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Advice on Investing Large Injury Settlement

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    Advice on Investing Large Injury Settlement

    Recently I was in a fairly severe auto accident that has resulted in a settlement of around $210,000 (after medical/property damages were covered). I am 25, married with no kids. My wife and I just bought our first home 2 months ago. At this point, we have a combined debt amount (mostly student loans and a truck note) of $32,000. Other than that, our only obligation is our new mortgage.

    We live fairly comfortably as it is. We both have solid jobs and solid income. Accordingly, I would prefer the majority of this amount to be applied towards some type of back-end investment (retirement, etc), but am a little out of my league at this point. I have had various people suggest paying off my mortgage entirely, while others suggesting I can get higher returns investing elsewhere.

    Regardless, this is a rare opportunity for us as a young couple to really solidify our family's financial future. Looking for any and all (reasonable & unbiased) advice! Thanks in advance!

    #2
    Sorry about the accident but glad to hear you're okay and able to work.

    I would absolutely pay off your non-mortgage debt of 32K.
    Then I'd max Roth IRAs for you and your wife for 2013. That's another 11K, so 43K total.

    What's the balance and interest rate on your mortgage?
    Do you each have employer-sponsored retirement plans like 401 or 403b? If so, how much are you currently contributing?
    Do you have a 6-month EF fully funded?
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

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      #3
      @ Disneysteve:

      We have only made two payments on our mortgage, leaving us with a balance of about $130,000.

      Currently, we each contribute a little more than $4,000 annually (my wife has a 401k, I have a 403b). We do not have any other retirement plans in place.

      We do have a 6 month emergency fund in place as well.

      Comment


        #4
        It would be sweet to have your house paid off and there are some who would suggest that but assuming you have a good interest rate, it probably isn't the best choice mathematically. I'd rather see you be maxing your retirement accounts for as long as you can. Doing that at age 25 will give you a great start with 40 years of compounding ahead of you.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

        Comment


          #5
          That's similar to what I was thinking. Our interest rate on our home is 3.5%. We managed to snag that, thank goodness.

          Comment


            #6
            I don't think it particularly matters either way. If you pay off all the debt, you can redirect all your current "debt payments" into investments. If you invest the bulk of the $210k instead... Either way you will be doing extraordinarily well in the long run.

            Another thing to consider is your investment savvy. I totally agree that the math makes more sense for investing, but the problem is that most people don't invest very well. IT can be extra risky for a young person to start with a big lump sum. If you pay off the mortgage and invest going forward, you'd maybe make your rookie mistakes on smaller amounts. I think there is a lot to be said for that. This is moot if you have experience investing, and understand not to buy high and sell low (which is people do when they panic and invest emotionally).

            On the retirement funding, there are tax considerations and income limits:

            On the 401k and the 403b, you can put in $17,500 per year, each. There may be limitations above and beyond that according to your employer's individual plans.

            I am assuming the settlement is tax-free. Funneling it into ROTHs is a great idea (keeps it tax free, forever). But, as Steve mentioned, you can only do a little bit at a time. If your household income is too high, you will also be ineligible for this option. (As Steve said, this would be $11k per year).

            If you are able to do the work retirement and the ROTHs, that is $46,000 per year that you can put away for retirement. If you max out the work retirement plans, this could significantly decrease your income taxes too, depending on your tax bracket.

            Comment


              #7
              something like this is large enough to plug into a financial planning calculator to see the impact of your various decisions on the outcome. i would suggest esplanner as it allows an effective asset-liability matching approach, where your liabilities are your inflation adjusted retirement expenses. if this is your target, you want to experiment with different strategies and see the impact on your ability to retire. long term fixed rate debt can be a good hedge against rising inflation, as is home ownership in general. some may say stocks will outperform bonds, but if you look at history that is not always true even for long periods of time. however, there are ways you can place the funds in fixed income investments when rates are higher and lock in an arbitrage profit. that is a little on the sophisticated side...i would suggest you also read the behavior gar by carl richards to see the impact of your behavior on your finances...

              Comment


                #8
                Originally posted by dhgodo View Post
                That's similar to what I was thinking. Our interest rate on our home is 3.5%. We managed to snag that, thank goodness.
                Given the low interest rate, I'd invest it. Mathematically, that's what makes sense.

                One thing to consider - I don't like 30 year mortgages. Assuming that's what you have, an option would be to refinance to a 15 year mortgage and apply some amount at the principal that would allow you to keep the same monthly payment.
                seek knowledge, not answers
                personal finance

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                  #9
                  I think if I had that opportunity, I would for sure pay off the student loan and truck loan (32K) and pay off your mortgage (130K) which leaves you $48K that I would max out any retirement plan for both of you, then after you have had a nice evening out and a good dinner with some of the remaining money, start investing a portion each month so you can take advantage of dollar cost averaging. To be so young with no bills would give you such an opportunity. No stress if one of you loses your job temporarily other than you can't stash as much into savings.

                  This also allows for possibilities that many don't have like going on a missionary or work type trips to help others either here in the US or in other countries without having to worry about taking an extended trip so you would have no mortgage to worry about. So many openings in the world of things to do when you know that you own the roof over your head completely
                  Gailete
                  http://www.MoonwishesSewingandCrafts.com

                  Comment


                    #10
                    I agree with Gailete - it may not be the "most prudent" but to be 25 and completely debt free is huge.

                    Then, I would do what DisneySteve recommends - max out your RothIRA for 2013 ($11k) and then the 401k at work (if your paycheck allows - for another $35k).

                    This would leave you $2k for a vacation or if you really want, put it aside for your 2014 Roths. I assume your mortgage is around $500 a month? If so, then you can put that into your 2014 Roths as well and so forth going forward. If you do that, you are looking at around $1.1 million when you get to age 65. If you keep putting in the $4k as well, you are looking at $1.6 million. These are using a very conservative 5% return. Up it to 8% and you're at nearly $4 million with putting in $10k per year. Plus you'd have a paid for house, that, when sold, would be a great downpayment on your next place.

                    Comment


                      #11
                      Originally posted by dhgodo View Post
                      @ Disneysteve:

                      We have only made two payments on our mortgage, leaving us with a balance of about $130,000.

                      Currently, we each contribute a little more than $4,000 annually (my wife has a 401k, I have a 403b). We do not have any other retirement plans in place.

                      We do have a 6 month emergency fund in place as well.
                      Your debt load doesn't seem bad, so I wouldn't rush to pay off any of it, unless the rates on the other notes are higher.

                      You need to do some investment research to find an allocation that you are comfortable with. For me it would be some balance of index funds to keep the fees low.

                      I would consider increasing the retirement contribution to the 401k and 403b, and also using a Roth IRA for more tax advantages.

                      Comment


                        #12
                        I disagree with some of the advice here.

                        1. If you refi right now to a 15 year, you'll end up with a 3.125% or higher rate. I'm not sure what the exact rates are, but it doesn't matter. And plus the fees for refi. So not worth it. 3.5% is a great rate. In a few years, savings accounts will likely pay more than 3.5% and you won't feel very smart for paying off your mortgage or refinancing. Besides, being cash poor and house rich is not fun. Cash is king. Not sure why so many people are so focused on paying off the mortgage. I guess it's the media constantly brainwashing people into thinking that somehow there is security in owning your home outright. You never really own the house anyway. If you dont pay your taxes, the government will take it away. I plan on paying just the minimum on my mortgage for 30 years. Mathematically, if you can make 3.5%+ on your money, you're better off not paying off the mortgage. If you wait just a couple of years, 30 year treasuries will probably pay more than 3.5%. I'm not saying this is a smart investment, but you will be better off investing there vs paying off the mortgage.

                        2. Definitely pay off your other debts assuming the rates you got on them are high. My rule of thumb is 5%. If I have any debt that has a rate of 5% or more, I want to pay it off asap. Your threshold might be a little lower or higher.

                        3. Max out your Roth IRAs and Roth/Regular 401K at work. That's a tax benefit you can't let go of. So, if you don't make enough money, max out your contributions from your paychecks and use the settlement money to cover expenses. I personally feel that Roth 401K is a better option, since you're young. You pay taxes now and there will be no taxes in retirement.

                        4. Learn about investments. There are so many out there! The more you learn the more likely it is that you will make good investment decisions. No one here knows what will go up or down. You are much better off learning this stuff on your own.

                        5. Don't get carried away because you feel wealthy. Focus on keeping your expenses low and aim for early retirement. Keep saving money!

                        6. Studies show that on average, you are better off investing in a low cost index fund vs paying other people to manage your money or buying funds that charge a lot of money. This doesn't mean that you can't find the next Warren Buffet who will produce 25%+ returns for the next 30 years. It just means that on average, fund managers underperform the market. So, it is even more important for you to learn as much as you can about investing.

                        Good luck!
                        Last edited by cardtrick; 07-08-2013, 05:10 PM.

                        Comment


                          #13
                          Oh Wait. US 30 year bonds are currently yielding 3.65%. You're already ahead. Instead of paying off the mortgage, you can put that money into 30 year bonds and make more in interest than you're paying on the mortgage, excluding taxes. In a few years, even after taxes you will probably make more.

                          Comment


                            #14
                            I would invest the money and forget about it. Pretend it doesn't exist and live life normally. I think paying off the mortgage could be a recipe for trouble. It could allow you to spend the mortgage payment on things you wouldn't otherwise instead of saving it.

                            I hate to be the negative debbie downer, but many people who win the lotto are broke 5 years later. How do you know in 10 years you won't have refinanced cashed out the home? Or not saved anything since you know you have a paid for home so every penny of your paycheck is spent?

                            I think you need to earn being debt free and pay off your debt yourself. That way you understand realize the sacrifice. I think being in debt $32k means that you aren't ready to have all your paycheck to yourself.

                            So I'd put $11k into a roth this year, earmark $55k for the next 5 years of Roth IRA contributions, then invest the rest say 70% Stock index funds and 30% Bond index funds or ETFs.

                            I would work at living lean and learning to pay off debt. If in 1 year you've made substantial changes I would use the money to pay off debt and home.
                            LivingAlmostLarge Blog

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                              #15
                              I guess it's the media constantly brainwashing people into thinking that somehow there is security in owning your home outright.
                              Doesn't have anything to do with the media, but the fact that I am closing in on 60 soon and would love to have that mortgage paid off long before 'retirement'. My husband is younger than me and I for sure want that mortgage paid off before he hits 65. I'm stunned at how many retires seem to be taking out mortgages for 'dream' homes at that point in their lives so that their retirement money has to subsidize a mortgage as well as medical expenses, food, utilities, clothing, etc. Perhaps my thinking about this got warped when I was literally cut off at the knees (both replaced 2x each now) in my 40's and having to go on disability in my mid 40's. I want that feeling of security!
                              Gailete
                              http://www.MoonwishesSewingandCrafts.com

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