Author Topic: Confused about options  (Read 2997 times)

Ms Early Out

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Confused about options
« on: January 17, 2013, 06:13:28 PM »
Hi all, I am new to this forum, though I have been retired a year now.   I retired on an Early Out from the federal gov.  My husband is currently working as an auto tech but I would like it if he could slow down.   And now there are several things going on that have changed our circumstances - I guess for the better.

I have inherited a share of my step father's investment portfolio, among other things.  The portfolio fund performed exceedingly well, almost a 30% return last year.  The balance, my share, is over $70K.  We have a 15 yr note on our house at 4.25% with payments of $460.  That is the only mortgage we have and basically the only debt.   The balance on that is $60K.   My pension is not big at this time, and I have not touched my federal 401K yet.   My pension is $2100/mo.  I am 57.  Under the terms of my early out, I can withdraw or take payments from my 401K without penalty at any time.   I haven't started taking anything from it yet and need to make some changes in it's fund allocations...but that's not my current problem.

My question is... is it possible that we could plan that my inherited investment fund would pay the $460 paments on that note from the dividends?   I know it's not going to always earn any 30% return but realistically could one expect it would at least cover that, on average?   I'm not terribly concerned with building principle as I also have other long term assets.   

I don't even know if this is reasonable to expect but I wanted to ask.  I have lots of other decisions to make, this is just one of them.   Some may say this is lucky, but it's just been giving me a headache...

Thanks in advance for any input or ideas.   

Honest Abe

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Re: Confused about options
« Reply #1 on: January 17, 2013, 07:15:54 PM »
That 30% gain is terrific. I feel however that double digit market gains are going to be going the way of the dodo bird in the next year or so. A 4% income on your $70k portfolio would give you $233/mo before tax. You could easily get that from a Dividend-income ETF plus possible capital appreciation. That's not too bad when you think about it.

If you're really thinking about using that $70k for income at this point in your life I'd consider a risk-off investment strategy. If you want double digit gains that's great too, but the extra risk would suggest that you should have a longer-term time horizon for that $70k.

sol

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Re: Confused about options
« Reply #2 on: January 17, 2013, 07:46:37 PM »
Firecalc says that if you put the 70k in the market (75% stocks, 25% bonds, 0.18 expense ratio) and then draw 460/mo or 5520/yr, you have a 71.4% chance of not depleting the 70k to zero over a 15 year time frame.  Average of 32,793 left over.

If your mortgage is down to less than 15 years, your odds go up.  If you only have 10 years left on it, it's a 98.5% chance of success.

Play with firecalc.com.  It's worth understanding.

KingCoin

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Re: Confused about options
« Reply #3 on: January 17, 2013, 08:53:01 PM »
First things first; figure out what's in that portfolio and whether the asset allocation is appropriate for your situation. A 30% return last year could be indicative of a high risk portfolio.

" is it possible that we could plan that my inherited investment fund would pay the $460 paments on that note from the dividends?"

The short answer is no. The current dividend yield on the S&P500 is 2.1% ($123/mo) and you need 8% to cover the payments. As Honest Abe mentioned, you can buy a high dividend fund that might get you closer to 4%, but you'd have to get into very high risk territory to yield 8%.

In order to cover the $460 then, you'll have to gradually sell off shares of your portfolio. That's where firecalc comes in. You need to calculate the odds that the fund hits 0 before your mortgage is up.

Of course, you could always just liquidate the portfolio and pay off the mortgage as the ultimate low risk play. Though, you may want to play the odds and hope stocks return more than 4.25% over the next 15 years.


Tyler

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Re: Confused about options
« Reply #4 on: January 17, 2013, 11:13:32 PM »
"I'm not terribly concerned with building principle as I also have other long term assets."

With that in mind, if I was retired with full access to a pension and 401k and just inherited $70k, I would personally pay off the $60k on the mortgage and wave goodbye to debt forever.  A portfolio that gains 30% in a year could just as easily lose 30% the next, but having an additional (and dependable) $460 a month to spend from a $2100 pension is the move that would make me sleep better at night.


rugorak

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Re: Confused about options
« Reply #5 on: January 18, 2013, 10:29:53 AM »
I'll add another vote to considering just paying off the mortgage. If you were living fine before you won't lose anything, and in fact will gain as you won't have that going out every month. Yes you potentially could gain more than the 4.25% you are paying in interest but you could lose money too. Why take the risk when there is no need?

But that is just the way I prefer to do things. I risk big when it doesn't have any large consequences but go conservative with those that may have big consequences. So my home is a big deal. Extra money that I don't need go nuts. Plus you say you aren't tapping your 401k yet and have been paying the mortgage fine. Pay it off and you still have 10k plus the payment every month you were making. With the lack of payment you can invest it as well, or maybe it is enough for your husband to work part time instead of full time, etc. And that doesn't even include your 401k options. Just my opinion as how I would do things in your shoes.

Ms Early Out

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Re: Confused about options
« Reply #6 on: January 18, 2013, 11:05:42 AM »
Wow you have all really helped me sort this out.  You are correct, this is money I didn't count on and it's my feeling that stocks that went up 30% could fall just as fast, and likely WILL.   If I was leaving it in over the long haul, it probably gains back any losses but at my age, I may not have the time to regain.   I have other assets I haven't even touched yet.   

I was also thinking, well let the dividends pay half of it, you know.   But we don't know if they would and there is a chance of losing principle.   

Thanks so much for your input and food for thought - much appreciated!   :)