“Liquid” assets

[iris lilies]

DH and I are having an argument about terminology.


I say that any of our financial instrumentstruments are liquid. He says that anything not in cash is not liquid. Probably both of us are making these definitions too rigid. But...

Specifically, are talking about 401K investments that our friend has, in the context of her desire to buy a house.

So my question: would you call 401K funds belonging to someone 67 years old to be “liquid “ assets?

[Float On]

If there is no loss in value and you can get access quickly, that's liquid right? For me because I'm only 51 my 401K is not liquid. I couldn't get access to the full amount, I'd lose a lot in penalties.

[Tybee]

Yes and no?
They have to pay the taxes on them if they pull them out. So the value is not the same as the number on the page.
It's more liquid than real estate.
Why is the idea of liquidity important in this discussion? Wouldn't one be more concerned about what effect pulling out the money from the 401k (or IRA) would have on the person's future retirement years?

I could sell stuff in my IRA and get cash within a few days. So that is more liquid than many things, but not like writing a check, and if she is buying a house, bank may not consider it liquid because they may discourage her cleaning out the 401k. I have taken cash out of a 401k to buy a house, but I had to do it through the benefits people--I don't know what rules her 401k has.

[LDAHL]

I would say they are as liquid as the plan administrator is efficient in executing the needed transactions.

[Teacher Terry]

Since your friend is 67 no reason for her not to spend some of her 401k and there is no penalty at her age so I would consider them liquid.

[iris lilies]

Yes and no?
They have to pay the taxes on them if they pull them out. So the value is not the same as the number on the page.
It's more liquid than real estate.
Why is the idea of liquidity important in this discussion? Wouldn't one be more concerned about what effect pulling out the money from the 401k (or IRA) would have on the person's future retirement years?

I could sell stuff in my IRA and get cash within a few days. So that is more liquid than many things, but not like writing a check, and if she is buying a house, bank may not consider it liquid because they may discourage her cleaning out the 401k. I have taken cash out of a 401k to buy a house, but I had to do it through the benefits people--I don't know what rules her 401k has.

The idea and definition of liquidity is important because it is a marital arguement and I have to be right! :~)

Your answer is more measured and resembles’s DH’s answer. He wants her to consider tax liabilities. Sure
I agree, but she is acting like she has no money when in fact she has $300,000 in 401k assets.

[rosarugosa]

I have 4 boxes of Black Box Cabernet in my cellar - it doesn't get any more liquid than that! :laff:

[iris lilies]

Haha yeah, baby!
I have 4 boxes of Black Box Cabernet in my cellar - it doesn't get any more liquid than that! :laff:

[frugal-one]

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.

[Gardnr]

For me liquid is I can have it in hand today. It takes several days to get your hands on investment monies. We keep about $135k liquid. The rest would take up to a week to get in our hands.

[jp1]

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.

[Tybee]

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!

[catherine]

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.

[iris lilies]

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.

[Teacher Terry]

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

[Tybee]

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?

[iris lilies]

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.

[Tybee]

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.

[Teacher Terry]

Definitely no.

[iris lilies]

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.

[Teacher Terry]

Wow hard to imagine being that old and that bad with money .

[iris lilies]

Wow hard to imagine being that old and that bad with money .

We have named her in our will along with a couple other people and several organizations. But, I have not mentioned that to her because it is highly unlikely she will see any of our money. And it worries me that she would count on some of that money. She blew through two inheritances and then told me she should get her brother’s share because it will just go to his children anyway when she dies. I was so shocked to hear this I said nothing.

[iris lilies]

I should also add that I see nothing wrong with having a second home that is a vacation home as long as one acknowledges that it eats money. To consider a vacation home that never produces income as an investment is silly, but part of her problem is she’s from the coast where real estate always appreciates even if you are an owner-idiot, while here in flyover country things don’t appreciate much.

[Teacher Terry]

Having lived in many Midwest states I know what you mean. Our house in Wichita was bought brand new in 1994 for 84k. Only worth 134k now. Where we live now house prices are skyrocketing. A friend of mine has a parent that is 88 and terrible with money.

[iris lilies]

For me liquid is I can have it in hand today. It takes several days to get your hands on investment monies. We keep about $135k liquid. The rest would take up to a week to get in our hands.


DH Would agree with you.

[Gardnr]

I should also add that I see nothing wrong with having a second home that is a vacation home as long as one acknowledges that it eats money.

I suppose it depends on your definition of "eats money". Our 2nd home cost us $447/month last year for a total of $5364. And for us that is all in: prop tax, insurance, wood pellets, utilities, snow removal any maintenance/replacement items.

[dado potato]

A house, or land, or other real estate would not be "liquid".
Marketable securities or mutual funds in a 401(k) would be "liquid".


Next, what is money? Cash is money. Marketable securities or mutual funds in a 401(k) are not money.

[Chicken lady]

Time is money ;)

actually, I think it was jp who used the word “liquidated” about the 401k? I’d say anything that has to be liquidated before it can be used is not “liquid”.

[Teacher Terry]

G, as much as you use your cabin it’s well worth the money. My FIL owned one a half hour from where we lived and we rarely used it. He wanted to give it to us but we declined even though it was right on a lake. Now we prefer traveling to different places.