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How can I optimize on my post-graduate financial situation?

I just recently graduated from a nurse anesthesia program in Los Angeles. I was hoping to get some guidance on how to optimize my financial situation. Here's the background:

Student Loan Debt: $120,000 that's been refinanced/consolidated to ~3%
Monthly Student Loan Payment: $1800/month
Date I will be free of this debt: ~October 2022

Gross Salary: $182,000
403b/457b Contributions ($18,000 each): $36,000
Pension Contributions: $14,000
Net Income: $132,000

I live in the beach community as it is very close to the hospital that I work. I am trying to figure out whether or not it makes sense for me to buy a condo. Considering that the local real estate market is booming and rent is increasing by ~6-8%/year, it seems as though it would behoove me to move into a 1 bed/1 bath condo. I've used the NYTimes Rent vs. Buy calculator and have come up with a variety of scenarios that seem to point in the direction of buying property since rent is so high and continues to rise in this area.

However, in order to buy a condo, I'd have to liquidate a significant portion of my 403(b) along with my savings in order to make a down payment of 15-20%. My question is whether this is a wise choice as it's my understanding if we look at the 30-year return rate from the market, it's ~10% while real estate (as a whole) doesn't generate as great a return. My biggest concern is becoming "house-poor" if I have to buy a condo, but at the same time, I'm also concerned that if I wait, I may end up being priced out of where I live because of the rising rents in the area.

Any tips/advice would be greatly appreciated.

Career / Compensation, Debt, Estate Planning, Pensions, Real Estate
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June 2016

Thank you for providing detailed information on your situation. It helps me to provide a more detailed response.

Your situation seems complex, so I will give you some things to think about. But ultimately, you should meet with a financial planner and your CPA to get specific information for your situation—so you can know the tradeoffs you’re making and the tax ramifications of your investment decisions. From the information you provided, I think your intuition that your “biggest concern is becoming house poor” is correct for your situation. I would consider taking the steps below to save for the down payment. As difficult as it may sound, I would recommend not using your 403(b) account for the down payment, and waiting until you save enough money for it instead.

  • Determine what your price range is for the 1-bedroom condo
  • Create a savings goal for your down payment
  • Potentially change your savings plan to decrease the amount you are saving in your 457 to save more for your down payment in a savings account
  • Keep the down payment funds in cash/money market accounts so that you are not affected by the stock market.
  • Review your current monthly spending to determine how much you spend in the big categories (housing, retirement savings, car, student loans, vacation, eating out, insurance, etc.). Then you can create a projected budget if you were to purchase a home.

I don’t recommend using your 403(b) as a down payment vehicle because you would be taxed on the distribution and decrease your long-term retirement savings. If you were to take funds from your 403(b) plan as a hardship distribution, the distribution would be added to your earned income and be fully taxable to you by Federal and State taxes, which I estimate to be close to 35% of the distribution. For example, if you took a $100,000 distribution, you would need to come up with $35,000 in cash for your tax bill next April to pay these taxes on the distribution.

In addition, you would most likely not be able to contribute to your 403(b) for a 6-month period (best to check with you plan administrator). You potentially could take a loan on your 403(b) plan, but then you would increase your total loan amounts, which is why I think a loan on your 403b or 457 is counter-productive. Taking funds from your 403(b) will significantly decrease your long-term retirement balance because you’re not allowing the invested funds to compound over the next 30 years.

As an example, I searched the price ranges for a 1-bedroom condo in the Marina del Rey area, which is a fairly large range of $450,000 - $750,000. Let’s take the example of the 1-bedroom condo for $750,000. A 15% down payment would be $112,000. A 30-year mortgage at a 4% interest rate will cost $3,039 a month. Property tax and insurance will cost approximately another $1,000 a month. HOA fees might cost $500-$1,000 a month. This creates a total expense of $54,000 -$60,000 a year in total payments for the condo.  

What is your current savings account balance set aside for a home purchase? Remember to set aside funds for moving, appliances and potential furniture. How much have you been saving outside of your retirement account for the down payment? You could potentially decrease your 457 contribution to increase the amount you can save for the down payment. Check to see if the 457 plan matches your contribution. Don’t go below the match percentage. Decrease your 403(b) plan contribution next.

Rent vs. Buy Calculator

I’ve used this calculator also and it’s pretty thorough. The one big downside to this calculator for your situation is that it assumes you have the down payment in cash. If you would need to cash out a significant amount of your 403(b) plan, this would increase the cost of the capital and would potentially change the recommendation to buy or rent.

Real Estate vs. Stock Market Return

The growth rates of real estate and the stock markets are going to fluctuate. I agree with you that rents and home prices in Marina del Rey and the surrounding area have been pretty dramatic. I lived in Santa Monica for two years and now live in Long Beach, so I’ve definitely seen the housing market get fairly crazy in the area. It may seem like a race to buy something, but the growth rates will slow down and even decrease at some point once we go through our next recession. I would recommend that you change your savings plan to build up the cash savings for the down payment and be patient. Don’t let the race to “get in” force you to buy something when you are not quite ready, especially while you have a large student loan payment.

The best advice I can give you is to meet with a financial planner and CPA. They can provide you with an outside prospective, and help you to understand your options better and create a savings plan to meet your goals.

June 2016
June 2016
June 2016