Windfall proceeds - what to do?

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RRB214
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Windfall proceeds - what to do?

Post by RRB214 » Tue Aug 14, 2018 11:47 am

Background:
Selling a business in a TX, looking at a $1.5MM (post-debt and post capital gains) all cash, and an additional $500k (post-cap gains) cash in 36 months, (12/31/2021)
Must continue to work for purchaser for 36 months as a W-2 for $150-$175k, depending on performance, could also likely stay on at similar salary indefinitely, or scale back involvement at reduced income...but this is not the preferred option, unless absolutely required to do so financially
DINKs (36/37) for now, but likely to add a new kid in 2019, and stopping with 1
Spouse is W-2 with $175k income plus insurance/benefits, will continue to work for 10-15 more years at most (hopefully), assuming 3-5% income growth annually
Max 401k ($18.5k) + decent match (capped at $5k), Max SEP IRA ($55k), Max HSA through employer, SEP IRA will obviously be going away, unsure if purchaser offers 401k, but would max if so
$400k spread-out between IRAs and 401k currently, no other substantial investments
$750k home, Note 1 - $400k @ 4.125%, 28 years left, Note 2 - $150k @ 5.250%, 8 years left until balloon is due, $15k +/- property taxes annually, we live in a relatively HCOL area of TX.
$20k left in student loan debt at +/- 3.25%, and not in any kind of hurry to pay it off
No other debts to speak of, except when the wife sees a sale at Nordstrom :o
Child's education would likely be private from birth - 12th, college paid for by grandparents :happy

What would you do to make the $1.5MM and $500k last?

After the 36 month transition period is over, there will be an additional 24 month non-compete, so going right back into this isn't possible. Considering additional school for specialty or an MBA.

Ideally, we're both done and retired in 12-15 years (2033ish) and want to maintain the same lifestyle with $20-$25k monthly income from retirement accounts and sale of business proceeds. Will have to institute IRA ladder of sorts to bridge the gaps between retirement and 59.5. Not counting on ever getting SS.

Goal33
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Re: Windfall proceeds - what to do?

Post by Goal33 » Tue Aug 14, 2018 11:56 am

I’d start by paying off the house loans and student loans
A man with one watch always knows what time it is; a man with two watches is never sure.

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BeBH65
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Re: Windfall proceeds - what to do?

Post by BeBH65 » Tue Aug 14, 2018 2:45 pm

Do you have an emergency fund?
Pay off the student loan and get rid it.
Set money aside for the children.
Pay off the mortgages. A high guaranteed return.

Consider updating the opening post according to the standard format of "asking portfolio questions" to get more reactions and a comprehensive feedback.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

RRB214
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Re: Windfall proceeds - what to do?

Post by RRB214 » Tue Aug 14, 2018 3:24 pm

Do you have an emergency fund? Yes, about $125k in a 1.50% online savings account
Pay off the student loan and get rid it. Not sure if we want to do this, low, low, low interest rates, and minimal impact to our monthly cash flow ($230)
Set money aside for the children CHILD :D . College is paid for, K-12 will be $20k/year or more. What type of account could this go into? 529?
Pay off the mortgages. A high guaranteed return. Will likely pay off the smaller note, but we itemize and the mortgage deduction helps. Not sure how interested in whacking 33% off of the nest egg

Will still have $350k+ annually coming in in salaries from 2019- 2021, so tax deductions are still in play. The idea would be to put this money to work immediately and keep 1 of us either at home or free to pursue other passions, business interests, and/or raise the kid without impacting our lifestyle.

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Meg77
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Re: Windfall proceeds - what to do?

Post by Meg77 » Tue Aug 14, 2018 4:13 pm

RRB214 wrote:
Tue Aug 14, 2018 3:24 pm
Do you have an emergency fund? Yes, about $125k in a 1.50% online savings account
Pay off the student loan and get rid it. Not sure if we want to do this, low, low, low interest rates, and minimal impact to our monthly cash flow ($230)
Set money aside for the children CHILD :D . College is paid for, K-12 will be $20k/year or more. What type of account could this go into? 529?
Pay off the mortgages. A high guaranteed return. Will likely pay off the smaller note, but we itemize and the mortgage deduction helps. Not sure how interested in whacking 33% off of the nest egg

Will still have $350k+ annually coming in in salaries from 2019- 2021, so tax deductions are still in play. The idea would be to put this money to work immediately and keep 1 of us either at home or free to pursue other passions, business interests, and/or raise the kid without impacting our lifestyle.
If it were me, I'd use $570k to pay off all the debt first. That still leaves you with over a million dollars in cash to figure out how to invest at a time when every single asset class is overpriced by historical standards. You'll have more to save each month which can be directed into the market, effectively giving you less to lump sum invest but boosting the amount you dollar cost average into the market over time. Given current stock market valuations, that's the route I'd go right now. (If the stock market tanks by 20%+ between now and when you get the money, I'd probably keep the debt invest the lump sum into the market instead.)

If you were in a normal situation it might make sense to leave cheap debt around, but your situation is no longer normal. I'm a banker and totally get the appeal of leverage, but you're trying to figure out what to do with a 7 figure windfall. Keeping a $20k loan around just because the rate is "good" is not going to move the needle. Sure, you can dump the whole windfall into the stock market and cross your fingers that you not only earn as much as the interest you're paying PLUS a reasonable spread above that for taking the risk. But we are in the longest bull market in history with stock valuations fluttering around all time highs. Not exactly the best time to make that bet. Let's say you invest that $20k instead and make 1% more on average every year than the debt cost. Congrats - you just bought yourself an extra fast food lunch once a month.

The same logic applies to the mortgage. You can always go get another one if you really hate being debt free. But you already have more money than you know what to do with - literally. If that's not the right time to pay off debt, even cheap debt, then when is?

By the way, unless you're giving away a ton, you aren't getting much benefit from itemizing. The standard deduction is $24k. You can write off $10K of property taxes or sales taxes now (max), and your mortgage interest is about $16k. So you're only getting a tax benefit on about $2k of your mortgage interest. Which means your stated loan interest rate is pretty darn close to your tax effective rate (and will be exact in a year when the mortgage balance is lower).
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Sandtrap
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Re: Windfall proceeds - what to do?

Post by Sandtrap » Tue Aug 14, 2018 4:23 pm


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vineviz
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Re: Windfall proceeds - what to do?

Post by vineviz » Tue Aug 14, 2018 4:32 pm

Meg77 wrote:
Tue Aug 14, 2018 4:13 pm
RRB214 wrote:
Tue Aug 14, 2018 3:24 pm
Do you have an emergency fund? Yes, about $125k in a 1.50% online savings account
Pay off the student loan and get rid it. Not sure if we want to do this, low, low, low interest rates, and minimal impact to our monthly cash flow ($230)
Set money aside for the children CHILD :D . College is paid for, K-12 will be $20k/year or more. What type of account could this go into? 529?
Pay off the mortgages. A high guaranteed return. Will likely pay off the smaller note, but we itemize and the mortgage deduction helps. Not sure how interested in whacking 33% off of the nest egg

Will still have $350k+ annually coming in in salaries from 2019- 2021, so tax deductions are still in play. The idea would be to put this money to work immediately and keep 1 of us either at home or free to pursue other passions, business interests, and/or raise the kid without impacting our lifestyle.
If it were me, I'd use $570k to pay off all the debt first. That still leaves you with over a million dollars in cash to figure out how to invest at a time when every single asset class is overpriced by historical standards. You'll have more to save each month which can be directed into the market, effectively giving you less to lump sum invest but boosting the amount you dollar cost average into the market over time. Given current stock market valuations, that's the route I'd go right now. (If the stock market tanks by 20%+ between now and when you get the money, I'd probably keep the debt invest the lump sum into the market instead.)

If you were in a normal situation it might make sense to leave cheap debt around, but your situation is no longer normal.
I agree with this 100%
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Meg77
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Re: Windfall proceeds - what to do?

Post by Meg77 » Tue Aug 14, 2018 4:36 pm

RRB214 wrote:
Tue Aug 14, 2018 3:24 pm
The idea would be to put this money to work immediately and keep 1 of us either at home or free to pursue other passions, business interests, and/or raise the kid without impacting our lifestyle.
RRB214 wrote:
Tue Aug 14, 2018 11:47 am
Spouse is W-2 with $175k income plus insurance/benefits, will continue to work for 10-15 more years at most (hopefully), assuming 3-5% income growth annually.
RRB214 wrote:
Tue Aug 14, 2018 11:47 am
After the 36 month transition period is over, there will be an additional 24 month non-compete, so going right back into this isn't possible. Considering additional school for specialty or an MBA.
RRB214 wrote:
Tue Aug 14, 2018 11:47 am
Ideally, we're both done and retired in 12-15 years (2033ish) and want to maintain the same lifestyle with $20-$25k monthly income from retirement accounts and sale of business proceeds. Will have to institute IRA ladder of sorts to bridge the gaps between retirement and 59.5. Not counting on ever getting SS.
There are a lot of potentially conflicting ideas here. You can probably both retire in 12-15 years, OR one of you can quit your high paying job in 2 years while the other continues to work, but there isn't enough money here to support both of those goals if you really want to spend $20k - $25k per month. You'll need a portfolio of at least $6 - 7.5 million to throw off that income (and that's before taxes). You're a big part of the way there, but getting there in real terms in just a decade or so will require a big income and a big savings rate. Play around with the retirement calculator at Personalcapital.com for projections.
RRB214 wrote:
Tue Aug 14, 2018 11:47 am
What would you do to make the $1.5MM and $500k last?

The 3 fund portfolio is really the only answer to this you'll get on this site. Decide the asset allocation that you're comfortable with, buy the cheapest index funds that match it, and buy and hold indefinitely. That's pretty much it, although real estate investing or starting another business is an option as well. I wouldn't pay for an MBA unless you have a career dream that requires it. And it would be hard to transition to the corporate world after running your own business I imagine.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Sandi_k
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Re: Windfall proceeds - what to do?

Post by Sandi_k » Tue Aug 14, 2018 6:53 pm

OK, given that:

- You're in your 30's
- Your wife will continue to work for the next few years (until the kid arrives?)
- You will have good income through at least 2021
- You want an outsize income in retirement AND want to retire early
- Private school and college are taken care of for your kid

Using the windfall to pay off all debt is appealing, but the time that investment could compound in your favor over the next decade is also important.

If I were you, these would be my next steps...

1) Pay off student loan (-$20k)
2) Pay off note 2. With a balloon, etc., it just complicates your life. (-$150k)
3) Open a brokerage, post-tax account, wherever you have your 401(k) and IRAs. Lump sum the remaining windfall money into those post-tax accounts, in the TSM fund and TB fund, 80/20 ratio, and whatever international proportion you prefer. Low cost index, you know the drill.
4) Keep your $125k emergency fund.
5) Consider refi'ing the Note #1 on the house to a 15 year mortgage. Keep a deduction, reduce the interest paid, which is insane on a 30 year note.

It's a good mix of optimizing your income, the magic of compounding, reducing interest paid out, and cash flow. IMO. :D

RRB214
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Re: Windfall proceeds - what to do?

Post by RRB214 » Wed Aug 15, 2018 10:15 am

@ Meg77 - thanks for spelling it out that way, it really helps me put it into perspective. I'm not sold on paying off the whole mortgage with that rate, but definitely something to think about. Thank you for detailing it out like that!
By the way, unless you're giving away a ton, you aren't getting much benefit from itemizing.
Charity - $20k in a typical year, probably closer to $100k in 2019 one-time, and then back to $15-$20k moving forward.
If I were you, these would be my next steps...

1) Pay off student loan (-$20k)
2) Pay off note 2. With a balloon, etc., it just complicates your life. (-$150k)
3) Open a brokerage, post-tax account, wherever you have your 401(k) and IRAs. Lump sum the remaining windfall money into those post-tax accounts, in the TSM fund and TB fund, 80/20 ratio, and whatever international proportion you prefer. Low cost index, you know the drill.
4) Keep your $125k emergency fund.
5) Consider refi'ing the Note #1 on the house to a 15 year mortgage. Keep a deduction, reduce the interest paid, which is insane on a 30 year note.

It's a good mix of optimizing your income, the magic of compounding, reducing interest paid out, and cash flow. IMO. :D
This is likely to be the direction we head down, but still nervous/apprehensive about dropping in a ton of money into the market right now, for the reasons Meg77 pointed out. I feel like the bull market has to come to an end, and November's elections may influence that as well.

I haven't run the numbers for a 15 year vs. staying put and adding the $900/month from the 2nd note payoff to see if it's worth paying for the re-finance.

hafjell
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Re: Windfall proceeds - what to do?

Post by hafjell » Wed Aug 15, 2018 10:29 am

If you keep saying you're only going to have one child, God is going to give you twins who ride horses competitively.

RRB214
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Re: Windfall proceeds - what to do?

Post by RRB214 » Wed Aug 15, 2018 10:35 am

Just ran the numbers on refi vs. adding to payment. Definitely refi, assuming sub 4.00% fixed.

RRB214
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Re: Windfall proceeds - what to do?

Post by RRB214 » Wed Aug 15, 2018 10:36 am

hafjell wrote:
Wed Aug 15, 2018 10:29 am
If you keep saying you're only going to have one child, God is going to give you twins who ride horses competitively.
I (jokingly) tell my wife that if we have twins, we'll sell 1 to pay for the other. :D
She doesn't think I'm as funny as I do.

hafjell
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Re: Windfall proceeds - what to do?

Post by hafjell » Wed Aug 15, 2018 10:57 am

RRB214 wrote:
Wed Aug 15, 2018 10:36 am
I (jokingly) tell my wife that if we have twins, we'll sell 1 to pay for the other. :D
She doesn't think I'm as funny as I do.
Ha!

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Blimpalot
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Re: Windfall proceeds - what to do?

Post by Blimpalot » Wed Aug 15, 2018 11:03 am

RRB214 wrote:
Wed Aug 15, 2018 10:15 am
I feel like the bull market has to come to an end,
I'm pretty sure you could do a search and find people saying the same thing in 2011. And 2013. And November 9, 2016. And January 2018. I mean, I'm not saying you're wrong or anything. Eventually, the music will stop and a correction will happen, and whoever was the last person to say "I feel like the bull market has come to an end" will then be able to say "See--I told ya so!" and then make money on their newsletter for a few years.
"Nothing I see can be taken from me."--Tom Marshall

Nate79
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Re: Windfall proceeds - what to do?

Post by Nate79 » Wed Aug 15, 2018 11:14 am

Blimpalot wrote:
Wed Aug 15, 2018 11:03 am
RRB214 wrote:
Wed Aug 15, 2018 10:15 am
I feel like the bull market has to come to an end,
I'm pretty sure you could do a search and find people saying the same thing in 2011. And 2013. And November 9, 2016. And January 2018. I mean, I'm not saying you're wrong or anything. Eventually, the music will stop and a correction will happen, and whoever was the last person to say "I feel like the bull market has come to an end" will then be able to say "See--I told ya so!" and then make money on their newsletter for a few years.
There is conflicting statements by the OP who seems truly worried about the market on one hand (meaning there is some risk tolerance issues) but on the other hand thinks they can make more in the market vs paying off their debt. A risk free after tax return of 3-5% can be very nice when you have a pile of cash sitting in front of you vs worry about the market being at very high valuations.

In the end, OP, you need to decide whether you want to be debt free (which reduces risk) or if you believe you can get a better risk adjusted return in the market. I would personally probably choose the debt free route and then use that wonderful income to pile up money in a taxable account. I would also make sure lifestyle creep doesn't take away that money you were paying on the debt and instead make sure to invest it.

Concerning the kids education you should check if Texas 529 plan allows paying K-12 tuition yet or not.

RRB214
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Re: Windfall proceeds - what to do?

Post by RRB214 » Wed Aug 15, 2018 11:46 am

I'm pretty sure you could do a search and find people saying the same thing in 2011. And 2013. And November 9, 2016. And January 2018. I mean, I'm not saying you're wrong or anything. Eventually, the music will stop and a correction will happen, and whoever was the last person to say "I feel like the bull market has come to an end" will then be able to say "See--I told ya so!" and then make money on their newsletter for a few years.
Absolutely 100% true. I wasn't an (semi-educated) investor of any sorts up until recently, so I wasn't the one saying that then, but I'm unfortunately saying it now.
There is conflicting statements by the OP who seems truly worried about the market on one hand (meaning there is some risk tolerance issues) but on the other hand thinks they can make more in the market vs paying off their debt. A risk free after tax return of 3-5% can be very nice when you have a pile of cash sitting in front of you vs worry about the market being at very high valuations.
I do have a bit of "I want to have my cake and eat it too" mentality. Wish this happened 6 years ago and could have ridden out the wave, but it didn't.

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