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Posted: 5/6/2017 12:21:02 PM EDT
He is receiving some life insurance money plus inherited money from his late wife's family. So he's thinking about whether to invest it all or pay off his mortgage and invest the rest.
He's 55 and has a little retirement from military. That's all. Kids are grown and working. He's working full time and relatively healthy. He shared with me two concerns: One, possibility of investing it all and the stock market falling and still having the mortgage, losing much of his invested money. Two, paying off the initial and only mortgage and having less to invest. Missing out on larger returns and still having a fixer-upper house. I think right now he's just wanting to start off in the right direction with it all. His amount to work with is about 375k. What are your thoughts? Hope he does well but wondering what would be the better path. |
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Pay the house off Invest the rest. Investments are a gamble and he could loose money. Paying off the house
Is a sure thing, He can always take a reverse mortgage on later in life should he need too |
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Pay off the house. If he has a 401k max it out. This is a instant raise and a reduction in taxable income. You keep more of what you earn for later.
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Pay off house debt, do any ira catch-up he can, do some infrastructure repairs if it is a fixer upper, spend a little (<$5k) on himself to make it a little more palatable, dump the rest into a balanced portfolio, set up autodraft for debt payment equivalents into a mutual fund and/or ira (up to max if he isn't there already) each month. he'll lose any mortgage tax deductions, but net I'd think he'd have a lot more security, especially at age 55.
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That's still not a lot. His risk tolerance is understandably low. Were it me, Id put 10-20% in some sort of index fund, then put the rest in some tax free bond funds.
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He was fine paying his mortgage before he received an inheritance, nothing has changed there. I don't know his income situation but if he itemizes and uses the mortgage deduction that could be significant.
If he's risk adverse he should look into bonds or bond funds. I think the market is high right now also but he can minimize the risk of loss by managing his allocation of investments. Also doesn't say how much equity he has in his house or how long to pay off. He'll always have a place to live, when is he going to have a lump sum of $375k again? I would invest it but I'm younger than him and need the growth. Also I disagree that paying off the house is a sure thing, again he has to live somewhere but he could drop tens of thousands of dollars into maintaining that house and not add ANY value to it that could be recovered on a sale. Also house prices DO go down as well. In this guys situation (only knowing very little about his finances) and having already been comfortable paying for the house I would not be in a hurry to lose all the liquidity I had just been gifted. That sounds terrifying to me. |
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I have always been a fan of keeping cash/investments first.
If he has a steady job and able to make his mortgage continue to pay down like normal.His situation does not change if he never received the inheritance. Therefore he should treat the inheritance like it never existed. Mortgage debt is not stupid debt like motorcycles and vacations. The $375k invested even conservatively will compound over time. Mixture of munis and dividend blue chip DRIPs will grow wealth. If you pay off your mortgage and reduce the lump sum, then you will have to rebuild your lump again based on the amount of the mortgage payment you just eliminated. Should something happen later down the road and you cannot pay your mortgage anymore, you can draw from the $375k+. I rather let my money work for me until I need it. Of course this is subject to adjustments based on the size of his mortgage, his ability to choose wise investments and discipline not to blow a huge chunk. |
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If I was in his position, I would pay off the house and invest the "house payment" he is used to paying out.
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Or, He could invest in dividend paying stocks, some are quite solid, such as ATT. Use the dividends to pay the mortgage off faster. Then use the dividends to reinvest (buy more stock). Or some of each. Depending upon his interest rate, potential earnings, amount left on mortgage, etc. He should meet with three or four professional advisors.
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You never said what the interest rate on the mortgage is, term left and balance. I am 8 years into a 30 yr at 3.125% so am not gonna pay that off ahead of time. If he is worried do like others have suggested and go with solid little to no risk mutual funds.
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Interesting advice.
I'm not sure of his mortgage rate but I know he's only a year and a half into 15 year loan. He owes 119k on the house. That would take a big chunk of his money to pay it off. Either way I think the advice on maxing out retirement funds is a good idea. It's not like he can retire straight out on the money so putting it to work might be his best bet. He did say he thought the loss of the investment return on conservative investments after paying th house off could be less than what he's having to pay out in mortgage each month. I don't know how he got that. He does know he needs some professional financial planner/fiduciary help. |
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119k? No brainer. Pay off. You still have 256k to invest plus whatever you were paying one the house payment to add to it.
I thought you were going to say his mortgage was 350k or something and it would leave him very little if he paid it off. Let me ask it this way. If his house was paid off now and he inherited 256k would you suggest he go borrow 119k on his house to add to the 256k so he could invest 375k? Whats the difference? |
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Quoted:
119k? No brainer. Pay off. You still have 256k to invest plus whatever you were paying one the house payment to add to it. I thought you were going to say his mortgage was 350k or something and it would leave him very little if he paid it off. Let me ask it this way. If his house was paid off now and he inherited 256k would you suggest he go borrow 119k on his house to add to the 256k so he could invest 375k? Whats the difference? View Quote Honestly, if the mortgage rate was several points lower than expected returns, I'd kick around the idea of borrowing to invest more. Carry on. |
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How much is the house? When does he expect to retire? What is his financial situation? Is this all the money he has in savings? These questions are just the start. If less than half and more than 3.5% I personally would pay off the house then invest. As long as he doesn't piss it away on a convertible or lake house he should be fine.
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1. Pay off the house tomorrow.
2. Max out retirement investments. 3. Invest the rest. |
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Doodle, my friend. Honestly, if the mortgage rate was several points lower than expected returns, I'd kick around the idea of borrowing to invest more. Carry on. View Quote That is why it is called personal finance because it is a personal decision for everyone. Mathematically you very well could come out ahead but there is a significant risk involved. Someone very aggressive like yourself sleeps ok at night doing things this - I don't |
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Haha I knew you would. That is why it is called personal finance because it is a personal decision for everyone. Mathematically you very well could come out ahead but there is a significant risk involved. Someone very aggressive like yourself sleeps ok at night doing things this - I don't View Quote View All Quotes View All Quotes Quoted:
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Doodle, my friend. Honestly, if the mortgage rate was several points lower than expected returns, I'd kick around the idea of borrowing to invest more. Carry on. That is why it is called personal finance because it is a personal decision for everyone. Mathematically you very well could come out ahead but there is a significant risk involved. Someone very aggressive like yourself sleeps ok at night doing things this - I don't I'm too lazy to run the numbers right now, but honestly for the average person who wants to retire at an average age and needs an maybe a million or 1.5 million to live very well through their older years, that inheritance would take care of most of that with average market returns. That guy is very fortunate. |
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Just running the rough numbers in my head if the $375k earned 3% for 20 years without any additional contributions, he would end up with a total $675k.
If he paid $119k up front and the remaining $256k earned 3% for 20 years without additional contributions, he would end up with a total $460k. If he paid $119k up front and the remaining $256k earned 3% for 20 years, paid $5,950 each year ($119k/20 years), he would end up with a total $622k. These are just rough estimates. There are a lot of other factors such as taxes, mortgage savings, mortgage interest paid not in the equation. |
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Pay off the house and live off retirement? but 119k isnt a large mortgage...
DNP has been mentioned here in the past. $11/share, $.065/share/month dividends... ~26k/yr in income... At 55 what was his plan? be 70 trying to work to make mortgage payments? or retire/travel/fish? I like the idea of a safety net of having the house paid off and just have to figure out how to pay the taxes and what not. |
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He is receiving some life insurance money plus inherited money from his late wife's family. So he's thinking about whether to invest it all or pay off his mortgage and invest the rest. He's 55 and has a little retirement from military. That's all. Kids are grown and working. He's working full time and relatively healthy. He shared with me two concerns: One, possibility of investing it all and the stock market falling and still having the mortgage, losing much of his invested money. Two, paying off the initial and only mortgage and having less to invest. Missing out on larger returns and still having a fixer-upper house. I think right now he's just wanting to start off in the right direction with it all. His amount to work with is about 375k. What are your thoughts? Hope he does well but wondering what would be the better path. View Quote He's 55. The ship of "larger returns" has already sailed. His time horizon sound like it could be 10 years or less which means it's time to start thinking about capital preservation more than anything else. Paying off the house is going to be about the same kind of return on investment as the investments he should be in at this point in his life which is mostly going to be bonds. Also, he's at the age he is with a house payment and little in the way of savings. There's some unspoken history there which is a clue in my book. I'd pay off the house and that's coming from a guy who always says to not pay off the house. Windfalls make people do stupid stuff. Taking that mortgage off the table would be a good victory to lock in up front. |
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Pay off the mortgage, it will save him thousands on interest and will provide comfort and security
My wife and I paid off our house and ran some numbers and realized we could live off less than $10k a year if we had to, like if we both lost our jobs. |
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What's the interest rate on the mortgage?
How long does your nephew expect to keep working? Is your nephew healthy and were his parents and grand-parents long-lived so he could easily live into his mid-90's, or is he likely to die before he hits 70? |
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I sleep better now that I have no mortgage. That being said, If he believes that he can make more on his investment over time and he has a low interest mortgage than taking the emotion out of it , investing is logical.
Remember, houses go down in value too but you will at least have a roof over your head. |
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Just running the rough numbers in my head if the $375k earned 3% for 20 years without any additional contributions, he would end up with a total $675k. If he paid $119k up front and the remaining $256k earned 3% for 20 years without additional contributions, he would end up with a total $460k. If he paid $119k up front and the remaining $256k earned 3% for 20 years, paid $5,950 each year ($119k/20 years), he would end up with a total $622k. These are just rough estimates. There are a lot of other factors such as taxes, mortgage savings, mortgage interest paid not in the equation. View Quote You also left out another scenario- What if he paid off the house, invested the rest, and put the monthly payment he was paying back into the investment? That would be the winning combination in my opinion. I would pay off the house and start paying the money back |
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Max his 401k from now till retirement.
Take 1/3 of the cash, and buy a rental property. Dump as much as he can into an IRA. 1/3 to Pay off the mortgage. 10k for himself to buy a new toy. Increase his emergency fund/savings by 10k Pick an investment for the rest. |
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Max his 401k from now till retirement. Take 1/3 of the cash, and buy a rental property. Dump as much as he can into an IRA. 1/3 to Pay off the mortgage. 10k for himself to buy a new toy. Increase his emergency fund/savings by 10k Pick an investment for the rest. View Quote |
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You can't leave out things like mortgage interest out of your equation as that is a substantial amount of money. You also left out another scenario- What if he paid off the house, invested the rest, and put the monthly payment he was paying back into the investment? That would be the winning combination in my opinion. I would pay off the house and start paying the money back View Quote This gives him the advantage of instant savings now, and dollar-cost-averaging into the market over a period of time. He MUST be disciplined enough to keep putting his mortgage payment into investments though. |
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Thanks for all the input. He's got some decisions to make and I appreciate the ideas for him to smoke over.
As usual, I can find a lot of info on this site in everything from guns to finances. |
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