Q&A: Sell Your Home or Stay Put?

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28:47welcome back our next question is from zarai hey paula and joe thank you very much for all you do and uh teaching me all this time about different types of investment and all that i have a full-time job and i also have a part-time job that I started a long time ago. So my full-time job has a pension and a 457. And I max out my 457 on my full-time job contribution. And then my part-time job also has a pension and also has a 401k contribution. And I thought I read somewhere where it says, since there are two different entities, both a nonprofit, I should be able to max out my 457 and then also the 401k on the part-time job.

29:30This is from the employee contribution, not the employer, the employee contribution portion of it. And I could not find any clear answer in a lot of places. And I just want to see if you and Joe will be able to help me. My question again is that can I max up my 457, my government estate job, and then also put a certain amount on my 401k from the part-time job, both are for employee contribution. Thank you very much. I appreciate all your help and teaching. Ozari, thank you for the kind words. And also thank you for this question. And again, Paula, and this is not the through line I was thinking of earlier, nuanced answer again.

30:10So you are spot on because of the fact that the 401k is a qualified financial plan and the 457 is a non-qualified financial plan directly from the IRS website. And Paul, I'll give you the link so you can put it in the show notes for everybody. You can contribute to both. Now, here's the deal. The 401k, because it's a qualified plan, you have to aggregate all of your financial plan contributions no matter where they are. So if you're somebody thinking you're in this position because you're in a simple 401k in one area and you're in a regular 401k with another employer, it's$23 ,000 for both in 2024.

30:55total between them both because they're both qualified plans. So ask your HR professional, is this a qualified plan or look at the plan documents? If they're qualified plans that you put money in, the most money you can put in is$23 ,000 into those plans. 457 is different because it's not qualified. So Paula, that brings up the second piece. Well, why is this different? Non-qualified brings up a little ugliness, which is that if anything happens to this institution where the plan is, let's say it's with a state government or a municipality, and that municipality declares bankruptcy, the state declares bankruptcy, whatever it might be.

31:43If the worst happens, this money could be subject to that bankruptcy, meaning your retirement money could go bye-bye because of the creditors to that entity. Does that mean that there's a big chance of that? I would definitely do a little bit of research and find out how financially solvent wherever this is located is. I would dive into that. I know that in fact, it is rarely, rarely, rarely ever happened. So the risk of a 457 going bye-bye and this not being your retirement money, in fact, probably very, very, very low. However, I think you need to know that. I think you definitely need to know that this might not be your money.

32:32401k, no matter what, is your money and is protected as your money. There are some other rules that you need to know about a 457. Let's start with the cool side, Paula. This is really neat. If you are eligible for catch-up contributions because you're an older saver, you can put additional money into this because of the fact that the government said, hey, if you even put enough in when you were younger and now you're really throwing cash at it, you can throw more money. It's even more with a 457. A 457 allows you to also put in funds to make up for money you didn't put in when you were younger.

33:15And I won't get into the granular details of this, but if you've been eligible for a 457 for a long time and you didn't max it out every year, you might be able to make up for all those lost contributions that you didn't make as well. So you can not only max this thing out, you can just shovel money into that 457. That's incredible because most retirement plans do not allow for anything like that. Most plans are use it or lose it. Now, that's a catch-up contribution. Without the catch-up provision, so I want to back up for just – without the catch-up contribution, there is a negative piece to the 457, which doesn't exist with the 401k.

33:56401k, that$23 ,000 number, Paula, is your contribution, right? $23 ,000 a year is the limit before we get to any of this catch-up stuff. With a 457, it's the combination of you plus employer. It's any money that goes into the plan. No matter who put it in, it's$23 ,000. So 23 ,000 is still the number, but if your employer is doing any type of match, that's going to be included in the 23 ,000. So you can put in 23 ,000 on the 401k side. Then your employer matches it on top of that, not included in 23 ,000. 457, you put in your money and employer match. those count toward the 457. Then if you're old enough for catch-up contributions, you can make a catch-up contribution in the 401k side, and then you can make a mega wham, possibly catch-up contribution on the 457 side.

34:50So multifaceted, there's a lot going on here. Because of the fact that the 401k is qualified, I would be biased toward filling that up first if you can't fill up everything. And then I would go to the 457 second because of the non-qualified nature of that. But there's another nuance here, which is then we need to look at the fund selection inside, right? It's the 401k is garbage and high fee funds. And the 457 is nice, low fee, well-rounded approach, the stuff I need to get to my financial independence vision, I might go, okay, I know the Achilles heel, the 457, this is non-qualified, but I might start there first.

35:35But I'm biased toward the 401k and away from the 457 because of the qualified versus unqualified nature of those two plans. So there's our nerdy answer, Zerai. But man, the fact that you got both of these available and you want to max them both out, have at it, buddy. Have at it. Paula, what I like about this question, and this is another through line that I hadn't thought about with Jessica and with Zerai, the answer is much more nuanced than you might think when you first hear the question. Right. Often it's either in Jessica's case, what do you want to do? It's Zerai's case. It's how do I take these two jobs and make them really work for me in the best way?

36:22And by the way, imagine that Sarai wasn't focused on retirement. If he wasn't focused on retirement because he knows what this retirement plan is, does he change the goal because he has this thing that a lot of people don't have? Like if you go to work for a company, Paula, and you've got these amazing benefits, but they don't have anything to do with what your number one goal is, do you change the goal to fit the game that you're playing? So a retirement plan is essentially a deal between you and the government in which you agree to not tap this money until a particular age in exchange for the government giving you a tax advantage.

36:57The fact that you have the opportunity to capitalize on a tax advantage is not in and of itself a reason to put your money into that type of account and to lock it away until you reach a given age. There are two things that I want to establish here. First, a retirement account is not for retirement per se. Retirement is an occupational description. So it is not a retirement account. It is an age-restricted account. That's the first thing to establish. The second thing is that just because you get a tax advantage that has the condition of an age restriction doesn't mean that you should necessarily take that tax advantage.

37:38To do so would be letting the tax tail wag the decision dog. In a hypothetical world, if Zerai was not concerned with retirement, if he had some other goal, let's say he wanted to start a validated yet capital-intensive business and he needed funds in order to do that, right? That would be an example of a goal in which he would need short-term use of that money and locking that money away into a tax-advantaged account would work against his pursuit of that given goal. Similarly, if Zerai had goals, any goals within a relatively short-term timeframe, even five years or 10 years, right? If Zerai had specific goals for that money that did not work with the age restriction of these accounts, then why work against your own goals just because you have the chance of getting a tax advantage?

38:33It doesn't make sense in the broader scope of things. We can even, Paula, flip that upside down. when I was working with people in their 50s and they had goals that were after 59 and a half. Again, we call it a quote retirement account. If my client had enough money to be financially independent, often left to their own device, they wouldn't think to put more money in the 401k or the 457 toward this goal that they had at age 65 because it's not a quote retirement goal. They'd open up a non-qualified brokerage account and do it that way. Hmm. Instead, if you're not maxing it out and I want to, I want a vacation home, but I don't want to tell I'm 65.

39:14Why wouldn't I use the Roth portion of the 401k account, get the tax-free benefit of that account toward this vacation home that I want to buy after that age restriction. I love what you're saying here that just because it says that this is a quote retirement account doesn't mean we need to use it that way. If the goal fixed the account, let's use it. Exactly. Exactly. A lot changes when you simply reframe it into an age-restricted account rather than a retirement account. Wonderful. Wonderful. In Zerai's case, he's excited about those age-restricted savings, age-restricted investments. And so the good news for him is he's got lots of opportunity.

40:00Oh, yeah. And that little hidden feature that you can go back and make up for contributions you didn't make in the 457. Wow. Wow. Incredible. Yeah, that's a rare opportunity. Thank you, Zerai, for asking that question. All right, now we're going to get to our big question, which is about the hidden dangers that may be lurking in a mortgage opportunity that three years ago people never talked about, but that today you hear about a lot. So we're going to get to that question in just a moment. But first, we're going to take one final pause to hear from the sponsors who allow us to bring you financial education at no cost to you.

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43:09Our final question today comes from Emily. Hi, Paula. My husband and I have been living in our current home for a little over a year. We locked in at a 5.125 % interest rate and have about$266 ,000 in equity. 13 more years and this home would be paid off. But our home is pretty small. And while it works for right now, as our son gets older, we can see the need for moving to a larger home. The area we live in is really expensive with limited land to build new homes. Right now, we can get a new home from a national builder for about$900 ,000 to a million. that would suit our long-term needs. The builder is offering a 3-2-1 buy-down on the mortgage, where the first year rate would be 3.99, the second year rate would be 4.99, the third year rate would be 5.99, and then from years 4 to 30, it would be 6.99.

43:59If we know we want to live in this area for the long run, does it make sense to sell our current home and move now? Emily, thank you for the question. Now, before we answer your question, I first want to, for the sake of everyone listening, elaborate a little bit on the concept of a 3-2-1 buy-down, and then I'm going to talk about your specific situation. So a 3-2-1 buy-down, again, this is the type of mortgage that a couple of years ago nobody was talking about, and now everyone's talking about it. And the structure of a 3-2-1 buy-down is, as you've given an example of within your question, in year one, the interest rate is reduced by 3%.

44:35In year two, the interest rate is reduced by 2%. So two, two. And in year three, the interest rate is reduced by one percent. So as a easy way of thinking about it, just think the three and the one are in an inverse relationship with one another and the two matches the two. Right. And then starting year four, moving forward, the lender charges the full interest rate for the remainder of the mortgage term. So in essence, it is a variable rate mortgage. Now, a variable rate mortgage is different from an adjustable rate mortgage. We're getting a little into the weeds here, but essentially there are a few different types of mortgages that you can choose from.

45:14There's the fixed interest rate mortgage, which I think most of us know what that is. You have one steady rate for the entire duration of the term. And Emily, that's what you have with your current mortgage, your 15-year mortgage with a 5.125 % fixed rate. There's also an adjustable rate mortgage in which your payment amount adjusts periodically. And then there's a variable rate mortgage, which is what a 3-2-1 buy-down is, where it's different from an adjustable rate in that with an adjustable rate, you don't quite know where the mortgage interest rate is going to go. There is a certain maximum cap, so you know what your worst case scenario is.

45:51And the adjustment happens periodically so that you know the schedule during which it will change, but you don't know exactly how much it's going to change. And that's different from a variable rate mortgage like the 321. Again, this is a relatively unusual and little known type of mortgage that a few years ago, no one talked about. And now these types of mortgages are becoming increasingly popular because builders are offering these as incentives to get people to buy. because we are now in a situation where most existing homeowners have golden handcuffs and don't want to go from a lower mortgage interest rate to a higher mortgage interest rate.

46:36And so this is a way of softening the blow for people in that golden handcuff scenario. Which I think raises the important point. I think that if she does this, and we can dive into that more later, Paula. But if you do it, I don't think that you can make this decision based on the blow softening portion of this loan. You have to look at those later years in the full frontal attack of how that's going to affect your cash flow later on. Yep. That's exactly what I was going to say. So the thing that strikes me about Emily's question is that the bulk of her question focused on the mortgage itself, right?

47:18She said she's got a 15-year mortgage. They bought this home a little over a year ago. So they are really new into this home. They more or less just purchased it to be in your home for only a year and to already be thinking about selling that home and moving into a new one and shouldering all of the transaction costs that come with the purchase and then later the sale of a home. That's a very rapid change. And certainly in the future, as Emily said, in the future, they want a larger home to hasten that move purely on the grounds of having the opportunity to lock in a variable interest rate. That in and of itself does not seem like a sufficient reason to hasten a move.

48:08Because Because, Emily, once you move into this new home, assuming it's a more expensive home than the one you're currently living in, everything from your insurance costs to your property tax costs to even the cost of utilities, assuming it's larger square footage, all of those costs are going to rise. So the moment that you move to a different, larger, more expensive home, you're going to be paying all of the costs associated with maintaining that bigger home. The heating, the air conditioning, the property taxes, all of it, the insurance, all of that, right? If you can save yourself those costs by living in a smaller and less expensive home for as long as you're happy with that home, why wouldn't you do so?

48:57I don't see the 3-2-1 mortgage as being a compelling reason to upgrade your lifestyle sooner than you need to. No, what it does though, is it, it, it shows us the builder's motivation though. Right. Which I think is an important thing when we're talking about negotiation, which I want to get into here in a second. But before that, I think Paula, this is exactly why I don't even start this discussion here. Yeah. I don't start with, is this a good deal? I don't start with anything here. Here's where I start this goal because it's more expensive than where you currently are is directly competing against your other goals.

49:35So my question then becomes not this goal. How am I doing toward those goals? Because if I'm doing great toward those goals, then by all means, if this makes you happier, let's do it. Let's do that right now. If it's not going to affect your retirement goals, your other goals, whatever those are, then let's do that. But if this is going to make it so you can't put as much money toward reaching, let's say, your financial independence goal or any other goals you might have. And those have college savings. Yeah. If that's the thing, like whatever it might be, if this directly affect, which it will, if, if those aren't already spoken for, then, then certainly I'm, I'm then putting this off, assuming that Paula, to your point that, that you're happy living where you are.

50:24And I make that move at the time that suits you best versus taking advantage of this carrot that the builder's putting in front of you. That's where I start this discussion. Not with, is this good or bad? How does it affect everything else? And my answer for Emily is going to be different than my answer to any other hypothetical person in a similar situation. Because what Emily expressed in her voicemail is that the home that she and her family are currently in works for them now. They are happy with it now. They anticipate that in the future, years from now, there may come a time when it no longer fits what they want.

51:07And so in the future, and she didn't indicate how far into the future that is, but maybe two, three, four, five years from now, at that point, they may want a larger home. But given the fact that their current home, they just bought it a year ago, right? They're so new into that current home. clearly one year ago at the time that they bought it they had anticipated living in it for longer than a year you would never buy a home if you only anticipate living in it for one year right so clearly as recently as a year ago they anticipated living in this current home for at least i would guess three or four years if not longer five six maybe the fact that they're thinking about changing course now is not due to a change in circumstance it's not due to an unhappiness with the current home that they're in.

51:58Quite the contrary. They're happy with the current home that they're in. They're just thinking about hastening the upgrade because they have a variable interest rate that's been presented to them. So let's go into negotiation then, Paula. Builders have a reason why they're offering these incentives. And if a builder comes forward that they have this incentive, they will often give you other incentives as well. And anyone that's bought a new house knows this, that this is an area where you can negotiate. I can't walk into Target and say, I don't want to pay this amount for Cheerios. I want to pay less.

52:33Target employee is going to look at you and go, I can't do that. When you're talking about a new home purchase, you might be able to, because they've already told you that, hey, we're giving you these incentives. You may be able to negotiate even more incentives. So Paula, I think that if the other goals are spoken for and she's able to get potentially a better deal now than she might be able to get five years from now that I may lean the other way, but I'm still not starting here. But I think, I think this idea of knowing how to negotiate really could factor big into her being able to, well, and let's not, let's take the five years off the table.

53:13Let's say that the builder's offering this and she's ready to go. Like being able to negotiate these incentives, I think she has the potential to be even more in the driver's seat than she thinks she is. And bear in mind, Emily, if you stay in your current home and you, let's say three years from now, decide that that's the appropriate time to move into another home, number one, we don't know what interest rates are going to be in three years. And there is at least a reasonable chance, you know, I don't want to make any predictions, and it's premature to make predictions three years into the future.

53:52No board member of the Fed would even do that. But there is at least a reasonable likelihood that interest rates in three years will be low enough such that you could potentially match or even beat the 5.125 fixed rate that you have today, right? That's not a tough rate to beat. It's not like you've got a 2 % or 3%, right? You've got above 5%, and that's on a 15-year, which a 15-year always has lower rates than a 30, right? You have a 5.1 on a 15-year. I don't think that's unreasonable to beat in a number of years from now, assuming inflation is under control by then. So there is, probabilistically speaking, a good chance that you can have the best of both worlds.

54:46You can stay in the home that you just bought and enjoy the lower costs associated with living in that home for as long as you're happy being there. and by virtue of doing so, that frees up cash that you can put towards other goals, to Joe's point. And then when you're ready to make the move, when you're actually ready and not just wanting to capitalize on a builder incentive, then you can do so and potentially lock in an interest rate that's theoretically close to what you have now. But I think this is a great discussion around not just what we do, not just the decisions that we make, but the when.

55:25Because in financial planning, the when is as important as the what. So thank you, Emily, for asking that question. Enjoy the home that you just bought and then reassess when you want to make that next move. When you get to the point where you're unhappy with your current home, That's when you know it'll be right. Well, Joe, that comes to the end of today's episode. But where can people find you if they would like to hear more of you? Oh, you can hear me and my friend Paula at the Stacky Benjamin Show. We call it the greatest money show on earth because we will combine very serious discussions about medical tourism with cat asthma.

56:14And you have to go back and listen to the Stack and Benjamin show to know what the heck I'm talking about. Back at the beginning of the year, I spoke with the man I referenced earlier, John Acuff. It was a fantastic discussion about that. How do we figure out what's going to light us up in the future? Everybody talks about leaving a legacy, and that freaks a lot of people out. Well, instead of thinking about leaving a legacy, John dove into the first week of 2024 a better way that we talked about on today's show. So find that back the first week of 2024 at Stacking Benjamins, and you can hear that entire discussion.

56:50We'll link to that in the show notes. If you can send me that link, we'll just put it in the show notes. I can do that. Well, thank you. Thank you.

57:00Oh, we didn't talk about the through line, by the way. Oh, dun, dun, dun. So what do you see the through line as being? I thought that it's the fact that all three of these questions were nuanced. That at the beginning of the discussion, when people first heard these questions, I bet everybody listening to this thought, oh, I know what they're going to say. Or I know exactly where this is going to go. And there were these offshoots that we didn't expect. You know, for a lot of people paying off the mortgage is a fantastic idea because the freedom from worry, the idea that that that it's it's one less thing in my life.

57:41It makes more people happy to have less debt. We went against that. And then the idea that most people don't know that the 457 plan has both this Achilles heel, but also for people trying to make catch up contributions, this wonderful benefit that who knew. Right. And the ability for him to do both much more nuanced, I think, than a lot of people knew. And then this idea of, of, Hey, I got these wonderful incentives from this builder and I can get into this house today that who knows a few years from now where I'm going to be. But really thinking through that much, much more nuanced than we thought that it was.

58:19So maybe a tale not as old as time. well actually the the story of beauty and the beast is a more nuanced story than the one that's told in good point the disney cartoon right the the true story of beauty and the beast that true story is much more nuanced so the man's name was petris gonsalves and his genetic condition was called hypertrichosis also known as ambrose syndrome or ambrose syndrome defined by an abnormal amount of hair growth. And so in the case of Gonsalves, it affected his entire body. It's a syndrome that is informally known as werewolf syndrome. Wow. And he was married to a woman named Catherine in 1500s France.

59:09I love that because even the point of the story is life is more nuanced, right? This person is in who they, even in Beauty and the Beast, the Disney version, that everything's not what you think at face value. Things are different, but it's even more different. So nuance, nuance was the through line of today. Well, thank you, Joe, for spending this time with us. Well, thank you, Paula. If you enjoyed today's episode, please do three things. First, share it with a friend or a family member. That's the single most important thing that you can do to spread the message of great financial literacy and financial health.

59:45Second, subscribe to our newsletter, which we are reviving, affordanything.com slash newsletter. And that newsletter is going to be based around the five pillars that I talked about early in this episode, financial psychology, increasing income, investing, real estate, and entrepreneurship. So affordanything.com slash newsletter. And third, make sure that you're following us on both Apple Podcasts and Spotify, as well as any other preferred podcast player that you like to use. While you're there, please leave us up to a five-star review. Thank you again for tuning in. This is the Afford Anything Podcast.

1:00:24I'm Paula Pant. I'm Joe Solcihy. And I'll meet you in the next episode.