Here's an email I recently received from a reader:
I am 31 and my wife is 30. We have a 1.5 year old son. We have no debt and are currently renting an apartment. We live in Orange County, CA. I am gainfully employed and my wife is a stay-at-home mother to our son and will continue to be so until we are done having children and they are older. I am in the software development industry and don't foresee being unemployed any time soon. We would like to purchase a home in Orange County in the next 3 years. I would like to pay 20% down and avoid PMI if at all possible.
My question is whether I should continue to keep my normal investments (all mutual funds) or sell all or part of them to up my retirement investments or general savings. I'm currently not adding anything additional to them and only to my retirement and 529 accounts. The mutual funds were opened around 2004-2005. They were of course doing really well until the market crashed.
I'd like to not give all the financials as this isn't a profile post. I will mention that on a normal month, ~$415 is for Roth IRA, $100 is for 529, and $300-700 is saved depending on my programming side income.
- General savings: ~$44K (after we receive our expected tax refund...still waiting on all the forms to arrive in the mail)
- Non-retirement mutual funds: ~$41K
- Roth IRA: $17
- Rollover IRA: $19K (2 previous employers)
- 401K: $2K (only employed 6 months)
- Lending Club: $3K
- 529: $3K
- 401K: 25% match up to 6% for a total of 7.5%
- employee stock matching: I can contribute 15% yearly and 33% of that is matched 1 year later (ie: $1000 in a single year invested after 1 year gets $333 free). I am free to sell the stock after it hits the account immediately and that is exactly what I am doing now.
1. Do nothing and keep adding money to my retirement/529 accounts. I have not yet opened a Roth IRA account for my wife.
2. Sell all of the non-retirement funds (market is rather high now) and add $40K to my general savings. Houses in decent areas are near $400K thus requiring a large down payment. My wife is putting the pressure on me to get a place before my 1.5 year old is in kindergarten.
3. Sell all of my non-retirement funds and put part into my savings and part into a Roth IRA for my wife. I guess I technically have until April 15th to open one for her to have it apply to 2012.
4. Sell some of the funds but not all of them. I like the idea of having money in the market that is somewhat liquid, although since putting it in around 2005, I have not touched it at all. I don't see a need in the future to touch it and the initial thought was that I'd keep it in there for retirement, but I'd rather not have to pay the capital gains taxes year after year, albeit small.
There are obviously many different scenarios, but those are the first 4 that come to my head. My primary reason for asking for advice is that the market seems to be up at a point that I've never seen before and this might be a good point to dump some of those mutual funds that I've held onto for a long time and put the money elsewhere.
What's your advice for him?