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Old 07-02-2009, 08:34 AM
 
163 posts, read 202,936 times
Reputation: 57
You don't always have to follow conventional wisdom. I have an 82 yr old co-worker whose worth millions (even after the drop) in just his apartment and he has an artwork collection. He got burned in stocks years ago and never went near them. I'm not recommending this, just showing an example that you don't need to follow conventional wisdom.

I parked my 401k in money market last Sept. before the steep drop, and stopped contributing as well when I bought my house earlier this year. I don't get a match (we get a tiny meaningless pension instead), but I may start doing 5% again to the money market for the tax savings.

Beware of anyone telling you to buy now because stocks are historically low. The market is being manipulated right now, there are ZERO earnings on the horizon and stocks are still averaging like 12x earnings price or some crazy # like that. Japans stock market went down after their bubble popped like 75% and never came back for 10 years (and still has not come back). Not saying this will happen - just withing the realm of possibility.

My Opinion: Stocks will be sideways for the next few years with more potential downside than up. I'd focus on the house and your family for now, and look at stocks again in a few years after all the gubber-mint manipulation runs it's courseand stocks are priced correctly. That is not the case now.
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Old 07-02-2009, 09:19 AM
 
95 posts, read 115,516 times
Reputation: 16
Yeah that's why we're advocating contributing at least the minimum supported by matching offered by her 401k - if your company gives you free money it should absorb up to a 50% loss and permit you to buy into a down market, even if the rabbit hole we go down is quite deep.

I think home prices, especially the mid market and upper range, are in for a rude awakening over the next year or so, so you can probably depend on the housing market to supply you with affordability. Even starter homes still have a way to fall, especially after the $8000 first time homebuyer's credit expires.
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Old 07-02-2009, 09:43 AM
 
2,348 posts, read 3,463,887 times
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My company contributes 0% !!
I was contributing 11% of my gross to 401k. I guess I can still do 2-3%....

Also let me ask you guys this.... lets say you move into a reasonably mint house.... how much buffer should you keep over your regular expenses (including everything... mortgage/tax/utilities and anthing you can think of), as per my calc I'll have about 350-500 per month to spare.... again I just want a ballpark, I know every house is different and its hard to predict but as a general thumbrule is that amount going to be enough ?

Note: I'll be following the philosophy.... if it ain't broken... don't fix it !! for maybe the first year in the house. (wishful thinking ? )
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Old 07-02-2009, 10:09 AM
 
95 posts, read 115,516 times
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A good rule of thumb should be to reserve 1% of the home's value per year in maintenance, even if you don't use it all you may have something big happen a couple years down the road.

I think 300-500 is extremely tight. You may want to keep more in reserve, and plan on building a rainy day cash fund to support yourself for 8 months, not including any home equity lines or anything else that can be instantly slashed by a bank.
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Old 07-02-2009, 11:35 AM
 
Location: Cary, NC
90 posts, read 115,458 times
Reputation: 64
I'd be really curious as to how many of the posters advocating not reducing your 401k contributions have always maxed out their contributions, especially considering a lack of a company match.

Here's my take. Money going in to 401ks are investments in different asset classes be it stocks, bonds, money markets, etc. Buying a house is also partially an investment in an asset class, that being real estate. While historically stocks have appreciated more in value over time as compared to real estate, long island home values have appreciated in value over time. Plus you get to live in house. If you were stopping contributions to purchase a depreciating asset like a new car, it would be a worse idea than putting money away to purchase another asset class.

Given the lack of a company match with your 401k, you might want to consider switching your contributions from your 401k in to a Roth IRA, subject to certain income restrictions. Because you do not get an upfront tax deduction with the Roth, you can always pull back your contributions (the money originally put in the Roth) without penalty (there would be penalties if you prematurely withdrew the gains). Then if you didn't need the money for the home purchase you could leave it in a retirement account for retirement.

While age 34 is a great time to be socking money away in your 401k to take advantage of time, the lack of a match somewhat changes the equation. Ideally, you might be able to cut spending in other areas to do both, but short of that a home purchase at potentially depressed prices is not a bad purchase.

Anyway, my guess is you are strongly leaning towards the idea and unless there is an overwhelming reason not to that is the path you are going to pursue. Before you do look at your budget to see if the money can come from elsewhere but if thats what you want to do, don't overreach on the house so that you can't re-start your contributions, and make sure the money earmarked for the house goes to the house. Because the biggest downside of stopping contributions is the risk the money disappears, or once you have a house and the expenses that go with it you can't restart your 401k contributions. Good luck to you.
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Old 07-02-2009, 11:44 AM
 
2,348 posts, read 3,463,887 times
Reputation: 474
Quote:
Originally Posted by rf22777 View Post
I'd be really curious as to how many of the posters advocating not reducing your 401k contributions have always maxed out their contributions, especially considering a lack of a company match.

Here's my take. Money going in to 401ks are investments in different asset classes be it stocks, bonds, money markets, etc. Buying a house is also partially an investment in an asset class, that being real estate. While historically stocks have appreciated more in value over time as compared to real estate, long island home values have appreciated in value over time. Plus you get to live in house. If you were stopping contributions to purchase a depreciating asset like a new car, it would be a worse idea than putting money away to purchase another asset class.

Given the lack of a company match with your 401k, you might want to consider switching your contributions from your 401k in to a Roth IRA, subject to certain income restrictions. Because you do not get an upfront tax deduction with the Roth, you can always pull back your contributions (the money originally put in the Roth) without penalty (there would be penalties if you prematurely withdrew the gains). Then if you didn't need the money for the home purchase you could leave it in a retirement account for retirement.

While age 34 is a great time to be socking money away in your 401k to take advantage of time, the lack of a match somewhat changes the equation. Ideally, you might be able to cut spending in other areas to do both, but short of that a home purchase at potentially depressed prices is not a bad purchase.

Anyway, my guess is you are strongly leaning towards the idea and unless there is an overwhelming reason not to that is the path you are going to pursue. Before you do look at your budget to see if the money can come from elsewhere but if thats what you want to do, don't overreach on the house so that you can't re-start your contributions, and make sure the money earmarked for the house goes to the house. Because the biggest downside of stopping contributions is the risk the money disappears, or once you have a house and the expenses that go with it you can't restart your 401k contributions. Good luck to you.
Thanks a bunch for the detailed explanation. I think I would be able to get back on track with the contributions within 2 years.... I know its a long time and I might lose a bunch of $$$ if the stock / money market assets give double digit returns in the next 2 yrs.... but my existing 401k will surely reap the benefit as I'm leaving it untouched, its just that there will be a temporary stop in the inflow of funds into it.

About housing, not sure, my take is that we may see the bottom in the next year or two maybe, but I have a house that I like in a good area so as you guessed we are very excited. Today we can make this work, tomorrow, we may not even with lower prices because of the high rates (obviously we do not have a loads of cash)
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Old 07-02-2009, 03:34 PM
 
Location: College Point, Queens
537 posts, read 1,022,267 times
Reputation: 365
A smaller amount in a Roth IA may indeed be a good idea, RF. Not only can you get to the principal in an emergency, but I'm hdeging when we retire in 30 years or so (I'm 31) tax rates will be much higher--making the Roth IRA a boon.
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Old 07-02-2009, 04:35 PM
 
Location: bay shore
518 posts, read 1,029,872 times
Reputation: 94
if anything u should just reduce your contributions to whatever the minimum allowed is. thats what i did when i bought my house, knocked it down to 1%, putting an extra $30 or so a week in my pocket. and if u decide you are making it just fine and dont need the extra liquid cash, u can always bump your contribution back up to whatever you want.
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Old 07-03-2009, 03:35 AM
 
28,597 posts, read 24,528,524 times
Reputation: 15942
Quote:
Originally Posted by Wes927 View Post
A smaller amount in a Roth IA may indeed be a good idea, RF. Not only can you get to the principal in an emergency, but I'm hdeging when we retire in 30 years or so (I'm 31) tax rates will be much higher--making the Roth IRA a boon.
for our baby boomer generation im planning around the last 40 years of history.. first off id be quite surprised if any political group would tell 180 million retired voting baby boomers we are raising your income taxes...... i dont know many people who will be in a higher tax bracket with no pay check then they are with a pay check........ they may raise every other tax especially inheiratance taxes as the dead dont vote but i think for most americans income tax is safe.

every year for the last 40 years taxes have dropped as the brackets are raised to allow 3% or so more income at lower and lower levels..

do you know a retiree can withdraw 35,000 bucks in retirement money and pay as little as 1500.00 in tax..... for most of america roths will not be a great deal i think.... in fact one of the reasons next year i believe the gov't is removing the come limit on roth conversions is they also realize most of america will not be in a higher bracket with no pay check then when they are working...... most of us will also be living in places with low or no state taxes too sooooooooooo folks analyze your situation very carefully before deciding whether a roth is a better deal for you....
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Old 07-03-2009, 05:24 PM
 
Location: Sound Beach
2,155 posts, read 4,401,397 times
Reputation: 823
I agree with the sentiment of buying a house that you can afford WITH your current 401K contributions. The mere fact that you are buying 401K shares at such a reduced cost should outweigh what you'll get in equity for the next 3 years. At least stay in it up to the match.
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