Author Topic: What to do with a windfall  (Read 6040 times)

PencilStache

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What to do with a windfall
« on: March 05, 2015, 07:59:48 AM »
Fellow mustachians,

Looking for a little advice. I will be receiving my annual bonus in a few weeks time and am deciding between paying off my mortgage in full or using most of the proceeds to invest in an index fund. I have no other debts and am looking forward to wiping out this mortgage to start devoting all of my extra "employees" to my vanguard investments account. My mortgage rate is a very reasonable 3.65%.

However, I know that in the long run getting my cash into an index account sooner will provide greater returns. Has anyone else been in this situation? Is the satisfaction of paying off the mortgage worth the potential lost returns from not investing the capital in an index fund?

This isn't a huge factor since most of my mortgage payment goes to principle at this point, but I will be itemizing my deductions for 2015 so any interest paid will reduce my tax liability by a portion of the amount paid.

Thanks in advance.

TN_Steve

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Re: What to do with a windfall
« Reply #1 on: March 05, 2015, 08:04:36 AM »
3.65% in the final paydown years v. market index is really going to come down to personal preference.

Me, if retirement isn't happening in the next year, I'd go with investing both for the long term return and for liquidity (just in case).  Others would differ.  You can find thread after thread on this debate on many finance boards, including bogleheads.

(I'm assuming that all your other financial ducks are lined up nicely...)

Congrats on being in this position!

YTProphet

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Re: What to do with a windfall
« Reply #2 on: March 05, 2015, 08:26:47 AM »
Fellow mustachians,

Looking for a little advice. I will be receiving my annual bonus in a few weeks time and am deciding between paying off my mortgage in full or using most of the proceeds to invest in an index fund. I have no other debts and am looking forward to wiping out this mortgage to start devoting all of my extra "employees" to my vanguard investments account. My mortgage rate is a very reasonable 3.65%.

However, I know that in the long run getting my cash into an index account sooner will provide greater returns. Has anyone else been in this situation? Is the satisfaction of paying off the mortgage worth the potential lost returns from not investing the capital in an index fund?

This isn't a huge factor since most of my mortgage payment goes to principle at this point, but I will be itemizing my deductions for 2015 so any interest paid will reduce my tax liability by a portion of the amount paid.

Thanks in advance.

Like TN_Steve said, I think you're golden either way. If it were me, I'd pay off the mortgage just to get that weight off my back and feel more free. That kinda feeling is worth a lot to me and it may be to you as well. Then again, stashing it in index funds is a great option too and will probably be the better mathematical decision.

Let us know what you decide!

kvaruni

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Re: What to do with a windfall
« Reply #3 on: March 05, 2015, 08:38:14 AM »
Same advice, really: paying off your mortgage is the emotional, but risk-free investment. You will get the 3.65% interest, and the weight will be lifted. Investing is the intellectual, logical investment. On average you will get 7% interest, but in the short term it could be quite different :). I would just be irrational and go for the mortgage, as I hate having any kind of debt.

RH

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Re: What to do with a windfall
« Reply #4 on: March 05, 2015, 10:19:35 AM »
You could always invest a bit in the mortgage and a bit in the index funds. I myself would love to pay off the mortgage in one fell swoop! I'm a believer in that once you don't have a mortgage, you would be inclined to daydream more or take more risks -- which could lead to a million dollar idea!!

MikeBear

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Re: What to do with a windfall
« Reply #5 on: March 05, 2015, 02:03:38 PM »
I'm for spending a little bit for a treat, (maybe go out to eat) then paying off the mortgage! There's no better feeling than doing that regardless of what many others on here might tell you.

If you never treat yourself now and again while setting up to fire, especially with windfall-type money, it just makes life a drudge. Besides, getting the windfall money AND paying off the mortgage is a two-fer reason to treat yourself a little to a job well done!

Gone Fishing

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Re: What to do with a windfall
« Reply #6 on: March 05, 2015, 02:04:58 PM »
Do you itemize your mortgage interest?  What is your tax bracket? Will you max out your tax advantaged retirement accounts this year not including the bonus?

DogMama

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Re: What to do with a windfall
« Reply #7 on: March 05, 2015, 02:26:45 PM »
There's no way I'd pay off my mortgage at that rate over investing. Good feelings are great, but math means more to me!

PencilStache

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Re: What to do with a windfall
« Reply #8 on: March 05, 2015, 03:25:03 PM »
Thank you all for your input. Many good points on both sides of the argument. I'm still working on deciding which path to go down. I do like the idea of putting half towards the mortgage and half into investments. If I do that, I should still be mortgage free in 2015.

To answer a few of the other questions that were asked:

- I do not quite max out my 401K (I put around $15K in last year.) I have enough cushion where I could max it out, but as early retirement is my goal (mortgage freedom is just a stepping stone for me) I do like the flexibility of having investments in non-401K/IRA assets to access them easier. Hoping to be FI by 37 (About 5 years from now.)

- I do know there are ways to access 401K funds before age 60 without penalty, but I personally am not knowledgeable enough about them to throw all of my assets into tax-deferred accounts. This is definitely something I need to brush up on. Any good articles or advice you have would be greatly appreciated.

- Each month I split my surplus between investments and mortgage pay down. I have not devoted 100% of my assets to the pay down as I know the fiscally prudent way to invest is in the market, however, mortgage freedom does hold a certain allure. However, once the pay down is complete, I hope to have an ever-growing snowball of employees flowing directly into my investment accounts each month.

- I do itemize mortgage interest as a deduction and will no matter what the amount is in 2015. I pay enough in state taxes to exceed my standard deduction and will continue to do so until I am FI and decide on a different career path. At this point, I pay only around $50 per month in interest, and that dwindles quickly as I knock off over $1,500 per month on the principal balance.

- I definitely agree that a treat is in store when the mortgage is completely paid off. Though instead of a dinner, I am thinking of a nice tropical vacation! (Michigan winters are brutal.)


Thanks again - I will let you know which direction I end up going.

Gone Fishing

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Re: What to do with a windfall
« Reply #9 on: March 05, 2015, 03:31:29 PM »
Thank you all for your input. Many good points on both sides of the argument. I'm still working on deciding which path to go down. I do like the idea of putting half towards the mortgage and half into investments. If I do that, I should still be mortgage free in 2015.

To answer a few of the other questions that were asked:

- I do not quite max out my 401K (I put around $15K in last year.) I have enough cushion where I could max it out, but as early retirement is my goal (mortgage freedom is just a stepping stone for me) I do like the flexibility of having investments in non-401K/IRA assets to access them easier. Hoping to be FI by 37 (About 5 years from now.)

- I do know there are ways to access 401K funds before age 60 without penalty, but I personally am not knowledgeable enough about them to throw all of my assets into tax-deferred accounts. This is definitely something I need to brush up on. Any good articles or advice you have would be greatly appreciated.

- Each month I split my surplus between investments and mortgage pay down. I have not devoted 100% of my assets to the pay down as I know the fiscally prudent way to invest is in the market, however, mortgage freedom does hold a certain allure. However, once the pay down is complete, I hope to have an ever-growing snowball of employees flowing directly into my investment accounts each month.

- I do itemize mortgage interest as a deduction and will no matter what the amount is in 2015. I pay enough in state taxes to exceed my standard deduction and will continue to do so until I am FI and decide on a different career path. At this point, I pay only around $50 per month in interest, and that dwindles quickly as I knock off over $1,500 per month on the principal balance.

- I definitely agree that a treat is in store when the mortgage is completely paid off. Though instead of a dinner, I am thinking of a nice tropical vacation! (Michigan winters are brutal.)


Thanks again - I will let you know which direction I end up going.

Read this:  http://www.madfientist.com/traditional-ira-vs-roth-ira/

You didn't mention your tax bracket, but based on your state tax comment I am guessing you are north of 25%?

SantaFeSteve

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Re: What to do with a windfall
« Reply #10 on: March 05, 2015, 04:00:56 PM »
As several have said  already, I am not sure there is a wrong answer.

Personally I like paying off the mortgage.  Then you can send all of that surplus each month into investments until you RE.  In my mind there is a large amount of security provided by having your mortgage paid in full.  If income is reduced, or eliminated, at some point you have already permanently lowered your housing costs to nothing more than utilities, taxes and insurance.  I like that thought.  Plus, sending your monthly surplus into investments gives you the whole dollar cost average thing instead of 1 lump sum purchase at a time when the markets are at their all-time highs. 

Congratulations on whatever decision you make.

kib

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Re: What to do with a windfall
« Reply #11 on: March 05, 2015, 05:14:06 PM »
This may also be a matter of your own personality.  For some people, a debt is an obligation which must be honored, while paying oneself is more of an option.  In other words, if you're going to put $2,000 a month toward your mortgage no matter what, but you might only put $1,000 a month toward your index fund, because Something (discretionary) Suddenly Came Up, then keep the mortgage.

DavidAnnArbor

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Re: What to do with a windfall
« Reply #12 on: March 05, 2015, 08:20:44 PM »
Since the income tax rate in Michigan is 4.25% (along with a 4,000 exemption allowance) and you pay enough state income tax to exceed the $6200 standard deduction already, then you have at least 150,000 in taxable income, which means you are at least in the 28% tax bracket. Consequently, your schedule A mortgage interest deduction means that your 3.65% interest rate is really pared down to 2.63%. Therefore, it's not really worth it to pay down your mortgage, instead use the money to buy investments.

MikeBear

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Re: What to do with a windfall
« Reply #13 on: March 05, 2015, 08:28:52 PM »
Since the income tax rate in Michigan is 4.25% (along with a 4,000 exemption allowance) and you pay enough state income tax to exceed the $6200 standard deduction already, then you have at least 150,000 in taxable income, which means you are at least in the 28% tax bracket. Consequently, your schedule A mortgage interest deduction means that your 3.65% interest rate is really pared down to 2.63%. Therefore, it's not really worth it to pay down your mortgage, instead use the money to buy investments.

Except there's NO mortgage interest deduction for anybody that has higher than a $49k AGI. Our governor took that away from us several years ago.

PencilStache

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Re: What to do with a windfall
« Reply #14 on: March 16, 2015, 08:02:20 AM »
Thanks again for the input. I finally decided which route to go. I'll be splitting the proceeds between index funds and mortgage pay down. While not the most financially prudent course of action, the allure of total freedom from debt is too much to turn down. With this plan of action, I should achieve total debt freedom in four months at which point I will be devoting all my resources back into index investments. Can't wait to see what it looks like on the other side of the debt mountain!

kvaruni

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Re: What to do with a windfall
« Reply #15 on: March 16, 2015, 08:40:00 AM »
[..] Can't wait to see what it looks like on the other side of the debt mountain!

A whole new world without shackles ;). Good choice and keep up the good work!

RH

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Re: What to do with a windfall
« Reply #16 on: March 16, 2015, 12:49:47 PM »
Nice! Just think of paying down your mortgage as your 'bond allocation' which earn you a guaranteed 3.65%. Then the index fund stuff is your riskier stock portfolio.

libertarian4321

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Re: What to do with a windfall
« Reply #17 on: March 18, 2015, 03:03:49 AM »
I'm for spending a little bit for a treat,

I agree.

And there is no bigger "treat" than being debt free.

Pay off the mortgage, invest the rest.  Retire young.