At This Point, Does It Make Sense To Purchase A House?
We've calculated you'll need an income of at least $280k in order to max out your i401k.
To max out the contributions we've discussed as an independent contractor you'll be saving
- $56k for the i401k (= $19k employee + $37k employer contribution)
- $6k for your backdoor Roth
- $6k for spousal backdoor Roth
- $7k for HSA
Total savings: $75k. A very respectable sum that corresponds to a 27% savings rate on an income of $280k.
What About 529 Plans For The Kids?
Sure, you can fund those as well (especially if your state offers tax incentives to do so), but only after you have fully funded your retirement accounts.
Banks and governments will gladly lend your kids money for their education, but none will extend a loan to fund your retirement.
What If I Have Extra Income I'd Like To Invest?
First, consider whether your proposed investment is likelier to perform better than the guaranteed return from paying down existing debt. If you have student loans at 7%, paying off that debt is critical and equivalent to a 7% return on investment - by all means, kill that debt instead of investing.
Our newbie has refinanced his student loans down to under 3%, a low enough interest rate that investing is likely to earn more than his guaranteed return of <3% on paying down debt. The math favors investing, but only if you can follow through with the plan. Docs get themselves in trouble when they their actions diverge from their intentions - an understandably human frailty. The math only works if you actually invest the sum that would have otherwise gone to paying down debt.
If you've maxed out your i401k, backdoor Roths x 2 and HSA, your taxable brokerage account is your next best investing vehicle.
True, a taxable brokerage invests after tax dollars that do not reduce your taxable income in the eyes of the government, but it remains a valuable means of investing your income to build wealth, and having investments in a taxable brokerage can also be beneficial during retirement when a tax optimization strategy is critical to avoid the unpleasant surprise of ballooning required minimum distributions (RMDs) from tax-deferred retirement accounts.
What Are The Red Flags Of Buying A House?
Now let's factor in the desired house purchase. Based on communications with this physician, he is targeting a $1.4 M purchase, something turnkey that will not require a remodel. Note that this sum is modest by the standards of his HCOL zip code. Per Zillow's mortgage calculator, here are some ballpark numbers:
- A 20% downpayment of $280k (which our newbie needs to save up) would result in a 30 yr fixed loan of ~4.1%
- A 10% downpayment of $140k would result in a 30 yr fixed loan of ~4.6%
- A 0% downpayment using a doctor loan (a higher interest rate and typically higher fees, but avoids the cost of Private Mortgage Insurance)
As an emergency physician, certain clinical descriptions reflexively increase my sphincter tone.
IV drug user with fever and back pain.
Lethargic, febrile infant with vomiting and rash.
Newbie attending with existing student loan debt considering taking out a 0% downpayment doctor loan.
The last is tongue-in-cheek, but the intent is to underscore that newbies are in a prime position to dig big holes early on and spend the remainder of their career trying to emerge from those holes. I realize this can sound like I'm a pessimistic debt scold, but I try to play devil's advocate in order to ensure newbies accumulate major debt with eyes wide open.
A home is a consumption item, and the timing of a home purchase is intensely personal and often based on factors not easily determined by logic.
Still, a home debt tends to compound as if it were a cycle of biblical reproduction: home loan begat new water heater begat repaired sewer connection begat kitchen remodel begat yard landscaping...
Could I Ever Give My Blessing To A No Money Down Loan?
I could envision a scenario where I might give my blessing to our young newbie desire for a home loan - namely, if he can commit to significantly reducing his mortgage debt in the 2-3 years after home purchase. Let's assume our newbie wants to avail himself of current low interest rates and reasons now is the right time to buy.
I'd bless the union of newbie and his house on the condition he commits to pay down the equivalent of $280k toward his mortgage in addition to his monthly payments in the next 2-3 years.
This will likely put him in a roughly comparable position to the one he'd have if he'd waited a few years to save up that downpayment - to make that payment schedule he'll have to functionally live like a resident because his income will go to retirement investments first, then his accelerated mortgage payments, with little left to spend once taxes are accounted for.
More importantly, it would demonstrate a willingness to counteract debt numbness and a willingness to flex frugality muscles after a big splurge that would restore my faith in his future spending discipline. I've written elsewhere about the terrible temptation that accompanies newly increased income, so a newbie who can pull off self-enforced austerity would be the rare exception where I could get behind a big spend.
Got a scenario or case study you'd like considered for review? Shoot me an email!