I’ve just finally unloaded my own slice of the housing crisis (PHEW), a condo in another place, and have been wired the proceeds, which are between $50 and $100k. What’s the best thing to do with that lump?
My only remaining mortgage (PHEW) is the house I live in. It’s for 80% of that house’s value, at 3.4%, and the monthly nut is reasonable, at ~30% of take-home. I have decent? retirement savings between IRA, investment and TIAA-cref accounts, about $70k (I’m 41). My car is paid off, and I have no CC debt or student loans. There are some upcoming expenses for the house that are within our planned budget. We do not have children and do not plan to.
I feel burned from the housing crisis (yet I know it wasn’t as bad for me as others). The proceeds represent my initial investment, so I came out about flat, although that money was locked up (or, circa 2009, nonexistent) for almost 10 years. Because of that, I’m hesitant to pay down principal on my current mortgage, more than the 20% we already have in there. But 2008 wasn’t so kind to investments, either. I know I don’t want to leave this money in checking or my 0.5% savings, so – where does it go?
Standard grumpy disclaimers apply: We are not financial advisers. Talk to a fee-based financial planner and/or do your own research before making any life-changing decisions.
You have a few good options. Three of them jump to mind immediately.
1. Put more money into retirement
2. Pre-pay your current mortgage
3. Put the money in taxable stocks
I do have a quibble with the last paragraph if your question. Pre-paying the mortgage *can* provide cash-flow liquidity. If you’re willing to reamortize (aka re-cast) the mortgage, then you can lower your monthly mortgage payments by re-extending the length of your mortgage if you have prepaid a significant amount. You can do this even if you’ve lost your job, generally for the cost of ~$250. Only if you’re willing/planning on foreclosing on your house would it make sense to never pre-pay under any circumstances, but since you didn’t foreclose on the condo, it’s unlikely that you’re in that situation. The *debt* is what you should be focusing on, not the value of your house. You will have the debt no matter what the value of your house is (absent willingness to foreclose, of course). Pre-paying here is the safest option– the low risk, low return option.
Your interest rate on your house is pretty small, so it’s not obvious you should pre-pay the mortgage. With a higher interest rate, it might tip your decision to the mortgage if doing so meant you could refinance, for example, and it would be a safe investment (assuming no plans to foreclose) and would allow you to decrease your monthly nut by reamortizing in the case of an emergency. In this case, the return is pretty low and this is something you’d only think about doing if you wanted a safer option. The return is higher than CDs or savings accounts, but you wouldn’t necessarily be able to get all your savings out in case of an emergency (because home equity loans tend to dry up when you actually need them), just enough to give you a somewhat lower monthly payment with re-casting discussed above. [Note, too, that the earlier you pre-pay the bigger the benefit of prepayment-- you can play with the numbers using the GRS amortization calculator.]
You should think about how quickly you will want this money. It sounds like you don’t have any major plans for expenditures that you can’t handle. However, how are you feeling about job risks over the next 15 years or so? Is there a chance that you or a spouse could lose income? Is there a chance that you’ll want to move to a more expensive locale? If you feel pretty secure on that, then putting the money away in a tax-advantaged retirement fund is going to be better than just putting it into the stock market because you will save money on taxes. However if you see a chance for needing more liquidity, then you would want to tilt towards regular stock investing (keeping in mind that IRA Roth contributions can be taken out tax-free even if their earnings cannot, so they have added liquidity).
You should also think about whether or not $70K in retirement accounts at age 41 is putting you on track for retirement or not. My druthers is that you could add more to that, but I also don’t know about your lifestyle and your planned expenses, your work situation, etc. There are a lot of retirement calculators out there with various inputs that you can play with to get a better picture of how much you think you’ll need going forward. It is unlikely that you have saved too much at this point. (And if you have, you can always cut down on the retirement savings later.)
If you choose one of the two investing options, what stocks to put it in? Broad-based low-fee Vanguard index funds if possible. VTSMX is a good one if you just want diversification, but there are other combinations you can make with VFINX, VGTSX and so on. You may want to throw in some bond fund, such as VBMFX. And ask about their admiral fund shares if you invest with Vanguard directly. With TIAA-CREF you’ll want to talk to an adviser to get numbers on fees for their broad-based indexes vs. their target-date funds. We can go more into detail on these if you want to add more information about your options.
Personally I like having a secondary emergency fund in taxable stocks (and/or in IRA Roths) that I feel like I could tap by selling off stocks. So far we have left ours untouched but the fact that it’s there (even when it dropped down to its lowest point in the recession– it has since more than doubled!) always made me feel more secure.
What I would do in your scenario would be to max out all the retirement accounts that I could (and given the sale, you may want to check with a tax accountant or other expert before putting money in the IRA), and put the rest into taxable stocks or (less likely given your situation) mortgage prepayment. For the retirement accounts, I would either pick some broad-based indexes with low fees from TIAA-CREF, or I’d pay a little bit more in fees to get their target-based fund. (Their target-based fund isn’t a no-brainer like Vanguard’s is, but if I didn’t want to sit down and create my own diversified sets of funds, I’d go for it.)
But again, you’ll have to think about what your short- and long- term goals and uncertainties are. The best thing to do will vary based on your needs. For shorter-term safety but low return: prepay the mortgage (knowing your can re-cast for a lower monthly payment later, should you need to). For longer term safety and the highest rewards: max out your retirement options. For a secondary emergency fund and somewhat risky growth (which will be correlated with the economy, as you note, but not necessarily your personal situation): put it in Roths first and the stock market second.
Grumpy Nation: What advice would you give Susan? Are there other things she should be considering in this decision? Bonus points if nobody mentions landlording as an option. Unless Susan *really* wants to landlord. Which we doubt.