Firecalc math, house purchase, liquidity questions

[hpnutty]

This first question has to do with the amount we plan to pay for our next house and how this is playing out in my Firecalc results. I am trying to determine how much we can afford in this next house and what the impact would be to our annual spending level. When I increase the cost for the house significantly it doesn't change the spending level for a 95% success rate significantly. And I can't seem to understand why the impact is not higher.

Here are the specifics:
Portfolio: $3.2MM (3/4 tax deferred, 1/4 taxable)
Years: 37
SS $50k starting in 2025
$6k off-chart spending, inflation adjusted starting in 2019
Retiring in 2018, adding $60k between now and then
Total market portfolio 65/35 split, .15% investing fees
Lump sum pension distribution of $2MM in 2018
-> House purchase $400k in 2019

Using these numbers I get a $221k constant spending yielding a 95.4% success rate. If I increase the house purchase price to $500k I get a $217k constant spend with the same 95.4% success rate.

So I pay $4k a year for 20% more house? Does that seem reasonable?

The second question is how to pay for the house. Using the equity in our pay-off current house ($250k), I plan to add $400 of the $800k in our taxable portfolio to establish the all-in budget of $650k for a cash purchase. Does that seem reasonable or can you suggest a better way?

Last question: I've set our annual spend budget at $150K. If we increase the house purchase budget as in the scenario above an additional $100k, that leaves $300k in the taxable portfolio to start retirement before withdrawals. How much liquidity should I have in a $5MM portfolio where most of it is in tax deferred 401K and traditional IRAs?

TIA for your insights!
HP

 

[DJRR]

Seems reasonable, but you need to factor in more than the decreased income from the smaller portfolio. I believe TX has hefty property tax so you will also need to factor in higher taxes, insurance, maintenance, lawn care etc. going from a $250k to a $650k house. If you have factored that into your expenses then enjoy. Seems like you don't want to downsize

For purchasing the house there are endless discussions here about that. Personally, I would prefer to keep liquidity until I had access to all my funds so would take a 30 year 5 year ARM with no points and then reevaluate later. You would also need to be comfortable having a meaningful stock component in your investments. I would not pay for a mortgage if you wanted to be all in cash or bonds

 

[hpnutty]

Sorry, I didn't mention that the $6k/yr additional spending starting in 2019 was for increased maintenance, taxes, etc. associated with the new house. Yes, this is not downsizing but adding acreage in the country. We have been saving and LBYM for 25 years for this!

Thank you for the advice concerning purchasing the house using an ARM. I'm sorry if this question has been discussed and answered many times.

 

[USGrant1962]

A delta of $100K in your purchase price is less than 2% of your portfolio. In as much as the historical annual volatility of the stock market is something like 14%, the small impact on your success rate is not surprising.

I chose to pay off my house to provide more flexibility on my portfolio draw. If you have a mandatory draw to pay a substantial mortgage you will have fewer options to manage tax cliffs, ACA subsidies, zero capital gains brackets, Roth conversions, etc.

On the other hand you are very light on taxable funds versus tax deferred, so you might not have to much tax flexibility anyway. Make sure you have studied up on Rule of 55 and SEPP.

 

[DJRR]

Thank you for the advice concerning purchasing the house using an ARM. I'm sorry if this question has been discussed and answered many times.

No worries, not meant as a criticism. It is just that if you ask 20 people here you will get 21 opinions You can search threads if you want to. Everyone has their own view and risk tolerance, so you have to make your own choice. You are obviously a very successful person so I am sure you will do fine.

Personally I have a 30 year fixed mortgage at 3.5% and never plan to pay it off. I like having $300k in my portfolio vs. having it sunk in my house.

I see it as a prudent inflation hedge and am comfortable investing, so my portfolio gains are usually more than the interest, but sometimes not. I never bought into the "peace of mind" mantra because the local government will always have a lien on my house and they will foreclose if I don't pay them. I prefer the liquidity and the options.

Plus, one day when the US dollar is worth as much as the Venezuelan Bolivar, I will pay off my whole house with one months salary and prove to everyone that I was right all along bwahahahaha