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What to do with extra cash?
Old 11-27-2020, 02:53 PM   #1
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What to do with extra cash?

Due to COVID, I haven't been travelling or spending much and also thanks to an end of year bonus, I now have an extra $80k sitting in my bank account. This is on top of my emergency fund.

I don't like having this much cash sitting around doing nothing. I'm currently 50 years old and 5-7 years until I'm FIRE'd.

So I figure I can either throw it at my mortgage (current balance of $485k @2.5% interest) or invest with a time period of 5+ years.

I would like to have my house paid off by the time I retire but feel like I should be able to get better than a 2.5% return over the next five years.

I was thinking of putting $60k into the Vanguard Total Market index then holding back $20k to invest in stocks that may catch my fancy or put into Vanguard if the market drops. This would be in a taxable account as I have maxed out my 401k and HSA.

I think I have moderately high risk tolerance. I am good at buying but horrible at selling so I tend to keep dogs way too long.

Any suggestions?
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Old 11-27-2020, 03:27 PM   #2
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... I am good at buying but horrible at selling so I tend to keep dogs way too long. ...
IOW, you are human. If you are interested, Thaler (Misbehaving) and Kahneman (Thinking Fast and Slow) both have a lot of behavioral stuff, like our human loss aversion, that applies to investing.
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Old 11-27-2020, 03:47 PM   #3
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Just curious why you want to put it all in the extended market index instead of mixing it with S&P or just putting it all in a broader index like Total.
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Old 11-27-2020, 04:03 PM   #4
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So I figure I can either I can either throw it at my mortgage (current balance of $485k @2.5% interest) or invest with a time period of 5+ years.



Any suggestions?
So even though we are both retired, we faced the same dilemma, similar mortgage 2.6% rate and amount, sitting on cash and more to come.

What got us off the dime was to consider you are paying your mortgage with after tax dollars, and investing the cash with future taxes off the returns. In our case, at our marginal tax rate the mortgage interest was really costing us closer to 3.5% or the CD's were netting after tax <1%. I started paying it off 100K at a time and feel pretty good about it now. Sure, we could have bought more preferred stock and got more than 3.5% (before taxes), but a guaranteed 3.5% forever saved is somewhat comforting if you have other larger amounts at risk.
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Old 11-27-2020, 04:04 PM   #5
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Just curious why you want to put it all in the extended market index instead of mixing it with S&P or just putting it all in a broader index like Total.
Oops, my bad. I meant Total, not extended. I already have a lot in the S&P so was thinking of opening something new.
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Old 11-27-2020, 04:51 PM   #6
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OP - In 5 yrs you want to have $485K paid off, might as well start now.

Also, either all or most of your 2.5% interest is not tax deductible, unless you have a boat load of other itemize type things. And remember none of it really matters until it exceeds the standard deduction of $24,800 for 2020.
So since it's after tax dollars, you need to earn 3% or more just to pay the 2.5%.
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Old 11-27-2020, 05:09 PM   #7
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OP - In 5 yrs you want to have $485K paid off, might as well start now.

Also, either all or most of your 2.5% interest is not tax deductible, unless you have a boat load of other itemize type things. And remember none of it really matters until it exceeds the standard deduction of $24,800 for 2020.
So since it's after tax dollars, you need to earn 3% or more just to pay the 2.5%.
True. Looks like I may take the standard deduction this year for the first time in many years as the new mortgage is a refi. Old rate was 3.5%. I think I'll only have paid under $14k in interest and since my SALT deductions are capped at $10k, I think that will just leave charitable deductions to get me above the standard deduction threshold.

Maybe I'll split the baby and pay down $50k on the mortgage and hold onto $30k in case there is market dip.
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Old 11-27-2020, 05:23 PM   #8
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I am in the no mortgage piece of mind camp at retirement, despite rates being low.
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Old 11-27-2020, 07:16 PM   #9
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Oops, my bad. I meant Total, not extended. I already have a lot in the S&P so was thinking of opening something new.
You might be better off with Extended... as Total is ~80% S&P 500 and ~20% Extended as I recall... so by buying Total you are just further inceasing your large cap/S&P 500 exposure.

I don't remember the exact percentages and they wander a bit over time.... but if you pair Extended with S&P 500 at some point you get Total.
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Old 11-27-2020, 07:18 PM   #10
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I am in the no mortgage piece of mind camp at retirement, despite rates being low.
Yes, but only if you're going to pay it off and have no mortgage payment. If you are just going to pay it down but not pay it off then you're still on the hook to make monthly payments... so I think from a financial flexibility perspective you are better off keeping the cash until you can pay it off entirely.
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Old 11-27-2020, 07:47 PM   #11
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The cool thing about hitting the mortgage with a lump is you make the later payments more effective.
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Old 11-28-2020, 06:20 PM   #12
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Yes. Don't buy any dogs. Or pay down any personal debt. Don't leave it in the bank...make it work for you.
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Old 11-28-2020, 06:34 PM   #13
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Yes. Don't buy any dogs.
I don't know. Buying a dog is a great way to spend money, and you get the companionship at no extra cost.

Oh. Wait. you were probably talking about stocks. Nevermind
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Old 11-28-2020, 07:16 PM   #14
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I am in the no mortgage piece of mind camp at retirement, despite rates being low.


I retired about same age. No mortgage. Having no debt is huge.
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Old 11-28-2020, 08:34 PM   #15
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I vote for paying down the mortgage.
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Old 11-28-2020, 08:42 PM   #16
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Use it to Pay the mortgage principal.
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Old 11-29-2020, 12:15 AM   #17
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Use it to Pay the mortgage principal.
Good point, I've heard some places want to apply it as a pre-payment of the mortgage payments rather than a payment to reduce the principal.
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Old 11-29-2020, 11:36 AM   #18
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Good point, I've heard some places want to apply it as a pre-payment of the mortgage payments rather than a payment to reduce the principal.
Yup, that happened to me, but after some iterations they finally corrected it and all was applied to principle. It was a good thing I kept an eye on how it was applied.

I am still paying this mortgage off as CD's mature or my gut says get it done. The closer I get, the better I feel about it. I remember designing and building my first home and building it with savings no mortgage. It was a different time, but I remember believing being debt free was a freedom. No it did not make financial sense looking back 40 years of missed stock performance, but the attitude did me some good.
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Old 11-29-2020, 01:00 PM   #19
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Yup, that happened to me, but after some iterations they finally corrected it and all was applied to principle. It was a good thing I kept an eye on how it was applied.

.
They mis-applied my lump sum principle payment to the escrow (used for tax and insurance), so zero benefit to me. These are not servicer "mistakes". Follow up every time! I only was able to catch it by having an online account setup with the "hidden" servicer my credit union sold the mortgage to the minute it was originated.
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Old 11-29-2020, 01:48 PM   #20
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I love low rate mortgages. My portfolio has significantly beat the mortgage's 3.25% cost.

A few years before retiring I fixed our spending to then-current levels, with yearly inflation adjustments matching the Social Security inflation adjustment. We're still doing that 13 years later, but with added discretionary spending now. That reduces the time to retirement a bit by keeping your spending reasonable. Everything else, regular income, bonuses, stock options, went into the retirement portfolio.

I wouldn't look at it as a 5 year investment period for the $80k. The retirement portfolio is expected to fund yearly expenses throughout it's hopefully 30+ year span. Ideally it's value is growing faster than inflation and it barely notices your 4% withdrawals. So I think of any retirement investing as 96% a very long-term investment. My thought experiment for this is imagining I decide to hold 20% in cash to ensure funding for the next five years. During retirement there is always (hopefully) a next five years. So are you committing to a portfolio that always has 20% in cash? When you make a withdrawal, does 20% of it come from cash and 80% from stocks/bonds so the AA stays constant? Why the heck do I want to hold 20% cash for 30+ years? So I'm thinking long term, and as a nod to withdrawal realities I hold 25% bonds. And I'm a little flexible in bear markets. But ideally I'd be selling a little bit of the portfolio each month to meet expenses.

I started retirement in 2007 with about 30 mutual funds/ETFs/individual stocks in a slice and dice portfolio. Before that I was all individual stocks. I didn't add bonds for maybe the first 7 years, after setting up my DM's portfolio. At that time I also moved to a simple four fund portfolio in our retirement accounts. I think the performance of all three portfolio constructions were roughly equivalent. But they have been progressively easier to manage. Have fun with your stocks, but they were a lot of work.
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