Inheritance advice

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thingsarefun
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Inheritance advice

Post by thingsarefun » Thu Feb 16, 2017 10:17 pm

Hello BH,
I'm wondering if you agree with using a portion of inheritance to pay off our mortgage in this situation?

Married, No kids
Him 39 / Her 49
96k combined Income 25% tax

Investments: we are aiming for an 80/20 equity/bond mix
Him
401k - 110k 16% contribution with 100% match of first 4%
T-IRA - 11k
Taxable account - 10k

Her
T-IRA - 11k
Taxable - 3k

Debt
No CC or Car loan
Home loan 39k @ 3.75% Currently paying accelerated rate 1k per month
~1700 interest paid last year

The inheritance is only spread across four holdings, it will need to be liquidated to diversify regardless of what is done ~230k in approximate value.

My thoughts, we get no tax benefit from carrying this loan and it would also be nice to free up the 12k per year in cash.
The downside, I feel we are way behind on retirement savings for our ages.

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Watty
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Re: Inheritance advice

Post by Watty » Fri Feb 17, 2017 12:09 am

thingsarefun wrote:The downside, I feel we are way behind on retirement savings for our ages.


Your net worth stays the same if you pay off the mortgage or invest the money.

What will turn out to be the best choice when you look back on this ten years from now depends on unknowable things like future interest rates and your investing return.

That is why there usually not a clear answer for questions like this.

That said I would go on and pay it off since it it only around half of the inheritance, but that is just me. I would then save my "mortgage payment" each month and max out all my retirement accounts.

Part of my reasoning is that you will have less sequence of returns risk. Here is what I have posted about this before.

If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also paid a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.


One possible downside of paying it off is that if something happens and you get divorced then things will be complex and the additional home equity might end up being split between you instead of going to whichever one of you actually inherited the money. That depends on a lot of factors and your state laws.

aristotelian
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Re: Inheritance advice

Post by aristotelian » Fri Feb 17, 2017 12:14 am

Personally I would not put too much into the mortgage. Paying off the mortgage effectively concentrates your portfolio in a single asset that could depreciate in the event of a real estate downturn. I believe you are best off hedging your bets and contributing some to the house and some to a diverse mix of stocks and bonds. 3.75% is an excellent interest rate, plus the interest is tax deductible.

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Flobes
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Re: Inheritance advice

Post by Flobes » Fri Feb 17, 2017 12:55 am

Welcome to the Forum.

Your 2016 story is my 2008 story.

In 2008 I'd been throwing extra money at my mortgage, and the balance was down to @$40,000. I received an inheritance. Everybody's advice was consistent: Do not pay off the mortgage, and use the inheritance money to fund your retirement.

But I paid off the mortgage. And splurged on some nice new pillows to enjoy my better sleep at night.

Then 2008 unfolded. My job went away in the recession vortex. The markets tanked, and investments evaporated. I owned my house free and clear.

So I'm firmly in the camp of use the windfall to pay off the mortgage. You live in your home, not in your accounts.

Then hold the discipline to shift your monthly mortgage payment amount to monthly retirement saving. And make thoughtful, tax-efficient investment decisions with the rest of your inheritance, and this inherited money will fund your retirement.

Consider using the generous wisdom of this Forum to help you organize and implement an effective strategy for all of your portfolio, including the newly inherited money.

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Pajamas
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Re: Inheritance advice

Post by Pajamas » Fri Feb 17, 2017 2:48 am

Since the inheritance is $230k and your mortgage balance is $39k and you are not getting an interest deduction, just pay it off. It feels great not to have a mortgage payment and you will still have $191k left for retirement. The extra $12k a year that is freed up will quickly offset the $39k. If your mortgage balance were $100k, it would be a much harder decision.

Don't forget that the ability to make retirement account catch-up contributions begins in the year you or your wife turns 50.

CyclingDuo
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Re: Inheritance advice

Post by CyclingDuo » Fri Feb 17, 2017 5:49 am

thingsarefun wrote:Hello BH,
I'm wondering if you agree with using a portion of inheritance to pay off our mortgage in this situation?

Married, No kids
Him 39 / Her 49
96k combined Income 25% tax

Investments: we are aiming for an 80/20 equity/bond mix
Him
401k - 110k 16% contribution with 100% match of first 4%
T-IRA - 11k
Taxable account - 10k

Her
T-IRA - 11k
Taxable - 3k

Debt
No CC or Car loan
Home loan 39k @ 3.75% Currently paying accelerated rate 1k per month
~1700 interest paid last year

The inheritance is only spread across four holdings, it will need to be liquidated to diversify regardless of what is done ~230k in approximate value.

My thoughts, we get no tax benefit from carrying this loan and it would also be nice to free up the 12k per year in cash.
The downside, I feel we are way behind on retirement savings for our ages.


Based on your ages, with the inheritance money coming in you will now have $375K which is in the ballpark. If we use your husband's age of 39, it is in the ballpark due to the number of years he has left to work and contribute (28 more years). If we use your age, it is probably $50-75K under where you "should be" based on the number of years you have left to work and contribute (18 years). So you have to sort of split the difference in your ages and figure that with the inheritance money coming in, combined with what is already in the 401k, IRA's, and taxable savings you'll be caught up to about where you should be.

His savings plan looks good with the 401K. If the mortgage was paid off with the inheritance money, in future years he could use $5500 of the annual 12K that is currently going towards those payments to fund his IRA's (Traditional IRA for the amount that is deductible, and the rest in a ROTH IRA). You would do the same to fund your Traditional for the tax deduction portion allowed, and the rest in a ROTH in your name as well. Once you hit 50, you'll be able to up that combination IRA contribution in your (wife) account to $6500 next year.

I would also use the inheritance money (provided you get it before the April IRS tax date) to fund Traditional and ROTH IRA's for both of you for tax year 2016 while you still can as well. That would be a more important step to do first than paying off the mortgage. IMO.

thingsarefun
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Joined: Wed Feb 15, 2017 9:10 am

Re: Inheritance advice

Post by thingsarefun » Fri Feb 17, 2017 9:44 am

Thank you all for the replies, really helps making me more comfortable with the decision to pay off the loan.

As for the IRA's both are fully funded for 2016 & 2017, my plan is to contribute the max the 1st of January from now on.

As a side note, is there anything else I should look into to try and reduce my taxable income? I'm only short of the max 401K contribution by 4k, and currently the only deductions we have is the IRA & our yearly donations to our local humane shelter & habitat for humanity.

Grt2bOutdoors
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Location: New York

Re: Inheritance advice

Post by Grt2bOutdoors » Fri Feb 17, 2017 9:49 am

thingsarefun wrote:Thank you all for the replies, really helps making me more comfortable with the decision to pay off the loan.

As for the IRA's both are fully funded for 2016 & 2017, my plan is to contribute the max the 1st of January from now on.

As a side note, is there anything else I should look into to try and reduce my taxable income? I'm only short of the max 401K contribution by 4k, and currently the only deductions we have is the IRA & our yearly donations to our local humane shelter & habitat for humanity.


Pay off the mortgage, use remaining $12K of free cash flow to fully fund the IRA's, use $4K of inheritance each year to fully fund the 401K. Done. You are in great shape, sorry for your loss.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

aristotelian
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Re: Inheritance advice

Post by aristotelian » Fri Feb 17, 2017 11:26 am

thingsarefun wrote:Thank you all for the replies, really helps making me more comfortable with the decision to pay off the loan.

As for the IRA's both are fully funded for 2016 & 2017, my plan is to contribute the max the 1st of January from now on.

As a side note, is there anything else I should look into to try and reduce my taxable income? I'm only short of the max 401K contribution by 4k, and currently the only deductions we have is the IRA & our yearly donations to our local humane shelter & habitat for humanity.


I would keep some cash on hand to cover the $4k you are short on the 401k for this year and the next 3 to 5 years. That is a bigger benefit than either taxable investment or the 3.75% return on paying down your mortgage.

malabargold
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Re: Inheritance advice

Post by malabargold » Fri Feb 17, 2017 11:39 am

Flobes wrote:Welcome to the Forum.

Your 2016 story is my 2008 story.

In 2008 I'd been throwing extra money at my mortgage, and the balance was down to @$40,000. I received an inheritance. Everybody's advice was consistent: Do not pay off the mortgage, and use the inheritance money to fund your retirement.

But I paid off the mortgage. And splurged on some nice new pillows to enjoy my better sleep at night.

Then 2008 unfolded. My job went away in the recession vortex. The markets tanked, and investments evaporated. I owned my house free and clear.

So I'm firmly in the camp of use the windfall to pay off the mortgage. You live in your home, not in your accounts.

Then hold the discipline to shift your monthly mortgage payment amount to monthly retirement saving. And make thoughtful, tax-efficient investment decisions with the rest of your inheritance, and this inherited money will fund your retirement.

Consider using the generous wisdom of this Forum to help you organize and implement an effective strategy for all of your portfolio, including the newly inherited money.




But you are not considering the flip-side, an important factor, and one which completely changes the moral of your story.
Had you invested the money, even then (assuming you had a proper emergency fund) - your returns, plus dividends, would be very handsome indeed,
- most houses even now, are just barely above their 2008 value.

aristotelian
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Re: Inheritance advice

Post by aristotelian » Fri Feb 17, 2017 11:54 am

malabargold wrote:But you are not considering the flip-side, an important factor, and one which completely changes the moral of your story.
Had you invested the money, even then (assuming you had a proper emergency fund) - your returns, plus dividends, would be very handsome indeed,
- most houses even now, are just barely above their 2008 value.


Exactly. In my mind, 2008 is the case in point of why NOT to invest all your assets in real estate. 2008 was a scary time whether you were invested in stocks or real estate. The stock market actually bounced back much faster.

If you had kept the $300k in cash, and used dollar-cost-averaging to invest from 2008 through 2011, you would have doubled your money and you could have bought two houses with it in 2011, or four houses today.

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T-Wrench
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Re: Inheritance advice

Post by T-Wrench » Fri Feb 17, 2017 12:23 pm

aristotelian wrote:
malabargold wrote:But you are not considering the flip-side, an important factor, and one which completely changes the moral of your story.
Had you invested the money, even then (assuming you had a proper emergency fund) - your returns, plus dividends, would be very handsome indeed,
- most houses even now, are just barely above their 2008 value.


Exactly. In my mind, 2008 is the case in point of why NOT to invest all your assets in real estate. 2008 was a scary time whether you were invested in stocks or real estate. The stock market actually bounced back much faster.

If you had kept the $300k in cash, and used dollar-cost-averaging to invest from 2008 through 2011, you would have doubled your money and you could have bought two houses with it in 2011, or four houses today.


I disagree (with the idea, not the math). The poster lost their job and didn't have to pay a mortgage; with a mortgage and no job, the risk of bankruptcy or garnished wages is real, and using investments that had just tanked to pay off the mortgage is a losing bet as well. I would consider this use of the money for peace of mind and a place to live, not as a real investment.

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Flobes
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Re: Inheritance advice

Post by Flobes » Fri Feb 17, 2017 12:32 pm

aristotelian wrote:
malabargold wrote:But you are not considering the flip-side, an important factor, and one which completely changes the moral of your story.
Had you invested the money, even then (assuming you had a proper emergency fund) - your returns, plus dividends, would be very handsome indeed,
- most houses even now, are just barely above their 2008 value.


Exactly. In my mind, 2008 is the case in point of why NOT to invest all your assets in real estate. 2008 was a scary time whether you were invested in stocks or real estate. The stock market actually bounced back much faster.

If you had kept the $300k in cash, and used dollar-cost-averaging to invest from 2008 through 2011, you would have doubled your money and you could have bought two houses with it in 2011, or four houses today.


The point got lost. The moral of my story is that I kept my house, as so many around me lost theirs. You have to live somewhere, even if you no longer have a job. Had I invested that $40k, I'd have watched $20k promptly disappear, right when I no longer had income to pay the mortgage. I was one of the infamous 99ers, out of work for years.

Glib hindsight of rapidly growing markets isn't really instructive, nor are hyperbolic messages about $300k when both OP and my amounts are <$40k. FWIW my home did not lose any value throughout the recession, and it actually grew each and every year.

To the OP: Your home is your home, not your strategic investment. Pay it off, and call it a gift from from your lost one. Then get very strategic about investing the rest of the inheritance. And treat yourself to new pillows!

malabargold
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Re: Inheritance advice

Post by malabargold » Fri Feb 17, 2017 12:33 pm

T-Wrench wrote:
aristotelian wrote:
malabargold wrote:But you are not considering the flip-side, an important factor, and one which completely changes the moral of your story.
Had you invested the money, even then (assuming you had a proper emergency fund) - your returns, plus dividends, would be very handsome indeed,
- most houses even now, are just barely above their 2008 value.


Exactly. In my mind, 2008 is the case in point of why NOT to invest all your assets in real estate. 2008 was a scary time whether you were invested in stocks or real estate. The stock market actually bounced back much faster.

If you had kept the $300k in cash, and used dollar-cost-averaging to invest from 2008 through 2011, you would have doubled your money and you could have bought two houses with it in 2011, or four houses today.


I disagree (with the idea, not the math). The poster lost their job and didn't have to pay a mortgage; with a mortgage and no job, the risk of bankruptcy or garnished wages is real, and using investments that had just tanked to pay off the mortgage is a losing bet as well. I would consider this use of the money for peace of mind and a place to live, not as a real investment.



As I said - have an adequate emergency fund

aristotelian
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Re: Inheritance advice

Post by aristotelian » Fri Feb 17, 2017 12:48 pm

Flobes wrote:The point got lost. The moral of my story is that I kept my house, as so many around me lost theirs. You have to live somewhere, even if you no longer have a job. Had I invested that $40k, I'd have watched $20k promptly disappear, right when I no longer had income to pay the mortgage. I was one of the infamous 99ers, out of work for years.

Glib hindsight of rapidly growing markets isn't really instructive, nor are hyperbolic messages about $300k when both OP and my amounts are <$40k. FWIW my home did not lose any value throughout the recession, and it actually grew each and every year.

To the OP: Your home is your home, not your strategic investment. Pay it off, and call it a gift from from your lost one. Then get very strategic about investing the rest of the inheritance. And treat yourself to new pillows!


Apologies for being glib. I was thinking more of OP's situation, not yours. To be clear, though, we are talking about $230k (I don't know where I got $300k) not <$40k. If it makes you feel good to own your home, that is great, but I disagree that you should not view your house as an investment. Part of the problem with the recession was that many people were investing all their cash in their homes, financing their homes with debt, and taking very concentrated risks.

Also, there is nothing wrong with renting if worst comes worst and you have to lose your house for some reason. I would rather lose my house and rent for a while and still have my retirement savings than have it all go up in smoke if all my assets are in the house and I am forced to sell in a down market.

bigred77
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Re: Inheritance advice

Post by bigred77 » Fri Feb 17, 2017 1:15 pm

aristotelian wrote:Personally I would not put too much into the mortgage. Paying off the mortgage effectively concentrates your portfolio in a single asset that could depreciate in the event of a real estate downturn. I believe you are best off hedging your bets and contributing some to the house and some to a diverse mix of stocks and bonds. 3.75% is an excellent interest rate, plus the interest is tax deductible.


I disagree with this view. Whether you own your home outright or only have 20% equity in the house, if the value of the house goes down by 25k, your net worth goes down by 25k. The financing is irrelevant.

If the OP paid less than 2k in interest, it's likely a married couple is not itemizing deductions. They are getting 0 tax advantages for holding the loan.


OP,

I would pay off the mortgage, bump your 401k contributions to the max, and invest the remainder in a taxable account. Be sure to max out your IRA's each year going forward. I would also suggest looking into Roth IRA contributions instead of traditional IRA in the future (I'm assuming with a 18k 401k contribution you're probably in the 15% marginal tax bracket). Some diversity in traditional/Roth balances can be helpful down the road.

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Flobes
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Re: Inheritance advice

Post by Flobes » Fri Feb 17, 2017 1:24 pm

malabargold wrote:As I said - have an adequate emergency fund

Really? Do you keep two years of expenses in your emergency fund?

aristotelian wrote:Apologies for being glib. I was thinking more of OP's situation, not yours. To be clear, though, we are talking about $230k (I don't know where I got $300k) not <$40k.

No. OP is asking about paying off a $39k mortgage from a $230k inheritance.

aristotelian wrote:Also, there is nothing wrong with renting if worst comes worst and you have to lose your house for some reason. I would rather lose my house and rent for a while and still have my retirement savings than have it all go up in smoke if all my assets are in the house and I am forced to sell in a down market.

When you lose your home in the recession, and you lose your job in the recession, you will have to take the rent money out of your depressed accounts. Where I live, 2008-2010 rent costs skyrocketed bcz demand went up as seemingly limitless households were displaced from their "owned" and rental homes. It's rather nice to ride out a storm in comfortable shelter.

We are getting somewhat OT here, but we're having collective amnesia about 2008 and the recession, when everything goes wrong at the same time, rapidly. How quickly we forget!

OP can buy freedom and peace of mind for 17% of a windfall. What a bargain for such a gift!

aristotelian
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Re: Inheritance advice

Post by aristotelian » Fri Feb 17, 2017 3:06 pm

Flobes wrote:
malabargold wrote:No. OP is asking about paying off a $39k mortgage from a $230k inheritance.


Doh. I completely missed that. I thought the question was whether to put the whole inheritance toward the mortgage. In that case, I agree, I would pay it off just for the convenience factor.

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