View Full Version : GUIDANCE ON INVESTING AN INHERITANCE
I am seeking advice from you intelligent people out there. I am 70 and retired. I own my home with a mortgage of approx. $135,000; my total monthly expenses I calculated at around $3,000; my current income sources are Social Security at $1,960 net; $888 from an annuity; and $100 from a small IRA. As you can see, I have a shortfall in income. However, I recently inherited about $130,000, of which I have $110,000 left after gifting $10k to each of my sons. I will be using some more of my inheritance on my house; leaving me with $10k in savings and $75,000 to invest so I can have additional income.
I have been looking at the Vanguard Funds. Do you have suggestions for me, given my age and fairly low risk tolerance? Feel free to ask me any questions. Thank you.
Linda
What are the terms of your mortgage?
I ask as I have an thought that paying off/down your mortgage might produce more low-risk net income than low risk investments of other sorts.
Hi bae,
I am just ready to sign docs on a re-fi where I am wrapping a $13k Heloc into my loan. I didn't want to lay out the cash to pay off the Heloc. My monthly mortgage payment is hardly changing at about $650 a month. I have never considered paying off my mortgage because it will tie up $$$ for other things and because my mortgage is so low. My mortgage will be for 30 years at 4.375%.
Linda
Chicken lady
5-16-15, 6:25pm
Unless I blew the math, if you just cover the shortfall out of the $75,000 every month for the next 30 years, you will use less than a third of it. It seems like the mortgage would be the best option for the rest unless you have in mind something that yields more than 4%.
ToomuchStuff
5-16-15, 7:07pm
You live in your home, but don't own it, as you have a mortgage. You have monthly expenses of AROUND "$3000" with an income of $2948. How exact are you on your expenses? Current emergency fund? (furnace goes out, etc)
What are you spending money on the house on? Wants or needs? Seems to me that spending $110,000 on the house and leaving yourself with a $20,000 mortgage might be a better thing to do (pay off quickly and free up that money for your projects and other stuff).
Just my thoughts.
My mortgage will be for 30 years at 4.375%.
So, every dollar you pay down your mortgage is basically a 0% risk tax-free 4.375% yield....
Wow, the consensus thus far is for me to pay down my mortgage. I will really have to consider that. Another option would be to make a few extra mortgage payments throughout the year?
Linda
rosarugosa
5-16-15, 8:13pm
Hi Linda,
I am with the mortgage payoff line of thought. If you are a risk-averse investor, there is no way you're going to surpass the 4.375% gain you'll get by paying off your mortgage. There would also be a huge peace of mind with owning your home outright and not having a monthly budget deficit, or at least it seems that way to me. Good luck with whatever you decide.
Another option would be to make a few extra mortgage payments throughout the year?
Reverse the thinking a little bit: you are paying the bank 4.375% to borrow money to invest elsewhere. Your dollar-optimal approach is likely to pay off as much as you can as soon as possible, to avoid borrowing that money. If you have money sitting in the bank that you are going to use to make a few extra payments over the year, you might as well do it as early in the year as possible, in as large an amount as you can. Unless you can risk-free make more than 4.375% on that money that you have sitting around.
I realize some people take out home equity loans to get funds to invest in the stock market. Would you do that? Not paying down the mortgage if you have cash sitting around is basically the same thing...
ToomuchStuff
5-17-15, 10:47am
I had a friend try to convince me to mortgage my house and invest in a particular thing. Made no sense to me to risk it. In the end the video game didn't come out in part due to issues with the studio (owned the rights to the franchise), and he lost $75k and one of the other investors, an actor, lost around $1 million.
When they say, been there, have the shirt, well I have the shirt and hat.
You are 70 and you want to take another 30 years on your mortgage?
We have made so many mistakes and should have paid off our mortgage 5 years ago, instead we still owe more than the original and just signed up for another 30 years (but I have a plan to pay it off in 15 unless we sell which is my first choice). If we take the full 15, my husband will be 67 when we're done. I think it's pretty unwise to have a mortgage after age 60. Personal opinion.
iris lilies
5-17-15, 2:28pm
Are you children in SoCal? If not, I would urge you or anyone else there to move to a less expensive part of the county.
not what you asked, but that much debt in your situation is not good.
and no more gifting money to your ur children. You cannot afford that.
ApatheticNoMore
5-17-15, 2:59pm
Actually if the house has been owned for a long time it may not be cheaper than anywhere else in the country, depending on prop 13 tax assessments (the property value might be more but taxes can't go up much). And Social Security is never taxed for state income taxes anyway. I don't know that it really is anywhere, but not in California either, so your not paying state taxes on much of your income whether they are high or low (they are high in California). Utilities can be quite reasonable depending, heating and cooling are probably not bad (this depends on how much cooling is mostly, but you won't ever struggle to pay the heating bill - people paying several hundred dollars for heating is unheard of), food is fairly inexpensive as much of it is from California. Cars can be costly. And there is a drought so water prices and food prices may go up.
Although I'd be jumping on the mortgage paydown bandwagon too, there is something to consider:
Polliwog is retired and not earning a lot of money. IF she pays down the mortgage and she should need the cash that's tied up in the house, she may have to sell it in order to get the equity out again, because she may not qualify for another mortgage loan. Also, until the mortgage is paid off entirely, the payment amount won't decrease.
I know it's not common to think in these terms, but I think as one ages, the idea of having cash in the bank and debt, even if it comes at a price, may in some cases be preferable to being free and clear.
So, every dollar you pay down your mortgage is basically a 0% risk tax-free 4.375% yield....
My mistake: my interest rate will be 4.125%. I just spoke to my son who is handling my refi. Since it hasn't closed, I can pay down the mortgage with 50 or 60k and my monthly payment will be based upon the new mortgage balance, after the re-fi. My son says "off his head" that I will probably save over $300 a month.
ApatheticNoMore
5-17-15, 5:00pm
Personally I think polliwog is earning a really good income for retirement (and not all of it fully taxable), those are very high SS payouts (it's not really news that SS is not that generous on payments). So it's a darn good retirement income even with those really rather modest when all is said and done housing costs. But if it's not enough it's not enough, maybe the inheritance makes it enough.
lessisbest
5-17-15, 5:04pm
If it were me, I would do whatever it took to be debt-free ASAP. PERIOD! Without knowing all the details, I would sell the mortgaged home and move down in home (perhaps a small townhome) and never carry a mortgage again. I would invest anything left from the sale and/or remaining from the inheritance, making sure I had an emergency fund of 3-6 months worth of expenses.
I would also get a tighter rein on the budget because you just don't have any wiggle room - you can't even cover cost of living increases. Our expenses are about $2,000 a month (out here in the middle of nowhere Kansas where you can purchase a brand new 3-bedroom home for $160,000). Our budget includes money set aside each month to pay for property taxes, vehicle insurance/taxes/tags, pest control, home insurance, and a couple other things throughout the year. For a number of years we've set our home budget to approx. the amount hubby's social security ALONE will be, just to prove we could do it.
We set our goal to be debt-free, including the house, by the time hubby was 60 (he'll be 64 in July), and managed to knock it out a couple years early. Now we are reducing the household "stuff" and will down-size again before he retires (probably when he's 68 or 70). Our home is 9-years old, so we'll do some up-dating in the next year or two and then sell it.
I'm probably in the pay off mortgage group. I don't know if age is a significant factor, but I was in a similar situation in my early 50's and that's what I did. Although there are some tax advantages by being able to deduct interest expense, the interest you pay is pretty much a black hole where the money goes. At least for me there was also the intangible pleasure of owning one's home free and clear. If you're still undecided, it doesn't have to be an all or nothing proposition. You could still pay down a large portion of you mortgage and have cash left for investing, spending, or having a security nest egg put away.
Admittedly, stocks have given a decent rate of return lately, but there are probably also going to be years in the future like the many after the financial meltdown. Bond funds have a very low rate of return right now and are subject to the risk of loosing value as interest rates rise. If you are a gambler and feel like you could loose a significant portion of your investment without hampering your quality of life, I could see putting a little bit into the stock market in terms of a Vanguard index fund, but would still focus on the mortgage.
Thank you all for your considered responses. Bae, I love how you described paying down a mortgage as risk free, tax free, and yield the same as mortgage interest. It all makes sense to me now. To some of you who have commented on having a mortgage at 70, I will just say that it never occurred to me that I could pay off my mortgage. I don't see myself buying another home even if I sell this one because I will be too old and I would probably rent at that point.
To kib, my mortgage payment will go down because after my re-fi will close with a much lower mortgage and therefore my payment will be lower. I also will have liquidity with the rest of my inheritance.
To iris lilies, yes, my two sons and their families are in SoCal, so moving is not an option for me. Besides, I love California - have lived here basically my whole life.
To ANM, I bought my townhouse 11 years ago this month. The market was still going up at that point, so I sold high (in Newport Beach) and bought high in Murrieta. Then everything took a dive, but we are very slowly rebounding. And, yes, thank goodness for lower utility bills than much of the country. Summers here can be really hot but it doesn't last so my electric bill is manageable.
Thank you to all of you again. The simple living forum is always the "go to" place to get informed answers.
:thankyou:
Linda
lessisbest: By paying down my mortgage during the re-fi process, I will end up with a lower payment which will free up $$$ to help with expenses, which I may have erred on the high side. Also, I live in a small townhouse, less than 1300 sq ft. I love my home and don't want to downsize further. You should be so proud of your successes.
Rogar: I will have money leftover to invest and upgrade my security fund. I do like Vanguard and have an IRA in a retirement targeted fund that has performed well.
Linda
Personally I think polliwog is earning a really good income for retirement (and not all of it fully taxable), those are very high SS payouts (it's not really news that SS is not that generous on payments). So it's a darn good retirement income even with those really rather modest when all is said and done housing costs. But if it's not enough it's not enough, maybe the inheritance makes it enough.
APN: Yes, I am thankful that I had some very good earning years as a paralegal. My inheritance is such a blessing and I thank my dear father for that. It has been a "game changer" for me.
Linda
I just wanted to say that I don't consider your income small / insufficient, it's a good amount and I think $3,000 a month is plenty to live on; all I was trying to say was that income level might make it difficult to qualify for a mortgage, especially the older you get. So in other words, that if you have a mortgage, you might want to keep it. Sorry if some judgment was implied, I didn't mean it that way.
I just wanted to say that I don't consider your income small / insufficient, it's a good amount and I think $3,000 a month is plenty to live on; all I was trying to say was that income level might make it difficult to qualify for a mortgage, especially the older you get. So in other words, that if you have a mortgage, you might want to keep it. Sorry if some judgment was implied, I didn't mean it that way.
Oh, kib, I didn't take it that way at all. I value your insight and comments.
Linda :)
Teacher Terry
5-18-15, 3:03pm
I think the combo of lowering your mortgage & keeping some $ for emergencies is the best choice. We have a paid-off home & have been frugal but now at age 60 we are going to spend $-travel, eat out, etc because you never know when you won't be able to do those things anymore. At age 70 spend-don't save-of course I don't mean go crazy but I would do some things that you have been wanting too. enjoy:))
Teacher Terry - I agree with you. I will have a nice emergency fund as well as extra $$ for travel, entertainment, etc. Thanks for your advice. And good for you being able to enjoy the fruits of your labor.
Linda
If the only 2 options are pay down mortgage or invest, then I'm with the majority here with pay down the mortgage.
However, at age 70, I think estate planning should be a high consideration.
I know someone who owns a home next door to his mother. Mother and child arranged a house trade. Mother has a smaller house easier to maintain,child received larger house for his family. Win win for both parties right? Fast forward several years, mother is now in nursing home eating up assets quickly. Child is concerned about losing both houses because not enough time has elapsed since transaction to protect his home from his mother's nursing home expenses.
[QUOTE=cx3;204713]If the only 2 options are pay down mortgage or invest, then I'm with the majority here with pay down the mortgage.
However, at age 70, I think estate planning should be a high consideration.
/QUOTE]
++++1
At age 71, I do not ask my children for financial advice or assistance in financial affairs as their knowledge and perspective is quite different from mine and they are very smart and capable people. I have told them everything that I am doing and they know that I am completely and capably charge of my affairs. I deal with my CFP and have everything in one site for estate planning and the accountant is aware of all my assets and has offered some input as well when we doing my tax return.
My kids are often surprised with how much they really didn't know so I am frankly horrified that anyone would rely on younger members of the family to handle their financial affairs. Keep them fully informed, absolutely, but my assets are my responsibility and my decision.
I do not intrude on my children's affairs either so it is a matter of mutual respect for boundaries and each other.
ToomuchStuff
5-20-15, 10:54am
[QUOTE=cx3;204713]
My kids are often surprised with how much they really didn't know so I am frankly horrified that anyone would rely on younger members of the family to handle their financial affairs. Keep them fully informed, absolutely, but my assets are my responsibility and my decision.
I do not intrude on my children's affairs either so it is a matter of mutual respect for boundaries and each other.
Keeping informed does NOT mean giving up control. Control comes when one can no longer mentally handle the job of ones own, in case of illness, coma, etc.
BTDT and educating the kids about, and WHY you make decisions, helps lead the kids to being able to make the same decisions, IMHE.
Here's some info about a different kind of way to use a Home Equity Line of Credit to pay off your loan in less than half the number of years without paying any extra payments.
MORTGAGE ACCELERATORS
These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan.
The general premise is to have your mortgage in the form of a home equity line of credit (Heloc), preferably in the first position. All your paychecks are deposited directly into the home equity account. You only transfer money from the equity line to your checking account once or twice a month to pay bills and get cash for general expenses. Since interest is compounded on the daily principal balance of your equity line, you will pay far less interest over the life of the loan because your paycheck income sits in your equity line rather than your checking account.
Illustration of concept
Several years ago I managed a law firm. Money market rates were 10% or more and. Passbook savings accounts paid around 8% interest. Business checking paid around 4%
Rather than depositing client payments into our checking account, we deposited all client payments directly into a money market checking account. We only transferred money from the money market account to our regular business account twice a month to pay bills. We would have paid bills with checks directly from the money market account but the bank had a high per-check fee. So we wrote only two money market checks a month to fund our general business checking account. We earned a very nice amount of interest by having our deposits sit in the money market account until needed to pay bills.
Mortgage accelerator systems work on the same principal as in the illustration above. But instead of parking your paychecks where they will earn interest, you are parking them where you avoid incurring interest on your home loan. This makes sense because current rates for home equity lines of credit are around 7%-8% and money market accounts only pay around 3.5%. Even if you were able to secure an equity line a few years ago with a fixed interest rate of 5% or 6%, using a mortgage accelerator system still saves money.
You will find several companies trying to sell you software to help you optimize this method. $2K - $4K. Don't buy - not worth the fees. Just park all your income in the heloc and pay bills when due.
This is not a gimmick. This type of loan a powerful tool that must be used carefully. You must be very disciplined and in a positive cash flow situation for any accelerator to work properly. If you lack financial discipline, this type of loan can be disastrous.
Helpful videos
"Mortgage Equity Optimization" here:
http://www.moneyanswers.com/mortgages.html
https://www.youtube.com/watch?v=6pzzYUOhbOk
http://www.helocbasics.com/how-a-heloc-works/
Note the borrow and repayment period explanations.
btw - I get nothing by sending/posting this. No referrals, no fees, nada. Just trying to help.
Here's some info about a different kind of way to use a Home Equity Line of Credit to pay off your loan in less than half the number of years without paying any extra payments.
MORTGAGE ACCELERATORS
These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan.
The general premise is to have your mortgage in the form of a home equity line of credit (Heloc), preferably in the first position. All your paychecks are deposited directly into the home equity account. You only transfer money from the equity line to your checking account once or twice a month to pay bills and get cash for general expenses. Since interest is compounded on the daily principal balance of your equity line, you will pay far less interest over the life of the loan because your paycheck income sits in your equity line rather than your checking account.
Illustration of concept
Several years ago I managed a law firm. Money market rates were 10% or more and. Passbook savings accounts paid around 8% interest. Business checking paid around 4%
Rather than depositing client payments into our checking account, we deposited all client payments directly into a money market checking account. We only transferred money from the money market account to our regular business account twice a month to pay bills. We would have paid bills with checks directly from the money market account but the bank had a high per-check fee. So we wrote only two money market checks a month to fund our general business checking account. We earned a very nice amount of interest by having our deposits sit in the money market account until needed to pay bills.
Mortgage accelerator systems work on the same principal as in the illustration above. But instead of parking your paychecks where they will earn interest, you are parking them where you avoid incurring interest on your home loan. This makes sense because current rates for home equity lines of credit are around 7%-8% and money market accounts only pay around 3.5%. Even if you were able to secure an equity line a few years ago with a fixed interest rate of 5% or 6%, using a mortgage accelerator system still saves money.
You will find several companies trying to sell you software to help you optimize this method. $2K - $4K. Don't buy - not worth the fees. Just park all your income in the heloc and pay bills when due.
This is not a gimmick. This type of loan a powerful tool that must be used carefully. You must be very disciplined and in a positive cash flow situation for any accelerator to work properly. If you lack financial discipline, this type of loan can be disastrous.
Helpful videos
"Mortgage Equity Optimization" here:
http://www.moneyanswers.com/mortgages.html
https://www.youtube.com/watch?v=6pzzYUOhbOk
http://www.helocbasics.com/how-a-heloc-works/
Note the borrow and repayment period explanations.
btw - I get nothing by sending/posting this. No referrals, no fees, nada. Just trying to help.
For an excellent independent analysis of this type of approach by someone who actually did the math I would recommend Joshua Sheat's podcast at http://radicalpersonalfinance.com/133-qa-paying-off-your-primary-mortgage-with-a-heloc-mortgage-acceleration-and-how-save-is-my-deferred-comp-program/.
You really have to pay attention while he does the math and applies logic to the premise but it is well worth giving it a careful listen before jumping in to something like this. His basic conclusion was that it was all smoke and mirrors with no real benefit.
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