Options to get rid of cash

[3MApprentice]

Hello Fellow mustachians,

I am long time reader, first time posting a Q:

Total Take home pay of 130,000 (11K/Month after tax and 401k contributions etc)
Total savings / Year of 90,000 (30K 401K + 10K in 529s + 50K cash)

Mortgage of 180,000  (Home bought with 30% down pay)

problem is: no substantial investments beyond 401Ks and IRAs -
Total cash sitting in bank accounts approx 350K
Total across various retirement accounts approx 150K
Another 30-40K in sundry accounts for 529s, HSA etc etc..

Ideally I would like to retire (or semi-retire ) but with no other income coming in, it feels rather impossible..
My total investments generate paltry 2-3K/yr..

I know I should start investing but paralyzed by prior experience of crash..
so below options come to mind:

a. Should I pay off mortgage with lumpsum payment and get 15K interest savings?
or
b. Start investing in markets aggresively? if so is it worth paying no-fee financial planner upto 900$ to create the plan?
or
c. what other avenues are open?

[daverobev]

Well, 'the stats' say dollar cost averaging loses to lump sum investing (when you have the lump sum). But yeah, can't say I'd drop $50k on one fund on one day myself.

Yeah pay off the mortgage. It's cashflow-easy.

My god you have huge income. Retiring early should be really easy.

I'd suggest: doing the whole Vanguard thing; I am NOT a US expert, but find a good couch potato allocation, find funds to match that, invest and off you go. Start with high monthly contributions - say for the next 6-9 months until all the spare cash is invested - then just do what you can afford every month after that. That includes the extra you're not spending on the mortgage.

Something like 30% domestic stocks/20% developed world/20% developing world/30% bonds. More bonds, less the rest if you're older/more risk averse.

But yeah. You're rich! Good job! Lucky you!

[aj_yooper]

Welcome to MMM and congratulations on your stellar savings per year!

As llamo noted, there must be a reason why you are into cash so you need to think clearly what you want your savings to do for you.  Go to the Bogleheads' site and start reading:  http://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit  I also like Rick Ferri's book Asset Allocation.  You could also go to the Vanguard site where you can read and do some investment questionnaires to clarify your point of view on saving and investing.  You need an investment policy statement.

Is there a reason you are not maxing out your 401k s and Roths?  529s can be very beneficial too.  Do you have a health savings account at work?  And, if so look into that as a place to put some money.

You have a good savings skill and habit.  Now, I think it is time to develop some investment knowledge and ideas for the future.  Take your time and do it right.  It is very important to use low cost funds for this process.

Best wishes.


[Mod Edit: URL Fixed.]

[Blindsquirrel]

   Follow the advice above but pay that house off! You are paying a ton of interest for not doing so with that much cash. If risk adverse, nothing reduces your risk like having your own crib paid off. If you are not in your forever house, go buy that and sell your other one. If your cash accounts yield 1% and you have a 4% mortgage your yield is actually -3% for not paying off the house. (-5-6% after inflation!). Good  job on the killer income but PAYING 5% to have a bank hold your savings is off the chain worthy of a face punch IMO. Your end yield is higher if you invest but if risk averse, pay your house off!

[arebelspy]

One other option no one has mentioned yet: real estate.

It'll depend on your temperament, but rentals could be a good way to turn that 350k cash into 14-49k/yr cash flow (4%-14% return) with some appreciation on top of that, depending on how (with leverage, without, notes, turn key, fix and hold, etc.) and where (location, location, location) it's invested.

[3MApprentice]

Thank you for the guidance !

I can not max out 401K due to contribution limit at my workplace, it's capped @ 10%  but we get close to maxing out.. approx 30K (between me and spouse) instead of 35K allowed by IRS for 2013

Reason for asking mortgage question is: I think rates are at historic low levels for mortgage interest, so what is better , to pay off mortgage or put money into investments where it will earn more returns in long run.. (10Yr)
But just looking at amortization schedule, it looks like I will pay 10K on 30yr mortgage in first 18 months! seems rather too much..
So wondering if there's a balanced approach of maybe going to 10Yr ARM and pay off with higher payments while preserving cash for longer period (as opposed to pay lump-sum mortgage and convert 40% of cash balance home equity in one go)?

To answer recurring question: why I sat out and kept saving cash: it was paralysis born out of prior experience with crash of 2000. Another reason being single income family for majority of working life so far (with exception of last 2 yrs) so having cash seemed like a good idea (not so good in hind-sight I have to admit :-))

[CDP45]

You missed out on 29% returns last year with all your cash sitting there, and if you had invested it you would have generated more than $100,000 vs less than $1000 given the average bank rates.  Invest it according to your financial plan. I wouldn't pay off the house,  stocks have historically outperformed 4% interest rates.

Given your total assets of about $550k and a 4% SWR, that's only $22,000/yr, so if you're comfy with that level of income then you can retire, but if your expenses exceed that you're going to have to keep working.

I think a more secure strategy is owning shares in hundreds of profitable companies who have worker bees toiling day in and out to make the most money for you vs having cash wasting away to inflation.

[Khan]

You missed out on 29% returns last year with all your cash sitting there, and if you had invested it you would have generated more than $100,000 vs less than $1000 given the average bank rates.  Invest it according to your financial plan. I wouldn't pay off the house,  stocks have historically outperformed 4% interest rates.

Given your total assets of about $550k and a 4% SWR, that's only $22,000/yr, so if you're comfy with that level of income then you can retire, but if your expenses exceed that you're going to have to keep working.

I think a more secure strategy is owning shares in hundreds of profitable companies who have worker bees toiling day in and out to make the most money for you vs having cash wasting away to inflation.

I second everything he said. Rentals are something to consider as you are making a large amount of money, but it depends on your own temperament. Paying off the mortgage is more of a piece of mind issue, if you're happy having the mortgage AND assets, then you are in a numerically stronger position.

But seriously, get that money to work for you. Spread it far and wide(emerging markets, value, asia/europe, and dollar cost it into those areas over a 6-12 month period. Put some money(<50k) if you still desire piece of mind into laddered cd's or some other option.

[J]

I'm actually going to disagree with the common advice here about rental properties.  That's effectively taking on another job; it might or might not turn out to be a well-paying one, but it's another job, and one you probably have little experience in.  If you really want to invest in real estate to some degree, you can always invest in a REIT fund, preferably as one of several components of your investment strategy.  And if you're not strongly attached to real estate, just invest in a good Vanguard index fund, with a balance of stocks and bonds depending on your desired risk level.

The only big open question is whether to pay off your house or invest that money.  That's going to depend heavily on two things: how certain you are that you're not going to move soon, and how risk-averse you are.  If you're not risk-averse, or you think you're likely to move in the next couple of years, you probably will make more money by investing the income and paying off the house normally, though you'll probably still want to make some extra principal payments every month to drastically reduce your total interest payment over the life of the loan.  If you are risk-averse, however, you'll likely feel far more comfortable with your situation if you go ahead and pay off the house, eliminating your biggest monthly expense and getting you in a mindset for early retirement.  You're in a position to retire very early; if you're not particularly attached to your job, plan on doing so.

[Jamesqf]

In your shoes, I don't think I'd pay off the house.  Instead, refinance to a 5-10 year ARM, or whatever you can get the lowest interest rate on.  You have a large income, and probably will keep having it for several years, so the tax deduction + income from investing the money you aren't using for the payoff should be a win.

Invest the rest, but look primarily at dividend/income investments, real estate if you have the temperment & skill, otherwise mutual funds.

[AccidentalMiser]

There are also a number of great stocks available that pay 4-9% interest in dividends each year with the added bonus of favorable tax treatment (if held for > 1yr).

Just my 2 cents.  I don't like to trust my portfolio to the whim of the overall market.  I pick solid performers with strong dividends over time.  Pays almost as well as rental real estate without having to worry about the headaches.

BTW, congratulations for having such a fantastic problem (I wish I had it!)