720K windfall

[madrone]

Hello,

I'm new to this forum. I just posted the following message on a simplicity forum and someone suggested that I post here. I would be interested in some feedback on our situation.

We just sold our house and now have 720K sitting in our Schwab account. My partner and I are trying to decide what to do with it - and we don't exactly agree... I would be very interested in hearing what you all would do in this situation.

Here's an overview of our financials:

720K profit from home sale
100K in stocks
400K in 401K
6 figure income (my partner) and still enjoying the work

Our only debt is the 290K mortgage on the home we currently live in (we had two homes)

What would you do?

 

[brewer12345]

1) I would do nothing for at least 6 months while you do some research and decide what you want to do with the money

2) I would seriously discuss with your partner what your goal in life is. This is a big chunk of change that you do not want to squander, so use it to work toward your goals.

3) Assuming you have fingured out what your goal is, invest the money a chunk at a time over 1 to 3 years. No point in making a big bet all at once.

 

[SteveR]

Welcome to the board.

What do you Want to do with the $$?  What are your personal goals in the next 5 years? 10 years? 20 years?

When do you plan on retiring?  How much $$ do you wish to live on?  Where will you live?  How old are you now?

Are you asking for retirement investment advice or just investment ideas for the $720k?  

A six figure salary between the two of you covers a lot of territory.  That could mean $100k or $999k depending on which end of that stick you are on makes a big difference in what you do with the cash.

Lots of questions but I am sure that the experts here will have some ideas for you.  

 

[maddythebeagle]

I agree, you could always dollar cost average into your investments and collect fixed income off of this money.

 

[wildcat]

Can't reco anything w/o age, risk preferences (although I hope I don't read another "I want to earn 6% without taking any risk" statement), retirement/life goals, blah blah...........

 

[madrone]

You are right - my husband and I have many questions to ask ourselves before we decide what to do with this money.  One thing I know for sure (for me) is that I want to live debt free.  I personally want to take part of the money and pay off our remaining mortgage (290K).  My husband has mixed feelings about this.  What are your thoughts on paying off this mortgage?

My husband is 48 and I am 51. I do not work at a "regular job" and he works for a major corporation (and believe it or not, likes it...) His base salary is 160K per year. He's not anxious to retire anytime soon. At the same time, I think he's starting to burn out and I want him to have the freedom to let it go when he's ready. I want financial peace of mind for both of us.  

 

[Patrick]

720K profit from home sale

What would you do?

Be sure to keep enough in cash to pay any income taxes that might be due on your profit.  The exclusion for a married couple is $500K for a house you have lived in for 2 out of the last 5 years.

 

[madrone]

The profit is 500K and it's been our primary residence - so we're okay there.

 

[Nords]

One thing I know for sure (for me) is that I want to live debt free.  I personally want to take part of the money and pay off our remaining mortgage (290K).  My husband has mixed feelings about this.  What are your thoughts on paying off this mortgage?

That depends.

If paying off the mortgage makes you sleep better at night then pay it off.

One issue (as you know) is that a house is not a liquid asset and its sale has high carrying costs. If you pay off your mortgage then you can't get money out of the house without going through a HELOC or a sale.

But if it's a low-interest mortgage, you're staying in your residence for a while (like greater than 10 years), and you don't have any other investments that are earning less interest than the mortgage is costing, then you may want to consider keeping the mortgage.

For example if your mortgage is at 5.5% then you may be able to equal that rate by depositing the mortgage money in a CD and earning at least as much from the CD as you're paying in a mortgage. If you have a long time horizon (20-30 years) then you'll probably make even more money in the stock market. But if any of this could disrupt your sleep then go back to considering paying off the mortgage.

 

[maddythebeagle]

You are right - my husband and I have many questions to ask ourselves before we decide what to do with this money.  One thing I know for sure (for me) is that I want to live debt free.  I personally want to take part of the money and pay off our remaining mortgage (290K).  My husband has mixed feelings about this.  What are your thoughts on paying off this mortgage?

My husband is 48 and I am 51.  I do not work at a "regular job" and he works for a major corporation (and believe it or not, likes it...)  His base salary is 160K per year.  He's not anxious to retire anytime soon.  At the same time, I think he's starting to burn out and I want him to have the freedom to let it go when he's ready.  I want financial peace of mind for both of us.

I love the idea of paying off your mortgage at your age and income esp. if you feel that you have enough equity investments. You will get an argument both ways on these boards. I like the idea of retiring with the mortgage paid since it frees up cash flow in retirement, but with your income, maybe it is a huge deduction?

 

[LOL!]

Lots of good advice above. We about the same age as madrone. (I love the smell of Texas madrone blooms). My spouse came into some 6-figure sum of money a couple of years ago. Our mortgage is a fixed-rate 4.875%, so she insisted that we not pay it off. I agreed with her. We didn't want to invest it as a lump sum either because we aren't gifted with the ability to predict the future. So we just put $10,000 a month into our investments every month. Whenever the stock market dropped, we put even more in, so now it is all invested.

Some folks predict 10-year T-bills will pay over 5% in the next few years. So even if we can't get a guaranteed return in investments today that might match our mortgage today, we may be able to do so in the future. In the meantime, we are satisfied that our relatively riskier mutual funds have done much, much better than 4.875%.

While peace of mind may come from a paid-off mortgage, I get more peace of mind knowing that I could pay off our mortgage any time we wanted to, but that in the mean time we make lots more money keeping those funds invested elsewhere.

 

[AltaRed]

Interesting that there are some for and some against paying off the mortgage. As a Canadian, I find it horrifying to believe some people would actually choose NOT to pay off a mortgage. and instead put spare cash into investments. Most everyone DW and I know focus on paying off the mortgage.

We did not have any investments beyond an emergency cash fund until we had paid off the mortgage many years ago and very happy to have done that. Everything that had been directed into the mortgage was suddenly free to be invested. The feeling was euphoric!

 

[bosco]

Interesting that there are some for and some against paying off the mortgage. As a Canadian, I find it horrifying to believe some people would actually choose NOT to pay off a mortgage. and instead put spare cash into investments. Most everyone DW and I know focus on paying off the mortgage.

This may be partially due to differences between the two countries. In Canada, mortgages, even though they may be figured on a 25 year amortization schedule, must be renegotiated every 5-10 years, so you don't have the security of knowing your rate all the way out to normal payoff. Canadian mortgages also tend to be adjustable rate mortgages, not fixed, unless they are fixed for a short term, like 5 years.

In the US, mortgages can be, for example, locked in for 30 years at a fixed rate. So if it's a good rate, there is no hurry to pay it off. This kind of mortgage is rare in Canada (at least I couldn't find one last January when I financed a house).

That coupled with the historical fact that Canadian equities don't appreciate as much as US ones (not true lately but long-term) means it is generally much more advisable to pay off a mortgage in Canada than in the US, rather than not pay it off and invest the money.

 

[bosco]

almost forgot....the biggest difference between American & Canadian mortgages. The interest is not deductable in Canada. In the US it is, assumming you can deduct more than the standard exemption. In effect this means that if your mortgage is big enough in the US, some of it is deductible.

 

[Mr._johngalt]

almost forgot....the biggest difference between American & Canadian mortgages.  The interest is not deductable in Canada.  In the US it is, assumming you can deduct more than the standard exemption.  In effect this means that if your mortgage is big enough in the US, some of it is deductible.

Slightly off-topic. Many years ago, in a land far far away, all interest of any kind
was fully deductible. This was back in my "livin' large" days. Anyway,
speaking only for myself, I would borrow money very casually. After all, it was deductible.

JG

 

[madrone]

I wanted to get back to you all and let you know what we've tentatively decided to do....

*pay 150K on the (290K) mortgage
*establish a 50K emergency fund
*100K to invest in stocks
*buy a house (outright) in the midwest town where we may retire
(and rent it out in the meantime)
*use the remaining money to invest in real estate

My husband doesn't want to pay off all of the mortgage cause we have an extremly low fixed rate. He wants to have at least 200K available for real estate (after we buy the midwest house). It's his idea to put more money into real estate than into stocks. And I just love real estate, so that is fine with me.

The good thing is that the remaining money would sit for a while cause I've only just begun to learn about the real estate market in the area where we want to buy. That will give us time to put together a life plan and re-consider what to do with the remaining money if our life plan warrants a change.

Thank you for your time and thoughts on this - it really helped our decisioin process.

 

[Kronk]

Sounds like a good plan on the whole to me.

Maybe I'm weird, but I've kind of gone off emergency funds per se. We used to have one, but then due to a business purchase, we got a Home Equity Line of Credit. It kind of got me thinking, though, that emergency fund rates of returns (i.e. money market, in our case) would almost certainly be lower than the rate I'd be paying for my mortgage.

If instead of 150k mortgage/50k emergency fund, I'd probably put 200k into the mortgage (well, okay, if it were really me, I'd pay the sucker off). But then you could turn around and get a HELOC for, say, 150k, and have plenty of liquidity in case of emergency or desire to buy some additional real estate.

Even at 5%, that extra 50k in the mortgage is over $200 per month in interest charges. If the Emergency Fund is something you're pretty sure you won't be tapping, I'd go the HELOC route. You can probably find a HELOC at around prime and no closing costs.

Anyone else doing this non-emergency fund but extra room in a HELOC?

 

[Mr._johngalt]

Sounds like a good plan on the whole to me.

Maybe I'm weird, but I've kind of gone off emergency funds per se.  We used to have one, but then due to a business purchase, we got a Home Equity Line of Credit.  It kind of got me thinking, though, that emergency fund rates of returns (i.e. money market, in our case) would almost certainly be lower than the rate I'd be paying for my mortgage.

If instead of 150k mortgage/50k emergency fund, I'd probably put 200k into the mortgage (well, okay, if it were really me, I'd pay the sucker off).  But then you could turn around and get a HELOC for, say, 150k, and have plenty of liquidity in case of emergency or desire to buy some additional real estate.

Even at 5%, that extra 50k in the mortgage is over $200 per month in interest charges.  If the Emergency Fund is something you're pretty sure you won't be tapping, I'd go the HELOC route.  You can probably find a HELOC at around prime and no closing costs.

Anyone else doing this non-emergency fund but extra room in a HELOC?

HELOC is a great idea for "emergency fund". We have not done it for a bunch of reasons. Anyway, our emergency fund is my credit cards.
Think I have around 175K available, currently using most of it to
pick up the spread between MM rates and their promo rates.

JG

 

[Nords]

Anyone else doing this non-emergency fund but extra room in a HELOC?

Yep, great idea, especially when the credit union is selling them for free (no closing costs). 

 

[maddythebeagle]

I was thinking of the same on the home equity line of credit (I dont think you have to use but it is there). I think credit cards are also good since you can get a short term loan (12-month loan) at 0%. I have 20k or so in transfer money in savings. I cant believe that the cc's havent called back some of that debt, John.