I will be receiving my share of my deceased mother's trust within the next three months. It will be between 300,000, and 350,000.00. Beyond taking the first 100,000.00 and paying my house off, I have no idea what to do with it.
I'm 58 years old, a widower (sort of), with no children, or heirs. I have no desire to marry again. My fiance passed away over 11 years ago. I'm "sort of" a widower because we were married, except in the eyes of the law. As a cancer survivor with a high probability of recurrence, she was uninsurable, and refused to marry me in order to insulate me financially if her cancer came back. It did, and while it wiped us both out financially, not being married saved me from around half a million dollars in debt from her medical and hospice care.
Since she passed, I've built my 401K back up to around 55,000.00, but that's it. I own 2 old cars outright (1996 and 1989 models), and I have a three months' emergency fund. I make 40,000.00 a year, my expenses run around 25,000 a year, and I have no debt.
My current budget is 990.00 every two weeks. Once I pay the house off, that drops to 710.00 every two weeks. I have the ability to cut back at work, if I like, and still keep my benefits, including my incredible insurance, and my 401K. I want to do that, and go back to school part-time to pursue my dream of writing. With a 710.00 bi-weekly nut, I can do that, and still make that amount easily.
I need to figure out how best to invest the remainder of my inheritance. My mother had the bulk of her million-dollar trust with an Edward R. Jones guy, and he never netted her more than 2% a year. I was shocked when I saw how he regularly churned her account, bought B-rated 15, 20, and even 30-year tax-free munis that yielded less than 3%, etc.
I've seen a lot of people advised on here to go in to S&P 500 index funds. I like the idea of them, but would they be the best investment for me, at my age?
Sun Dec 27, 2015 10:05 am
oldguy Senior Member
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quote: Beyond taking the first 100,000.00 and paying my house off, I have no idea what to do with it.
The 'obvious" isn't always so obvious. Lottery winners (and lawsuit winners, heirs, etc) are tracked by Lotteries to see how they fare with their winnings. On average, big lottery winners are broke in 7 years. They are unable to manage a lump-sum, they fail to keep it intact, they break it into small chunks and scatter it to the wind.
They pay off their house, buy a new car, pay off their kid's cars, pay-off credit cards, pay the taxes, etc. And after the dust clears, they invest that last $50,000 "for their future". Those things seem 'correct and obvious' to a wage earner - but they are completely backwards to wealth-building.
Eg, if you have a current 4% or 5% mortgage, fixed rate, longterm, you have one of the best sources of capital in the world. All other nations require resets, usually at about 10 years. But in the US, Joe Blow can wander into a bank, ask for $300,000 to buy a house, ask for a 30 year fixed rate guarantee, ask for a 4% rate, near-zero down payment - and get the loan. So - the first question - why would you pay off a good $100,000 mortgage? (Or - if you have a shortterm note with toxic rates, refi it into a 'keeper' loan).
And you know from your mother's experience what NOT to do. Don't churn/trade, place it and leave it.
Since you have no heirs and no need to build a pot of wealth, you could pull some aside for entertainment, fun stuff. But I would invest the major lump into 50% SP500 Index Fund, 50% Bond Fund (about a 3 year duration). That 50/50 stocks/bonds mix has wealth-building and wealth-preservation that matches your age. The goal would be to double the $300k in about 8 or 10 years, That would get you out of your $55,000 life savings situation and bump you into a "never have to worry about money" class. When you have over a half-million in your 60's you are mostly free from financial worries (not "all", but "most").
As for writing - most Community Colleges have adult classes, both daytime and evening. The cost is small, your budget could handle that now if that is your wish. I took some Law courses after I retired just for my own entertainment, it is interesting/entertaining, no pressure - back in the Day, college was hard work, you had to pass the tough finals to get your degree - but that's not the case when you're taking classes for fun.
Sun Dec 27, 2015 5:16 pm
The DumbGuy New Poster
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quote:Originally posted by oldguy Eg, if you have a current 4% or 5% mortgage, fixed rate, longterm, you have one of the best sources of capital in the world. All other nations require resets, usually at about 10 years. But in the US, Joe Blow can wander into a bank, ask for $300,000 to buy a house, ask for a 30 year fixed rate guarantee, ask for a 4% rate, near-zero down payment - and get the loan. So - the first question - why would you pay off a good $100,000 mortgage? (Or - if you have a shortterm note with toxic rates, refi it into a 'keeper' loan).
Thanks for the response.
My reasons for wanting to pay the house off are three-fold.
The first is cutting the monthly budget. Again, going from a 990.00 nut every two two weeks to a 710.00 nut every two weeks allows me to cut back at work, giving me the time to follow a dream. The big deal for me is time. I watched my old man bust his ass to build a nest egg for his and my mother's retirement. All he talked about for 20 years was what he was going to do after he finally retired. Three months after he retired, he dropped dead. I watched my fiance waste away and die ... all our dreams and all the money I'd put away for the fulfillment of those dreams went with her. My last promise to her was to follow my dreams, but more than 10 years later, I haven't done it. It takes all I've got left to make my nut. I live frugally, and I'm happy doing so, ... I want to give myself the gift of time to get the stories in my head down on paper.
The second is peace of mind. I love my house, and fully intend on staying in it till they take me out feet-first. I have a number of anxiety issues, and really like the idea of knowing I don't have to sweat a monthly payment if things get tight.
The third is ROI. I bought the house just under 2 years ago. It's a FHA loan at 5%, with 1.25% PMI for the life of the loan. That's 6.25% for the life of the loan, although some percentage of that is recouped as tax-deducted interest,.
My house payment is 833.00 per month, including taxes and insurance, which amount to 225 of that payment. That means I'll save 608.00 per month, or 7,296.00 per year by paying the house off. With a payoff of just under 97,000, isn't that an immediate, guaranteed 7.5% return on the money?
Also, doesn't the interest I don't have to pay on the loan for the next 27 years and 2 months factor in?
Sun Dec 27, 2015 8:55 pm
oldguy Senior Member
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quote: The second is peace of mind.
You'll have more peace-of-mind with an extra $100,000 in the bank. If you spend that money on prepaying the house, then if you lose your job, you won't have the money for gas & food to look for a job. But if you had that $100,000 in the bank you could make the $608/m payment, plus eat & buy gas for a couple years. What you are contemplating is called house-poor, ie you'll have a paid-for house but no money.
But it might be good to refi to get a conventional loan, 4% fixed, 30 years. The $608/m payment would be cut to less than $460/m.
Sun Dec 27, 2015 10:41 pm
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Joined: 23 Dec 2015
Don't pay it off as of yet. Save your funds, and keep on saving. You'll be surprised that you'd gain more peace of mind as you see your savings increase. But this is definitely up to you. Make sure that you think and rethink everything, like for a couple of months, or more, if you need to make the final decision of paying it off. I hope that you'd be able to come up with the excellent option for you.
Thu Jan 07, 2016 9:29 am
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Here's my two cents. There are three types of people. Those who have a high income, those making a modest income and those who are poor. Those with high incomes, need not pay off their mortgages due to the fact that they tend to have more disposable income every month, so it isn't a goal because they can afford to carry the mortgage and invest.
A middle income earner doesn't make a ton of money so their disposable income is much less per month, therefore paying off a mortgage in one hit would greatly benefit them because it frees up more income per month. Thereby allowing the middle class worker such as yourself making 40k, to have more money to invest and to live comfortably due to no mortgage to worry about. After paying off your mortgage then I would suggesting investing the money. Due to your age as you stated (which I have no idea what it is) take 50k and put it somewhere safe like CD's or a money market fund where the intent isn't to make money off of it, but to provide protection should the market tank and you need it asap. Take the remaining 150k and invest it into index funds like VTSMX or VTSAX and if you left it in that fund for 20 years for example, making 10%, and you never added another dime, it would be worth 1 million. So now you have a paid for house, 1 million in index funds and 50k for emergencies. I think you'd be well off.
Plus if you took what you were paying for the mortgage and invest that sum, it could be worth a lot of money. (I don't know what your mortgage payment is)
As for a poor person, it would also be benificial to pay the mortgage off because they could end their dependencies on the government.
So IMO, the lottery example only pertains to people who have character problems who don't invest their money, but buy cars and toys.
Risk comes from not knowing what you're doing. (Warren Buffet)
Thu Jan 07, 2016 3:49 pm
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Joined: 28 Dec 2015
Another thought......instead of paying off the house all at once, just increase the amount of principal you pay each month. You could leave part of your inheritance in something that doesn't pay a lot of interest but that you have access to. You could use that to increase how much you pay every month on the mortgage but still have access to it if you needed it for an emergency. The rest of your inheritance you could invest in something long term.
It may not always make financial sense, but I am a big believer of paying off the mortgage ASAP. It gives one a real peace of mind, and more financial flexibility. If I had not paid off my home, there is no way I would be retired today.
However, conversely if I had not invested my money, I would not be retired either! You need to find a good balance.
Thu Jan 07, 2016 4:34 pm
christcorp Preferred Member
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We all have our opinions, and here's mine.
YES, pay off the house. Why? If you only had a wind fall of about $100,000 , then I'd agree with oldguy about the "House Rich - Cash Poor" scenario. But in your case, you'll still have between $200,000 and $250,000 with the house paid off. And YES, you are correct. That IS a 6-7% return on your money. And being no decent financial adviser would ever recommend putting all your money in one place, you can consider that 6-7% return, as the portion of your investment which is the SAFE part of your investor. Sort of like getting a 6-7% CD. BUT, there is one caveat to this. You need to do something with that FREED UP $600+ per month that you now have because you don't have a mortgage payment. In other words, don't just blow it. Give yourself a $200 per month Pay raise (Increase in standard of living) and put the other $400 into something.
Again; a GOOD investment, savings, etc. strategy, is to be DIVERSIFIED. And while oldguy definitely has some great advice about investing in some securities like an S&P fund and bond fund, I wouldn't do 50/50 with the entire $350,000 lump sum. That's NOT diversified. Especially with the stock market being the way it is currently. I personally, and this is just me, do not see the current market as very stable. The last couple of days alone has shown a dramatic drop. Over 1000 points. And even the S&P is back under 2000. That's not to say you shouldn't invest in it, you should. I do. But you need to diversify. We are close to the same age, and this is what I would do. (Again, just my opinion). You need 3 investment tiers and 2 savings tiers. Investment tiers are a) No Risk, b) Low Risk, and c) Moderate/High risk. Savings tiers are: a) Short term and b) Long term. (Savings also include preserving wealth to compensate inflation).
1. Starting with $350,000 inheritance and $50,000 in your 401K
2. Pay off $100,000. (Immediate 6-7% return on money - this is your NO RISK INVESTMENT)
3. Leaves you $250,000 inheritance and $50,000 in your 401K
4. Convert your $50,000 401K to an S&P type fund (If it isn't already that type) and bond type. (Old guy is correct in this area). CRANK UP your 401K to the MAXIMUM $18,000 per year. This lowers your TAXABLE INCOME. I don't know what you're putting in NOW, but whatever the INCREASE is to max it to $18,000 a year, reimburse your self from the inheritance money. Basically, you lower your taxes a lot. Assuming you put in $500 per month into the 401k ($6000 per year), add the extra $12,000 from your paycheck. ($1500 per month). Reimburse the $12000, for 7 years until retirement, that's $84,000. Basically, take $84,000 from the inheritance and set it aside in a money market, higher savings account, etc. to reimburse you for the reduced paycheck you'll get for MAXING out your 401K. (This is moderate/high risk investment)
5. Round off; that leaves you about $166,000 remaining in inheritance
5. You said you have a 3 month emergency fund. (E.g. $5,000 - $6,000). I prefer to have a 1 year emergency fund, which equals one year gross salary/income. In other words, put $40,000 into the best CD's or similar you can get. It's very low risk and takes a little bit to get it out if not matured, but it's there if you have an emergency. (This is low risk investment).
6. Remaining is about $125,000 in inheritance. I'd use $25,000 towards silver and gold. (NO, Silver and gold are NOT an investment). They preserve value. They always have. They will handle inflation. (This is Long Term Savings). (BTW: Only buy Physical Silver and gold, NOT ETF, or any paper).
7. This leaves about $100,000 in inheritance money. PLUS, an additional $600 per month from No Mortgage. Use part of this (The $600 to increase standard of living and enjoy life). Use some for short term savings. I also don't know if you have any tax issues to deal with. If so, that can also come from here.
Sorry for writing a BOOK. But in the end, you are diversified, with many benefits.
1. Peace of mind, no mortgage.
2. Additional $600 per month INCOME, based on a guaranteed 6-7% return on your mortgage
3. Your 401K gets MAXED OUT, which drops your taxes dramatically. (Differed),
4, Your investments get more into S&P and Bonds
5, You have a 1 year emergency fund
6. You have silver/gold to preserve some wealth in case of extreme high inflation and temporary market crash.
7. And, you still have about $100,000 plus any other savings to handle taxes or any personal investment, hobby, real estate, etc. you want to pursue.
Just my opinion, and this is only a "Possible Scenario". It's not the only option. Just trying to get you to think outside the box. Best of luck. Mike.