Author Topic: Windfall incoming - please review/criticize my plan!  (Read 1628 times)

Home Stretch

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Windfall incoming - please review/criticize my plan!
« on: May 06, 2019, 09:52:52 AM »
Long story short, I've got a windfall coming in the next few weeks that will accelerate my early retirement plans by about 3-4 years from what I had mapped out since 2013. So, now I'm at the point of deciding what to do with the money. For the sake of anonymity, let's say it's $400k (not the actual number, but in the ballpark).

I have a mortgage with $150k left on it @3.5% - that's the only debt. Been making minimum payments on it since day 1 because it's such a low rate.

My current plan prior to feedback from you guys is to pay off the mortgage and then put the rest in a 2.2% high-yield savings account and dollar-cost average it into various Vanguard mutual funds at the rate of $10k/month until it's all invested.

I know this is a very conservative approach; the question is, am I being too conservative? Am I going to have serious FOMO while watching the S&P creep past 3,000? Should I just go "YOLO put all that shit in VTSAX"?

I'm absolutely open to any and all feedback - don't hold back!

TheHardenedInvestor

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Re: Windfall incoming - please review/criticize my plan!
« Reply #1 on: May 06, 2019, 09:57:45 AM »
I think paying off the mortgage is a fine decision no matter what.

Ultimately this is an asset allocation question. I think you need to answer that question first. What is your target asset allocation (stocks vs fixed), and then the answer is easy...

1) pay off mortgage
2) invest remaining money immediately at desired asset allocation percentages.

The immediate invest vs DCA is up to you. Studies show investing immediately always pays off more in the end...10+ year’s from now.

RWD

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Re: Windfall incoming - please review/criticize my plan!
« Reply #2 on: May 06, 2019, 11:32:09 AM »

Laura33

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Re: Windfall incoming - please review/criticize my plan!
« Reply #3 on: May 06, 2019, 11:48:30 AM »
Why pay off the mortgage now?   Why the large hunk o' cash?  Has that always been your plan, or is that an emotional, fear-driven decision in the face of an unexpected windfall?

If this money puts you 3-4 years ahead in your plan, put it where your plan would have that money in 3-4 years.  Does your plan say that in 3-4 years you should have a paid-off mortgage and @$250k in cash?  Assuming you weren't going to get this money in a few weeks, would you be sitting there right now thinking "I need to change my plan, because 3-4 years from now, I want a paid-off mortgage and $250k in cash?"  If the answer to both questions is no, then don't go someplace you never planned to go. 

Tl;dr:  don't fuck with the plan unless you actually need to. 

Home Stretch

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Re: Windfall incoming - please review/criticize my plan!
« Reply #4 on: May 06, 2019, 02:24:30 PM »
Why pay off the mortgage now?   Why the large hunk o' cash?  Has that always been your plan, or is that an emotional, fear-driven decision in the face of an unexpected windfall?

If this money puts you 3-4 years ahead in your plan, put it where your plan would have that money in 3-4 years.  Does your plan say that in 3-4 years you should have a paid-off mortgage and @$250k in cash?  Assuming you weren't going to get this money in a few weeks, would you be sitting there right now thinking "I need to change my plan, because 3-4 years from now, I want a paid-off mortgage and $250k in cash?"  If the answer to both questions is no, then don't go someplace you never planned to go. 

Tl;dr:  don't fuck with the plan unless you actually need to.

I've always wanted to enter early retirement with no mortgage payment to worry about, so that was kind of part of "The Plan". The windfall became expected about a year ago - before that it was not something we could depend on at all.

My vote is "YOLO put all that shit in VTSAX".

Lol, one vote for YOLO VTSAX - noted! I'm starting to think maybe ditch the dollar cost averaging and go with pay off mortgage and dump all remaining money into mutual funds (not specifically VTSAX, since I don't have any plans to go back to work and may have to draw down within the next year or so - need to minimize risk).

Stimpy

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Re: Windfall incoming - please review/criticize my plan!
« Reply #5 on: May 06, 2019, 02:32:27 PM »
Lol, one vote for YOLO VTSAX - noted! I'm starting to think maybe ditch the dollar cost averaging and go with pay off mortgage and dump all remaining money into mutual funds (not specifically VTSAX, since I don't have any plans to go back to work and may have to draw down within the next year or so - need to minimize risk).

Make that two.  YOLO it all in VTSAX (or whatever ETF you're using).

And if you planned on being mortgage free, yea pay that off first then YOLO it. 

Villanelle

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Re: Windfall incoming - please review/criticize my plan!
« Reply #6 on: May 06, 2019, 02:34:14 PM »
Another YOLO VTSAX vote.  (In actuality I'd want some bond exposure in most situations.)

If you truly can't stomach that, put 1/3 toward your mortgage and 2/3 in the market.  Or some other divisions, but just know that it's not the most rational choice. 

It's not clear from your post how far out FIRE will be with this windfall.  Could you calculate how much you'd beed to lump sum to the mortgage to get the final payment to more or less coincide with that FIRE date?  Again, it's not statistically the best bet, but if "no mortgage in retirement" is a huge psychological thing for you, that would get you there while still allowing you to maximize the amount you invest. 

Home Stretch

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Re: Windfall incoming - please review/criticize my plan!
« Reply #7 on: May 06, 2019, 02:59:47 PM »
It's not clear from your post how far out FIRE will be with this windfall.  Could you calculate how much you'd beed to lump sum to the mortgage to get the final payment to more or less coincide with that FIRE date?  Again, it's not statistically the best bet, but if "no mortgage in retirement" is a huge psychological thing for you, that would get you there while still allowing you to maximize the amount you invest. 

You're right, I didn't make it clear. What I meant to write was that the original plan had our FIRE date being in 2022/2023, and this windfall has accelerated it to.... next month!

Now that I've gotten a dose of jlcollins (thanks @RWD), I am starting to feel like we should just invest it all. I just crunched the actual numbers and it appears the average difference between the two strategies (investing $400k or investing $250k) is just about the same as our mortgage, including escrow for insurance and taxes... So it does really seem like a no-brainer. I think I am more in love with the idea of having a paid off house than the financial implications of actually doing it... I don't know, now I'm just kind of on the fence.

cincystache

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Re: Windfall incoming - please review/criticize my plan!
« Reply #8 on: May 06, 2019, 03:16:47 PM »
I'd pay off the mortgage and invest the rest in VTWAX or VTSAX, either is good

chasingthegoodlife

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Re: Windfall incoming - please review/criticize my plan!
« Reply #9 on: May 06, 2019, 03:54:07 PM »
Congratulations - an exciting time for you!

Invest in ETFs vs Pay Off Mortgage and Invest in ETFs are both solid plans. Many people have had success following each path.

If you are firing next month, I would put more thought into other aspects of your plan - withdrawal strategies, tax, insurances and so on.

FIRE 20/20

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Re: Windfall incoming - please review/criticize my plan!
« Reply #10 on: May 06, 2019, 06:21:49 PM »

You're right, I didn't make it clear. What I meant to write was that the original plan had our FIRE date being in 2022/2023, and this windfall has accelerated it to.... next month!

Now that I've gotten a dose of jlcollins (thanks @RWD), I am starting to feel like we should just invest it all. I just crunched the actual numbers and it appears the average difference between the two strategies (investing $400k or investing $250k) is just about the same as our mortgage, including escrow for insurance and taxes... So it does really seem like a no-brainer. I think I am more in love with the idea of having a paid off house than the financial implications of actually doing it... I don't know, now I'm just kind of on the fence.

It sounds to me like you don't have the kind of plan I would expect someone about to FIRE would have.  For instance - if you're in the US, have you calculated the difference in insurance premiums depending on whether or not you need additional income to cover the mortgage?  I was surprised to find out that for me, paying off the mortgage right before FIRE actually made sense because of the substantial increase in ACA subsidies we would be eligible for plus the reduction in taxes on our ladder rungs.  Another question - do you have a plan to access your tax deferred accounts?  Will you be using a Roth ladder?  I assume the ~$400k gives you more than 5 years of accessible funds so you should be fine here, but have you checked?  If the windfall takes you far past the 5 years of expenses you'll need, then you might be able to make ladder rungs that are smaller than your annual spend including the mortgage and within the range of maximum subsidies, in which case keeping the mortgage probably makes sense.  But you need to do the math to figure out which is better. 
Can you post what your monthly health care costs and annual taxes will be in both cases?  If not I don't think we have the information we need to make a call on which is optimal. 
Finally, do you have an IPS?   Does that tell you what to do? 

Home Stretch

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Re: Windfall incoming - please review/criticize my plan!
« Reply #11 on: May 06, 2019, 06:53:22 PM »
It sounds to me like you don't have the kind of plan I would expect someone about to FIRE would have.

Nah, I'm good. Appreciate the concern but yes I have considered all of the items you mentioned.

To be completely honest, I don't really have much of an appetite for the financial trickery outside of a Roth conversion ladder, specifically I'm turned off to trying to make any guesses about how the ACA will play out even 12 months from now. The political environment around that is a complete fustercluck.

Don't take this the wrong way, but the way you jumped into this thread sounds quite a bit like you're spreading FUD.

Goldy

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Re: Windfall incoming - please review/criticize my plan!
« Reply #12 on: May 06, 2019, 08:55:59 PM »
Another vote for YOLO

Three years ago I had a similar struggle with 275k from selling our house.  My options were to pay off the new house with $270k or invest it either DCA or lump sum.  I chose to invest and DCA at 50k per month but quickly found out that after one month of DCA and watching the market creep up with my money on the sidelines I couldn’t take waiting for a dip anymore.  The Dow was at 17k then.

If you plan on FIRE next month I might recommend paying off the mortgage to get an ACA subsidy but you would need to run some numbers to see if it makes sense.

Laura33

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Re: Windfall incoming - please review/criticize my plan!
« Reply #13 on: May 07, 2019, 07:21:05 AM »
FWIW, IMO it is entirely reasonable to pay off the mortgage when you FIRE -- I had assumed you were earlier on in the journey, where that doesn't make as much sense.  Any plan must reconcile two opposing considerations:  maximizing your upside potential; and minimizing your downside risk.  During the accumulation phase, the former is most important, because you have plentiful income and time to manage any bumps in the road.  But once you achieve FIRE and quit, your priority shifts to the latter, because you have now determined that you have as much as you need (so the value of excess returns is minimal), and you no longer have a steady stream of cash coming in the door to mitigate rocky periods in the market.

So given that you are at "immediate FIRE" stage, I will give you two options.

1.  As others have suggested, pay off the mortgage and throw the rest in VTSAX.

2.  If 100% VTSAX feels too aggressive, set up a bond or CD ladder with some of the leftover money.  Take 3-5 years of living expenses (considering inflation) from the remainder of the windfall, keep one year's expenses in cash, and buy individual bonds or CDs maturing each year of the following years (depending on how conservative you feel).  Live on the cash for the first year, and then a year from now, you will have another year's expenses maturing from the bond or CD.  Take that money to live on, and then sell enough stocks to buy another set of bonds or CDs maturing a year after your last current set -- you are basically replenishing the ladder. 

The reason this works is that when the market crashes, you just don't replenish the ladder that year.  Because you have guaranteed income for the next several years, you can just let your investments ride until the market recovers -- then you can sell and replenish the ladder for however many years you missed.  And that security means that you can maintain the entire rest of your portfolio in VTSAX, because now market gyrations are irrelevant.

Home Stretch

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Re: Windfall incoming - please review/criticize my plan!
« Reply #14 on: May 07, 2019, 08:29:01 AM »
Thanks @Laura33 - we're definitely on-board with the CD ladder idea!

Still on the fence about the mortgage... It would feel awfully nice, risk-wise, to be able to safely cover all housing-related expenses for about $8k/year instead of the ~$20k we pay with the mortgage.

Car Jack

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Re: Windfall incoming - please review/criticize my plan!
« Reply #15 on: May 07, 2019, 08:42:07 AM »
What *I* would do in your shoes......

Overfund emergency fund, including maxing out iBonds.
Pay off the mortgage.
Get any repairs done as needed on the house.  (I have a house....they always need something)
If the car needs repairs, tires, whatever, do it.
Kids?  Fund the 529(s).
Put the rest into the index funds according to your asset allocation in ONE lump.

I'll be receiving a smaller (let's call it $57k....because....well....it's $57k) this summer.  I'll cash the check, let it settle, transfer to Schwab and buy SCHB.  So yes, I do put my money where my mouth is.

Oh....maybe out of that $400k, buy yourself something for $250.

Steeze

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Re: Windfall incoming - please review/criticize my plan!
« Reply #16 on: May 07, 2019, 08:42:31 AM »
That close to fire, I say pay off mortgage, cd ladder 5 years, vtsax whatever is left.

Catbert

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Re: Windfall incoming - please review/criticize my plan!
« Reply #17 on: May 07, 2019, 12:11:06 PM »
There was a recent thread (too lazy to find it) about paying off the mortgage before RE.  One big argument for paying off is the ability to keep income low in retirement for ACA and college financial aid purposes.  If either of those is part of your long- term plan, pay off that mortgage before retirement.

Personally, I would dollar cost average into your portfolio.  I was around for 2008 and 2001.

HeadedWest2029

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Re: Windfall incoming - please review/criticize my plan!
« Reply #18 on: May 07, 2019, 01:24:22 PM »
I had a similar situation last year.  I know lump sum is the statistically optimal decision, but it's another thing when you're staring down the barrel of a gun with a high CAPE environment and the lifetime earnings of a family member in your care (after an unexpected death).  It's easy to talk a big game, but from experience I get the reticence.  Ultimately, I settled on a 6-month DCA schedule of equal-sized investments.  I set a calendar reminder for the exact same day each month to make the investment and plowed away.  For me personally, it was the right balance emotionally.  In general, the longer you stretch out the DCA, the more likely you are to under perform.
Further reading which helped me - https://ofdollarsanddata.com/how-to-invest-a-lump-sum/
And I think paying off the mortgage makes sense if it helps you sleep at night, even if it's probably going to be a sub-optimal decision in a spreadsheet.  I didn't have a mortgage so it didn't factor in my decision
« Last Edit: May 07, 2019, 01:36:08 PM by HeadedWest2029 »

PathtoFIRE

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Re: Windfall incoming - please review/criticize my plan!
« Reply #19 on: May 07, 2019, 01:35:01 PM »
I would not pay off the mortgage (except maybe in the circumstances Catbert alluded to above).

Rather than thinking of it as "dollar cost averaging", I would consider something more along the lines of a "bond tent" or "reverse glidepath", ideas that I just learned about here.

In these similar ideas, you've skipped right to the moment of early retirement, when you are at the moment when the sequence of return over the next few years will have the greatest impact on whether your portfolio survives. So I'd take a holistic look at your whole portfolio (current + windfall numbers), choose an equity/bond ratio (I like the look of the 60/40 gliding up to 80-100% equities) to start at, and then slowly increase your equity exposure over time, primarily by preferentially selling bonds for quarterly funds, actively rebalancing when appropriate.

Admittedly, this isn't that much different than your idea of taking the windfall, starting conservative, and "dollar cost averaging" it in to the markets, but I think the idea framework that I'm suggesting is the more appropriate way of thinking of it. Ignore the windfall nature of the money, instead reset your thinking to "we are now FI", and with that in mind, what is a logical way to RE while not taking unnecessary risks?

FIRE 20/20

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Re: Windfall incoming - please review/criticize my plan!
« Reply #20 on: May 07, 2019, 03:30:34 PM »
It sounds to me like you don't have the kind of plan I would expect someone about to FIRE would have.

Nah, I'm good. Appreciate the concern but yes I have considered all of the items you mentioned.

To be completely honest, I don't really have much of an appetite for the financial trickery outside of a Roth conversion ladder, specifically I'm turned off to trying to make any guesses about how the ACA will play out even 12 months from now. The political environment around that is a complete fustercluck.

I'm sorry it came across that way.  Unfortunately without the numbers we can't make a recommendation and be confident that it's going to be correct.  If paying off the mortgage can save you substantial amounts in taxes and ACA costs, then that's probably the best path.  That's how it works out for me.  However, I've seen people post elsewhere with different numbers where it works the other way.  To use my numbers - roughly speaking - it's about $300 each for ACA premium reductions per month and $150 each in taxes due mostly to the reduced income required to pay for the $300 each in ACA payments.  Combined that's about $900 per month that our costs are reduced because we don't have our mortgage.  Of course we lose the benefits of having that money invested, which will vary based on assumptions about growth as well as the interest rate and amount left on your mortgage (which you have posted), whether or not you itemize, etc.  Simply put, without those specific numbers it's simply impossible to actually come up with the right answer. 

Don't take this the wrong way, but the way you jumped into this thread sounds quite a bit like you're spreading FUD.

I'm curious why you posted that.  I've re-read my post 3 times and can't see it.  If I'm coming across that way I'd like to know why so I can improve my communication in the future.  Feel free to PM me.  My only intent was to ask the questions to get the numbers so we can help answer the questions.  Any answers you get without accounting for the actual math are a shot in the dark. 

alcon835

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Re: Windfall incoming - please review/criticize my plan!
« Reply #21 on: May 07, 2019, 03:53:06 PM »
I'd pay off the mortgage and then YOLO VTSAX with the leftover.

There's something so emotionally satisfying about not owing a mortgage. That has value you probably don't recognize (especially since you've mentioned it several times). Could this lose you a few points of interest? Sure, but in the end it sounds like you're really close to FIRE anyway, so who cares?

Home Stretch

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Re: Windfall incoming - please review/criticize my plan!
« Reply #22 on: May 08, 2019, 07:08:50 AM »
I spoke again with my SO last night and we agreed that we definitely want to pay off the mortgage even if the odds of it being the financially optimal choice are not in our favor - it's more of an emotional choice and yes it could come with the benefits of lower ACA healthcare costs (if we still have the ACA subsidies in the next few years).

@FIRE 20/20 - Appreciate the reply. I think I'm a little sensitive to people questioning my plan because it's happened a few times in the real world (the classic Baby Boomer telling me "that's not possible - you need $5m to retire at your age!"). I also have more of a "loose" plan because I personally don't fear the prospect of having to work a little bit in the future to keep from taking too much money out of investments, and both myself and my SO are in fields that are very easy to step in and out of without a problem. I got my first "real" job in 2009, so I know what it's like to find a job in a tight market - it doesn't worry me.

Thanks everyone for the input!

FIRE 20/20

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Re: Windfall incoming - please review/criticize my plan!
« Reply #23 on: May 08, 2019, 02:48:24 PM »
@FIRE 20/20 - Appreciate the reply. I think I'm a little sensitive to people questioning my plan because it's happened a few times in the real world (the classic Baby Boomer telling me "that's not possible - you need $5m to retire at your age!"). I also have more of a "loose" plan because I personally don't fear the prospect of having to work a little bit in the future to keep from taking too much money out of investments, and both myself and my SO are in fields that are very easy to step in and out of without a problem. I got my first "real" job in 2009, so I know what it's like to find a job in a tight market - it doesn't worry me.

Thanks everyone for the input!
[/quote]

No problem.  Tone is very difficult to read with only text.  I am envious that you are in a field that you can jump into and out of - that's an incredibly valuable safety margin to have and one I'm painfully aware that I do not have, so I built in other safety margins into our plan.