Principal P, return r, tax rate t.
Investing in the market earns Pr(1-t) annually. Buying a house earns Pr annually. So each period, one can take the tax savings of Prt, and reinvest it in the market at the rate Pr(1-t). I used 15-20% tax rates for a taxable account. 10% could be justified if capital gains are getting deferred for a long period. Technically, I should split the rental and capital components, which would allow the tax savings to grow over time slightly and make this look more attractive, but it wouldn't make a big difference. I also abstracted from time-value of money considerations for heavily deferred gains. Of course, one could invest in a taxable account, buy stocks which don't pay many dividends, and donate them all to charity or your heirs at death, in which case the taxable investment rate is effectively zero.
This is all sensitive to the ratio of rent to housing prices, net of expenses. It can vary a lot. If too high or low the r's won't be the same.
Where is the mortgage payment and property tax in this? IIUC, you are saying that the homebuyer is saving all this money in rent that they can invest. But doesn't that money actually go into paying for the home?
The example I gave you was intended to be of an up front investment of the total principal. This was after I explained that one of the major differences between investing and buying is that one is typically done on margin, which distorts the comparison.
This was just to make things more simple and apples to apples though. Obviously, most people don't have 300-500k or whatever to drop on a house in cash. The thing is, as long as total return is higher than the interest rate, you're effectively increasing the amount you invest by buying a house, because it is done on margin.
To put it another way, if your mortgage rate is 4% (with tax benefits and current rates it will usually effectively be lower), and you're earning 6%, the opportunity cost on the down payment ought to be compared against the net gain (2% let's say, 6-4) on the principal net of loan, which will typically start off being at least 4x larger -- in addition to the gross gain(6%) on the share with the interest paid off(say 20% down initially and increasing over time as it gets paid off). Your opportunity cost here is literally nothing, because most people don't weigh borrowing to buy a home against borrowing to invest more in the stock market.
Yet another way of saying this is that one of the major advantages of having a home is that it gives you easy access to credit to let you invest in an asset which will reliably pay you more than the associated debt (again, the tax benefits lowering the cost of debt helps).
The 5% I cited was intended to be net of property taxes. Property tax payments are different from the mortgage interest because they are paid in perpetuity. They are of course net of tax as well, which is nice and softens the blow, but ideally should be netted against the rental value when determining the flow payment.
Question for those putting spare money in a taxable account.
At Vanguard I have a taxable account where I put any extra money into VTI (60%), VEA (32%), and VWO (8%). I noticed there is an ETF for the world called VT:
https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT
I'm starting to think I can just replace putting money int 3 ETFs with one. I'm not going to sell my other ETFs since it's a taxable account, but just start putting money into VT instead.
Any good reason to stick with 3 ETFs instead of one?
Just wanted to say thank you to tokkun, Gruco and everyone else for the ongoing discussions. Despite following this thread since its inception 3.5 years ago (egads), I learn something new nearly every week.
This got me thinking on something tokkun touched on a few pages back. I was reading this article on foreign investments, and based on what it says and what you guys have said, I feel like I shouldn't have any foreign investments in my 401k because I wouldn't be eligible for a foreign tax credit on those dividends. I guess I'm just looking for some clarification on how I should handle my international investments. Right now, I've got a Roth IRA with this year's contribution nearly maxed and everything in FSTMX, and a 401k with a 40/20/40 split between FUSVX, FSEVX, and FSIVX. Should I move those funds out of FSIVX and only do any sort of international investing in a standard brokerage account, then?(You should also consider foreign tax effects when investing in foreign securities).
I had an interview yesterday morning for a much better job and they said they would be in contact "very soon" so I've been anxious about knowing every moment since I got home from the interview.
I have a former colleague who works at the same place and if his speculation on potential salary is correct I could be putting an extra $1000+ into investments every month. Trying not to put the the cart ahead of the horse here though because it was a fairly difficult interview and I'm not too sure on how they'll see it as going.
I wait with bated breath.
Am I misunderstanding the early Roth IRA penalty? It 10% unless you've contributed more than you've sold right?
We forgot to add my 1099 2 years ago and tge IRS was notified by Vanguard and they want full income tax or 3x what we sold to cover.
There's no early Roth penalty on what you put into it. There's only a penalty on earnings.
Boy I sure was understanding Roth IRA withdrawals wrong! I thought I would be completely penalized in general.
I only recently opened up a Roth IRA with Vanguard thanks to this thread putting it with a target date fund. Got a lot of a ways to go to max out the 5500 limit but I'm trying to knock 100 per paycheck to get the ball rolling.
So only my contributions can be within drawn. So does that mean if I say maxed the contributions limit of the $5500 but need to get it back selling off my fund shares in case of emergency, I can't contribution it back til next year if I already put in $5500?
Correct.
Great to know, thanks.
Makes sense thinking about it since the the $5500 money is post taxed.
This certainly makes me think about things. I have saved up 6 months of emergency funds, and now wondering if I should cram $5500 of into my Roth IRA.
This got me thinking on something tokkun touched on a few pages back. I was reading this article on foreign investments, and based on what it says and what you guys have said, I feel like I shouldn't have any foreign investments in my 401k because I wouldn't be eligible for a foreign tax credit on those dividends. I guess I'm just looking for some clarification on how I should handle my international investments. Right now, I've got a Roth IRA with this year's contribution nearly maxed and everything in FSTMX, and a 401k with a 40/20/40 split between FUSVX, FSEVX, and FSIVX. Should I move those funds out of FSIVX and only do any sort of international investing in a standard brokerage account, then?
I'm with tokkun preferring renting. I like stocks because they're handsfree if I don't want to worry about them and liquid if I do. Roth contributions are basically cash if I need to withdraw for an emergency. As an investment, I hate home-ownership because it's hands-on and illiquid. Time I'm spending on maintenance and compliance is time I'm not improving my skills, making progress on entrepreneurial efforts, or leisure. Time is way more valuable to me than money right now, so realtors can forget it unless the return is an order of magnitude greater than stocks...at least that was my previous opinion.
The lack of penalty on Roth withdrawals is a lovely benefit, but you really really need at least a basic emergency fund even before IRA contributions, even if it doesn't seem financially "optimal".
A rule meant to make it easier for retirement savers to trust their financial advisers began its long-awaited roll out on Friday. But investors may not want to let their guard down just yet.
Implementation of the retirement rule, which requires brokers working with retirement savers to put their clients interests ahead of their own, marks a major victory for consumer advocates, lawmakers and retirement groups who have been pushing for the regulation for more than six years. The rule, originally slated to take effect in April, was delayed by two months after President Trump signed a memo asking the Labor Department to reevaluate the regulation and determine if it is harmful for investors. Last month, Labor Secretary Alexander Acosta announced that he could not delay the rule any further.
Yet even as supporters of the regulation celebrate the milestone, many of them are reminding savers that the fight isnt quite over.
The fiduciary rule has faced robust opposition from Republicans and industry groups since it was first introduced by the Labor Department in 2010. But efforts to kill or weaken the rule intensified after the election, when Republican victories in Congress and the White House provided more momentum to people who say the rule will raise legal costs and limit options for investors. One provision tucked inside of a sweeping regulatory reform bill that was passed by the House of Representatives on Thursday would repeal the fiduciary rule and block the Labor Department from proposing a new fiduciary standard until after the Securities and Exchange Commission proposes its own rule.
Has this been posted yet? Student Loan Payoff vs. Interest Calculator
I plugged in my numbers, even tilting them in favor of paying off my loans, and the results came out overwhelmingly in favor of investing as opposed to paying off my student loans by a factor of 8 to 1. I figured it's better to invest as opposed to pay off, but I didn't realize just how much better it would be.
True, and I think that omitting the tax deductions just further proves the point that investing is a no-brainer compared to aggressive loan payment. You really only lose in a major recession. I'd be interested in seeing a scenario where it'd make sense to pay down a loan as opposed to investing. I couldn't find a more robust tool, but this was still enough to confirm my belief that investing as opposed to paying down my loans was justified.That's a simple function of rate of return being higher than interest charged. Add in a tax deductions on student loan interest, and the result tilts more in favor of investing. The one disclaimer is that the student loan interest is guaranteed to be incurred, market returns are not. Some people will choose the peace of mind of paying down the debt rather than accepting the risk of the stock market, and the higher the interest on the debt, the more rewarding this is.
True, and I think that omitting the tax deductions just further proves the point that investing is a no-brainer compared to aggressive loan payment. You really only lose in a major recession.
I'd be interested in seeing a scenario where it'd make sense to pay down a loan as opposed to investing. I couldn't find a more robust tool, but this was still enough to confirm my belief that investing as opposed to paying down my loans was justified.
That's a good point; since I'm 100% invested in stocks, I'm obviously thinking about this from a high-risk perspective. I can see where 2ish% on 10-year bonds versus about 7% on student debt makes it a much less appealing proposition.As has been said, it is not exactly a fair comparison pitting a guaranteed return against the expected value of a high-risk investment. If you compare it against a 10-year treasury bond, paying off the loan has a better return.
In the present day, pretty much any scenario where your investments are not 100% high-risk. I mean, if you have any bonds, you are probably better off selling them and paying off your loans first because bond rates are so low.
It is also more favorable to pay off loans during long periods of very low inflation (or deflation). Deflation has the double-whammy of reducing stock returns and increasing loan principle and interest in real terms.
I didn't think about the inflation piece either, which puts an interesting spin on the issue. But is that something to be concerned with or more of a theoretical concern? It looks like inflation rates have been positive since, uh, the Great Depression? The last time I took an econ course was like ten years ago, so I'm pretty naive on a lot of this stuff.
You pay a lot in opportunity cost for extreme liquidity with cash. Personally, I believe that is largely unnecessary in a society where you can pay for most reasonable expenses with a credit card.
I suggest putting it in VCIT for a modest amount of risk. That yields 3.2%.
I didn't think about the inflation piece either, which puts an interesting spin on the issue. But is that something to be concerned with or more of a theoretical concern? It looks like inflation rates have been positive since, uh, the Great Depression? The last time I took an econ course was like ten years ago, so I'm pretty naive on a lot of this stuff.
I still feel like, given my situation, continuing to invest would be the better plan, but I'm not 100% sure. You've seen my investment mix in previous posts; would you recommend paying off my loans or holding steady with my investment strategy?
Thanks a bunch for this and to everyone in this thread. I think my problem now is that I'm reaching paralysis by analysis. I've searched up many different funds for monthly income, funds with the highest yields/distributions, etc., and as someone who hasn't been dealing with investing for too long, it's overwhelming and difficult to tell which one is the smart one to invest in.
Are you referring to the federal funds rate? Also, I'm curious as to what information you're using to arrive at your conclusions. Obviously I don't have a lot of knowledge on the subjects, but that's why I'm in this thread.Inflation in the US has been low since the financial crisis; I say 'low' as in less than the traditional 2% target. I am not particularly worried about sustained deflation in the US at present, although Japan serves as the warning example that it can still happen to developed economies in the modern era.
Normally I am the type to advocate going with the higher expected value of stocks if you can tolerate the risk, however I think there is fair reason for doubt about what the expected value of stock returns will be over the period of the next 10 years. Valuations are pretty high based on historical metrics (and current corporate tax rates). That may mean below average returns in the intermediate term.
The tipping point for me with current stock valuations is an interest rate around 5%. Above 5%, I would pay off loans early, and below that I would make minimum payments and invest the difference. That is a non-scientific value I arrived at by splitting the difference historical average returns and historical returns based on valuations, with a little adjustment downward to account for risk.
Are you referring to the federal funds rate? Also, I'm curious as to what information you're using to arrive at your conclusions. Obviously I don't have a lot of knowledge on the subjects, but that's why I'm in this thread.
Interesting. I'll be reading that article later. So if I have 12000 principal with 6.8% interest, then you're saying my efforts should probably be focused on paying that down rather than investing that in the market? And that's because of the guaranteed 6.8% accrual versus the unpredictable market returns?No, I'm referring to the interest rate on a loan. If 5% or higher, I would favor paying the loan back faster, rather than investing extra money.
This is a fairly comprehensive article from last year talking about forecasting future returns based on valuations:
https://seekingalpha.com/article/3987114-predicting-stock-market-returns-using-shiller-cape-pb
It predicts a 4.3% return on US stocks (and this is prior to the "Trump bounce" so presumably it would be lower if computed today).
A couple addendums I would add:
- What the article calls "long term" is more like intermediate-term in retirement investing - roughly 10-15 years. Valuations tend not to matter as much when you are looking at money that will be invested for >25 years, as things converge to the historical mean over long enough periods. Valuations are also poor predictors of short-term performance.
- If Congress reduces corporate tax rates (which they have pledged to do, but may be very difficult to achieve), it would make the valuations of US companies look better. However this has already been priced into markets to some degree.
- This stuff is all based on back-testing, meaning it is only good as a predictor if the future behaves like the past, which is never guaranteed.
Is it smart to keep investing in Vanguard Admiral Index Fund at this point? It has become very pricey.
Yes to both, I mean this is my long term holding fund...average price went from $192 -ish in November to $227, I have almost no doubt it'll crash back to prior levels, but on the flip side...I don't think it'll totally crash.The per unit price isn't really meaningful as a unit could be for any amount of a fund/stock. You can buy partial units, right?
If you're concerned it might crash, nobody can really predict the market.
Interesting. I'll be reading that article later. So if I have 12000 principal with 6.8% interest, then you're saying my efforts should probably be focused on paying that down rather than investing that in the market? And that's because of the guaranteed 6.8% accrual versus the unpredictable market returns?
Is it smart to keep investing in Vanguard Admiral Index Fund at this point? It has become very pricey.
Is there any method by which I can transfer stocks I own that are not in retirement accounts into a retirement (or other tax-advantaged account) without getting swamped with capital gains taxes?
I unfortunately had more money than I could put into my IRA quite a few years ago, and those stocks have since then improved quite a lot in value. I'm guessing there's nothing I can do that'd help, but figured I'd check in with Retirement-GAF.