what should MIL do with "windfall"?
what should MIL do with "windfall"?
In short: she bought way too much house, but sold her old one for a good profit.
She wants to dump it all into the new house, but I think it can be used way more effectively.
She's 59, and plans to continue working until 65.
The proceeds from the sale are roughly double her annual take home, and the new house cost about 5 times her take home.
My opinion:
Pay down new house just enough to eliminate PMI (may be moot already; not sure if she put down 20% on the new place).
Replenish whatever she withdrew from her retirement (also may be moot).
max out 401k, start a Roth
Invest the rest.
What I'm less clear on: how should she invest it?
Given that she isn't currently maxing out 401k and Roth, she'll want to invest conservatively, and may even need to withdraw from it periodically.
So may need to adjust levels a bit...but my general sentiment remains the same.
She wants to dump it all into the new house, but I think it can be used way more effectively.
She's 59, and plans to continue working until 65.
The proceeds from the sale are roughly double her annual take home, and the new house cost about 5 times her take home.
My opinion:
Pay down new house just enough to eliminate PMI (may be moot already; not sure if she put down 20% on the new place).
Replenish whatever she withdrew from her retirement (also may be moot).
max out 401k, start a Roth
Invest the rest.
What I'm less clear on: how should she invest it?
Given that she isn't currently maxing out 401k and Roth, she'll want to invest conservatively, and may even need to withdraw from it periodically.
So may need to adjust levels a bit...but my general sentiment remains the same.
Re: what should MIL do with "windfall"?
She could set aside enough to pay for 401k and a Roth IRA each year (live on this money while contributing max to 401k.) This will essentially transfer some of her money into tax-advantaged funds.
She could pay down enough to avoid PMI and possibly refinance. It sounds like she has too much house.
She could save some in conservative accounts such as savings or CDs to pay for living after retiring and use it to delay SS until age 70, thus buying the best COLA adjusted annuity available. If a widow or divorced but married 10+ years, she could draw one SS at FRA and let the higher SS grow until age 70.
Does she have any other debts? What is her mortgage rate? What is her tax bracket? What funds and their ER rate in 401k?
Vanguard's Life Strategy Conservative is 60% bonds which might be suitable. However one should find out what is available in 401k and complement that in Roth.
She could pay down enough to avoid PMI and possibly refinance. It sounds like she has too much house.
She could save some in conservative accounts such as savings or CDs to pay for living after retiring and use it to delay SS until age 70, thus buying the best COLA adjusted annuity available. If a widow or divorced but married 10+ years, she could draw one SS at FRA and let the higher SS grow until age 70.
Does she have any other debts? What is her mortgage rate? What is her tax bracket? What funds and their ER rate in 401k?
Vanguard's Life Strategy Conservative is 60% bonds which might be suitable. However one should find out what is available in 401k and complement that in Roth.
Re: what should MIL do with "windfall"?
What do you mean "dump it into the new house"?
Frivolous upgrades or needed maintenance? Something else?
Is she all set for retirement (could be true even if not maxing out ROTH), has a negative net-worth, something in between?
Your question is totally lacking in enough detail to answer.
Is this a rhetorical question or do you actually intend to tell her what she should do with her money?
Frivolous upgrades or needed maintenance? Something else?
Is she all set for retirement (could be true even if not maxing out ROTH), has a negative net-worth, something in between?
Your question is totally lacking in enough detail to answer.
Is this a rhetorical question or do you actually intend to tell her what she should do with her money?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: what should MIL do with "windfall"?
An easy answer is to pay it all towards the mortgage.
Bogle: Smart Beta is stupid
Re: what should MIL do with "windfall"?
Would depend on her need for liquidity.Jack FFR1846 wrote:An easy answer is to pay it all towards the mortgage.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: what should MIL do with "windfall"?
Rodc wrote:What do you mean "dump it into the new house"?
Frivolous upgrades or needed maintenance? Something else?
Is she all set for retirement (could be true even if not maxing out ROTH), has a negative net-worth, something in between?
Your question is totally lacking in enough detail to answer.
Is this a rhetorical question or do you actually intend to tell her what she should do with her money?
That's precisely the question: no upgrades or maintenance (yet), but she intends to just pay it all towards the new mortgage.Rodc wrote:Would depend on her need for liquidity.Jack FFR1846 wrote:An easy answer is to pay it all towards the mortgage.
I have no idea how well prepared for retirement she is, but I know for a fact she's not prepared for the long term maintenance costs associated with this new house, and I expect she'll figure out soon enough that she doesn't need it, so ought to keep a good portion of it liquid.
BIL is advising, so sent him the link to the "invest or pay off debt" wiki page; hopefully they won't make a snap decision without considering the alternatives.
Re: what should MIL do with "windfall"?
It sounds like you are trying to close the barn door after the horse has bolted.
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Re: what should MIL do with "windfall"?
What windfall? If she had downsized appropriately, there'd be a windfall.
She has a choice between "way too much house" or way too much house and way too much mortgage.
I'm old fashioned and debt phobic, but reasonable people think it's a great idea to not enter retirement with a big, or any, mortgage. If possible. And it would have been possible here. As 555 says, you are late to the discussion. If it were me, I'd stay out of it, and only provide my opinion if I were dragged kicking and screaming into the conversation.
She has a choice between "way too much house" or way too much house and way too much mortgage.
I'm old fashioned and debt phobic, but reasonable people think it's a great idea to not enter retirement with a big, or any, mortgage. If possible. And it would have been possible here. As 555 says, you are late to the discussion. If it were me, I'd stay out of it, and only provide my opinion if I were dragged kicking and screaming into the conversation.
I get the FI part but not the RE part of FIRE.
Re: what should MIL do with "windfall"?
Totally agree with all of this, but there was no talking her out of it; we tried.TomatoTomahto wrote:What windfall? If she had downsized appropriately, there'd be a windfall.
She has a choice between "way too much house" or way too much house and way too much mortgage.
I'm old fashioned and debt phobic, but reasonable people think it's a great idea to not enter retirement with a big, or any, mortgage. If possible. And it would have been possible here. As 555 says, you are late to the discussion. If it were me, I'd stay out of it, and only provide my opinion if I were dragged kicking and screaming into the conversation.
I'm just hoping she has enough equity to not lose any more money when she finally realizes to appropriately downsize.
And financial independence. If she can afford the monthly payments after retirement, then fine; paying into the mortgage won't reduce monthly payments. But I'm really worried that she won't have any liquid assets to take care of some inevitable future expense.
Last edited by batpot on Fri Apr 24, 2015 3:19 pm, edited 1 time in total.
Re: what should MIL do with "windfall"?
Given the update and where she is, putting the cash towards paying down the mortgage is not a bad thing. Might not be optimal, but is not bad.
The main thing BIL might discuss is making sure she has enough liquid savings to function as an emergency fund. Could be cash or have some equity in mutual funds as both are liquid enough if in taxable accounts. Would just have to make sure if in equities there would be enough for an emergency in a market down turn.
The issues are paying down the mortgage is a guaranteed savings of some known percentage of what is invested (treasury bond like if you will) vs some risky investment that might pay more or might lose money.
The main thing BIL might discuss is making sure she has enough liquid savings to function as an emergency fund. Could be cash or have some equity in mutual funds as both are liquid enough if in taxable accounts. Would just have to make sure if in equities there would be enough for an emergency in a market down turn.
The issues are paying down the mortgage is a guaranteed savings of some known percentage of what is invested (treasury bond like if you will) vs some risky investment that might pay more or might lose money.
Last edited by Rodc on Fri Apr 24, 2015 3:21 pm, edited 1 time in total.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: what should MIL do with "windfall"?
Why do you think she resisted? One part of me says stay far away from the train wreck, the other part says figure out what this purchase was about, and maybe you can avert the wreck.batpot wrote:Totally agree with all of this, but there was no talking her out of it; we tried
I get the FI part but not the RE part of FIRE.
Re: what should MIL do with "windfall"?
Yes.Jack FFR1846 wrote:An easy answer is to pay it all towards the mortgage.
At ages 62/53, we bought a house at 8.5 x AGI.
But, we paid cash.