Investment Strategy for $200,000 Capital Gain

[rrdeeptech]

Hi all,
This is my first post, but I have been a fan of BH forums for years!

Emergency Funds : 20k not included in total portfolio in wealthfront.

Debt : 610k @6.1% home mortgage
35k @ 3% car

Tax Filing Status: Married file Jointly

Tax Rate: Fed 22% State 6.25%

State: IL

Age : Him 42 Her:38

Asset Allocation: 70/30 International: 10 % of stock portion


Portfolio Size 780k


Him 403b 250k
Him 401a 300k
Him ROTH 26k
Him IRA 30k

Her 401K (voya): 150K
Her Roth: 25K

529 (2kids):90k

Goals: Retire early and carry some debt. Debt/Assesst of 30% is acceptable.



QUESTION
We recently sold our home and moved into a new home, realizing a capital gain of $200,000. The new home mortgage is $610k@6.1%.

I'm seeking investment advice on utilizing the 200k funds from capital gains. I need portfolio advice, but more specifically, I need to identify a Vanguard mix of funds return that exceeds my mortgage interest rate (currently 6.1%). Inspired by Anderson's "The Value of Debt," I'm interested in strategies for asset growth rather than solely debt reduction.

I'm interested in exploring Vanguard investment options for this $200,000.

I would love to hear advice based on my financial situation. Retiring early is a priority.

[sycamore]

Invest in stocks. Stock funds are certainly liquid - settlement is next business day. Stock funds are not only volatile (day to day price swings) but their future value is far from certain.

So what's your risk tolerance?

What risks worry you the most?

Can you sleep well knowing you have $200k in stocks that may drop in value by 5% the next day? Or even 50% over a years time?

[HomeStretch]

If you sold your home, what is the 6.1% mortgage of $600k for? Is the interest tax deductible?

You have some options for the $200k:
1) pay down the mortgage
2) fully contribute to all tax advantaged space including 403b/401k mega backdoor Roths, if available
3) contribute to the 529 accounts
4) invest the remainder tax efficiently to your asset allocation

For specific feedback on funds to use and tax-efficient fund placement, please edit your original post to add the information requested in the “Asking Portfolio Questions” template found here:
https://www.bogleheads.org/wiki/Asking_ ... _questions

[rrdeeptech]

Invest in stocks. Stock funds are certainly liquid - settlement is next business day. Stock funds are not only volatile (day to day price swings) but their future value is far from certain.

So what's your risk tolerance?

What risks worry you the most?

Can you sleep well knowing you have $200k in stocks that may drop in value by 5% the next day? Or even 50% over a years time?

Thhank you. I cannot tolerate too many swings at this point. My biggest fear is that these 200k will not grow faster than my mortgage interest. So I prefer a mutual fund in Vanguard.

[rrdeeptech]

If you sold your home, what is the 6.1% mortgage of $600k for? Is the interest tax deductible?

You have some options for the $200k:
1) pay down the mortgage
2) fully contribute to all tax advantaged space including 403b/401k mega backdoor Roths, if available
3) contribute to the 529 accounts
4) invest the remainder tax efficiently to your asset allocation

For specific feedback on funds to use and tax-efficient fund placement, please edit your original post to add the information requested in the “Asking Portfolio Questions” template found here:
https://www.bogleheads.org/wiki/Asking_ ... _questions

The mortgage is for the new home. We just moved in, so I'm not sure about the details. Will consult my Tax preparer/CPA.
2. Thank you for the mega door Roth option. I am going to check with my benefits dept tomorrow.
3. I don't want to contribute more than I need to 529. But thank you though.

I hope to beat my mortgage interest rate so that my money can grow faster than 6%. As I mentioned, I dont fear a little debt but i want to build assets specifically in a good index fund. That is where i need the most advice.

I consulted the template and modified my inputs accordingly. Thanks for the guidance.

[suemarkp]

Trying to out invest your mortgage is somewhat dangerous unless you can easily pay it without any interest/gains from the $200K. It was easier recently when mortgage rates were 2% to 4% and money market funds were yielding 5%. A 5% loan rate is a maybe. 6% and higher it is tougher. Long term, stocks should beat 6%. But there will be years when it doesn't. So as long as you can pay the monthly bill ignoring what the $200K is doing, you should come out ahead (but not by a lot).

Are you itemizing your taxes so the mortgage interest is deductable? If not, the safe approach is to pay down the mortgage. That gives you a guaranteed 6% return. There are no guarantees with stock investing and bonds aren't paying 6%.

Vanguard has no magic. You can get similar returns from Fidelity, Schwab, State Street or Blackrock ETFs.

You may get the highest return with a large growth fund (VIGAX / VUG). But value could flip growth and then you're hurt. S&P 500 or total market fund would be safer but VIGAX may outperform. There are no knowns with stock investing, just trends and history.

[masha12]

If you have a 30-year mortgage, my rough calculation is that throwing $200k at the debt would result in the house being paid off in 14 years. If you have a 15-year mortgage, it would be paid off in 9 years.

I’d pay down the mortgage. It is a guaranteed return.

[grabiner]

If you have a 30-year mortgage, my rough calculation is that throwing $200k at the debt would result in the house being paid off in 14 years. If you have a 15-year mortgage, it would be paid off in 9 years.

I’d pay down the mortgage. It is a guaranteed return.

Another advantage is that you can pay down and then refinance. If you pay down your 30-year mortgage so that it can be paid off in 15 years, you can refinance the remaining balance to a 15-year mortgage with a lower rate, and still have lower monthly payments.

However, I would recommend maxing out the retirement plans and IRAs in preference to paying down the mortgage, You are paying enough in mortgage interest that a paydown would eliminate deductible interest, so the return on a paydown would be 4.76% after tax if your state does not allow a deduction, or 4.38% if it does. You can earn about the same with low risk on a bond fund in a 401(k) or IRA.

[boomer_techie]

Another advantage is that you can pay down and then refinance.

Or you can pay down and then "recast". This means keeping the same loan, same provider, same interest rate, same duration, but with the reduction in the principal owed, the monthly payments are adjusted downwards.

[grabiner]

Another advantage is that you can pay down and then refinance.

Or you can pay down and then "recast". This means keeping the same loan, same provider, same interest rate, same duration, but with the reduction in the principal owed, the monthly payments are adjusted downwards.

Not all lenders allow this, but if your lender does, this has the advantage of improving your cash flow, and increasing the value of the option to refinance if rates drop later.

The recast-versus-refinance decision is essentially the same as the original decision whether to take a 15-year or 30-year mortgage, but now with a much lower balance. If you refinance to 15 years, you get the lower rate on a 15-year mortgage, but with higher monthly payments than on a recast 30-year mortgage. Either of these is better than just paying down principal with the same monthly payments, as you would then have a 15-year mortgage at the 30-year rate.

[david99]

If you have a 30-year mortgage, my rough calculation is that throwing $200k at the debt would result in the house being paid off in 14 years. If you have a 15-year mortgage, it would be paid off in 9 years.

I’d pay down the mortgage. It is a guaranteed return.

I would also pay down the mortgage to get the guaranteed return and have the house paid off sooner.

[rrdeeptech]

If you have a 30-year mortgage, my rough calculation is that throwing $200k at the debt would result in the house being paid off in 14 years. If you have a 15-year mortgage, it would be paid off in 9 years.

I’d pay down the mortgage. It is a guaranteed return.

Another advantage is that you can pay down and then refinance. If you pay down your 30-year mortgage so that it can be paid off in 15 years, you can refinance the remaining balance to a 15-year mortgage with a lower rate, and still have lower monthly payments.

However, I would recommend maxing out the retirement plans and IRAs in preference to paying down the mortgage, You are paying enough in mortgage interest that a paydown would eliminate deductible interest, so the return on a paydown would be 4.76% after tax if your state does not allow a deduction, or 4.38% if it does. You can earn about the same with low risk on a bond fund in a 401(k) or IRA.

Thank you grabiner for your help. This is great. I am a newbie and so I would appreciate answers to this question as I tried to understand your reply line by line.

1. When you say "pay down," do you mean to drop the $200k towards the mortgage principal and refinance the rest? That is, instead of paying the $610K at 30 years @6.1%, which comes to a monthly payment of $5336 (I checked my bill again. This includes all the property tax and insurance and hoa), you suggest that I drop the $200k toward the mortgage and reduce to $410k (after dropping the $200k) and get 15 years for the $410k? So, would this reduce my monthly payment? When I ran the calculation assuming a 5.6% for the 15-year loan, the monthly payment totals $5000. I don't think I am lowering my monthly fee. The interest on the $200k in my bank account is $120ish.

2. I am maxing out my 401k (at least that is allowed in the US). Yes, I am considering putting this $200k (half into an IRA). Can you explain what you mean by "return on the paydown would be 4.76%"? I am sorry, but I got a little lost after that.

3. In your response to recast, you mention "Either of these is better than just paying down principal with the same monthly payments, as you would then have a 15-year mortgage at the 30-year rate." Again, I might have lost you. My calculation in point 1 above shows that paying down the loan for a 15-year refinance at a lower-rate is not better since it only reduces the monthly payment by approx. 300 dollars. However, if I recast the loan it drops to $4,113.06. A significant saving. So, are you saying either of these is better than paying a "fixed" monthly payment? Yes, I want my mortage per month to reduce. I can see benefit of keeping the monthly payment but at a reduce time but I want cashflow.

Thank you again for your response.

Thank you boomer_tech. I have never considered this recast idea.

[rrdeeptech]

Trying to out invest your mortgage is somewhat dangerous unless you can easily pay it without any interest/gains from the $200K. It was easier recently when mortgage rates were 2% to 4% and money market funds were yielding 5%. A 5% loan rate is a maybe. 6% and higher it is tougher. Long term, stocks should beat 6%. But there will be years when it doesn't. So as long as you can pay the monthly bill ignoring what the $200K is doing, you should come out ahead (but not by a lot).

Are you itemizing your taxes so the mortgage interest is deductable? If not, the safe approach is to pay down the mortgage. That gives you a guaranteed 6% return. There are no guarantees with stock investing and bonds aren't paying 6%.

Vanguard has no magic. You can get similar returns from Fidelity, Schwab, State Street or Blackrock ETFs.

You may get the highest return with a large growth fund (VIGAX / VIG). But value could flip growth and then you're hurt. S&P 500 or total market fund would be safer but VIGAX may outperform. There are no knowns with stock investing, just trends and history.

Thank you. I looked in VIGAX. I am willing to take a risk for $100k and invest in VIGAX or VOO. I can pay my bills without touching the $200K, maybe for two years at max. But after that, it is misty.

[rrdeeptech]

If you have a 30-year mortgage, my rough calculation is that throwing $200k at the debt would result in the house being paid off in 14 years. If you have a 15-year mortgage, it would be paid off in 9 years.

I’d pay down the mortgage. It is a guaranteed return.

I would also pay down the mortgage to get the guaranteed return and have the house paid off sooner.

Thank you. Given my portfolio, I am not sure that is the best idea. I appreciate your comment. I could have been carried away with having cash flow as the important thing vs clearing the debt. Debt vs. cash flow—a question that has kept me awake for the past week! Reading the book "Value of Debt" didn't help!

[Sam_957]

I cannot tolerate too many swings at this point. My biggest fear is that these 200k will not grow faster than my mortgage interest. So I prefer a mutual fund in Vanguard.

You are trying to play a game that will earn you an extra 30k over the coming decade if everything works out. Will that be worth the worry? The value of debt seems high when the interest rate is low - like when the book was written. At 6% and a pretty hot market, it’s not a gamble I would take. You mention that you want cash flow - what does that mean? What do you need this cash flow for that your current income is not providing? It seems like you have good dual incomes already.

I’d move that money into a money market fund tomorrow. You should be making about 4% (600mo) while you decide what to do.

Do you have life insurance for you and your spouse to cover lost earnings?

[Nate79]

6% after tax return sounds really nice. We can hope a stock/bond mix outperforms that in the future but no guarantees of that.

[grabiner]

6% after tax return sounds really nice. We can hope a stock/bond mix outperforms that in the future but no guarantees of that.

While I agree with paying down the mortgage, the 6.1% return is pre-tax. There is enough mortgage interest that the OP will itemize deductions even after paying it down.

Once they have paid it down enough that they are taking the standard deduction, further paydowns are even more attractive because the return becomes tax-free.

[mikejuss]

Be aware that one problem with paying down your mortgage early is that your house may, for reasons beyond your control, lose value.

[grabiner]

Be aware that one problem with paying down your mortgage early is that your house may, for reasons beyond your control, lose value.

The only situation in which this makes a difference is if you are both willing and able to default on the mortgage. If you have an $800K house which declines in value to $500K, you have lost $300K in equity regardless of how much you owe. If you have not paid down a $600K mortgage, you can get back the $100K negative equity only if you abandon the house or sell short. But if you can afford to pay down the mortgage, you aren't likely to do either of these things. In some states, the bank can collect against your other assets, so you would still lose the negative equity just as if you sold the house and paid off the extra at closing. And even in a non-recourse state, you probably don't want to have a mortgage default on your record when you can still afford to live in the house, as this will make it impossible to get a new mortgage for several years and thus impossible to buy a new house.

[rrdeeptech]

Thank you all. After going through the advice to spread my 200k capital gain, here is what I decided. I would highly appreciate it if you have any feedback.

1] 60K into Vanguard 3-fund portfolio. VTSAX 80% VTISAX 5% VBTLX 20%
2] 40K into Betterment and/or Wealthfront with risk tuned to 90%
3] 100K towards taxableIRA or a money market fund
and then, in five months, use item 3 to pay the mortgage.

Thanks in advance

[grabiner]

Thank you all. After going through the advice to spread my 200k capital gain, here is what I decided. I would highly appreciate it if you have any feedback.

1] 60K into Vanguard 3-fund portfolio. VTSAX 80% VTISAX 5% VBTLX 20%
2] 40K into Betterment and/or Wealthfront with risk tuned to 90%

You aren't getting any extra diversification by combining the two strategies. If you want to invest in a taxable account, you might as well just invest it all with your appropriate allocation.

In addition, for tax reasons, you probably don't want the bond fund in your taxable account. It's likely better to have one allocation across all your accounts, and hold Total US Stock Market in the taxable account because it has the lowest tax cost. You can then hold the appropriate amount in bond funds and international stock in your employer plans or IRAs.

3] 100K towards taxableIRA or a money market fund
and then, in five months, use item 3 to pay the mortgage.

You can only contribute $14K to your own and your wife's Roth IRA, or $28K if you haven't already contributed for 2024.

And I don't see the purpose of waiting five months for the paydown. This is a guaranteed loss, as you will earn less interest on the money-market fund than you pay on the same amount of money in the mortgage. If you value liquidity, keeping money in the taxable account could be reasonable, but you won't have any less need for liquidity in five months than you have now.

[rrdeeptech]

Thanks. The reason I have to keep it for five months in mmf is that i just bought the house last month and my lender requires me to wait six months before i can refinance. I am gambling on the interest rate to drop a little bit. Otherwise, i will just "recast"

You are right. I am better off doing Vanguard and just stocks. I will increase the bonds in my employer's retirement.

[boomer_techie]

The reason I have to keep it for five months in mmf is that i just bought the house last month and my lender requires me to wait six months before i can refinance. I am gambling on the interest rate to drop a little bit. Otherwise, i will just "recast"

You could still pay down the principal right away. And then in five months refinance or recast.

[BirdFood]

Thanks. The reason I have to keep it for five months in mmf is that i just bought the house last month and my lender requires me to wait six months before i can refinance. I am gambling on the interest rate to drop a little bit. Otherwise, i will just "recast"

You are right. I am better off doing Vanguard and just stocks. I will increase the bonds in my employer's retirement.

Why refinance? Does the lender somehow forbid extra payments?

[thedaybeforetoday]

Pay down the mortgage balance or in other words, take out the $400,000 mortgage at 15 years as suggested by others.

That 6% you would "earn" (A penny saved is a penny earned) is in after tax dollars.

Tough to beat 6% after tax rate of return.

By my math, based on the income tax rates you cited in your original post, you would need to earn 8.5% in the market, guaranteed, to match 6% return after tax guaranteed.

There is no one anywhere offering a guaranteed, legitimate 8.5% return in the market.

It's kind of life to offer you such a clear cut decision.

[dogagility]

Asset Allocation: 70/30

If you want higher expected growth of your portfolio (which it seems you are wanting with your 200K question), I'd increase your overall stock allocation.

Seems to me that paying 6% interest on the 200k and (perhaps) getting a 9% return (subject to federal taxes) won't move the needle much compared to increasing your overall equity allocation above 70%.

Unless you need the liquidity, I would use the 200K to pay down your mortgage. and... if you're wanting greater expected portfolio growth at the same time, increase your equity allocation.

[Jonamag]

Congrats on the 200k cap gains!

I’d say that the future is unknowable, and time in market and entry price determines the long term price/gains. We’ve had an amazing run in the s&p500 over the last 5 years. Who knows whether this will continue. https://www.oaktreecapital.com/insights ... bble-watch

My suggestion is to keep 1 years mortgage payments+ 6month expenses as a buffer and invest it in 3-6 month treasuries. Treasuries currently yield about 4.3% and are exempt from state income tax. For the remainder, dollar cost average by investing a sum every month or Quarter. In terms of the funds some mix of VGT, VOO and VT would be my recommendation. Note VGT is if you believe the indication economy will continue to out perform and you are willing to hold for about 10yrs. The min 10yr holding period is a good rubric generally for ask investments.

[grabiner]

Thanks. The reason I have to keep it for five months in mmf is that i just bought the house last month and my lender requires me to wait six months before i can refinance. I am gambling on the interest rate to drop a little bit. Otherwise, i will just "recast"

You are right. I am better off doing Vanguard and just stocks. I will increase the bonds in my employer's retirement.

Why refinance? Does the lender somehow forbid extra payments?

The reason to refinance is to get a lower rate. Once the mortgage is paid down, the payments on a refinanced 15-year loan will be about the same as the current payments on the original 30-year loan, but 15-year rates are lower and thus less interest will be paid. Depending on the exact balance, refinancing to a lower rate will either allow the loan to be paid off faster with the same payments, or at the same time with lower payments.

[rrdeeptech]

Why refinance? Does the lender somehow forbid extra payments?

The reason to refinance is to get a lower rate. Once the mortgage is paid down, the payments on a refinanced 15-year loan will be about the same as the current payments on the original 30-year loan, but 15-year rates are lower and thus less interest will be paid. Depending on the exact balance, refinancing to a lower rate will either allow the loan to be paid off faster with the same payments, or at the same time with lower payments.

Thats correct!!

[rrdeeptech]

Congrats on the 200k cap gains!

I’d say that the future is unknowable, and time in market and entry price determines the long term price/gains. We’ve had an amazing run in the s&p500 over the last 5 years. Who knows whether this will continue. https://www.oaktreecapital.com/insights ... bble-watch

My suggestion is to keep 1 years mortgage payments+ 6month expenses as a buffer and invest it in 3-6 month treasuries. Treasuries currently yield about 4.3% and are exempt from state income tax. For the remainder, dollar cost average by investing a sum every month or Quarter. In terms of the funds some mix of VGT, VOO and VT would be my recommendation. Note VGT is if you believe the indication economy will continue to out perform and you are willing to hold for about 10yrs. The min 10yr holding period is a good rubric generally for ask investments.

thanks. This is a good idea. I like the buffer idea and treasuries. I am not so sure about VGT. We have had a hot run.

[arcticpineapplecorp.]

If you have not paid down a $600K mortgage, you can get back the $100K negative equity only if you abandon the house or sell short. But if you can afford to pay down the mortgage, you aren't likely to do either of these things. In some states, the bank can collect against your other assets, so you would still lose the negative equity just as if you sold the house and paid off the extra at closing.

could a short sale result in the unpaid borrowed amount to become taxable income? I.E., if there's $600k left on the mortgage and the house short sales for $500k, wouldn't the $100k not paid back be income to the borrower upon which taxes would be owed?

[BirdFood]

Why refinance? Does the lender somehow forbid extra payments?

The reason to refinance is to get a lower rate. Once the mortgage is paid down, the payments on a refinanced 15-year loan will be about the same as the current payments on the original 30-year loan, but 15-year rates are lower and thus less interest will be paid. Depending on the exact balance, refinancing to a lower rate will either allow the loan to be paid off faster with the same payments, or at the same time with lower payments.

My question is why you (sorry, not “you”—the original poster) can’t put the money in now, thus immediately saving the interest you’re paying on that amount, and then refinance in five months?

[itnetpro]

Hi all,
This is my first post, but I have been a fan of BH forums for years!

Emergency Funds : 20k not included in total portfolio in wealthfront.

Debt : 610k @6.1% home mortgage
35k @ 3% car

Tax Filing Status: Married file Jointly

Tax Rate: Fed 22% State 6.25%

State: IL

Age : Him 42 Her:38

Asset Allocation: 70/30 International: 10 % of stock portion


Portfolio Size 780k


Him 403b 250k
Him 401a 300k
Him ROTH 26k
Him IRA 30k

Her 401K (voya): 150K
Her Roth: 25K

529 (2kids):90k

Goals: Retire early and carry some debt. Debt/Assesst of 30% is acceptable.



QUESTION
We recently sold our home and moved into a new home, realizing a capital gain of $200,000. The new home mortgage is $610k@6.1%.

I'm seeking investment advice on utilizing the 200k funds from capital gains. I need portfolio advice, but more specifically, I need to identify a Vanguard mix of funds return that exceeds my mortgage interest rate (currently 6.1%). Inspired by Anderson's "The Value of Debt," I'm interested in strategies for asset growth rather than solely debt reduction.

I'm interested in exploring Vanguard investment options for this $200,000.

I would love to hear advice based on my financial situation. Retiring early is a priority.

There is to much uncertainty and volility in the market right now.

I would keep it in a high yeild savings account for now. Capital One is paying 3.8% but some online banks are offering more with some even offering a cash bonus for starting an account and maintaining the balance for a period of time essentially paying much higher.

Nobody knows where inflation is going at the moment. Much will depend on how/if the new administration follows through with campaign promises.

Perhaps in 6 months you can reassess after we get a clearer picture on inflation.

If inflation continues to rise, some fixed income, bonds or munis, might be a good idea, if lower, perhaps equities. Or, maybe even consider paying down that 6% mortgage. It will be tough going forward, to beat the 6% you are paying in the market. Besides, you did mention retiring young and eliminating that mortgage will make it easier to achieve those goals.

Paying down real estate is never a bad idea when the debit cost 5%+. Your home is part of your assets.

Of course, higher interest could also be offset by itemizing deductions. Another reason to sit tight and wait. We could get the ability back to deduct all local & state taxes. At that time, adding the interest into the itemized deduction could justify keeping that mortgage and investing the capital gain.

John