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Thread: “Liquid” assets

  1. #11
    Senior Member jp1's Avatar
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    Personally I would consider a 401k asset illiquid only if the owner of the asset was too young to convert it to cash without suffering an early withdrawal penalty. After they've hit 59.5 years of age it's as liquid of an asset as the 200 bottles of wine we have on racks in our dining room. At least in my opinion. The tax issue only seems relevant if the taxes are higher because the person is not yet old enough to convert them to cash without a tax penalty.

    Back to the original question, yes, the OP's friend might be making a better decision if they only withdraw a certain amount each year in order to keep their tax rate low* but that doesn't make the asset illiquid. It only makes liquidating illogical. I certainly consider all the stocks in my non tax advantaged e*trade account to be liquid despite the fact that if I sold them today I'd likely pay a higher tax rate on the capital gains than I will if I wait and sell them once I've stopped working and am in a lower tax bracket.

    *spending a few minutes calculating the cost from a tax perspective of getting a loan that would be repaid over a few years vs. selling off a large chunk of 401k in one big lump would probably be time well spent. Depending on the amount of money involved maybe the decision is as easy as take half out in December of this year and the other half out in January of 2019.

  2. #12
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    Quote Originally Posted by frugal-one View Post
    Looked it up....

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value.
    Everyone is making great points here, but I wanted to note this last part of this definition: "An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value."

    In this case, it's the "little impact on its value" that I am grappling with in the friend's situation. If the friend had a million dollars in her 401k and wanted to cash out 100k and buy a house in Hermann, I'd say "Do it!" But it's not that simple, as we don't know about the friend's other resources going into retirement. At 67, friend is not likely to be able to replenish the money, so how will friend pay for things needed in retirement--is there a pension, is there social security, if so how much (I know I cannot live on my social security, it's really a meager amount). All of these questions impact the last part of that definition of liquidity: "can be sold with little impact on its value."

    What exactly is the "value" of the 401k? One value is it allows her her to grow money tax deferred. Of course her new house in Hermann may also do this.

    Or is she looking to get a mortgage if she buys a house? How will lender view her ability to meet the obligations of the mortgage--they will want income, and just having money in the 401k will not qualify as future income, unless she annuitizes it into a steady withdrawal amount to show income.

    That will certainly impact future value of the 401k.

    That's why I think you have to consider all of these things even at the level of figuring out what "liquid assets" mean.

    But I know, that's more complicated than a simple "what is liquid assets".

    And this is an interesting question, which has made me think about my own situation!

  3. #13
    Senior Member catherine's Avatar
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    Here was my (sad) situation to prove that point.

    Back in 2007, I had about 75k in my 401k. Thanks to the recession, it had shrunk to 25k. At that point I had some bills that had come due relative to our purchase of the foreclosure house for my MIL to live in and the fact that we still had her first house hanging around our neck. I had no other money to pay these bills. MIL wouldn't use her money. She told me to let her first house go to foreclosure. I didn't want to do that because I didn't want my credit to go bust. So I did my last resort option and cashed out my 401k, knowing I would be heavily penalized. I did so, got my money relative quickly--in time to pay those bills.

    I feel those assets were liquid. I was able to access them quickly and use the funds as cash. Their loss in value to me at that point was irrelevant to the definition, IMHO.
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  4. #14
    Senior Member iris lilies's Avatar
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    Quote Originally Posted by Tybee View Post
    Everyone is making great points here, but I wanted to note this last part of this definition: "An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value."

    In this case, it's the "little impact on its value" that I am grappling with in the friend's situation. If the friend had a million dollars in her 401k and wanted to cash out 100k and buy a house in Hermann, I'd say "Do it!" But it's not that simple, as we don't know about the friend's other resources going into retirement. At 67, friend is not likely to be able to replenish the money, so how will friend pay for things needed in retirement--is there a pension, is there social security, if so how much (I know I cannot live on my social security, it's really a meager amount). All of these questions impact the last part of that definition of liquidity: "can be sold with little impact on its value."

    What exactly is the "value" of the 401k? One value is it allows her her to grow money tax deferred. Of course her new house in Hermann may also do this.

    Or is she looking to get a mortgage if she buys a house? How will lender view her ability to meet the obligations of the mortgage--they will want income, and just having money in the 401k will not qualify as future income, unless she annuitizes it into a steady withdrawal amount to show income.

    That will certainly impact future value of the 401k.

    That's why I think you have to consider all of these things even at the level of figuring out what "liquid assets" mean.

    But I know, that's more complicated than a simple "what is liquid assets".

    And this is an interesting question, which has made me think about my own situation!

    The wider picture is:
    She also has $250,000-$300,000 in real estate, a non liquid asset. Two pieces of real estate.

    This is why I dont understand all of her angst about having no money to buy more real estate.

    She wants to buy a third property and says she needs money from previous parcels to do so. I say, take 401k money, buy the third parcel, and when parcels 1 and 2 sell (one is on the market, the other is her living place) replentish the stash. Granted, it cant go back into the 401k but big deal, it can go into a Vanguard account.

    Now, I completely understand the concept of having too much money in non liquid real estate (ala catherine) and that is a very bad idea. I would NOT do that under any circumstances but I am very leery of real estate as an asset. But that isnt her hangup, oddly.

    For the other details: for income she has only Social Security. She will buy a house in New England for around $350,000. She will get a reverse mortgage and will be required to pay down about half of the cost of this house, $175,000.

  5. #15
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    Reverse mortgages usually are bad ideas. Sounds like she is not making the best decisions with the money she has.

  6. #16
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    Quote Originally Posted by iris lilies View Post
    The wider picture is:
    She also has $250,000-$300,000 in real estate, a non liquid asset. Two pieces of real estate.

    This is why I dont understand all of her angst about having no money to buy more real estate.

    She wants to buy a third property and says she needs money from previous parcels to do so. I say, take 401k money, buy the third parcel, and when parcels 1 and 2 sell (one is on the market, the other is her living place) replentish the stash. Granted, it cant go back into the 401k but big deal, it can go into a Vanguard account.

    Now, I completely understand the concept of having too much money in non liquid real estate (ala catherine) and that is a very bad idea. I would NOT do that under any circumstances but I am very leery of real estate as an asset. But that isnt her hangup, oddly.

    For the other details: for income she has only Social Security. She will buy a house in New England for around $350,000. She will get a reverse mortgage and will be required to pay down about half of the cost of this house, $175,000.
    Okay, now I am thoroughly confused. Why would she liquidate her tax deferred 401k and buy more real estate, if she already has 50% of her net worth in real estate?

    Why would she buy a third piece of non-liquid real estate? If she wants more real estate, why wouldn't she wait to sell the ones she has? And I think she can't afford a 350000 house right now.

    What if another 2008 hits and all these houses lose half of their value?

    I am not following the plan of using the 401k to buy more real estate; I am not getting the logic and how that complies with not having too much real estate?

  7. #17
    Senior Member iris lilies's Avatar
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    Quote Originally Posted by Tybee View Post
    Okay, now I am thoroughly confused. Why would she liquidate her tax deferred 401k and buy more real estate, if she already has 50% of her net worth in real estate?

    Why would she buy a third piece of non-liquid real estate? If she wants more real estate, why wouldn't she wait to sell the ones she has? And I think she can't afford a 350000 house right now.

    What if another 2008 hits and all these houses lose half of their value?

    I am not following the plan of using the 401k to buy more real estate; I am not getting the logic and how that complies with not having too much real estate?
    She owns real estate here, and wants to buy real estate elsewhere.

    I completely agree that is it a bad idea to have too much of one’s assets in real estate. Totally agree! I would not do it.

    But, I guess because she has ALWAYS had so much of her assets in real estate, why is now different?

    Given the reverse mortgage scenario, she can buy this $350,000 out of state property by

    1). selling one of the exisiting properties, realizing $100,000
    2). pull out from her 401k $75,000

    And that gives her the $175,000 she needs to buy the out of state property. One of her current properties is on the market. There is a lot of issues with her living in property #2 while trying to sell it.

    The advisability of a reverse mortgage, a large country house on acreage, a severe climate, all of this on an income from Social Security is not advisable to say the least, but she is dead set on it.

  8. #18
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    Oh dear, this plan is so outside my own comfort level, and I love real estate. There seem to be so many places for things to go wrong. . .
    I wonder if anyone else thinks this is a good idea.

  9. #19
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    Definitely no.

  10. #20
    Senior Member iris lilies's Avatar
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    She has always made financial decisions that are ones I would NEVER make. She would easily have assets off $1+ million if she hadnt burned through $500,000 in the last real estate downturn.

    Her second property, the one currently for sale, is a vacation house that sits empty, eats up money, attracts theives and vandals. she makes bad decisions about fixing it up. A series of breakins and theivery caused her to continue to fix up a mobile home on that property ( not the main house) that is just junk. It is a depreciating asset. Then she bought new appliances for it. This, in a place that is never occupied and where someone burned down one of her sheds last month, suspected meth cooking or at least vagrants.

    She makes poor decisions about maintenance.

    In her mind, real estate is an investment.

    she has this property listed for the same amount she bought it for. Has $8,000 bill coming for a new roof, spent $10,000 on new siding work and Clean up.

    However—for her, real estate probably is not a bad place to park money because is IS il-liguid. She spends heavily. If she had a big pot of cash, it probably would be spent. So having it inaccessible is not a bad thing.

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