Advice Wanted-What would you do?

[JENRETIRE]

Hi All
I've been following these forums for quite some time but haven't ever posted. My husband and I are far from mustachian (we have some bills that would get us quite a few face punches). But I take what I can from here and always like reading advice. So I thought I would post my question just to get some food for thought.

Little Background: It's my husband (46), myself (36) and 4 kids (11, 10, 8 and 6). I am a SAHM for about 3 years now. My husband has worked for around 22 years for his brother (machine shop) and is also a small owner of that business. We found out recently that his brother plans to sell the business. We were a bit shocked at first but are very happy for them and understand the decision (tons of hours, time away from family, etc...). Our share of the sale of the business will be roughly 1.8 million (before taxes). So, my question, what would you do with that money? As in, what is the best way we can make the money work for us? We will be seeing a financial advisor, but since there seem to be so many smart people on this forum I would love to know what you would do. Keep in mind my husband will be required to sign a minimum 5 year contract to continue working at said company. His salary should be roughly 100,000-150,000. After that, he will take some time off, but I have a feeling find something at least part time.

Current Debt:
Mortgage $170,000 (Home appraised at $400,000); Interest Rate at 2.875
Honda Van $25,000; Interest Rate at .9%
No Other Debt

Current Assets:
401K (2 of His, 1 of Mine): $555,000
Savings: $100,000 (Going to Be Doing Some House Improvements, Thus the High Amount)
Then obviously the business..

Monthly Expenses:

Utility: $225.00 (Highest It Ever Would Be)
Phone/Internet:   $79.47
Cell Phones (3): $197.72
Life:   $46.68
Vehicle Insurance: $77.50
Donation-Church: $102.08
Dish Network: $122.31
Mortgage (Insurance/Taxes): $1,675.00
Vehicle: $413.71
Tuition (4): $441
Fitness: $26.75

These expenses vary a bit more and might not always occur, but I put the highest amount
Kid's Lunch: $140.00
Gas: $200.00
Groceries/Household Items: $750.00
Eating Out: $150.00
Clothes: $75.00
Haircuts: $25.00
Dog Haircuts: $30.00
Babysitting: $50.00
Dentist/Doctor/Vet Bills: $50.00
Medicine: $25.00
Donations-Other: $50.00
Car Repair: $25.00
House Repair:$50.00
Gifts (Wedding, Birthday): $75.00

TOTAL EXPENSES (Preparing for Face Punches :): $5102.22

   


We were planning to pay off the house, mainly for peace of mind. Then funding 529 plans for the kids (ideally would like around $30,000 for each child at college time, roughly $5000-6000 in each account now). After that, what????

What's funny about all this is I am almost more paranoid about money now when we have a nice cushion, then when I was a poor college student. I just don't want to screw it up. Any advice would be appreciated!

*Edited to Add Monthly Living Expenses

[MDM]

Stay away from indexed annuities (if you have been reading much of this forum at all you already understand...).

Back-of-the envelope says you will net ~$1MM after taxes, and ~$800K after paying the mortgage.  You will have enough cash flow from salary that you won't need your investments to produce income.

So...when you look at asset allocation, you would want "dividend and interest paying assets" in your $555K 401k, and "growth" assets in your $800K taxable investment.  You don't have to be fanatic about it, but that's a good direction.

All the usual advice about low fees, index funds, etc. applies.

You could come up with a plan, then post it for comments.  Appears you have done well to get where you are - best wishes for continued success.

[brewer12345]

If the sale happens, take your time.  Don't make any rash decisions.  A pause of 6 months with the sale proceeds in cash will not hurt anything.  Take sufficient time to educate yourself enough to know you are making good decisions.

Choose what advisor you speak to carefully.  Most of them are commission whores who do not have your best interests at heart.  You want CFP and/or CFA advisor who is fee only and you pay by the hour.  Do not agree to any relationship with an advisor other than an hourly fee for service.

I would not pay off the mortgage.  It is a low rate and if your husband will continue working and bringing in cash it should not be hard to keep up with the note.

Most likely you will invest the remaining proceeds in a diversified, low cost index portfolio.  This is very easy to do and you can do it yourself and save a great deal of money on fees.  You can also just dump it in an all-in-one fund like a Target retirement fund or something like Vanguard Wellington.  But first take time to learn enough to do this confidently for yourself.

Do you know what your living expenses are?  You might be FI after the dust settles on this deal.

[JENRETIRE]

If the sale happens, take your time.  Don't make any rash decisions.  A pause of 6 months with the sale proceeds in cash will not hurt anything.  Take sufficient time to educate yourself enough to know you are making good decisions.

Choose what advisor you speak to carefully.  Most of them are commission whores who do not have your best interests at heart.  You want CFP and/or CFA advisor who is fee only and you pay by the hour.  Do not agree to any relationship with an advisor other than an hourly fee for service.

I would not pay off the mortgage.  It is a low rate and if your husband will continue working and bringing in cash it should not be hard to keep up with the note.

Most likely you will invest the remaining proceeds in a diversified, low cost index portfolio.  This is very easy to do and you can do it yourself and save a great deal of money on fees.  You can also just dump it in an all-in-one fund like a Target retirement fund or something like Vanguard Wellington.  But first take time to learn enough to do this confidently for yourself.

Do you know what your living expenses are?  You might be FI after the dust settles on this deal.

Thanks for the reply Brewer. We will definitely mull over all our options. The sale should be complete by the end of April, but of course nothing is guaranteed and it may end up falling through. We just want to be prepared no matter what.

I do have my living expenses tracked, I will modify the original post when I get a chance.

One of my main concerns going forward if my husband would decide to retire is health care. Right now we have top-rate health care through the company and pay fees which are almost laughable they are so low (in 22 years my brother-in-law has never raised health care premiums for his employees). But going forward I don't know what will happen. And when I think of how long we could "potentially" live it seems like LOTS of money will be going towards healthcare. It's that big unknown. So when thinking about FI, that is my biggest red flag and probably scares me the most. My mom is a two time ovarian cancer and 1 time breast cancer survivor so it's something I want to be overly prepared for.

[nereo]

Hello JENRETIRE
Congrats on your windfall.  Sounds like you are already taking the first step I'd recommend:
1) consult your tax advisor.  Having a tax plan in place could mean hundreds of thousands less paid in taxes over time.
another thing I normally advise
2) make a plan, don't change your immediate lifestyle and try not to spend it for 6-12months until you are certain of your plan.  Sounds like you are already thinking this through though. Funding 529 plans is a good plan.

Besides that... with a mortgage as low as yours I wouldn't accelerate your payments by much.  Over the long term you're likely to do far, far better investing that money than 2.875%.

Personally my approach would be pretty boring; put all the money you possibly can into tax-advantaged accounts (IRAs, 401(k)s, 529s etc) and then I'd put most of the rest in low cost index fund(s).   
Because you are talking about such a large amount I'd dollar-cost average your contributions by putting 0.5-2% into a fund each and every week until it's all invested in 1 to 4 years, depending on what's most comfortable for you.
Since your husband will still be making $100k+ you can live off of that for the next five years (and continue to save even more from his salary).  With your current $555k in savings you and your husband should hit FI by the time he's done with the required 5 years.

[JENRETIRE]

Hello JENRETIRE
Congrats on your windfall.  Sounds like you are already taking the first step I'd recommend:
1) consult your tax advisor.  Having a tax plan in place could mean hundreds of thousands less paid in taxes over time.
another thing I normally advise
2) make a plan, don't change your immediate lifestyle and try not to spend it for 6-12months until you are certain of your plan.  Sounds like you are already thinking this through though. Funding 529 plans is a good plan.

Besides that... with a mortgage as low as yours I wouldn't accelerate your payments by much.  Over the long term you're likely to do far, far better investing that money than 2.875%.

Personally my approach would be pretty boring; put all the money you possibly can into tax-advantaged accounts (IRAs, 401(k)s, 529s etc) and then I'd put most of the rest in low cost index fund(s).   
Because you are talking about such a large amount I'd dollar-cost average your contributions by putting 0.5-2% into a fund each and every week until it's all invested in 1 to 4 years, depending on what's most comfortable for you.
Since your husband will still be making $100k+ you can live off of that for the next five years (and continue to save even more from his salary).  With your current $555k in savings you and your husband should hit FI by the time he's done with the required 5 years.

Thanks for the reply Nereo.

I'm thinking besides talking to a FA we will also talk to the company's accounting firm. I'm not sure what we can to, but I obviously want to pay as few taxes on this sale as possible. More to us, less to Uncle Sam :)

Just a question, why do you think we should invest the money over 1-4 years and not just all at once?

As for the mortgage, I know we probably shouldn't pay it off, but oh, I so want too!!!

Lastly, as you can see by my expenses we have a pretty nice lifestyle and in fact should probably cut some fat off, so I hope we don't fall into the trap of thinking we have money to spend!

[nereo]

Just a question, why do you think we should invest the money over 1-4 years and not just all at once?

As for the mortgage, I know we probably shouldn't pay it off, but oh, I so want too!!!

Lastly, as you can see by my expenses we have a pretty nice lifestyle and in fact should probably cut some fat off, so I hope we don't fall into the trap of thinking we have money to spend!

Just a question, why do you think we should invest the money over 1-4 years and not just all at once?

It's called dollar-cost averaging, and it's a solid and simple strategy.  The short version is that by investing automatically every week over several years you will average out the highs and lows during that time period, and you won't have to worry about buying on a peak.  Putting it on automatic also counteracts our human tendancies to not buy when prices are falling ("oh no!  it's going down, hoard cash!") and buying too much when it's going up ("the market has rallied, quick, invest and get rich!"), which is mathmatically the exact opposite of what we should do as investors.
If you choose this strategy, put all the money you are going to ultimately invest in your index fund(s) into a separate savings or money market account, and set up automatic transfers from the savings/mma account into the index fund(s).  Then, don't touch it :-)

If paying off the mortgage will give you piece of mind, than go ahead and pay it off.  But an alternative strategy is to set up one investment fund labeled and to put into that exactly what you would need to pay down your mortgage. If you ever have a time when you just need to pay off your mortgage, there will be funds earmarked for that. However, over time you'll notice that your mortgage will be going down and the funds you set aside will continue to increase.  EVentually, you will have no mortgage and a fund that (in all likelihood) will have over $1M in it.  It would be very unlikely to not earn at least 2.875% over a ten year period.  Also, by keeping your mortgage you will get to deduct the interest every year on your taxes.  This can save you thousands, provided your tax rate is more than your capital gains rate (and it sounds like it definitely will be).

Avoiding lifestyle creep or rushing out an 'upscaling' everything is the only way I can see you torpedoing your FI/FIRE.  Trim some of the fat now, keep your spending levels the same and before you oldest kid goes away to college you can throw yourself a retirement party.

[Prairie Stash]

Congrats!

Look around for some secure investments, can you find one that pays at least 3%? then you'll make more money off it then paying off the mortgage.  Never pass up free money, that's a sign of lifestyle creep ;)

You have 5 years till FI, there's no rush.  I agree with nereo about DCA, no one can guarantee that 2015 won't be a repeat of 2008.  If you started investing in 2007, finished in 2010, the stock tumble would have been meaningless. All in at 2007 could have jeopardized some plans.  It's all about risk management now, not gains (I'm in the gains camp still)

I'd start cutting the dogs hair at home, pay a kid $10 if nothing else, you have 4 I bet one is greedy. The other dogs might laugh, but eventually it will be okay.

Also, do you still need life insurance?

[Thegoblinchief]

Does he have to work for 5 more years? Even after taxes, that would be enough for my family of 5 to FI at a 3% SWR.

If he needs/wants to work for those 5 years, then try and structure the deal to spread out the income from the sale over multiple years. A third-party accountant and/or tax attorney will be a MUCH better help here. Not one myself, but taking it as an increased salary, shares in the new company, etc could potentially preserve more than a lump sum payment.

Preserve the capital first, THEN talk to a financial advisor (if you must) to learn how to invest it.

[marty998]

Does he have to work for 5 more years? Even after taxes, that would be enough for my family of 5 to FI at a 3% SWR.

It's pretty much a standard deal for small business sales (thought 5 years is on the longer side I've seen). The point is that most small businesses have a very large key man risk, so retaining the services of the previous owners/managers for a period of time ensures the business knowledge is retained and successfully transitioned.

[JENRETIRE]

Does he have to work for 5 more years? Even after taxes, that would be enough for my family of 5 to FI at a 3% SWR.

It's pretty much a standard deal for small business sales (thought 5 years is on the longer side I've seen). The point is that most small businesses have a very large key man risk, so retaining the services of the previous owners/managers for a period of time ensures the business knowledge is retained and successfully transitioned.

Yep, he and his brother must sign minimum five year deals, the sale is contingent upon that. And to be honest, he is fine with that, he loves this company like another child :)

[JENRETIRE]

Does he have to work for 5 more years? Even after taxes, that would be enough for my family of 5 to FI at a 3% SWR.

If he needs/wants to work for those 5 years, then try and structure the deal to spread out the income from the sale over multiple years. A third-party accountant and/or tax attorney will be a MUCH better help here. Not one myself, but taking it as an increased salary, shares in the new company, etc could potentially preserve more than a lump sum payment.

Preserve the capital first, THEN talk to a financial advisor (if you must) to learn how to invest it.

Thanks, we will definitely talk to our accountant as well as the accounting firm the company uses. We also have the option of buying back in, which we are also debating.

[nereo]

Thanks, we will definitely talk to our accountant as well as the accounting firm the company uses. We also have the option of buying back in, which we are also debating.

What's the appeal of buying back in?  I'm not trying to be critical here, I'm just curious.
Sounds like after this payout money won't be the main reason you'd buy back in...

[Emg03063]

Talk to your accountant and the business broker handling the sale (if any).  It might make sense to do a structured sale (i.e. You realize the proceeds over a period of time (with interest) instead of as a lump sum), and/or 1031 exchange into some other business(es).

[JENRETIRE]

Thanks, we will definitely talk to our accountant as well as the accounting firm the company uses. We also have the option of buying back in, which we are also debating.

What's the appeal of buying back in?  I'm not trying to be critical here, I'm just curious.
Sounds like after this payout money won't be the main reason you'd buy back in...

I guess mainly diversification. I know for the next five years at least this will be an extremely profitable company.

[nereo]

I guess mainly diversification. I know for the next five years at least this will be an extremely profitable company.

Hmm... I think you might have it backwards.  If you buy back into the company instead of investing in a broad-based market fund you'll be less diversified, not more.  For example, if you put $100k into an S&P 500 index fund, you would own a portion of the 500 largest US corporations.  Instead, if you put that $100k into buying back into the company, you'll have a lot more money invested into one single company.
This isn't to say that it won't be a profitable solution, but it's less diverse and almost certainly more risky.  History is filled with failed companies that looked enormously profitable to everyone a year before they went belly up.  Enron & Lehman Bros are poster children.
I'd recommend determining what % of your portfolio you are comfortable having invested in this one company before buying back in.  Personally, I wouldn't put more than 25% of my investments in one company.  I'd probably stay closer to 10-15%.  But everyone else has  different tolerances for risk.

[JENRETIRE]

I guess mainly diversification. I know for the next five years at least this will be an extremely profitable company.

Hmm... I think you might have it backwards.  If you buy back into the company instead of investing in a broad-based market fund you'll be less diversified, not more.  For example, if you put $100k into an S&P 500 index fund, you would own a portion of the 500 largest US corporations.  Instead, if you put that $100k into buying back into the company, you'll have a lot more money invested into one single company.
This isn't to say that it won't be a profitable solution, but it's less diverse and almost certainly more risky.  History is filled with failed companies that looked enormously profitable to everyone a year before they went belly up.  Enron & Lehman Bros are poster children.
I'd recommend determining what % of your portfolio you are comfortable having invested in this one company before buying back in.  Personally, I wouldn't put more than 25% of my investments in one company.  I'd probably stay closer to 10-15%.  But everyone else has  different tolerances for risk.
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Thanks for the reply, sorry I am just seeing it. The $100,000 is a small part of our portfolio, probably 5-10%.

[TrulyStashin]

I'd caution you against buying 529 funds to pay for college.  I bought one for each of my kids (Florida PrePaid in 1995; Va PrePaid in 1998) and now neither kid is going to college (well, Son is going but the Navy is paying for it).   We will have to cash out the 529's, pay tax on the "income" the year in which we cash it out, and we will get back only what we put in without any gain at all. 

The Florida PrePaid account would have covered 4 years of tuition, 1 year in the dorm, and 4 years of fees.  In 2009, when my daughter opted not to use it, we got back........ $14,000.00 which is exactly what we put in and not a penny more.   I still burn when I think of the lost value. 

My son also has an Ed IRA/ 529 with about $8k in it.  It can only be used for qualified education expenses which means it will have to be cashed out too and used to fund a IRA for him (it resulted from a settlement for an injury he sustained when he was 12; it's his money).   I'll have to pay state and federal tax on that and a 10% penalty.   

The restrictions on 529's make them a poor vehicle for college savings IMHO.   And FWIW, I come from a family that prizes education and has a long tradition of sending kids to college.  In fact, going back three generations, my two kids are the only offspring to NOT go to college.  So, college was expected/ the norm and I felt completely confident that they'd go when I bought the 529's.   Grrrr.....

[frompa]

I was waiting for the subject of your kids' college education to come up and I see it finally did.  With your kids heading into that age range, unless you expect to pay completely for their educations, I'd suggest you deal with your money in a way that takes into account the likely effect on their eligibility for college bucks. For example, I'm fairly certain a fully paid off house and fully funded health savings and retirement accounts do not "count" as assets for purposes of figuring parent contribution to their education expenses, while the same amount of money sitting in a non-tax advantaged is considered wholly available to the student.  You might want to talk with someone who knows the details of college funding, so you have that info at your fingertips.  Good luck. 

[JENRETIRE]

I'd caution you against buying 529 funds to pay for college.  I bought one for each of my kids (Florida PrePaid in 1995; Va PrePaid in 1998) and now neither kid is going to college (well, Son is going but the Navy is paying for it).   We will have to cash out the 529's, pay tax on the "income" the year in which we cash it out, and we will get back only what we put in without any gain at all. 

The Florida PrePaid account would have covered 4 years of tuition, 1 year in the dorm, and 4 years of fees.  In 2009, when my daughter opted not to use it, we got back........ $14,000.00 which is exactly what we put in and not a penny more.   I still burn when I think of the lost value. 

My son also has an Ed IRA/ 529 with about $8k in it.  It can only be used for qualified education expenses which means it will have to be cashed out too and used to fund a IRA for him (it resulted from a settlement for an injury he sustained when he was 12; it's his money).   I'll have to pay state and federal tax on that and a 10% penalty.   

The restrictions on 529's make them a poor vehicle for college savings IMHO.   And FWIW, I come from a family that prizes education and has a long tradition of sending kids to college.  In fact, going back three generations, my two kids are the only offspring to NOT go to college.  So, college was expected/ the norm and I felt completely confident that they'd go when I bought the 529's.   Grrrr.....

Definitely something to think about. We have 4 kids, so I would "assume" at least one would go to college (and the Iowa plan allows money to be moved between accounts). But on the flip side, I don't know if it would be particularly "fair" to give all that accumulated money to just one or two of them if the others choose not to attend college.

[JENRETIRE]

I actually just made an appointment with a FA so I will keep everyone updated on what he says. I plan on asking him about all of your points. Thanks!