Windfall, but need to withdraw

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LearningToSave
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Joined: Tue Feb 07, 2017 9:56 pm

Windfall, but need to withdraw

Post by LearningToSave » Wed Feb 08, 2017 4:19 pm

Hey guys, new to the site but loving the information I'm getting. I have what I suppose is a special situation (at least I have not found a thread outlining my scenario thus far) which I'd like to get some opinions on. My wife and I have received a substantial gift of $500k. We are in a situation where we need to withdraw some of these funds for the next five years at the rates listed below to allow her to stay home with our young children and to fund our Roth IRA’s (to total the allowable $5,500/year/person). In a perfect world we would love to invest as much of this as possible for retirement and leave it but for us, it is worth forgoing the potential investment return to allow her to be with our kids during this time.

• Years 1-2: $5k/month
• Year 3: $4k/month
• Year 4: $3k/month
• Year 5: $2k/month

What I would like to get some advice on is what you can suggest to invest the $500k in, considering the withdrawals. We want to grow it as much as possible of course, but knowing that we will be withdrawing funds each month, is there some tax-advantaged allocation/approach we should use (considering that this is a taxable account)? Or should we just invest the money in whatever we feel would provide the most growth long-term, then sell off the value of funds to meet our monthly withdrawal (taking the funds each month from the appropriate fund type to stay balanced)? Since our overall plan is to begin drawing less each year from these funds as listed below, I do consider these funds a long-term investment (albeit a much smaller one after 5 years of drawing from it). If I was to disregard the fact that we are drawing from this, I would lean toward the three fund 20/80 portfolio. I would like to know people’s opinions on whether this makes sense as well. I’ve included some basic info below as well. Don’t think it’s pertinent but just in case. Thanks so much in advance!

General Details
• Emergency Funds: 2 months emergency fund, but plan to use the $500k funds for anything additional
• Debt: $178k mortgage
• Children's 529 plans: fully funded for all 3 kids
• Tax Filing Status: Married filing jointly
• Tax Rate: 25% Federal, 0% State
• Ages: 39

Current retirement assets
• His Roth IRA at Vanguard: $61k
• His Rollover IRA at Vanguard: $17k
• His pension: State sponsored pension plan which I estimate to amount to $500/month at this point (based on years of service, not sure if I'll work there forever) in today's dollars at retirement (feel good about plan solvency)
• Her 401k: $150k XOM stock
• Her Roth IRA at Vanguard: $41k
• Her pension: Company sponsored pension plan which I estimate to amount to $100/month in today's dollars at retirement (feel good about plan solvency)

i<3Investing
Posts: 150
Joined: Tue Jun 29, 2010 7:29 pm

Re: Windfall, but need to withdraw

Post by i<3Investing » Wed Feb 08, 2017 6:32 pm

I have a few questions..
  • If you instead paid off your mortgage would you be able to live on your salary only?
  • Can you cut back and save elsewhere? Eating in more now that the wife is at home.
  • I think you're overinvested in XOM. I would consider moving that to a more balanced portfolio.
  • Do you mean a 20% stocks / 80% bonds portfolio or the other way around?
I think the wife staying at home is a noble pursuit. I'm just trying to see if there can be some cost savings with these numbers. They seem pretty high in my opinion.

Regarding an 80/20 portfolio, this seems a little risky given the fact that you'll be on a solo income and relying on the money. I would set aside any money you need in the next 5 years into Money Market/CD's/ or short term bonds and invest the rest per your risk tolerance.

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jmndu99
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Re: Windfall, but need to withdraw

Post by jmndu99 » Wed Feb 08, 2017 7:20 pm

+1 to i <3Investing

It looks like this; of $500,000.00. You need $228,000.00 for Mrs. to stay home.

That is your "safe" money.
The difference (still a sizeable amount) is either dca or lump sum into the market per your allocation.

Best wishes
J

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Pajamas
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Re: Windfall, but need to withdraw

Post by Pajamas » Wed Feb 08, 2017 7:28 pm

So you plan to spend $228k in living expenses, which would leave you with $272k for other purposes.

The $228k should not be placed at risk because you will be spending it in the short to medium term. I would probably just use CDs for that and look for the best rates. Because rates might be going up you may wish to stick with shorter term CDs rather than say 3 year CDs unless there is a real jump in rates with the 3 year CDs. With that much in reserve, you don't need a large emergency fund at least for the next couple of years until the reserve dwindles.

The rest you could invest immediately per your 80/20 plan in taxable accounts but if you are not maxing out your tax-deferred accounts, you should use it for that first and then invest the rest in taxable. Your wife can contribute to an IRA while she is not working as long as your income covers it.

Another alternative is to use some of the $272k to pay off the mortgage depending on your risk tolerance, taxes, and mortgage rate, and then invest the rest. That is more of a personal preference than an absolute because you have to make a lot of assumptions, including future investment returns, to make a decision to pay off a mortgage or invest.

You didn't provide much information about your income or living expenses, so the declining draw amount from the gift sum for living expenses is a little confusing and the amounts seem arbitrary. Perhaps you are expecting your earnings to increase or your wife to work part time with increasing hours after the first couple of years or you expect your expenses to decline for some reason?

Regardless, I would infer that your living expenses are fairly high and would definitely suggest that you take a hard look at reducing them as much as possible. Your wife being able to stay home with the children is worth the foregone income and may reduce expenses some, but it still seems a shame to use almost half of a $500k gift for living expenses in context of the amount of your retirement investments, your age, and assumed income and living expenses. If you could put more towards retirement now, it would make a huge difference in twenty or thirty years. On the other hand, if you are maxing out your retirement accounts and continue to do so, you would probably be okay, anyway.

Oh, I also agree $150k in XOM is worrisome because it is a significant percentage of your retirement assets at 55%+, not counting pensions. I'm guessing that it has to do with your wife's employer but if you can do something about that, you should.
Last edited by Pajamas on Wed Feb 08, 2017 7:41 pm, edited 4 times in total.

bigred77
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Re: Windfall, but need to withdraw

Post by bigred77 » Wed Feb 08, 2017 7:33 pm

I wouldn't think of Roth IRA contributions as a "withdrawal" as much as it is a move between investment vehicles.

1.) If you pay off the mortgage, ignore the Roth IRA funding, and cut expenses a little bit can you live on just income? If so I would do just that (and move the max Roth IRA amounts from taxable to Roth IRAs each year). If you can't do that (live on 1 income with a paid for house and not needing to save for college) then I would have some reservations about your ability to sustain your standard of living long term.

2.) You could always just set aside 200k in a MM, CD ladder, or short term bond funds and use it over the next 5 years. Invest the remaining 300k according to your portfolio AA in a taxable account.

123
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Re: Windfall, but need to withdraw

Post by 123 » Wed Feb 08, 2017 8:21 pm

I guess I don't really see a reason to "spend down" a significant part of the $500 K gift related to childcare. Had you not received the gift you would have made other arrangements for childcare. I don't think there's anything wrong with using parts of the gift to allow contributions to retirement plans, though it seems like some kind of mental accounting to me. The money doesn't get used up by contributing to retirement plans, it just sits in a different account. It just sounds to me that the $500 K gift is being used to legitimize some lifestyle creep, but maybe that's okay. However, once most people start "spending down" a windfall they keep spending until its all gone.
The closest helping hand is at the end of your own arm.

LearningToSave
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Joined: Tue Feb 07, 2017 9:56 pm

Re: Windfall, but need to withdraw

Post by LearningToSave » Wed Feb 08, 2017 8:47 pm

Thanks for the answers so far. Some answers to your questions:

The 80/20 is 80 stock/20 bonds.

We are working toward cutting budget but the reason for the decrease in withdrawals is my wife starting her own business which will take some time.

The mortgage is 2.875%, would it not be better to keep the money on the market with the possibility of earning more factoring in the tax deduction for interest?

You guys are right, just moving money between taxable account and the Roth but trying to build up that "bucket".

aristotelian
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Re: Windfall, but need to withdraw

Post by aristotelian » Wed Feb 08, 2017 8:50 pm

What if you hadn't gotten this money, what would your plan have been? I would suggest doing that plan and keep the 500K to invest. You guys are a little behind in retirement savings, and the bulk of it is in one stock. (Does she work for Exxon?)

Nate79
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Location: Portland, OR

Re: Windfall, but need to withdraw

Post by Nate79 » Wed Feb 08, 2017 9:09 pm

Yikes! You have significant single company exposure. Any way to dump the stock in the 401k and invest in index funds?

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Pajamas
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Re: Windfall, but need to withdraw

Post by Pajamas » Wed Feb 08, 2017 9:31 pm

LearningToSave wrote:We are working toward cutting budget but the reason for the decrease in withdrawals is my wife starting her own business which will take some time.
Your figures for drawing from the gift are very specific in light of that. Leave lots of leeway there. Lots of new businesses fail for lack of capital but on the other hand, some businesses don't require much capital, i.e., if she will be consulting and there are no employees or inventory and little overhead. The area of overlap between "starting a new business" and "stay-at-home mom" is labelled "stress" on a Venn diagram.
LearningToSave wrote:The mortgage is 2.875%, would it not be better to keep the money on the market with the possibility of earning more factoring in the tax deduction for interest?
In my opinion, yes, others might disagree. You don't know for sure that it would be true, only what might have happened in the past. Your specific situation would weight it more towards not tying up most of this gift in paying off your mortgage.

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