Large windfall - impact on financial plan

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Bb073084
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Large windfall - impact on financial plan

Post by Bb073084 »

Hi everyone,

Recently found out I will be receiving a $400K-$500k windfall within the next few months. We are currently both working and ages 35 (me)/38 (wife). Currently we have the following assets:

Home equity: $175k ($550k mortgage left at 3.75% rate). Plan to payoff within 25 years.

529: $70k
After tax investments: $260k (without windfall)
Traditional ira/401ks: $535k

Allocation is roughly:
50% US stock market
20% international equities
18% total bond market
12% reits

Cash/emergency fund: $180k (only own one car and planning on buying a mini van soon with cash).

Monthly expenses are $11.5k (includes $3.3k for daycare which will eventually go away as kids go to school). This daycare is for two kids age 3. Have a new infant who will be going to daycare starting in October for $1.8k a month until age 5 when enter public kindergarten.

Right now (prior to new daycare expense) we save the following:

401k: Max our two plans with 3.5% match each (adds about 12k in match) - about $52k
529: $13k
Post tax investments: $36k
Home maintenance/repairs: $12k

I have a few questions on this windfall and seeking all the advice I can to determine how to use it and how it impacts retirement plans:

1) should we pay off mortgage or invest given the low mortgage rate and that mortgages are non-recourse debt?
2) if we invest, should we lump sum invest or given the market/corona virus should we maybe invest the sum over the next 12-18 months?
3) ideally we would like to retire when our youngest enters college in 18 years. How much do we need/how much can we reduce our savings to reasonably achieve this goal?
4) I currently make $200k base. Can we afford to live on one income?
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anon_investor
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Re: Large windfall - impact on financial plan

Post by anon_investor »

Bb073084 wrote: Sun Aug 09, 2020 7:29 am Hi everyone,

Recently found out I will be receiving a $400K-$500k windfall within the next few months. We are currently both working and ages 35 (me)/38 (wife). Currently we have the following assets:

Home equity: $175k ($550k mortgage left at 3.75% rate). Plan to payoff within 25 years.

529: $70k
After tax investments: $260k (without windfall)
Traditional ira/401ks: $535k

Allocation is roughly:
50% US stock market
20% international equities
18% total bond market
12% reits

Cash/emergency fund: $180k (only own one car and planning on buying a mini van soon with cash).

Monthly expenses are $11.5k (includes $3.3k for daycare which will eventually go away as kids go to school). This daycare is for two kids age 3. Have a new infant who will be going to daycare starting in October for $1.8k a month until age 5 when enter public kindergarten.

Right now (prior to new daycare expense) we save the following:

401k: Max our two plans with 3.5% match each (adds about 12k in match) - about $52k
529: $13k
Post tax investments: $36k
Home maintenance/repairs: $12k

I have a few questions on this windfall and seeking all the advice I can to determine how to use it and how it impacts retirement plans:

1) should we pay off mortgage or invest given the low mortgage rate and that mortgages are non-recourse debt?
2) if we invest, should we lump sum invest or given the market/corona virus should we maybe invest the sum over the next 12-18 months?
3) ideally we would like to retire when our youngest enters college in 18 years. How much do we need/how much can we reduce our savings to reasonably achieve this goal?
4) I currently make $200k base. Can we afford to live on one income?
Does your 401k allow for the mega backdoor roth?

Look into a no cost refi, you likely can get that rate sub 3% at no cost.
Topic Author
Bb073084
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Re: Large windfall - impact on financial plan

Post by Bb073084 »

anon_investor wrote: Sun Aug 09, 2020 7:46 am
Bb073084 wrote: Sun Aug 09, 2020 7:29 am Hi everyone,

Recently found out I will be receiving a $400K-$500k windfall within the next few months. We are currently both working and ages 35 (me)/38 (wife). Currently we have the following assets:

Home equity: $175k ($550k mortgage left at 3.75% rate). Plan to payoff within 25 years.

529: $70k
After tax investments: $260k (without windfall)
Traditional ira/401ks: $535k

Allocation is roughly:
50% US stock market
20% international equities
18% total bond market
12% reits

Cash/emergency fund: $180k (only own one car and planning on buying a mini van soon with cash).

Monthly expenses are $11.5k (includes $3.3k for daycare which will eventually go away as kids go to school). This daycare is for two kids age 3. Have a new infant who will be going to daycare starting in October for $1.8k a month until age 5 when enter public kindergarten.

Right now (prior to new daycare expense) we save the following:

401k: Max our two plans with 3.5% match each (adds about 12k in match) - about $52k
529: $13k
Post tax investments: $36k
Home maintenance/repairs: $12k

I have a few questions on this windfall and seeking all the advice I can to determine how to use it and how it impacts retirement plans:

1) should we pay off mortgage or invest given the low mortgage rate and that mortgages are non-recourse debt?
2) if we invest, should we lump sum invest or given the market/corona virus should we maybe invest the sum over the next 12-18 months?
3) ideally we would like to retire when our youngest enters college in 18 years. How much do we need/how much can we reduce our savings to reasonably achieve this goal?
4) I currently make $200k base. Can we afford to live on one income?
Does your 401k allow for the mega backdoor roth?

Look into a no cost refi, you likely can get that rate sub 3% at no cost.
Not sure on the 401k but will check. I am in a jumbo mortgage and from what I understand it is hard to come by a no cost refinance for 30 years with a sub 3% rate at least per the two mortgage people I have already talked too in my area. Maybe that is changing. I could pay down enough to get in to confirming mortgages which might make that easier to find.
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anon_investor
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Re: Large windfall - impact on financial plan

Post by anon_investor »

Bb073084 wrote: Sun Aug 09, 2020 7:48 am
anon_investor wrote: Sun Aug 09, 2020 7:46 am
Bb073084 wrote: Sun Aug 09, 2020 7:29 am Hi everyone,

Recently found out I will be receiving a $400K-$500k windfall within the next few months. We are currently both working and ages 35 (me)/38 (wife). Currently we have the following assets:

Home equity: $175k ($550k mortgage left at 3.75% rate). Plan to payoff within 25 years.

529: $70k
After tax investments: $260k (without windfall)
Traditional ira/401ks: $535k

Allocation is roughly:
50% US stock market
20% international equities
18% total bond market
12% reits

Cash/emergency fund: $180k (only own one car and planning on buying a mini van soon with cash).

Monthly expenses are $11.5k (includes $3.3k for daycare which will eventually go away as kids go to school). This daycare is for two kids age 3. Have a new infant who will be going to daycare starting in October for $1.8k a month until age 5 when enter public kindergarten.

Right now (prior to new daycare expense) we save the following:

401k: Max our two plans with 3.5% match each (adds about 12k in match) - about $52k
529: $13k
Post tax investments: $36k
Home maintenance/repairs: $12k

I have a few questions on this windfall and seeking all the advice I can to determine how to use it and how it impacts retirement plans:

1) should we pay off mortgage or invest given the low mortgage rate and that mortgages are non-recourse debt?
2) if we invest, should we lump sum invest or given the market/corona virus should we maybe invest the sum over the next 12-18 months?
3) ideally we would like to retire when our youngest enters college in 18 years. How much do we need/how much can we reduce our savings to reasonably achieve this goal?
4) I currently make $200k base. Can we afford to live on one income?
Does your 401k allow for the mega backdoor roth?

Look into a no cost refi, you likely can get that rate sub 3% at no cost.
Not sure on the 401k but will check. I am in a jumbo mortgage and from what I understand it is hard to come by a no cost refinance for 30 years with a sub 3% rate at least per the two mortgage people I have already talked too in my area. Maybe that is changing. I could pay down enough to get in to confirming mortgages which might make that easier to find.
With the windfall, you could pay down to conforming and maybe land a really good rate (e.g. no cost and 2.75% or less). I believe < $510k is conforming (although the # is higher in some states). Check out the Refinance Mega Thread (viewtopic.php?f=2&t=289559), people are posting their experiences. It helped me get a no cost refi on a 30yr fixed at 2.75%.

Have you looked into rolling the TIRAs into the 401ks to allow for regular backdoor Roth IRA?

My suggestion is to see if you can expand tax advantaged space and see if you can lower your mortgage rate. After that you can figure out if additional 529 plans contributions make sense (personally I only contributed to the state income tax deduction limit), otherwise the rest probably should go into a taxable brokerage account.

Edit: added link
retiredjg
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Re: Large windfall - impact on financial plan

Post by retiredjg »

Bb073084 wrote: Sun Aug 09, 2020 7:29 am 1) should we pay off mortgage or invest given the low mortgage rate and that mortgages are non-recourse debt?
There is no wrong answer here - do whatever seems most comfortable. For me, it would probably be paying down enough to get into a conforming loan at a low rate. And invest the rest.

2) if we invest, should we lump sum invest or given the market/corona virus should we maybe invest the sum over the next 12-18 months?
Financially, the best answer most of the time is to lump sum regardless of market/covid. Some people are more comfortable spreading it out. I don't think I'd spread it a full 18 months - that's a lot of time for some of your money to be out of the market.

3) ideally we would like to retire when our youngest enters college in 18 years. How much do we need/how much can we reduce our savings to reasonably achieve this goal?
Depends on how much you save and what your expenses are in 18 years. (Not enough information.)

4) I currently make $200k base. Can we afford to live on one income?
Not enough information, but if one income meant that your child care costs are reduced it would seem so.
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Watty
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Re: Large windfall - impact on financial plan

Post by Watty »

Bb073084 wrote: Sun Aug 09, 2020 7:29 am 1) should we pay off mortgage or invest given the low mortgage rate and that mortgages are non-recourse debt?
There are all sorts of opinions on this and there is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

There is not one easy answer but if I was in your situation I would pay it off.

The reason is that investing the money and earning a higher return is harder than it sounds even though interest rates are low because you have a sequence of returns risk. Here is a very simplistic example of that which I have posted 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 pay 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 pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
If you decide to not pay it off then your might want to pay it down to the point where you could comfortably refinance with new 15 year mortgage which is at a lower interest rate. That way it would be paid off by the time your kids start college.
Bb073084 wrote: Sun Aug 09, 2020 7:29 am (includes $3.3k for daycare which will eventually go away as kids go to school).

I currently make $200k base. Can we afford to live on one income?
Even when the kids are in school you will still need to pay for things like after school care, summer care, school holiday care, and figuring out how to care for a kid with a cold, etc. Don't expect to free up a lot of that day care money.

If your spouse wants to be a stay at home parent then that should be very doable. I did not crunch the numbers but if you pay off your house and with no daycare costs your expenses would be a lot lower so living on $200K should be easy. I would guess that your monthly expenses would be less than half of your current expenses, especially once the new baby would be in daycare.
Last edited by Watty on Sun Aug 09, 2020 8:35 am, edited 1 time in total.
bluebolt
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Re: Large windfall - impact on financial plan

Post by bluebolt »

Watty wrote: Sun Aug 09, 2020 8:31 am There is not one easy answer but if I was in your situation I would pay it off.

The reason is that investing the money and earning a higher return is harder than it sounds even though interest rates are low because you have a sequence of returns risk.
At their ages and with the amount of time left on their mortgage (especially if they do a refi), I'd be much less worried about the sequence of returns risk.
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anon_investor
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Re: Large windfall - impact on financial plan

Post by anon_investor »

bluebolt wrote: Sun Aug 09, 2020 8:34 am
Watty wrote: Sun Aug 09, 2020 8:31 am There is not one easy answer but if I was in your situation I would pay it off.

The reason is that investing the money and earning a higher return is harder than it sounds even though interest rates are low because you have a sequence of returns risk.
At their ages and with the amount of time left on their mortgage (especially if they do a refi), I'd be much less worried about the sequence of returns risk.
+1.
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David Jay
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Re: Large windfall - impact on financial plan

Post by David Jay »

Watty wrote: Sun Aug 09, 2020 8:31 amIf your spouse wants to be a stay at home parent then that should be very doable. I did not crunch the numbers but if you pay off your house and with no daycare costs your expenses would be a lot lower so living on $200K should be easy. I would guess that your monthly expenses would be less than half of your current expenses, especially once the new baby would be in daycare.
+1

I would want to see a review of expense numbers, but no child care and no mortgage makes this sound possible.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Bb073084
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Re: Large windfall - impact on financial plan

Post by Bb073084 »

David Jay wrote: Sun Aug 09, 2020 8:39 am
Watty wrote: Sun Aug 09, 2020 8:31 amIf your spouse wants to be a stay at home parent then that should be very doable. I did not crunch the numbers but if you pay off your house and with no daycare costs your expenses would be a lot lower so living on $200K should be easy. I would guess that your monthly expenses would be less than half of your current expenses, especially once the new baby would be in daycare.
+1

I would want to see a review of expense numbers, but no child care and no mortgage makes this sound possible.
I think it is possible but worry about how long it would delay retirement. We want to be able to spend $120-$150k in today’s dollars at retirement at age 50-55. This avoids the risk of eventual ageism which appears to be getting worse and worse. That is the major hang up with one income.
bluebolt
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Re: Large windfall - impact on financial plan

Post by bluebolt »

Bb073084 wrote: Sun Aug 09, 2020 8:41 am
David Jay wrote: Sun Aug 09, 2020 8:39 am
Watty wrote: Sun Aug 09, 2020 8:31 amIf your spouse wants to be a stay at home parent then that should be very doable. I did not crunch the numbers but if you pay off your house and with no daycare costs your expenses would be a lot lower so living on $200K should be easy. I would guess that your monthly expenses would be less than half of your current expenses, especially once the new baby would be in daycare.
+1

I would want to see a review of expense numbers, but no child care and no mortgage makes this sound possible.
I think it is possible but worry about how long it would delay retirement. We want to be able to spend $120-$150k in today’s dollars at retirement at age 50-55. This avoids the risk of eventual ageism which appears to be getting worse and worse. That is the major hang up with one income.
It might be helpful to run some of your scenarios through Firecalc (firecalc.com). That will give you a good idea of what variables impact your likelihood of hitting your retirement goals.
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Watty
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Re: Large windfall - impact on financial plan

Post by Watty »

bluebolt wrote: Sun Aug 09, 2020 8:34 am
Watty wrote: Sun Aug 09, 2020 8:31 am There is not one easy answer but if I was in your situation I would pay it off.

The reason is that investing the money and earning a higher return is harder than it sounds even though interest rates are low because you have a sequence of returns risk.
At their ages and with the amount of time left on their mortgage (especially if they do a refi), I'd be much less worried about the sequence of returns risk.
I would be interested in seeing how you think the rough numbers might look for year two and beyond if there is 10% portfolio decline in the first year like in my example.
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Watty
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Re: Large windfall - impact on financial plan

Post by Watty »

Bb073084 wrote: Sun Aug 09, 2020 8:41 am We want to be able to spend $120-$150k in today’s dollars at retirement at age 50-55.
Compared to your current expenses that sounds real high when you consider that the kids would be off on their own by then.
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Bb073084
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Re: Large windfall - impact on financial plan

Post by Bb073084 »

Watty wrote: Sun Aug 09, 2020 9:03 am
Bb073084 wrote: Sun Aug 09, 2020 8:41 am We want to be able to spend $120-$150k in today’s dollars at retirement at age 50-55.
Compared to your current expenses that sounds real high when you consider that the kids would be off on their own by then.
I assume a fair amount of medical cost and we would
Like to travel a lot in retirement. We currently do not travel given three kids under the age of 3. So our travel budget is zero. Would like to take 2-4 big trips a year overseas in retirement if I could be fortunate enough to do so.
JGoneRiding
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Re: Large windfall - impact on financial plan

Post by JGoneRiding »

I would definitely fund staying home for a year with the baby. You dont get that time back and nearly every other developed society gives it to moms.

Also with this money and what you have you dont really need to save any more. So yes you can totally live on 200k a year. Especially since there isnt a need to put more money away. Though i would still save enough for the match.
bluebolt
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Re: Large windfall - impact on financial plan

Post by bluebolt »

Watty wrote: Sun Aug 09, 2020 8:55 am
bluebolt wrote: Sun Aug 09, 2020 8:34 am
Watty wrote: Sun Aug 09, 2020 8:31 am There is not one easy answer but if I was in your situation I would pay it off.

The reason is that investing the money and earning a higher return is harder than it sounds even though interest rates are low because you have a sequence of returns risk.
At their ages and with the amount of time left on their mortgage (especially if they do a refi), I'd be much less worried about the sequence of returns risk.
I would be interested in seeing how you think the rough numbers might look for year two and beyond if there is 10% portfolio decline in the first year like in my example.
With a $200K salary, 18 years until retirement, and a lower absolute loss due to the decline coming early in the sequence during accumulation, OP has plenty of opportunity to make it up with increased contributions, reduced spending or both.

The biggest challenge in sequence of returns risk is if you have a large percentage loss right before retirement, when your nest egg is at its near-maximum value. Then, you don't have enough time or earnings to make up for the loss.
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Bb073084
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Re: Large windfall - impact on financial plan

Post by Bb073084 »

JGoneRiding wrote: Sun Aug 09, 2020 9:37 am I would definitely fund staying home for a year with the baby. You dont get that time back and nearly every other developed society gives it to moms.

Also with this money and what you have you dont really need to save any more. So yes you can totally live on 200k a year. Especially since there isnt a need to put more money away. Though i would still save enough for the match.
Thank you. Running calculators and of course returns over the next 10-15 years will make or break but would be so happy to only NEED one income and have extra room so there is less pressure on that income for savings too.
dowse
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Re: Large windfall - impact on financial plan

Post by dowse »

Suggest having a look at the wiki article on this topic: https://www.bogleheads.org/wiki/Managing_a_windfall.
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Sandi_k
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Re: Large windfall - impact on financial plan

Post by Sandi_k »

Make sure that your wife works enough to accrue the necessary quarters of employment for Social Security. Having two SocSec checks in retirement - with a COLA - is a great backup to the investment portfolio and a paid off house.
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Watty
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Re: Large windfall - impact on financial plan

Post by Watty »

Bb073084 wrote: Sun Aug 09, 2020 9:18 am I assume a fair amount of medical cost and we would
Like to travel a lot in retirement. We currently do not travel given three kids under the age of 3. So our travel budget is zero. Would like to take 2-4 big trips a year overseas in retirement if I could be fortunate enough to do so.
Be sure to consider what your expenses will be at different ages. Once you get on Medicare you medical expenses will be likely be more reasonable. If only one of you is surviving when long term care is needed then your expenses could even go down since you would not be spending much money on other things.

Travel will be different at different ages. I have seen relatives naturally slow down in about their mid 70's even though they were still in relatively good health.

Travel also does not need to be real expensive if you are not doing something like buying an RV, taking a safari or going to an exclusive resort. Prices are usually much better in the shoulder season and when you rent a condo for a week or a month the daily rate is usually a lot better.
mbasherp
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Re: Large windfall - impact on financial plan

Post by mbasherp »

One middle ground regarding the mortgage that I haven’t seen mentioned is to consider doing a refinance to a term that lines up with your targeted retirement. So perhaps putting some of the windfall towards a “cash-in” refinance which gets you to a manageable 15 year payment... with an interest rate around 2-2.25% right now.

Just another idea to consider since you seem to have plenty of liquidity, which is the prime reason one might not do it.
ymmt
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Re: Large windfall - impact on financial plan

Post by ymmt »

We are around the same age with around the same goals

I think the pay down to conforming is a great idea. The rest should probably go to the markets

There’s a lot of good advice so I’ll just leave you with what I’ve calculated for myself.

Assumptions:
Mid 40s retirement
130-150k expenses

Goal: To have enough in taxable brokerage to bridge me to 59.5 to tap retirement accounts.

Target: Around $1.5mm in taxable brokerage by retirement. We contribute 85-100k per year to our taxable accounts to reach our target.

We will likely overshoot but any extra usually gets pulled out to pay down mortgage (to reduce expenses in retirement). This is after we max out nearly all tax advantaged accounts.

I feel like at 200k/yr and after saving in the 401ks/backdoor/529s you would be pulled pretty thin with little to put anything towards early retirement. If you want to hit your goal I would think you’d need to reallocate to more risk, especially with all that cash sitting around (is there a reason it’s so high?)

Happy to chat via PM if you wanna talk more.
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gr7070
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Re: Large windfall - impact on financial plan

Post by gr7070 »

I'd pay off the mortgage. Locking in a guaranteed, tax-free return.

The equivalent at-risk, taxed return needed is far, far higher than the 3.75% mortgage rate.

This isn't just about how one views debt nor about the emotional "return" of having no mortgage. Mathematically, when considering risk equity investing is not necessarily the obvious, certain best option.
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Bb073084
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Re: Large windfall - impact on financial plan

Post by Bb073084 »

ymmt wrote: Sun Aug 09, 2020 4:41 pm We are around the same age with around the same goals

I think the pay down to conforming is a great idea. The rest should probably go to the markets

There’s a lot of good advice so I’ll just leave you with what I’ve calculated for myself.

Assumptions:
Mid 40s retirement
130-150k expenses

Goal: To have enough in taxable brokerage to bridge me to 59.5 to tap retirement accounts.

Target: Around $1.5mm in taxable brokerage by retirement. We contribute 85-100k per year to our taxable accounts to reach our target.

We will likely overshoot but any extra usually gets pulled out to pay down mortgage (to reduce expenses in retirement). This is after we max out nearly all tax advantaged accounts.

I feel like at 200k/yr and after saving in the 401ks/backdoor/529s you would be pulled pretty thin with little to put anything towards early retirement. If you want to hit your goal I would think you’d need to reallocate to more risk, especially with all that cash sitting around (is there a reason it’s so high?)

Happy to chat via PM if you wanna talk more.
Cash was high because we plan to buy a new Honda mini van. Otherwise planned to move $40k to investments anyhow and have a $100k EF which is conservative but given the pandemic I have been more conservative.
ymmt
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Re: Large windfall - impact on financial plan

Post by ymmt »

Bb073084 wrote: Sun Aug 09, 2020 5:57 pm
ymmt wrote: Sun Aug 09, 2020 4:41 pm We are around the same age with around the same goals

I think the pay down to conforming is a great idea. The rest should probably go to the markets

There’s a lot of good advice so I’ll just leave you with what I’ve calculated for myself.

Assumptions:
Mid 40s retirement
130-150k expenses

Goal: To have enough in taxable brokerage to bridge me to 59.5 to tap retirement accounts.

Target: Around $1.5mm in taxable brokerage by retirement. We contribute 85-100k per year to our taxable accounts to reach our target.

We will likely overshoot but any extra usually gets pulled out to pay down mortgage (to reduce expenses in retirement). This is after we max out nearly all tax advantaged accounts.

I feel like at 200k/yr and after saving in the 401ks/backdoor/529s you would be pulled pretty thin with little to put anything towards early retirement. If you want to hit your goal I would think you’d need to reallocate to more risk, especially with all that cash sitting around (is there a reason it’s so high?)

Happy to chat via PM if you wanna talk more.
Cash was high because we plan to buy a new Honda mini van. Otherwise planned to move $40k to investments anyhow and have a $100k EF which is conservative but given the pandemic I have been more conservative.
I can see why you'd like to have a bigger EF balance with an infant + 2 toddlers. Think if you really want to reach for retirement in 18 years, then that windfall would be best put to use in equities. This is factoring in your long time horizon, the substantial EF, and dual-income household. Still think you guys will both need to work in order to reach that goal unless you are fairly optimistic about the markets; your expenses are going to be a real drag on savings. Do you expect your salaries to go up substantially?
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Bb073084
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Re: Large windfall - impact on financial plan

Post by Bb073084 »

ymmt wrote: Mon Aug 10, 2020 5:27 am
Bb073084 wrote: Sun Aug 09, 2020 5:57 pm
ymmt wrote: Sun Aug 09, 2020 4:41 pm We are around the same age with around the same goals

I think the pay down to conforming is a great idea. The rest should probably go to the markets

There’s a lot of good advice so I’ll just leave you with what I’ve calculated for myself.

Assumptions:
Mid 40s retirement
130-150k expenses

Goal: To have enough in taxable brokerage to bridge me to 59.5 to tap retirement accounts.

Target: Around $1.5mm in taxable brokerage by retirement. We contribute 85-100k per year to our taxable accounts to reach our target.

We will likely overshoot but any extra usually gets pulled out to pay down mortgage (to reduce expenses in retirement). This is after we max out nearly all tax advantaged accounts.

I feel like at 200k/yr and after saving in the 401ks/backdoor/529s you would be pulled pretty thin with little to put anything towards early retirement. If you want to hit your goal I would think you’d need to reallocate to more risk, especially with all that cash sitting around (is there a reason it’s so high?)

Happy to chat via PM if you wanna talk more.
Cash was high because we plan to buy a new Honda mini van. Otherwise planned to move $40k to investments anyhow and have a $100k EF which is conservative but given the pandemic I have been more conservative.
I can see why you'd like to have a bigger EF balance with an infant + 2 toddlers. Think if you really want to reach for retirement in 18 years, then that windfall would be best put to use in equities. This is factoring in your long time horizon, the substantial EF, and dual-income household. Still think you guys will both need to work in order to reach that goal unless you are fairly optimistic about the markets; your expenses are going to be a real drag on savings. Do you expect your salaries to go up substantially?
Not expecting salaries to go up but in 2 years daycare goes away for two children which will be a major boost to savings. Right now we plan to both work for 5-10 more years so we get at least 5 years with no daycare costs. Hoping that is enough to then drop to on income or just retire.
ymmt
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Joined: Fri Jul 10, 2020 10:59 am

Re: Large windfall - impact on financial plan

Post by ymmt »

Bb073084 wrote: Mon Aug 10, 2020 6:41 am Not expecting salaries to go up but in 2 years daycare goes away for two children which will be a major boost to savings. Right now we plan to both work for 5-10 more years so we get at least 5 years with no daycare costs. Hoping that is enough to then drop to on income or just retire.
Watty wrote: Sun Aug 09, 2020 8:31 am Even when the kids are in school you will still need to pay for things like after school care, summer care, school holiday care, and figuring out how to care for a kid with a cold, etc. Don't expect to free up a lot of that day care money.
Going to have to echo Watty's insight here. I have daycare costs as well, but I'm baking those into my expenses going forward even after they're out.

Ultimately the money you're getting is great, but my sense is that retirement in even 10-15 years will be difficult without some really strong portfolio gains or other expense cuts. Maybe people with teenagers can chime in on how their expenses shifted as their kids got older?
Topic Author
Bb073084
Posts: 108
Joined: Sun Feb 03, 2019 10:24 am

Re: Large windfall - impact on financial plan

Post by Bb073084 »

ymmt wrote: Mon Aug 10, 2020 7:57 am
Bb073084 wrote: Mon Aug 10, 2020 6:41 am Not expecting salaries to go up but in 2 years daycare goes away for two children which will be a major boost to savings. Right now we plan to both work for 5-10 more years so we get at least 5 years with no daycare costs. Hoping that is enough to then drop to on income or just retire.
Watty wrote: Sun Aug 09, 2020 8:31 am Even when the kids are in school you will still need to pay for things like after school care, summer care, school holiday care, and figuring out how to care for a kid with a cold, etc. Don't expect to free up a lot of that day care money.
Going to have to echo Watty's insight here. I have daycare costs as well, but I'm baking those into my expenses going forward even after they're out.

Ultimately the money you're getting is great, but my sense is that retirement in even 10-15 years will be difficult without some really strong portfolio gains or other expense cuts. Maybe people with teenagers can chime in on how their expenses shifted as their kids got older?
We spend 3k now and will go up to almost $5k for two years. I find it hard to believe we will spend that much when they are in school. After/before school care is at most $500 per kid. I figure we spend about $1.5/$2k a month on the kids after daycare so free up $12-$18k annually.

Additionally once we have enough assets we can drop term life insurance which costs $350 a month. Lastly, refinancing our mortgage could save $300 a month. Between all of that I figure we can save an additional $0-$25k per year on top of our current savings. At a 4-5% real return on top of current portfolio ($1.3m with windfall) I thought we get to $4m + in 18 years. $4m at 4% withdrawal is $160k.
Regattamom
Posts: 267
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Re: Large windfall - impact on financial plan

Post by Regattamom »

ymmt wrote: Mon Aug 10, 2020 7:57 am
Bb073084 wrote: Mon Aug 10, 2020 6:41 am Not expecting salaries to go up but in 2 years daycare goes away for two children which will be a major boost to savings. Right now we plan to both work for 5-10 more years so we get at least 5 years with no daycare costs. Hoping that is enough to then drop to on income or just retire.
Watty wrote: Sun Aug 09, 2020 8:31 am Even when the kids are in school you will still need to pay for things like after school care, summer care, school holiday care, and figuring out how to care for a kid with a cold, etc. Don't expect to free up a lot of that day care money.
Going to have to echo Watty's insight here. I have daycare costs as well, but I'm baking those into my expenses going forward even after they're out.

Ultimately the money you're getting is great, but my sense is that retirement in even 10-15 years will be difficult without some really strong portfolio gains or other expense cuts. Maybe people with teenagers can chime in on how their expenses shifted as their kids got older?
I know some people are doing to say they don’t spend anything on their teenagers (Heck their kid actually benefits them financially!) and they also spend only $100 on groceries per week and don’t own a car. Good for them but that’s not my family and the families I know.

Examples of expenses for teens from my experience:
5k braces
7k used car
7k per year for sport activity
1k per year additional insurance (umbrella and auto)
1.5k per year tutor
Add in clothes, laptops for school, cell phone, money for prom and homecoming dances, potential trips with clubs or sports and it adds up. Also wisdom teeth removal, college applications, AP test fees, SAT/ACT fees, yearbook ($75!), college tours, etc... And to top it off college tuition and living expenses.
MJS
Posts: 577
Joined: Sat Aug 05, 2017 10:55 pm

Re: Large windfall - impact on financial plan

Post by MJS »

Bb073084 wrote: Sun Aug 09, 2020 7:29 am Right now (prior to new daycare expense) we save the following:

401k: Max our two plans with 3.5% match each (adds about 12k in match) - about $52k
529: $13k
Post tax investments: $36k
Home maintenance/repairs: $12k
Consider adding a Frivolity Fund for things like a swing set, future vacations, swimming lessons, or even bi-weekly Date Nights for you and your spouse. Have fun planning for your future, but don't forget to enjoy the present!
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