Author Topic: 100k Windfall  (Read 1195 times)

Va

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100k Windfall
« on: August 05, 2019, 03:35:26 PM »
Trying to determine best use of $100k windfall.

Background:

- 36M, 33F in HCOL area

Income:

- $180k combined

Net worth:

- $631k total (including $100k windfall)

- $390k in retirement accounts (was over $400k until recent unpleasant events...)

- $140k Home Equity

- $100k windfall

-- $25k E-fund dedicated to new roof, etc.

- No debt except low interest mortgage and IBR student loan payment

Asset allocation:

- 100% Stocks (VTSAX or closest thing to it offered in retirement accounts)

Current spending:

~$75k-$80k per year

Long-Term Financial Goals: Honestly not sure, other than to not have financial stress and to have increasing freedom to make career/life decisions. Enjoy my career and not necessarily hoping to retire at 45 or anything. Wife might want to switch to lower-paying career at some point, but maybe not.

We are hoping to have a baby within the next 1-1.5 years and are wrestling with how to utilize the $100k windfall. Beyond the cold, hard calculation, I have a slight sentimental preference to put some of it in a 529 given the source of the windfall. Here are the options as I see them, but maybe there are others I'm not thinking of. Would love to know people's thoughts.

529: Put $50k into a 529 in my name that I could then transfer to Baby and $50k into taxable VTSAX. Based on various calculators, $50k invested for 20-ish years would come close to covering four years of in-state tuition. If necessary, we could make a few contributions over the course of that time to top it off. Upside here is the stress of saving for college would be over on day one. Downside is life happens, less flexibility, maybe we can't have children, etc.

Taxable: Put all $100k into taxable VTSAX today. This would double as a robust emergency fund as I'm convinced of the opportunity costs of traditional emergency funds. We would then fund 529 savings on an ongoing, annual basis. My fear is that the cost of child care in years 1-5 would make significant 529 savings a challenge, then we would be scrambling in years 6-18 to make up the difference.

Wait and See: Put $50k into taxable VTSAX today and the other $50k into Ally Savings Account. If Baby is born healthy, transfer $50k into 529 at that point. Downside here is missing out on a year of potential market growth.

MustacheAndaHalf

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Re: 100k Windfall
« Reply #1 on: August 05, 2019, 04:04:57 PM »
The U.S. and international stocks take turns winning - just look at that performance by decade.  I think it's good to diversify away from 100% U.S. stocks.  What about 20-25% international?  You can buy Vanguard Total International ETF (VXUS) to cover the rest of the world, and diversify your investment.

If you spend $75k/year, then a $25k emergency fund is 4 months worth.  Anticipating the baby expenses, maybe that could be $40k (~6 months) or so.  If one of you stops working, how close will things get?

Va

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Re: 100k Windfall
« Reply #2 on: August 05, 2019, 04:15:42 PM »
The U.S. and international stocks take turns winning - just look at that performance by decade.  I think it's good to diversify away from 100% U.S. stocks.  What about 20-25% international?  You can buy Vanguard Total International ETF (VXUS) to cover the rest of the world, and diversify your investment.

I've done a fair amount of reading/podcast listening on the diversification or lack thereof of the 100% VTSAX portfolio. Might revisit in the future, but for now my decision-making muscles are being taxed by this other question.

If you spend $75k/year, then a $25k emergency fund is 4 months worth.  Anticipating the baby expenses, maybe that could be $40k (~6 months) or so.  If one of you stops working, how close will things get?

If one of us stopped working, we'd have a $1k-$2k/month shortfall. So a beefed up emergency fund would provide some peace of mind. While I recognize there is not unanimity on this point, I'm generally convinced that, assuming one has a sizeable taxable account, a cash emergency fund is an unnecessary drag on a total portfolio. So, in this instance, the question becomes -- what are the odds that one of us is out of work due to complications or choice after birth AND that coincides with a market downturn such that I would be selling at a loss to utilize emergency funds from the taxable account.


nsmall

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Re: 100k Windfall
« Reply #3 on: August 05, 2019, 10:43:57 PM »

529: Put $50k into a 529 in my name that I could then transfer to Baby and $50k into taxable VTSAX. Based on various calculators, $50k invested for 20-ish years would come close to covering four years of in-state tuition. If necessary, we could make a few contributions over the course of that time to top it off. Upside here is the stress of saving for college would be over on day one. Downside is life happens, less flexibility, maybe we can't have children, etc.

Taxable: Put all $100k into taxable VTSAX today. This would double as a robust emergency fund as I'm convinced of the opportunity costs of traditional emergency funds. We would then fund 529 savings on an ongoing, annual basis. My fear is that the cost of child care in years 1-5 would make significant 529 savings a challenge, then we would be scrambling in years 6-18 to make up the difference.

Wait and See: Put $50k into taxable VTSAX today and the other $50k into Ally Savings Account. If Baby is born healthy, transfer $50k into 529 at that point. Downside here is missing out on a year of potential market growth.

All look good to me.  I agree with the VXUS option, dump 50k in VXUS, 25k into VTSAX for the 529, 25k into Ally.

Just my opinion. Who knows, this dip may be gone in a flash. 

SimpleLifer

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Re: 100k Windfall
« Reply #4 on: August 05, 2019, 11:11:07 PM »
Looks like you're in great shape so far!  Congrats!

I've found this Investment Order post to be very helpful in informing my decisions:  https://forum.mrmoneymustache.com/investor-alley/investment-order/

I would consider putting a smaller percentage in the 529.  Something like $10K (invested in something long-term, of course). 

The rest I would consider 50/50 VTSAX and VTIAX (or VXUS).


MustacheAndaHalf

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Re: 100k Windfall
« Reply #5 on: August 05, 2019, 11:41:59 PM »
The U.S. and international stocks take turns winning - just look at that performance by decade.  I think it's good to diversify away from 100% U.S. stocks.  What about 20-25% international?  You can buy Vanguard Total International ETF (VXUS) to cover the rest of the world, and diversify your investment.

I've done a fair amount of reading/podcast listening on the diversification or lack thereof of the 100% VTSAX portfolio. Might revisit in the future, but for now my decision-making muscles are being taxed by this other question.

If you spend $75k/year, then a $25k emergency fund is 4 months worth.  Anticipating the baby expenses, maybe that could be $40k (~6 months) or so.  If one of you stops working, how close will things get?

If one of us stopped working, we'd have a $1k-$2k/month shortfall. So a beefed up emergency fund would provide some peace of mind. While I recognize there is not unanimity on this point, I'm generally convinced that, assuming one has a sizeable taxable account, a cash emergency fund is an unnecessary drag on a total portfolio. So, in this instance, the question becomes -- what are the odds that one of us is out of work due to complications or choice after birth AND that coincides with a market downturn such that I would be selling at a loss to utilize emergency funds from the taxable account.
I'd go with the comfort level for both people.  Since the additional $15k (of $631k) is only 2.4% of your assets, it being in equities or cash won't change your retirement plans much.

It might be a good time to look at your health care plan for giving birth, and healthcare before and after.  At least, I assume you have healthcare - if you don't, it could eat up your entire emergency fund!  Average U.S. birth costs $10k without complications, and including related healthcare it can be $30k without health insurance.  So double check how your health care will treat those expenses - it might be more significant in terms of both cash and stress to sort it out.

A Fella from Stella

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Re: 100k Windfall
« Reply #6 on: August 13, 2019, 10:19:54 AM »
Put the money down, turn around and count to 100.

HAHAHHAHAHHAHAHHA, it's MINE!!! MINE!!!!!!

bwall

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Re: 100k Windfall
« Reply #7 on: August 13, 2019, 11:14:40 AM »
Why not pay off your student loan? Student loans can't be discharged for any reason (even in a bankruptcy). So why not just knock that out now?

Financial.Velociraptor

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Re: 100k Windfall
« Reply #8 on: August 13, 2019, 12:28:33 PM »
Have you accounted for the tax consequences of this 100k windfall?  Don't lock it up if you owe the IRS 22% or more!

PDXTabs

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Re: 100k Windfall
« Reply #9 on: August 13, 2019, 12:31:43 PM »
The U.S. and international stocks take turns winning - just look at that performance by decade.  I think it's good to diversify away from 100% U.S. stocks.  What about 20-25% international?  You can buy Vanguard Total International ETF (VXUS) to cover the rest of the world, and diversify your investment.

I concur. I'm global market cap weighted so 45% international right now.