About to get 130K windfall, would appreciate feedback on my plan

[Keith Miller]

I’ll be selling my first home and moving to Montana in June, and will receive around 130K from the sale. This is my first time selling a home, and would like feedback on my plan for what to do with the money.

In a nutshell, I’d like to deposit all of the money into my tax-advantaged retirement accounts, but I’m wondering about the best way to do that. My draft plan is this: Live off of this 130K for living expenses for 3-4 years, while depositing my entire teacher’s salary into tax advantaged accounts like a 457, 403b, and IRA. My questions are these:

1. Any feedback on this plan? Do you have another suggestion?

2. For these 3-4 years while I’m slowly drawing down the 130K, should the money be invested in a taxed account, like VTSAX? I’m only 28, so would like to be aggressively tilted towards stock index funds, but am not sure if I should be more conservative since I’m living off of the money.

[terran]

Sounds like a good plan. We're doing something similar with a smaller gain from a house sale.

One thing to consider is your mix of tax deferred and Roth (if Roth is available in your 403b/457 plan). You definitely want to realize at least enough income to fill the standard deduction ($12k if you're single) and possibly the 10% bracket (another $9525).

I think technically/mathematically the right thing to do is to invest in taxable then sell as you need it (and as you're contributing to other accounts). This feels a little strange, and we haven't done it completely since it feels wrong to invest money you "need" to live off of, but what we're really doing and what you're proposing isn't really investing money you need, but rather investing it in one type of account and then transferring it to a better type of account while still invested. It just so happens the transfer has to happen through you and your regular spending since the second account only accepts contributions through payroll deduction. If you think about it that way, then you end up with a decision about lump sum investing vs dollar cost averaging, and on average lump sum beats DCA. Like I said, we haven't quite pulled this off because it feels weird from a behavioral standpoint.

[DK]

It would probably make more sense to check whether the investment has lost money or not before pulling out your (monthly/quarterly/yearly?) budgeted amount...if it has, just take your salary instead. That way if the market drops 50% you're not locking in your losses and can wait for it to recover while taking your normal income coming in.

[josh4trunks]

It would probably make more sense to check whether the investment has lost money or not before pulling out your (monthly/quarterly/yearly?) budgeted amount...if it has, just take your salary instead. That way if the market drops 50% you're not locking in your losses and can wait for it to recover while taking your normal income coming in.

I know it feels like this is correct, but it is just a mind trick.

Assuming both accounts are invested in correlated assets. If you live off your income instead of taxable investment, you are not buying more money in your retirement account (457/403/IRA) at the new lower rate and "locking out" gains you would have made. Either scenario end up exactly the same, the only difference is what account they are in, and the tax implications associated.

[SwitchActiveDWG]

With a time horizon of 3-4 years I’d say keep it in high yield savings. Even with an AA heavily weighted to bonds the risk vs return numbers aren’t favorable for such a short time if your plan is to live off of it.

[DK]

It would probably make more sense to check whether the investment has lost money or not before pulling out your (monthly/quarterly/yearly?) budgeted amount...if it has, just take your salary instead. That way if the market drops 50% you're not locking in your losses and can wait for it to recover while taking your normal income coming in.

I know it feels like this is correct, but it is just a mind trick.

Assuming both accounts are invested in correlated assets. If you live off your income instead of taxable investment, you are not buying more money in your retirement account (457/403/IRA) at the new lower rate and "locking out" gains you would have made. Either scenario end up exactly the same, the only difference is what account they are in, and the tax implications associated.

good call. you also bring up a good point about tax implications, he should probably make sure to 'use up' his 0% taxable space. and if he is selling at a loss, make sure he has income to reduce for it.