
Our home is about the same. The houses in our neighborhood doubled in about 4 years before we purchased, and ours was about the highest priced when we got it in early 2006.
BUT, we didnât have to pay for private schools, and we bought it to live in, not for an investment.
I only started maxing out retirement savings once kidsâs college fund was well taken care of, but I always contributed at least the match amount.
2 Likes
Itâs certainly not always a 100% return or winning financial strategy. As touched on in the examples from the original post, the relative financial return depends on how the saving on rent expense compares to the extra spending on mortgage interest, property tax, home maintenance & repairs, etc. It also depends on the specific rate of value increase of the home and 401k investments.
Many people do take out 401k loans for a home downpayment, which is an option with typical 401k plans. I believe the max 401k loan is usually the lesser of $50k or 50% or 401k value. The calculation for net financial return is similar to 401k savings. However, there are some additional caveats. Examples include needing to quickly repay 401k loan if lose job or face 10% early withdrawal property, increased risk of overextending due to not considering 401k loan payments in mortgage debt to income limits, and getting in the psychological habit of seeing 401k as a fund source for expenses rather than long term retirement vehicle.
2 Likes
You can plug in the specific numbers for your specific financial situations including SD for your real estate market, but doubling in 2 years is not reflective of the typical standard deviation in any region of the US.
You mentioned being in the SF Bay Area. Case Shiller since 1987 for SF Bay shows an average SD of 11% per year. The highest average gain over a 2-year period was 55% from early 1999 to early 2001. The worst average 2-year loss was 45% from mid 2007 to mid 2009. The typical year-to-year change was a small fraction of these best/worst extremes.
Also keep in mind that there are max 401K amounts imposed by the government
Employee Annual 401(k) Contribution Limits
| 2022 Limit | 2023 Limit | |
|---|---|---|
| Maximum Employee Contribution | $20,500 | $22,500 |
| Catch-Up Contributions for those 50 or Older | $6,500 | $7,500 |
Honestly, for somebody with a high salary this is a rather low amount. You will need to put money in other investments also.
The timing can work right. At 50 we had the luxury of being able to put in the extra money (tuition and home paid for).
1 Like
We bought in 1997 for 224,000 and sold in 1999 for 523,000 - I donât really care what Case Schindler says - this is what we actually experienced - as I said - your standard deviation is wrong;. you can continue to flog national averages, but it is not indicative of what people actually experienced.
We bought in 1997 for 224,000 and sold in 1999 for 523,000 - I donât really care what Case Schindler says - this is what we actually experienced - as I said - your standard deviation is wrong;. you can continue to flog national averages, but it is not indicative of what people actually experienced.
Thatâs not how you compute a historical standard deviation. It does not prove âyour standard deviation is wrong.â The previous post also did not list the national average. It was specific to SF Bay market.
1 Like
Computing a standard deviation with zero degrees of freedom isnât a good idea.
1 Like
As a reminder that CC is supposed to a friendly and welcoming place. Personal attacks are not permitted and will be deleted.
Yes, when I said maxing out, I meant putting in the most we could legally, before and after 50. We are already retired.
We targeted college fund before maxing out retirement, but we always saved for retirement also.
We also did not purchase as much house as we could according to our income, as part of our savings equation.
All of these âbucketsâ are tough to balance and decide, unless youâre very wealthy.
Many higher income people use a health savings account like a 401k to increase the amount.
1 Like
One can typically also add $6.500 to retirement IRA in addition to 401k + HSA limits above. If above income limit, one can still do a backdoor conversion. Mega-backdoor may also be possible, for higher limits.
So between (non-deductible) IRA and 401k, $29,000 per person (if still under 50) - $58,000 if two earners with 401k.
An additional $8,500 per person if over 50, $19,000 if two earners.
Plus $7,750 to an HSA (for family coverage), or an extra $1,000 if over 50.
And of course 529s for each kid, amounting to hundreds of thousands - since this is College Confidential.
One can choose to do some serious tax-deferred saving each year (more than most familiesâ net income), before having to resort to taxable investments.
1 Like
A mortgage on owner occupied housing is basically a substitution of renting the money for renting the residence.
If the investments happen to be ones that commonly produce yearly taxable income, then deferring such taxable income until the end point means that you get the investment gains (at least you hope for gains) on that money before it is paid in taxes.
We had kept a portion of our investments in tax free bonds (state and federal tax exempt). This way we got income without taxes and these funds were still available for our use before retirement.
IRA and 401K defer tax, other investment can get you tax free income (no tax better than deferred tax).
1 Like
Donât forget today many do a Roth 401k. My son and I just did his this weekend and after explaining the nuances, he chose via the Roth, especially given this year will have just six months of income and a lower tax rate.
Back in the day, we didnât have Roths. At my employer, I donât believe we do even today.
In this case thereâs no deferral. I am not sold on Roth per se. Like @kiddie I have muni bond income and the argument for Roth is your income and tax rates will be higher later. But if you accumulate wealth via minis, that wonât necessarily be true.
2 Likes