Windfall advice

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Topic Author
klce2001
Posts: 3
Joined: Sun Feb 10, 2019 3:43 pm

Windfall advice

Post by klce2001 » Sun Feb 10, 2019 3:48 pm

I am inheriting about 1.2M and we are struggling with the best approach to managing this windfall. We are fully aware that this is going to change the course of our financial freedom. Early on in our marriage, we made some poor financial decisions (read: let’s spend $$$$) and have crawled out of that hole over many years. Since we focused on getting out of debt, we don’t have much in the way of retirement savings, which will obviously be one of our main focuses.

I have read the WIKI on windfalls, and we plan on sitting tight once we receive the money. We have known it was coming for a while, so we have had lots of time to think.

My husband and I are in our mid-40s and plan to retire in 15-20 years. We are both public school educators in a state with notoriously low pay. Our combined income is about $110,000. This includes the 2-3 extra jobs that we each work in addition to being educators. Our income just reached this level recently due to raises.

Debts: $225,000 @ 4.25% mortgage - 5 years in on a 30 year note
$6,000 - car loan
$10,000 - husband’s student loans
NO credit card debt - never again

Emergency fund in savings account: $25,000

Me: Roth IRA through Vanguard that I have had since 1999 - 100% VGHCX - $29,000 - no contributions in a long time.

We both have teacher retirement through our current state, which is where we plan to retire. We should each receive about $39,000/yr.

We both have teacher retirement from a previous state with about $15,000 each. We plan to roll these over into Roth IRA or Traditional IRAs???

We each have an HSA that doesn’t have enough in to invest yet, but will by the end of this year and we plan to max those out. Should we invest this in VBTLX? We will have some significant medical expenses in the future. Daughter was born without some of her permanent teeth, so we are spending a fortune on her mouth and dental implants are in her future when she is 18.

We have two children, 15 and 13 who are college bound. College savings are very sparse. I have a savings bond that will be worth about $10,000 in 2022, which is the year my oldest starts college. We plan to use this to start since there are tax breaks for education. Oldest child has lots of potential to earn scholarship $$. The youngest... we’ll see.

We are setting up 529 plans for each kiddo - there are tax advantages our state, but we do not want to over fund them. We have no idea where the kids want to go to school and we will now be able to pay all of their college education.

Our plan is to max out Roth IRAs for each of us each year, but first we need to set one up for my husband. Which fund for his Roth?

Obviously, we will pay of our car loan and husband’s student loans. We plan to park the majority of the money in online high yield savings accounts while we figure out what to do.

We have been debating whether or not to pay off our house. This would free up about $1500 month.

Husband gets a new car this year because the almost 16 year old will get his dad’s 10 year old Honda Accord.

We are pretty conservative as far as investments go and not well versed, although I have been doing a TON of reading. Honestly, the simpler the better for us. I am in charge of all finances and I do not want to over complicate things. For our taxable account the three fund portfolio seems like our best option, but I heave read not to put the bond fund in the taxable account - that is why I was thinking the HSA.

Thanks for reading though all of this and your suggestions. All of this is so overwhelming and I want to be the best steward of this gift.

lakpr
Posts: 2812
Joined: Fri Mar 18, 2011 9:59 am

Re: Windfall advice

Post by lakpr » Sun Feb 10, 2019 4:55 pm

In no specific order, with the approaching windfall, this is what I would suggest:

1. Your $225,000 in mortgage at 4.25% is not fetching you any tax break, I suspect you will be choosing standard deduction of $24,400. If you are sure you want to retire in the same state, and the home meets your needs, I suggest to pay off the mortgage. It would free up a cashflow of $1106 per month. I would also get rid of the student loan and the car loan.

2. Your HSA should be fully invested in 100% stocks, you want to have the maximum growth in that account. It escapes both the social security tax and the income tax, with the only catch that you use that money for medical expenses. Everyone grows old, and at that time there will be a great need for medical services, or at the very least Medicare premiums for which the money can be tapped. Bonds is not a good choice

3. I would suggest conversion of your previous retirement plan into Roth IRA, *only if* you can also simultaneously commit to maxing your 403b plans of $19,000 each. The reason is that I think a conversion to Roth IRA makes sense only if you remain in the 12% tax bracket. With your combined salary at $110K, you have very little buffer before you jump into the 22% tax bracket, and I do not know your state taxes which could be a spoiler. But if you do commit to contributing $19K max to your 403b plans, then the equation becomes: $110K + $30k Roth Conversion - $38K 403b plans - $24.4k standard exemption = $77.6K AGI, which is JUST BELOW the max of $78K of 12% bracket. You can also opt perhaps to convert one of the $15K to Roth IRA this year, and another one to next year so you don't cut it close

4. I'd suggest Vanguard or Fidelity for setting up the Roth account, with Schwab a close third. Fidelity has some ZERO expense funds, which could boost your returns ever so slightly more than Vanguard funds (a calculation made that the return would have been $10 per $10,000 per year)

5. If you are conservative in your philosophy of investments, I'd suggest Wellington fund from Vanguard. It's an excellent fund, with a 60:40 split of equities vs. bonds. You can try it out first for a couple of years and if you decide you want to be more or less aggressive, there are other funds we could suggest

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willthrill81
Posts: 13514
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Windfall advice

Post by willthrill81 » Sun Feb 10, 2019 5:48 pm

I second the call to pay off your mortgage (along with the rest of your debt; you should never again need debt for anything). A guaranteed 4.25% after-tax return is great these days. The cash flow that will free up will help you to both max out all of your tax-advantaged space, which you should do immediately(e.g. HSA, 403b, Roth IRAs), with the possible exception of the 529 plans (more on that below). If doing so raises your savings rate higher than you want, you can take the difference out of the nearly $1 million you'll still have after you pay off all your debts. Since money is fungible, maxing everything out will enable you to effectively move as much of this money into tax-advantaged space as you possibly can, which should be a big goal, though it will take a while to achieve.

I agree that Roth IRAs are probably better than traditional IRAs as long as you can remain in the 12% federal tax bracket, which you certainly should if you're maxing out all of the above accounts.

I would suggest that you convert the old teacher funds into Roth IRAs, which requires you to pay the federal tax on them, as long as you can remain in the 12% bracket while doing so.

Don't pay for any healthcare expenses from your HSAs. That space is too valuable to use right now; remember that your goal right now is to get as much of your funds into tax-advantaged space as you possibly can. You're going to have a lot of funds in taxable space for a while, so just pay for medical expenses out of cash and retain receipts that can be used to make penalty-free and tax-free withdrawals from your HSAs far down the road.

You didn't mention it, but do you have access to a 457 plan, sometimes referred to as a deferred compensation plan? As a state employee, you very well might. It's basically a 401k plan but it would give you another $19k of annual tax-advantaged space every year (double that if your husband has one as well).

The 529 plans are tricky. Since contributions are tax-deductible in your state, they make the most sense to use to pay for college expenses IF your kids actually incur the expenses. Whether they will or not is far from certain. They're unlikely now to qualify for financial aid, but they may get scholarships that offset some or even all of the costs. Plus, you just never know whether they will actually attend. I have two cousins who were provided by my uncle with fully paid college tuition, and both of them turned it down in lieu of other paths. Is the state tax break worth the risk of having the money locked away in a 529, only accessible if you pay the 10% penalty? Only you can determine that.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
klce2001
Posts: 3
Joined: Sun Feb 10, 2019 3:43 pm

Re: Windfall advice

Post by klce2001 » Sun Feb 10, 2019 6:02 pm

Thanks for your replies.

We do not have access to 457 plans through my district, and we have been hesitant to contribute to 403b plans because we are only offered annuities. Everything I have read has cautioned against annuities. Should I set up a 403b if annuities are are only option?

skime
Posts: 132
Joined: Fri Nov 10, 2017 6:24 pm

Re: Windfall advice

Post by skime » Sun Feb 10, 2019 6:07 pm

klce2001 wrote:
Sun Feb 10, 2019 3:48 pm
I am inheriting about 1.2M and we are struggling with the best approach to managing this windfall. We are fully aware that this is going to change the course of our financial freedom. Early on in our marriage, we made some poor financial decisions (read: let’s spend $$$$) and have crawled out of that hole over many years. Since we focused on getting out of debt, we don’t have much in the way of retirement savings, which will obviously be one of our main focuses.

I have read the WIKI on windfalls, and we plan on sitting tight once we receive the money. We have known it was coming for a while, so we have had lots of time to think.

My husband and I are in our mid-40s and plan to retire in 15-20 years. We are both public school educators in a state with notoriously low pay. Our combined income is about $110,000. This includes the 2-3 extra jobs that we each work in addition to being educators. Our income just reached this level recently due to raises.

Debts: $225,000 @ 4.25% mortgage - 5 years in on a 30 year note
$6,000 - car loan
$10,000 - husband’s student loans
NO credit card debt - never again

Emergency fund in savings account: $25,000

Me: Roth IRA through Vanguard that I have had since 1999 - 100% VGHCX - $29,000 - no contributions in a long time.

We both have teacher retirement through our current state, which is where we plan to retire. We should each receive about $39,000/yr.

We both have teacher retirement from a previous state with about $15,000 each. We plan to roll these over into Roth IRA or Traditional IRAs???

We each have an HSA that doesn’t have enough in to invest yet, but will by the end of this year and we plan to max those out. Should we invest this in VBTLX? We will have some significant medical expenses in the future. Daughter was born without some of her permanent teeth, so we are spending a fortune on her mouth and dental implants are in her future when she is 18.

We have two children, 15 and 13 who are college bound. College savings are very sparse. I have a savings bond that will be worth about $10,000 in 2022, which is the year my oldest starts college. We plan to use this to start since there are tax breaks for education. Oldest child has lots of potential to earn scholarship $$. The youngest... we’ll see.

We are setting up 529 plans for each kiddo - there are tax advantages our state, but we do not want to over fund them. We have no idea where the kids want to go to school and we will now be able to pay all of their college education.

Our plan is to max out Roth IRAs for each of us each year, but first we need to set one up for my husband. Which fund for his Roth?

Obviously, we will pay of our car loan and husband’s student loans. We plan to park the majority of the money in online high yield savings accounts while we figure out what to do.

We have been debating whether or not to pay off our house. This would free up about $1500 month.

Husband gets a new car this year because the almost 16 year old will get his dad’s 10 year old Honda Accord.

We are pretty conservative as far as investments go and not well versed, although I have been doing a TON of reading. Honestly, the simpler the better for us. I am in charge of all finances and I do not want to over complicate things. For our taxable account the three fund portfolio seems like our best option, but I heave read not to put the bond fund in the taxable account - that is why I was thinking the HSA.

Thanks for reading though all of this and your suggestions. All of this is so overwhelming and I want to be the best steward of this gift.
Do nothing with the money for one year. Give it time for the emotional dust to settle. The worst time to do anything with money is when you're overwhelmed.

Take your time to make the best decision possible.

User avatar
segfault
Posts: 496
Joined: Thu Jun 21, 2007 4:51 pm

Re: Windfall advice

Post by segfault » Sun Feb 10, 2019 6:07 pm

klce2001 wrote:
Sun Feb 10, 2019 3:48 pm
We both have teacher retirement from a previous state with about $15,000 each. We plan to roll these over into Roth IRA or Traditional IRAs??
Hold that thought. Would you receive an additional monthly pension at retirement age if you just let that sit? Or can you use it to purchase months of service credit in your current state's pension plan?

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willthrill81
Posts: 13514
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Windfall advice

Post by willthrill81 » Sun Feb 10, 2019 6:09 pm

klce2001 wrote:
Sun Feb 10, 2019 6:02 pm
Thanks for your replies.

We do not have access to 457 plans through my district, and we have been hesitant to contribute to 403b plans because we are only offered annuities. Everything I have read has cautioned against annuities. Should I set up a 403b if annuities are are only option?
The only thing they offer is annuities? That seems very odd indeed. Have you verified this with plan administrators?

Who is offering these annuities? Not all annuities are bad options. For instance, TIAA offers many annuities that are basically just mutual funds, and some of their straight-up annuities are used by many here, like TIAA Real Estate and TIAA Traditional.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

02nz
Posts: 2358
Joined: Wed Feb 21, 2018 3:17 pm

Re: Windfall advice

Post by 02nz » Sun Feb 10, 2019 6:33 pm

I agree you should double-check on your 403b options. I would be surprised if annuities were truly the only available options. While you're at it, figure out whether the 403b has a Roth option. With pensions and at the 12% federal tax bracket (you might have a tiny little bit that falls into the 22% bracket), you should probably do all Roth contributions to the 403b. And with the inheritance in hand, you should max out all tax-advantaged space, if necessary by spending some from the inheritance; effectively, move money from the inheritance into tax-advantaged space. (That's of course assuming you're not stuck with a high-expense 403b.)

In terms of allocation, think of your portfolio as whole, rather than individual accounts. Given your time frame and stated conservative approach, I would probably recommend something around 55% stock (maybe 35% US and 20% int'l) and 45% bonds. If the inheritance is not in a tax-advantaged account (IRA), you need to take extra care to invest it in tax-efficient funds, to minimize "tag drag." Generally index mutual funds (especially Vanguard) and index ETFs are the most tax-efficient.
lakpr wrote:
Sun Feb 10, 2019 4:55 pm
5. If you are conservative in your philosophy of investments, I'd suggest Wellington fund from Vanguard. It's an excellent fund, with a 60:40 split of equities vs. bonds. You can try it out first for a couple of years and if you decide you want to be more or less aggressive, there are other funds we could suggest
I would not recommend Wellington for a taxable account. More tax-efficient to use index funds or ETFs.

Topic Author
klce2001
Posts: 3
Joined: Sun Feb 10, 2019 3:43 pm

Re: Windfall advice

Post by klce2001 » Sun Feb 10, 2019 7:14 pm

I will double check on our 403b plan options. We only have 4 choices for plan administrators and when I checked with HR she said they were annuities. But, what does she really know?

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