How should I think about investing a windfall when our time horizon is an unknown

[hp12see]

I suspect the answer is "figure out your timing first and invest accordingly" but absent that clarity how should one consider the pros and cons?

Background: my family (wife and three young children) live in Northern Virginia. Some days we like it OK - at least for this phase of life - but much of the time we wish we could move back out west. We used to live in a mountain town out there but moved here before the pandemic and prices have absolutely exploded since then. If we were to move out west today a comparable house would likely cost twice what our current home does ($1.6M here, ~$3M+ there). Being able to make a move like that would require setting up my business so that I could mostly work remotely and fly back as necessary. I think that's possible in the next 5-7 years and am working towards that goal but it's not a certainty. If we end up staying here long term we'd probably want a larger house as our kids grow up but there's no hard deadline on that either. I guess in either case I'm earmarking this money to go towards a more expensive house in the medium term.

We'll be receiving a lump sum of approximately $1M in 2026 (net) and I don't know how to invest/save it for our squishy timelines. Retirement accounts are funded so nothing to see there and I feel confident using that money towards new housing in 5-6 years is the answer. Of course then the question is whether to invest in equities or play it safe. Here are my thoughts on potential outcomes:

• Market and economy do well over the next 5-7 years. Prices in the mountains continue to grow faster than our home value on the east coast. If that $1M has been in the market it's hopefully been growing at least as fast as mountain housing prices and maybe faster. If it's been in CDs or bonds the gap between a house in the mountain and our current house + $1M fund grows.

• Market does not do well over that same time period. Maybe prices in the mountains collapse but if we're all in on stocks that are also doing poorly the gap could remain the same. Or maybe DC area prices drop faster than the mountains and the gap widens. Of course if housing becomes cheaper and that $1M is in CDs or bonds we're in good shape.

I know I'm not sharing any deep insights here but it feels like the "safe" CD ladder/HYSA option actually runs a real risk of mountain town pricing continuing to run away from us. And the equity option runs the risk of the opposite - not being able to take advantage of a buyer's market if housing prices and the broader economy enters a recession.

The only investing I do is dollar cost averaging into tax advantaged accounts and a taxable brokerage. I don't care what the market is doing in the short term, I assume it'll all work out over the next 20 years. This is the first time I've had to contemplate investing/saving money with a short(er) time horizon and that 5-7 year range is both squishy and right in that "in between" phase from what I can tell. Would the boglehead approach be - don't guess what's going to happen and do 50/50? Choosing either to go into 100% feels like making a prediction on what the market is going to do over that timeframe which feels very un-bogle like.

TL;DR: will have $1M to save or invest with the intention of using it towards a new house in 5-7 years. Concerned that doing the "smart thing" and keeping it in CDs/HYSA will erode our position if prices in an expensive market (Colorado mountain town) continue to boom

[MJS]

Just like someone who is retiring, you need to mitigate sequence of returns risk (SORR). Consider a glide path for these funds that starts ~50/50 and moves to more conservative investments as you get closer.

[DocH]

Do you own home currently if not how much do you owe? What is interest rate?

[CoAndy]

Are you planning on adding money to this million dollars over time?

[lazynovice]

I think the run up in the mountain towns of Colorado was COVID and interest rate related. I wouldn’t assume that same growth into the future. As you know, unless you are just dead set on one town in particular, some towns are cheaper than others.

[simplesimon]

Seven years is quite some time - anything could happen.

If it were me, I would invest it in 50/50 or less stock. Maybe 1/3 cash, 1/3 bonds, 1/3 stock.

It's impossible to know what the optimal decision is seven years ahead of time.

[bombcar]

50/50 is a good "I don't know what to do, but I could control the time" option - because you get the upside of the stock which could help accelerate things, but you're not going to see a huge drop delay you that long.

Of course, you could attack debt and other things with it, too.

If you really want the mountain town, you may end up having to compromise. But 7 years from now is a lot different, and the kids will be almost grown.

[mchampse]

If housing prices continue to rise, in all likelihood the stock market also will. Similarly if housing prices fall, stocks are likely to not do as well. If you want to invest to keep up with housing prices, a 60/40 portfolio or whatever your current allocation is might be the best thing. Then if you don’t move, you’re invested for the long term anyways.

[Grt2bOutdoors]

Does lump sum + brokerage account + new taxable savings this year+ existing home equity get you to amount needed to buy house today out west?

If you’re buying in 5 years, I wouldn’t be more than 30-40% equity. Perhaps that’s conservative but you have assets already exposed to real estate (just not out west) you have 5 years of taxable brokerage additions, the existing fund balance and the net lump sum.

[hp12see]

Do you own home currently if not how much do you owe? What is interest rate?

We have $475K left of a $500K mortgage at 2.75% - not looking to pay that off a day earlier than necessary.

[hp12see]

I think the run up in the mountain towns of Colorado was COVID and interest rate related. I wouldn’t assume that same growth into the future. As you know, unless you are just dead set on one town in particular, some towns are cheaper than others.

I've got my heart set on Steamboat Springs but I suppose it's all flexible.

If you really want the mountain town, you may end up having to compromise. But 7 years from now is a lot different, and the kids will be almost grown.

I know you're right but oof, what a gut punch. Good reminder that we need to prioritize spending as much time out west as possible in the interim because they won't be young forever. I'm still coming to grips with out quickly 5-7 years will feel to me while it's the bulk of our kids' childhoods.

[hp12see]

Are you planning on adding money to this million dollars over time?

I think that's likely but it'd be in the 5-figures a year range. There's a decent chance the market returns on $1M will outpace what we'd be adding to the pot from cashflow.

[GrumpyFarmer]

If you know what/where you plan to move and do in retirement, and assuming you are able to fund your retirement the way you want to live w/o the windfall…

1. Depending on how you plan to fund housing for when you move, id figure that out before deciding how to hold the money. (For example if you put all in bond fund, or some kind other fixed income, the dividend/distribution could well pay the loan for what you want to buy without touching your retirement funds or the principal of the windfall.)

2. Start real estate shopping and be prepared to buy when the right thing pops up.

2.5. Have a plan what you will do with the property (and how to take care of it) should you find and buy before ready to retire and move.

3. Execute plan.

[hp12see]

Thanks GrumpyFarmer - for some reason I never thought of investing it and using the proceeds to pay down the mortgage. My thought process has only been to limit the mortgage through a large down payment but if rates are lower when it’s time to buy I’ll run that calculation too.

My wife and I are in our mid to late 30s and would like to move well before retirement if we can make it work.

[GrumpyFarmer]

NP…my thoughts normally go against the grain here, but IMO, once you have 2 commas, then you start to have some other options in how you leverage your wealth.

The windfall is something you did not have, so really there is no reason to change anything from your savings…in my thought invest it all, let it work passively for you for your future…the principle will be untouched and you can add real estate for your future plan with no money out of pocket…in this case time is on your side and you can pick and choose what and when to buy. The other thing that may do depending on what you ultimately purchase and when, it can be a tax shelter (yes those are legal) for you. Point being let the windfall work for you passively, if that helps with your goals.

In the case of a bond or something similar if it pays the mortgage, guess what? Even though the bond(s) may gain or lose some face value the coupon remains same and at the same time you are building equity in another property(asset) which depending on the location is going to appreciate. So in that case you could have not only not touch the principle of the windfall, even if the bond loses some face value, the distribution will go to an asset that appreciates. Sure it’s less liquid than a money market account, it may be much more valuable too depending on the location. If you choose to rent it, then you will gain even more equity.

The reason to take a loan is to let you save more…in this case you could effectively do just that.

Anyway good luck on what you decide. You don’t have to do anything…you could take the windfall as cash spread on the bed and swim in it too. It’s your money. Let it work for you.

[DocH]

Agree not pay off mortgage at that rate. I would go 50/50