New risk averse HENRYs... critique

[Medica8ed]

Hi all, found WCI a few weeks back and have been consuming all the posts with hunger.

So my first post and all insights and suggestions gratefully received:

We're MD/PhD couple, low 40s with 2 kids under 8 in NY metro.

Combined income $550K, all CCs, student loans, debt other than mortgage paid off

Bought condo in 2007 $450K. Present value $480K. Paid mortgage off in 2013. Now renting giving 4% return (crappy given that I manage everything).

Bought "starter home" in 2011, currently $1.1M with $600K mortgage remaining @3.625%

$130K in emergency fund (cash)

Zero equities/bonds, retirement funds (moved to US from abroad 10 years back and never started)

 

Now the controversy...

Have invested in stocks over the years but missed all the big moves (and falls) along the way. Lifetime earnings for stocks -$20K. Not keen to start indexing now at the market top when I have a 3.625 guaranteed "bond" available to me instead.

Also dont believe in government regulated 401K program. Retirement ages will be set higher by the time I get there and I have no control over fees and withdrawal rates, so prefer to invest in things closer to me under my control. Most likely sell primary res, move back to our condo when kids leave and buy more rentals on retirement for cash flow.

Current plan is to kill the 600K on our remaining mortgage in next 4 years.

Thoughts?

 

 

 

 

 

[Donnie]

Immediately start contributing to any retirement, HSA, and back door Roth accounts that are available to the highest level you can. Do not pay down the mortgage instead of funding retirement. You have 90% of your net worth in two residential properties. No need to get even more concentrated by aggressively paying down the mortgage. I would sell the the condo. 4% (not sure if that is before or after expenses) is not great.

Assuming you have made ~$550k for 10 years since moving back to the US, your net worth of ~$1M is fairly low. Consider dialing back your spending while you build retirement savings and diversify your net worth.

[Lithium]

You've gotten 4% returns from renting (crappy as you admit).  Are you willing to live with that going forward?  If not, what are you going to do differently?

[hightower]

I agree I would leave the current mortgage alone for now.  And you need to contribute to your 401k to avoid paying taxes on those dollars and to get any company matches offered.  You're leaving money on the table and getting higher taxes by not contributing.  Being worried about it being "government controlled" is kind of unwarranted.  It's all about tax diversification.  That is money that will only be taxed when you withdraw it.  Whether it's at a later age or not doesn't matter, since you'll ideally have multiple other accounts to draw from (taxable, ROTH, HSA, etc).  Your taxable account will end up dwarfing your 401k anyway.

So, my suggestion is to keep your current living situation intact.  Don't pay extra on your mortgage.  Instead, start pouring extra cash (which you should have plenty) into the 401k, Backdoor Roth, HSA (if available), and a taxable brokerage account.  Don't worry about it being "at the market top"  The market is always hitting top, that's normal.  It doesn't matter if you start investing now as long as you keep buying and holding for the next 20 years or so.  You'll get a chance to buy at the bottom too.

It sounds as if the reason you've not made any money in the stock market over the years is because of your fear of market timing?  You seem to like only "guaranteed" things like paying off debt and bonds (even though bonds are not guaranteed either).  The problem with that is if you're not willing to take risk, you're losing out on growth that you desperately need. Plus, paying off your house and seeing that as guaranteed return is also problematic because you're not taking into account the very real possibility that the housing market could see another big downturn in the future and you could lose all that equity overnight.  If 90% of your portfolio is in real estate and you're 65 years old and not working anymore and we see a big 2008-like event again, you'll be in big trouble.  Diversify your investments.

[q-school]

you might be asking in the wrong place.  this forum is not filled with people who focus on real estate first.  if that is your strategy, you may be better off seeking opinions from alternate forums.

i think there are a fair amount here who do real estate investing, i'm not one of them.  i think however that there are a fair number here who choose to pay down mortgage quickly.  i'm not one of those either.  i think the number who would pay down mortgage over maxing retirement accounts here would be less than one hand's worth of fingers.

i look at it slightly differently than the always brilliant Donnie, and i think you are doing pretty well at saving and putting the money to work (esp given where you live and young kids).  it's just that in my very limited view of the world, your success (or failure) is going to be harder to know for a long time.  many people have done well by socking money away in real estate in new york.   it's just hard to imagine you wouldn't benefit from some diversification and you likely have tax breaks available to you that you can really use if you utilize your retirement space (and likely company match) that would almost certainly increase your statistical probability of increasing your net worth.

good luck!

 

[Hatton]

I also think you should hold off paying off the mortgage.  You need to at the very least max out your tax deferred space.  You make a nice income so let the investments work for you.

[wideopenspaces]

Paging Crixus . . .

 

So you've got a net worth of nearly 1M, but 90% in real estate. My net worth is half that, with 50% in real estate and I personally am not comfortable with that balance. So I've just stopped paying down extra on the mortgage to shove more into tax deferred retirement space, investing in a simple 3 fund portfolio. I'm guessing/betting that over the next 30 years I'll make more in index funds than in real estate. If you are worried about when you can access your retirement funds, you should also have a taxable account that you can access in the years prior without any penalties. If you are worried you're buying at the top of the market and it's going to crash, well, it'll then recover and in the meantime you'll get to buy at the bottom too. But if you're set on not investing in the stock market, I guess I'd try to get more properties now, not once you're retired. And I'd focus on duplexes, fourplexes, etc. And maybe go ahead and get a real estate license to save money when buying. But you should talk to people who really know what they're doing, as I certainly do not.

 

 

[Dreamgiver]

I echo the sentiment above. No retirement funds?!?! Is it a cultural thing that you are afraid of equities?Pick up a few books suggested on this website and conquer your fear. You said you lost money in the market? Were you handpicking stocks or trading options or trying to become rich quickly? Again, conquer your fear. Alternatively, hire a good financial advisor and let him/her help you. Because as it stands now you will be retiring on social security and 4% rental returns. Are you ok with that?

[Peds]

Lol you sound like you think 401ks are a scam...

[FIREshrink]

Medica8ed wrote:

Hi all, found WCI a few weeks back and have been consuming all the posts with hunger.

So my first post and all insights and suggestions gratefully received:

We’re MD/PhD couple, low 40s with 2 kids under 8 in NY metro.

Combined income $550K, all CCs, student loans, debt other than mortgage paid off

Bought condo in 2007 $450K. Present value $480K. Paid mortgage off in 2013. Now renting giving 4% return (crappy given that I manage everything).

Bought “starter home” in 2011, currently $1.1M with $600K mortgage remaining @3.625%

$130K in emergency fund (cash)

Zero equities/bonds, retirement funds (moved to US from abroad 10 years back and never started)

 

Now the controversy…

Have invested in stocks over the years but missed all the big moves (and falls) along the way. Lifetime earnings for stocks -$20K. Not keen to start indexing now at the market top when I have a 3.625 guaranteed “bond” available to me instead.

Also dont believe in government regulated 401K program. Retirement ages will be set higher by the time I get there and I have no control over fees and withdrawal rates, so prefer to invest in things closer to me under my control. Most likely sell primary res, move back to our condo when kids leave and buy more rentals on retirement for cash flow.

Current plan is to kill the 600K on our remaining mortgage in next 4 years.

Thoughts?

 

 

 

 

 

Click to expand...

Your blunt rejection of 401ks suggests a high degree of ignorance. Are you ready to listen and learn or not? Because otherwise we’re just whistling past the graveyard.

A net worth of $1,000,000 in your early 40s with a gross household income of $550,000 and not a penny in equities, bonds, or retirement accounts suggests you have a lot of learning to do.

[Lithium]

While I don't think much of the OP's investing strategy, I think calling it ignorant is more likely to trigger the backfire effect than get him to reconsider it.

With that said, OP, if you truly are interested in challenging your preconceptions about the 401(k), I think this post is excellent:

https://www.whitecoatinvestor.com/in-defense-of-the-401k/

 

[Kamban]

Medica8ed wrote:

Zero equities/bonds, retirement funds (moved to US from abroad 10 years back and never started)

Click to expand...

You and your spouse have been here for 10 years and yet not in a retirement plan?. If there was a match that was free money you left on the table because of your irrational fear.

I invested in a retirement plan in fellowship and during my early employed years, even though there was no match. I have not had a tax deferred retirement plan since then because being a soloist I could not afford to support all my staff's match. But I have still invested in stocks over the years.

Buying houses and managing it is a pain in the neck. And those returns are not that great unless you strike a gold vein of skyrocketing valuations. Commercial real estate is more tricky to get into.

My suggestion is to enroll in a retirement plan at work. And also invest in taxable retirement like 1/3 uS index stocks, 1/3 international index stocks and 1/3 bonds in Vanguard. Continue paying your mortgage. And invest some in 529 plans.

[The White Coat Investor]

q-school wrote:

you might be asking in the wrong place.  this forum is not filled with people who focus on real estate first.  if that is your strategy, you may be better off seeking opinions from alternate forums.

 

 

Click to expand...

Oh come on. There are plenty of real estate investors here including me.

The truth is that even with a $1.1M house, an income of $550K is enough to build wealth if they can just avoid the big mistakes. If they invest 20% of that every year, whether it is in paying mortgages, getting 4% on rental properties, or putting it into a more traditional stock and bond index fund portfolio, they'll probably be fine.

But a few thoughts:

# 1 The market is usually at an all time high. That's a reason to invest, not a reason not to. If you're not comfortable putting 90%, 80%, 50%, 40% or whatever of your portfolio into stocks, then fine, put in 20%. But I wouldn't skip the asset class.

# 2 Now you need to figure out what else you're going to invest in. Because invest you must. So if you like real estate, then make real estate the majority of the portfolio. Add a few bonds or pay off the debt with the rest and all of a sudden you've got a real portfolio there.

[The White Coat Investor]

wideopenspaces wrote:

 

 

So you’ve got a net worth of nearly 1M, but 90% in real estate. My net worth is half that, with 50% in real estate and I personally am not comfortable with that balance. So I’ve just stopped paying down extra on the mortgage to shove more into tax deferred retirement space, investing in a simple 3 fund portfolio.

 

 

Click to expand...

There's a misunderstanding a lot of people have. Paying off the mortgage doesn't increase the amount of money you have invested in real estate. If you own a $500K property, you have $500K invested in real estate whether it is paid off or whether you owe $600K on it. The mortgage is a separate portion of the portfolio, a negative bond if you will.

[q-school]

The White Coat Investor wrote:

q-school wrote:

you might be asking in the wrong place.  this forum is not filled with people who focus on real estate first.  if that is your strategy, you may be better off seeking opinions from alternate forums.

 

 

Click to expand…

Oh come on. There are plenty of real estate investors here including me.

The truth is that even with a $1.1M house, an income of $550K is enough to build wealth if they can just avoid the big mistakes. If they invest 20% of that every year, whether it is in paying mortgages, getting 4% on rental properties, or putting it into a more traditional stock and bond index fund portfolio, they’ll probably be fine.

But a few thoughts:

# 1 The market is usually at an all time high. That’s a reason to invest, not a reason not to. If you’re not comfortable putting 90%, 80%, 50%, 40% or whatever of your portfolio into stocks, then fine, put in 20%. But I wouldn’t skip the asset class.

# 2 Now you need to figure out what else you’re going to invest in. Because invest you must. So if you like real estate, then make real estate the majority of the portfolio. Add a few bonds or pay off the debt with the rest and all of a sudden you’ve got a real portfolio there.

Click to expand...

we agree that if they save enough, real estate will be fine to build a retirement around.  did you agree with the parts about nothing in retirement funds?  anti 401?

it's very hard to be all things to all people.   it is my opinion that there are real estate focused websites that would help them achieve real estate based wealth rather than this one.  they are much more likely to hear more suggestions to diversify and add to 401s here, and i read from the post they have a considered opinion that they believe they are better off with their current strategy.

i am okay with your disagreement with me (wci), but i don't think that the points you make are the reasons why i made my suggestions.  or at least i would love to hear why you wouldn't advise them to put at least some money into 401s?

truthfully i don't think they have posted enough to know what there savings rate is.  they may have paid off a lot of debt aggressively.  maybe early retirement isn't a focus for them.  i presume that if they kill a 600k mortgage in 4 years, they will go on to buy more properties and pay them off and build a stream of retirement income.  that is not generally my understanding of how fortunes are made in real estate, but i don't do it so i'm happy to learn more.

i thought real estate was about leverage and multipliers.  paying off debt quickly is not taking advantage of low mortgage rates etc.

their approach will be fine given they are actually saving quite a bit to pay off that amount of mortgage that fast, but imo their wealth could be optimized both by taking advantage of tax laws and retirement matches and also by leverage into more properties and probably 1031 exchanges etc.

as always, ymmv, jmo, etc