Dialing back 401k until both kids are in PK3

[Anonymous]

We're looking at buying a house that needs some work, but is in a great school district and otherwise fits our needs. We can afford the down payment and the monthly payment within our current budget (which maxes our 401ks), but don't have the cash to make the place really livable. We have a 1yr old in daycare and a 3 yr old in PK with aftercare expenses.

We've had some relatives offer us a loan to get some work done on the house. They'd lend us $50k, and we'd document and model it by IRS standards (https://www.nationalfamilymortgage.com/afr-rates/) and pay back over 5 years.

So we'd be paying back our relatives $833/month, which we'd be taking directly out of our current 401k allocations. This is almost exactly the difference in cost between our daycare and PK3 before/aftercare - meaning that in 2 years, we'll be able to go back to fully funding our 401k when our 1yr old is in daycare.

I know we'll be missing out on compounding interest during that 2-year period...but it probably needs to be weighed against the increase in the value of the house, right?

Thoughts on this tradeoff?

[Anonymous]

i'd probably only do this if the place literally is not livable at all in its current condition and the upgrades are a necessity.

but either way, if you are reducing contributions for only a couple of years, it isn't the end of the world. I just wouldn't do it unless I absolutely had to.

[Anonymous]

I'd do it - you're basically talking about reducing your 401k contribution by $20k during those two years? I wouldn't necessarily do it for longer than the daycare years, and I'd toss any extra cash that you come into back into the 401k during that period, but I think it sounds perfectly reasonable.

[Anonymous]

Why not just hold off on the "work" for a few years until the kids are no longer in daycare / pre-K?

How urgent is it, really?

Took us a looooong time (years) before we could remodel our kitchen and bathrooms.

[Anonymous]

Took us a looooong time (years) before we could remodel our kitchen and bathrooms.

(PS and they were pretty awful when we moved in!)

[Anonymous]

I would do that but I want to also caution you that after daycare ends you will have summer camps, spring break camps etc. that are not cheap.

[Anonymous]

I wouldn't borrow from family. I'd rather take a 401k loan. Problem is your renovation budget is likely too small for this area.

[Anonymous]

I agree that unless the house is dangerous you shouldn't slow your retirement. 401k loans also slow retirement.

[Anonymous]

How well funded are your 401ks so far (ie, did you start young and max out all along or did you just start 2 years ago)?
Will you still be contributing enough to your 401ks to get any match offered by your employers?
Is the 50k really enough to do the work you're talking about? What do you mean when you say it is needed for the house to be livable?

[Anonymous]

We moved into a house 9 years ago and the plan was to redo the kitchen. It is updated - but not renovated from the original 1937 footprint.

We decided to finish the basement 1st, and then needed to enclose a screened in porch for an office, and the original bath we modernized as it was really tight for 3 kids.

We are hoping to get the kitchen redone in the next 3 years after we have paid off all of the above.

If I had the financial flexibility to have done the renovation earlier, I would have jumped on it.

[Anonymous]

OP here.

We're 37. We have about 500k between the two of us in our 401Ks. We actually took our max 401k loan (100k between our two accounts) as a bridge loan to buy the new property, so that we can buy without having to sell first.

We need to do about 125k in renovations on the new place. We will clear between 85-130k in profit on the sale of our current place after we pay back all the loans. If we wind up selling on the low end of our expected range, we'll be coming up short to do all the needed work, so that's why we were looking at 1) keeping one of the 401k loans or 2) taking the intra-family loan.

When I do the projections of paying back the 401k loan over 5 years, and basically halving my 401k contributions for 2 years so that I can manage the loan from a cashflow perspective, it projects out to about a 30K or so reduction in future value at age 62.

So, the trade is really: get 50k now to do work that makes the house livable & increases its value ...at the expense of 30k less in 25 years. I think we'll probably take that gamble (and do some catch up contributions later in life to make up some of it, if all goes well).

[Anonymous]

How the Hell do you reduce your contributions by $50k over the next two years and only reduce the FV of your retirement accounts by $30k? You're being dishonest somewhere.

[Anonymous]

Anonymous wrote:How the Hell do you reduce your contributions by $50k over the next two years and only reduce the FV of your retirement accounts by $30k? You're being dishonest somewhere.

Op has some confounding elements she's looking to take $50,000 from family repaying that at $830 a month. However in order to do so she needs to stop contributing to her 401(k) for a period of two years. Thus the relevant calculation in simple terms is The value of the $20,000 she would have contributed over the period compounded.

Regardless OPs math is fucked. $20,000 put in an account today and allowed to accrue for 30 years at 6% is $114k.

[Anonymous]

Anonymous wrote:

Anonymous wrote:How the Hell do you reduce your contributions by $50k over the next two years and only reduce the FV of your retirement accounts by $30k? You're being dishonest somewhere.

Op has some confounding elements she's looking to take $50,000 from family repaying that at $830 a month. However in order to do so she needs to stop contributing to her 401(k) for a period of two years. Thus the relevant calculation in simple terms is The value of the $20,000 she would have contributed over the period compounded.

Regardless OPs math is fucked. $20,000 put in an account today and allowed to accrue for 30 years at 6% is $114k.

OP here. Please don't confuse bad math with dishonesty. You're right, and I did have an error in my future value equation - my interest rate and contributions were set to a biweekly rate/amount, but my number of periods was set to monthly. So the numbers are a bit more severe than what I originally thought.

What I'm looking at doing is dialing back my contribution, not stopping it, while one kid is in daycare. If I do it as a 401k loan, I'm required to pay 4% interest, which I pay back to myself. I'd keep roughly the same out of pocket contributions to the 401k, but only a portion would be new and a portion would be loan payback. As a result of both of those things (interest payback + continued contributions), the numbers aren't quite as dire as if I pulled it out completely. I was also using an annual growth rate of 4% to be conservative - the effects are much larger at 6%.

What I think I will ultimately do is take the 50k as a 401k loan, dial back my new contributions for 2 years to meet my company match (which will require me increasing my overall out of pocket by about 200 bucks/month).

Here's what the numbers come out to at 4% and 6%
Age 42: 23k/24k difference
Age 62: 77k/93k difference
Age 72: 141k/170k difference

Those of course assume no withdrawals prior to 72, so the numbers aren't *exactly* right, but close.

Thanks for the tip-off to re-look at the math. The cost of borrowing that money is pretty significant. We have the option to do a VA cash-out refinance a few months after we close. That has a 3.3% fee associated with it, which will be about 20k added onto our mortgage balance. That's probably a much cheaper way to get the extra cash.


Here's what those numbers come out to at 4% and 6%
Age 42: 23k/24k difference
Age 62: 34k/41k difference
Age 72: 53k/65k difference

When I look at the numbers that way - it works out like

[Anonymous]

^^ please ignore the last couple lines (copy/paste error)