When will I invest outside of retirement?

May 11, 2011 · 16 comments

Kevin at Thousandaire.com asked an interesting question in the comments section of my most recent Net Worth update. He asked…

When are you going to start investing outside of your retirement accounts?

A valid question seeing that the only dabbling I’ve done in the stock market has been strictly related to retirement planning. To many of you, it probably appears as though I’ve overlooked short term investing. I beg to differ.

Although Girl Ninja and I don’t plan on buying a house in the immediate future we know that we don’t want to be renters forever. We’ve also read reports that indicate rent increasing between 4% – 8% a year for the next few years. It’s also probably safe to assume that interest rates will also rise in the next year or two (the difference between a 5% and a 7% mortgage loan can literally end up costing tens of thousands of dollars more over the life of the loan).

So Kevin, I challenge your assumption that Girl Ninja and I aren’t investing outside of retirement. In fact I’d argue that we are aggressively pursuing short term investing opportunities…via our savings account :).

We’ve been throwing $3,000 to $5,000 a month in to our savings account in hopes of building a sizable down payment quickly (between $60k-$100k). Can you imagine how great things will be once we reach this threshold (hopefully as early as this winter)!? If we have cash we can buy what we want, when we want.

We will have the ability to take advantage of interest rates while they are at one of their lowest rates ever (saving us hundreds of dollars a month).

We can put down 20% (saving another $100-$200 a month since we won’t pay PMI).

We could save tens of thousands of dollars by buying a house in a relatively flat market (this of course assumes house prices will begin to increase over the next few years).

And if for some reason we decide to NOT buy a house in the next few years, we will enjoy having a boatload of money in our savings account… Which we can then use to do things like short term investing in the stock market, travel the world….and by world I mean the United States, have 17 babies and get a reality TV show deal, but MOST importantly, I can buy that darn unicorn I’ve always wanted.

What short term investing strategies are you taking advantage of? What are you actively doing to better your financial situation outside of saving for retirement? I say there is more to “investing” than the stock market, what say you?

{ 16 comments }

1 Jessicaw

Good for you to save for the downpayment on your house. Smartest investment plan at your age and stage in life….and if you want a sweet deal on a sunny condo on a pond 15 min outside of Seattle, dont forget to let me know ;-) start investing more after the house.

2 Austin

No investing in the short term to speak of :( We do have one of those fancy high-yield savings accounts, though. Unlike you Ninjas, my wife and I are very ready stop renting. We’ve batted around a bunch of scenarios involving down payments and PMI and such; and because home prices in North Texas kick a$$, PMI isn’t a huge concern. If we can lock in a 5% 30-yr loan for $185,000 our PMI is only $80 a month if we put down $18,500. Word to your mother. I think it won’t be until after we get into a house that we consider short-term investing…. although I’m trying to convince my wife to let me have a couple thousand bucks to just “play with” in the stock market. Now that I write that out, it sounds pretty stupid. Maybe I should start researching more about how to “play” the stock market…..

3 Larry

Kevin is probably referring to investing in individual stocks/bonds and/or mutual funds in a taxable rather than a tax-deferred account. Presumably the advantage of a taxable account is that you purchase the assets with after-tax dollars and then pay tax at the lower capital gains rate rather than as ordinary income as with a traditional IRA, though you may also have to consider trading costs and taxable dividends. On the other hand, in a Roth IRA you purchase the assets with after-tax dollars, and if you leave the money there for 5 years and don’t touch it until you’re 59 1/2, you pay no tax at all under current law. Certain investments like REITs are also placed best in a tax-deferred account. Personally all my investments are in tax-deferred or tax-free accounts, and I don’t miss having taxable investments at all.

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

4 Ninja

Good to have you back larry, I thought I lost ya for a while there :)

5 Larry

Somebody managed to misplace me, and it took more trouble to find me than it’s worth explaining.

6 slug | sunkcostsareirrelevant.com

OK, so the next question is what will you do to diversify beyond your real estate holding, which by way of a large down payment will become a significant portion of your net worth. And, will you allow changes in your new home’s value be a variable in your net worth calculation? I recently posted about calculating mine both ways.

7 Ninja

You’re right we will have a decent chunk of our “liquidity” tied up in our house once we make a purchase, but when it comes to home ownership I’m not looking for a five year place. When we buy we will do so with the intentions of staying put for 10+ years. This will help mitigate any dependence we have on housing values in the short term. If we don’t want to or need to sell then it doesn’t matter if our house has appreciated or depreciated.

My second means of diversification is simple; continue to work, and get promoted. By making more we can build up our savings again, making us less dependent on home value. We can then begin to shift our focus to whatever we want, even investing in stocks/bonds/etc.

Lastly it’s important to remember that I have both a 401k and a Roth Ira. The Roth is after tax so I can essentially treat that as another savings account buffer since I can take contributions out at any point. I’ll be blogging about this soon. I’m investing for retirement in my Roth, but can get that money quicker if I want.

8 Kevin @ Thousandaire.com

Well I’m glad you at least have a good reason that you aren’t using the stock market. I can definitely understand the allure of cash, even though you could potentially get to that 20% down payment faster if you pick the right stocks. But I digress. I can accept that you just want to use a savings account.

You have $33k in your savings account. That’s good for a 20% down payment on a $165k house. When you get to $50k, that’s good for a $250k house. (not to mention that you have like $15k in your checking) At what point (if ever) are you going to be comfortable with your cash savings and be willing to invest in the market outside of your retirement accounts?

9 StackingCash

You could “potentially” get to that 20% down payment slower if you pick the wrong stocks.

10 Evan

If I am not mistaken he is buying a house in a location where 250K is likely to buy him 200 square foot condo….if I had to guess the number is going to be closer to 100K in cash, but even then what’s the point of getting into the market until AFTER you purchase the house since you don’t know what closing/fixing up is going to cost him.

Or maybe I am just projecting

11 Ninja

You’re right. We are looking at more like a $400,000 purchase price for something over 2,000 square feet in a decent neighborhood. $250,000 would either put us somewhere we didn’t want to live (rural) or in something smaller than would be comfortable for a five to ten year time horizon.

12 krantcents

If you invest your savings in a Roth IRA, you can withdraw the principal without penalty for your down payment. I have a brokerage account and the advantage is any earnings will be taxed a capital gains rates. I am holding that account for retirement as an additional source of income.

13 Larry

Another advantage of a taxable account is the ability to offset capital losses against capital gains.

14 StackingCash

Nice! Sticking to your blogs namesake :) That big down payment will save you so much in interest. Your defeat of Sallie Mae will be nothing compared to defeating a mortgage. Let me tell you how much my rent is now… $250 a month which equates to property tax and insurance. Of course we have home maintenance stuff and what not, but our home is pretty modest and our emergency fund is enough to handle stuff insurance will not cover. Oh don’t be jealous because paying off our home required great sacrifices and I mean GREAT SACRIFICES. Still it’s nice to have that result of burning the mortgage sooner than later.

Lately I was kicking around the idea of putting my toes back into the market but looking at it right now, down 142 points, it’s just too crazy. I’m doomed to be once bitten forever shy. That’s ok because I don’t fear the market anymore and my rate of return is what I make it depending on how much we decide to put into our savings. To me that is exciting enough :)

By the way, make sure you by a home that’s energy efficient. Recently here in Las Vegas the utility companies are trying to raise their rates because of all the empty homes here. Paranoid me feels they need to keep up their “tax” on us to maintain the CEO’s salary. I want to punch utility companies in the face!

15 Parker

I just started to invest outside my retirement within the past year. I waited until all of my retirement vehicles (401k/Roth 401k/IRA) were maxed out. Then I started to pay extra money, about $100 per month to the principal on my mortgage. Then I started working toward my 6-12 month emergency fund.

Now I put aside some money each pay period for stocks, ETFs, or Lending Club. I have learned that messing with stocks is not for everyone and takes some serious resolve and a game plan.

16 Rafiki

I actually think your action plan is awesome. Many people don’t consider it anymore but cash is still king. weather it is digital(just numbers on the screen) or smelly and green(dollar bills). Investing has taken the world by storm but it carries a risk with it.

Also. That Unicorn picture is super awesome!

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