Stuck - what to do with lump sum severance

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Elizabelle
Posts: 11
Joined: Sun Nov 12, 2017 12:23 pm

Stuck - what to do with lump sum severance

Post by Elizabelle » Thu Mar 08, 2018 11:42 am

My husband and I have Roth IRAs and 401k's that we contribute to regularly/automatically. However, he received a large lump sum severance two years and it has been sitting in an Ally CD at 1.5%. I just can't seem to pull the trigger and put in the market which seems really high (and yes, I know I should have already put it in the market and I think about that every single day :oops: ). We don't have any taxable investment accounts and we are invested in mostly stock mutual funds (Vanguard) with very little invested in bonds with the exception of my husband's pension fund with former employer which makes up 20% of our portfolio and is somehow connected to bonds. We had thought about purchasing another investment property and using this money as a down payment, but real estate in Chicago is nuts.

What should I do with this $100K. We don't need to access it anytime within the next 8-10 years.
Our particulars below and Thanks!

*******************************************************

Emergency funds: 6 months
Debt: Mortgage - Primary Residence $217K (4.875%) – multi-unit so interest rates are higher than SFH
Mortgage - Investment Property - $411K (4.375%). Strong positive cash flow.
Tax Filing Status: Married Filing Jointly (no children, btw)
Rate: 25% Federal, 4.95% State
State of Residence: Illinois
Age: 50/56(husband)
Desired Asset allocation: 70 stocks/30 bonds
Desired International allocation: Not sure

Current Portfolio is mid to high six figures

Current retirement assets
10% cash
10% CD (1.5% APR)

Tax-Deferred
His 401k (Still w/former employer 401K)
27% Equity Index Grown (Large Growth) (Ticker N/A) (.03%)
14 % Int’l Equity Index (Foreign Large Blend) (Ticker N/A) (.06%)

His Roth IRA at Vanguard
4% Large Cap Index (VLCAX) (.06%)
1% Vanguard Mid Cap (VLMSX) (.18%)

Her Roth IRA at Vanguard
2% Foreign Large Stock (VTRIX) (.43%)
2% Total Stock Market (VTSAX) (.04%)

Her solo 401k at Vanguard
2% Target Retirement 2035 (VTTHX) (.14%)

20% Pension (with former employer)

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Meg77
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Re: Stuck - what to do with lump sum severance

Post by Meg77 » Thu Mar 08, 2018 11:54 am

One easy option is to pay down your mortgage by $100k. This is especially true if you'll be taking the standard deduction from now on and therefore getting no tax benefit for the mortgage, which I suspect may be the case. That's a guaranteed 4.875% return which is much more than you're getting paid in cash, and much more than you can expect to get at least in the next decade on bonds and perhaps even stocks (you never know of course).

I know that's not a fun answer because it doesn't actually wipe out any debts. My other suggestion would be to move $10K a month into the index fund(s) of your choice unless and until some better use of the funds comes along, such as a real estate investment opportunity. Of course, make sure you're maxing out your 401ks, Roth IRAs and a HSA first.
"An investment in knowledge pays the best interest." - Benjamin Franklin

CoAndy
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Re: Stuck - what to do with lump sum severance

Post by CoAndy » Thu Mar 08, 2018 12:02 pm

I agree 100% with what Meg says. That is a great use of that money.

bungalow10
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Re: Stuck - what to do with lump sum severance

Post by bungalow10 » Thu Mar 08, 2018 12:05 pm

Another vote for paying down that primary residence. You will thank yourself later when you wipe it out a substantial number of years early!!
An elephant for a dime is only a good deal if you need an elephant and have a dime.

Hillview
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Re: Stuck - what to do with lump sum severance

Post by Hillview » Thu Mar 08, 2018 1:18 pm

Husband was laid off 18 months ago and we paid off our mortgage with his severance. I sleep better at night. It also freed us up to do other investing with other cash vs needing it for the mortgage. The years cut off your mortgage will get you closer to debt free retirement. My 2 cents.

Dottie57
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Re: Stuck - what to do with lump sum severance

Post by Dottie57 » Thu Mar 08, 2018 1:33 pm

Meg77 wrote:
Thu Mar 08, 2018 11:54 am
One easy option is to pay down your mortgage by $100k. This is especially true if you'll be taking the standard deduction from now on and therefore getting no tax benefit for the mortgage, which I suspect may be the case. That's a guaranteed 4.875% return which is much more than you're getting paid in cash, and much more than you can expect to get at least in the next decade on bonds and perhaps even stocks (you never know of course).

I know that's not a fun answer because it doesn't actually wipe out any debts. My other suggestion would be to move $10K a month into the index fund(s) of your choice unless and until some better use of the funds comes along, such as a real estate investment opportunity. Of course, make sure you're maxing out your 401ks, Roth IRAs and a HSA first.

I say mortgage pay down too.

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Hyperborea
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Location: In Limbo

Re: Stuck - what to do with lump sum severance

Post by Hyperborea » Thu Mar 08, 2018 1:46 pm

Hillview wrote:
Thu Mar 08, 2018 1:18 pm
Husband was laid off 18 months ago and we paid off our mortgage with his severance. I sleep better at night. It also freed us up to do other investing with other cash vs needing it for the mortgage. The years cut off your mortgage will get you closer to debt free retirement. My 2 cents.
That's great if you can completely pay it down. The OP can't do that. If they run into a tight cashflow situation then the monthly mortgage amount is the same and the bank will take possession if they don't pay just the same, no matter what the remaining balance. Until they can pay it off completely I would do something else with the money. Ideally, that would have been to invest it 2 years ago. At this point the second best option is to invest it now into their desired allocation.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Watty
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Re: Stuck - what to do with lump sum severance

Post by Watty » Thu Mar 08, 2018 1:55 pm

Meg77 wrote:
Thu Mar 08, 2018 11:54 am
One easy option is to pay down your mortgage by $100k.
+1

You can call your lender and ask if they will "recast your mortgage"(Google this) if you pay make a large prepayment. They are not required to do this but they often will for a small processing fee of a couple of hundred dollars. The way this works is that if you pay down the mortgage by 33%(or whatever makes sense) then your required monthly payment will be reduced by the same percentage which could be important if thre is something like another layoff of disability. The length and interest rate of the loan will stay the same which could be important if interest rates go way up.

You could then invest the freed up money each month.

Elizabelle
Posts: 11
Joined: Sun Nov 12, 2017 12:23 pm

Re: Stuck - what to do with lump sum severance

Post by Elizabelle » Thu Mar 08, 2018 2:13 pm

I never thought about paying off our mortgage. Interesting idea. I will check into "recasting" with our lender to see what they say. Other than that, I will probably just have to take my lumps and put it into the market over the next year 10K at a time as suggested. I could always take it out (provided it's not at a loss) if a worthwhile real estate investment opportunity comes up.

Jack FFR1846
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Re: Stuck - what to do with lump sum severance

Post by Jack FFR1846 » Thu Mar 08, 2018 2:17 pm

For a point of reference, that CD rate is low. Ablebanking online savings account pays 1.7% and Redneck Megamoey pays 1.75% up to $35k.

If you don't want to just pay down the mortgage in one shot, use one of these bank accounts and pay an extra thousand a month on the mortgage.
Bogle: Smart Beta is stupid

gotester2000
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Re: Stuck - what to do with lump sum severance

Post by gotester2000 » Thu Mar 08, 2018 2:35 pm

Looking at your assets and liabilities, it would be better to reduce the primary mortgage.

I dont understand why would you think of another investment property at your age - the one you have is going to take a long time to payoff the mortgage. Do you put everything in real estate?

Elizabelle
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Joined: Sun Nov 12, 2017 12:23 pm

Re: Stuck - what to do with lump sum severance

Post by Elizabelle » Thu Mar 08, 2018 4:14 pm

At my age <sigh> :D But your point is well taken gotester2000. Real estate only takes up about 1/3 of our NW. We have done well with real estate and like being landlords. But it seems the housing market in our area is just too hot right now and is an even longer game. Perhaps we should take all of the excess cash flow in that investment property ($2000/month) and apply it every month to the mortgage (4.375%) allowing us to pay it down more quickly.
Our primary home is also an investment property (2 flat), so we may (?) continue to get some kind of tax benefits from a mortgage? I will look into paying down a large sum and "re-casting" that mortgage.
Great feedback, thank you.

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