Author Topic: what to do with large lump sum?  (Read 3336 times)

leah77

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what to do with large lump sum?
« on: September 08, 2013, 08:03:34 AM »
My husband just received a large bonus payout ($75K). We are aggressively paying down our primary residence, but we still owe $150K (on a $285K mortgage). The interest rate on the mortgage is really low - 2.875%. We have no additional debt. We max out our 401(k)s and IRAs each year, as well as fund our two kids' 529s. I think we should throw the unexpected $75K at the house payment, cutting off five years from our anticipated payoff date and saving around $18K in interest. My husband votes to put it in cheap ETFs, but do so over the course of the next twelve months because he thinks the market is a bit overpriced right now (so basically dollar-cost averaging it out over the next year, unless there is a big pull-back, in which case we would dump a larger percentage in).

I like the peace of mind of being that much closer to FI with not having a house payment (we're hoping to "retire" when we're 40 - 7 years from now), but my husband argues convincingly that with that low of an interest rate, we should just keep plugging away and invest elsewhere where we can make larger returns. In addition, we could use the interest right-off this year with this big (to us anyway) windfall.

What would you do??

icefr

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Re: what to do with large lump sum?
« Reply #1 on: September 08, 2013, 08:16:11 AM »
It doesn't really matter what I would do, but what you two want to do.

Since one of you wants A and one of you wants B, why not split the two? Throw $37.5K at the mortgage, shave a few years off, and add the other $37.5K into your investment portfolio.

SunshineGirl

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Re: what to do with large lump sum?
« Reply #2 on: September 08, 2013, 08:17:16 AM »
First, make sure taxes are accounted for.

Then, this is one of those things that comes to goals and piece of mind. Your husband's probably right that you can make more by investing - just the yield on many Vanguard funds pays more than your mortgage interest rate. I'd probably side with your husband on this one, financially. But you really can't go wrong here - it's a great dilemma to have!

DocCyane

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Re: what to do with large lump sum?
« Reply #3 on: September 08, 2013, 09:11:53 AM »
Your husband is right.

However, if you are generally bad with money and are incredibly fearful whenever the stock market loses a penny, than you can ascribe to the Dave Ramsey kindergarten level of finance and pay off the house.

ender

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Re: what to do with large lump sum?
« Reply #4 on: September 08, 2013, 10:46:49 AM »
I would split it 50-50 (assuming you have a healthy emergency fund).

Based on your post, it sounds like you will either:

 1. Regret not putting it into the market if the market goes up
 2. Regret putting it all into the market if the market goes down

By splitting it 50-50 you basically emotionally hedge yourself against both and avoid the "what if we had done something else??" internal questioning.

djulian529

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Re: what to do with large lump sum?
« Reply #5 on: September 08, 2013, 11:04:22 AM »
As long as taxes are covered, I personally would do the 50/50 split.  That way you are hedging yourself closer to FI and also getting some investments done at the same time

Ratracespectator

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Re: what to do with large lump sum?
« Reply #6 on: September 08, 2013, 11:36:36 AM »
Remember that your mortgage rate is actually quite a bit lower if you itemize your deductions. If your marginal tax rate is 25%, then your true rate is 2.785% x 75%.

Your most prudent move is to put the money into your children's 529 plans, so that the money grows tax free. I believe that you can put a lump sum of up to $50 or $60k per plan, which represents about 5 years of max contributions (remember that Mr. MMM is not saving for college, so his computations for FI will be different than yours .)

Congrats on your disciplined approach.

chasesfish

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Re: what to do with large lump sum?
« Reply #7 on: September 08, 2013, 11:50:27 AM »
Both options are good ideas.

I'd probably buy a few dividend stocks or an ETF like VIG and let it go.  I think that'll have a slightly better return over 7 years, even though it involves a little more risk

2527

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Re: what to do with large lump sum?
« Reply #8 on: September 08, 2013, 04:51:46 PM »
I like the 50/50 split idea.  Personally I would hold it in cash until the stock market tanks and then buy stocks.  Why buy now at record highs?

brewer12345

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Re: what to do with large lump sum?
« Reply #9 on: September 08, 2013, 05:13:17 PM »
I personally would not be looking to pay off the mortgage ( I will be keeping my mortgage as Iquit the day job, actually).  That said, would you buy a 15 year bond with a yield of 2.875%?