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 Post subject: Another windfall question
PostPosted: Tue Oct 09, 2012 12:57 pm 

Joined: Tue Oct 09, 2012 12:20 pm
Posts: 10
I'll try to give as much info as I can, but generally would like some advice on the first few steps after a significant (to me) windfall.

I am negotiating the sale of a small% of a very large privately owned company, final take after cap gains ~$1.3M.

Currently have a home ~$800k value, $450k equity, rest is in 4.25% mortgage, about $50k savings in a money market accnt, ~20k in 401k in about 90% stocks. Also about 60k student loans at 6%, a personal loan where i owe ~30k @3%. I also contribute ~3% to my 401k on a salary of ~100k, but live in an expensive place so I don't save much every month. Also planning on sending at least 2 kids to private school starting in a year or so, will cost about 5k/year each from pre-k through high school. no life insurance.

Would like to either upgrade house for more space, or move into a bigger one, estimate $300k for addition to house, or move to ~$1.1M house.

My wife wants to pay off the mortgage right away because her parents (who are extremely wealthy, but lost a lot of $$ in the market at one point) told her that financial Armageddon was coming and the stock market was going to self-destruct, so she wants to pay it to feel better. It's probably not the best thing, but might be worth the lost revenue to avoid the argument.

Clearly, I should meet with a financial adviser soon, but in the mean time I should probably park the $$ and get my plan sorted out. I don't want to trade very actively, just put most of it somewhere and perhaps draw some income off of it every month (maybe $3k) to supplement salary.

thoughts? advice on dealing with a very non-financial savvy and highly risk-averse spouse also welcome. We are in our mid-late 30s.


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 2:00 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
So, basically you can pay off all your debt and have a little extra? and have the bigger house? If it makes momma happy, why not?

It's not what I would do, but it is FAR from being in a bad situation.

As far as dealing with your spouse, I always remind mine who has the longer rope. :)

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 2:02 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1213
Quote:
My wife wants to pay off the mortgage right away because her parents (who are extremely wealthy, but lost a lot of $$ in the market at one point) told her that financial Armageddon was coming and the stock market was going to self-destruct, so she wants to pay it to feel better. It's probably not the best thing, but might be worth the lost revenue to avoid the argument.

I'd completely disregard the in-laws opinion. Whether they prove to be ultimately right or wrong is of no consequence. You should never base your financial decisions on rash human emotion.

Quote:
advice on dealing with a very non-financial savvy and highly risk-averse spouse also welcome.

Good luck. Sounds like the apple didn't fall far from the tree.

I'd keep your current home & pay it off, pay off the SL, & personal loan. Bank the rest somewhere nice & safe until you & your wife come to some understanding on how it should be invested for the long term.


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 2:31 pm 

Joined: Mon Apr 25, 2011 7:37 am
Posts: 446
First of off, having that kind of windfall is great, I wish I had your problem!

But to be the devils advocate, your wife wants to pay off the mortgage because she is risk adverse, at the same time you/your wife want to get a bigger /more expensive house? You have children and you don't have life insurance? Unless the more expensive house also had a working farm, if your wife was truly risk adverse, she would want to pay off the house and bank the rest to provide an income for future uncertain times (aka the coming "apocalypse").
Pay off all the "small" debts. Find a way to consistently contribute to retirement fund (or place a large sum there). Set aside private school monies. And for goodness sake hire an attorney and create a will!.
Have a heart to heart with wife, figure out where you want to be in say 10, 20 years and how your housing fits in with it.


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 3:28 pm 

Joined: Tue Oct 09, 2012 12:20 pm
Posts: 10
Good points, especially re: the will (its been on the list and we just never do it). I'm definitely not complaining, but I feel a lot of pressure not to screw up.

I think the impression she has is that there are no investments that will be safe, so might as well put it all into the house. I've mentioned that there are investments of all types (not everything is corporate stock), and that in a true Armageddon the best investment is a lot of guns, barbed wire, and Cliff bars. I'm hoping to find an adviser she likes that will explain things in a way she will believe. She just suffers from thinking with her emotions, and also having grown up with infinite $$ - luckily not a problem I had.

I'm a little confused with ROTH IRAs: This comes through in 2012, is that part of my income limit? do you have to split the limit between the ROTH and 401k? is there a good reason to just do the match on the 401k and then supplement with ROTH, or do it all in the 401k?

Also, I'm completely ignorant on life insurance. It seems to me that insurance rates factor in the risks of death for the rates, so there is a very high probability that you are wasting money - the house always wins, right? If your family is really screwed without your income, this makes some sense, but if not, it's just bringing more risk into your portfolio. Where am I wrong in this thinking?

For education accounts, are there limits to what you can put away each year, and can you use them for preschool through college? What are the advantages relative to simply having a separate account that is invested on the specific timeline?

partgypsy1 wrote:
First of off, having that kind of windfall is great, I wish I had your problem!

But to be the devils advocate, your wife wants to pay off the mortgage because she is risk adverse, at the same time you/your wife want to get a bigger /more expensive house? You have children and you don't have life insurance? Unless the more expensive house also had a working farm, if your wife was truly risk adverse, she would want to pay off the house and bank the rest to provide an income for future uncertain times (aka the coming "apocalypse").
Pay off all the "small" debts. Find a way to consistently contribute to retirement fund (or place a large sum there). Set aside private school monies. And for goodness sake hire an attorney and create a will!.
Have a heart to heart with wife, figure out where you want to be in say 10, 20 years and how your housing fits in with it.


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 7:26 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
Life insurance isn't vegas. It isn't for you, and it isn't about who wins. If you die uninsured, who wins? Yes, you never want to collect on it. If you truly love your family, you'll care about how their needs will be provided for if you take your dirt nap. Again, you need to have an honest conversation with your wife and decide what will happen if you die - will they move elsewhere, will they make cuts to their lifestlye, can your wife go back to work? Decide how much income is needed (this is NOT always your salary, but rather your annual spending). Multiply by anywhere by 25-30 and then add in things like college. Then I usually add a healthy chunk, since life insurance is relatively cheap. You also need to remember if you select term (which I recommend) that your premium will most likely never change during the term, and neither will your benefit. Use term4sale.com to search for rates. Have you thought about disability insurance?

You have 2 main options for education savings. a 529, which has no cap, but may limit a state tax deduction. You want to balance any STATE deduction with the expenses in the plan. If your state offers no tax deduction, I would recommend Utah's 529 plan. Coverdell is your other option, limited to $2000/yr and may not be available for k-12 education expenses in the future. Ibonds also offer no taxes due on interest for qualified education expenses.

It would be nice to have have some goals. IRA's and 401k's are separate vehicles and have nothing to do with each other in terms of contribution limits. There is a backdoor Roth. You should max your 401k, your IRA and your wife's IRA if you are serious about retirement. If not, perhaps something less would be acceptable.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 7:42 pm 

Joined: Sat Jun 16, 2012 8:06 am
Posts: 100
You really need to understand that life insurance has a role in serious financial planning. Especially because it is one of the very few ways you can leave substantial amounts free of income tax (although the face amount IS counted in your overall estate worth total, for estate tax purposes).

Assuming you are in reasonably good health, level term insurance should not cost very much and can provide substantial risk mitigation to your family. It's nice to think that you're guaranteed not to die until both your kids are through graduate school, but realistically? We all know life has no guarantees.

Heck, for that matter, if you are in a two-wage earner household, you BOTH need life insurance. The fact that you have not saved a lot of money tells me if one of you died, the other might find his/her lifestyle seriously constrained going forward.

$1M is a nice sum, so congrats. But if you haven't got a lot in your retirement accounts, then each of you only has $500K as an individual share - and that's without paying off any debts and NOT buying a "keep up with the Joneses" house. Even if the markets were kind to you and you doubled your funds in 20 years to be back at the $1M/each mark, that's a not-too-munificent $30K/yr/person to spend...before taxes.

So I think your "to do list" is:
1) Start regular talks with your wife about money. You two are not on the same page, and you both need to make some compromises. Remember, investing, saving, budgeting, and planning are ALL different things. Don't try to settle everything at once, but you both need to find reasonably common ground. Reassure her that her fears are normal; everybody has them to differing degrees. But you can't let fear rule your life, or your pocketbook either.

You also need to discuss goals. These are broken down into short (now – 6 months), medium (6-24 months), long-term. Yes, they'll change over time. But a financial advisor can't do much if as a couple, you haven't determined what you want your money to accomplish for you. Different people have different priorities, so it's another give and take situation.

2) Next, the lawyer. If you don't have all your legal docs in order DO THIS NOW. You have children and responsibilities. Should anything happen to you and your wife, you do not want the State to manage your heirs and estate in a way which might not be what you two would want. You probably should have a Revocable Living Trust, with your assets, but a will is sufficient as a "placeholder" for now. And get your Durable Healthcare Power of Attorney taken care of and a copy given to your doctors!

And always, always, keep a copy handy – if you spend hours at work, keep a copy there, too. A co-worker of mine once got a phone call during work that her husband had been in a serious bike accident. Before she could get to the hospital, it turned out they were so worried about his condition, they transferred him to another hospital in a nearby city. This hospital did not have his records on hand, and they would not release any information to her because she did not have a copy of the DHPoA in her possession. Her husband was unconscious and could not give verbal permission to release information to her. She had to go all the way home, pick it up, and come back. To say it was a nightmare for her, was putting it mildly!

3) Talk to a financial advisor – WITH fiduciary responsibility, like a CFP. Someone who works for an hourly fee is fine. Get your financial and legal papers in order, come with a rough outline of your goals, and the advisor can get right to work on analyzing your situation and giving you recommendations.

Having money has its own set of problems and responsibilities. Handling it poorly hurts no one but yourself and your family. Because you will have money, you can learn to mitigate financial risks (with tools like life insurance), so that your chances of success are better. But it takes being informed, and getting good professional advice. A public forum of anonymous responders is only going to be able to take you so far, and in your case, I don't think it will get you far enough. You have the chance to take this windfall and lay a solid foundation for the future, with you and your wife working together as a team. Good luck!


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 9:10 pm 
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Whoa, whoa, whoa. It's $1+ million. It's hardly life-changing in the Op's situation, but it does open up options.

I'd pay off the mortgage and student loans. You'll still have enough to invest if that's what you want to do. Don't do it until after the armegeddon though or your wife will never forgive you. Maybe stick with cash for a year or two.

Forget the tax issues regarding life insurance. You don't have THAT much and besides NO ONE knows what estate taxes will be like even 3 months from now so it's dumb to buy anything based on that NOW. If your heirs need to replace income then consider life insurance but forget it for tax/estate purposes until we have some kind of long term political consensus on that important issue. Don't fall for any "solution" that is not a permanent change.


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 Post subject: Re: Another windfall question
PostPosted: Tue Oct 09, 2012 10:04 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
jaiko wrote:

3) Talk to a financial advisor – WITH fiduciary responsibility, like a CFP. Someone who works for an hourly fee is fine. Get your financial and legal papers in order, come with a rough outline of your goals, and the advisor can get right to work on analyzing your situation and giving you recommendations.



Disagree with 3. A FA is a waste of money for 99% of the population. Fiduciary means nothing. CFP means nothing.

My suggestion instead of a FA is a book. Check it out from your library. Boglehead's guide to investing.

Next question.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Another windfall question
PostPosted: Wed Oct 10, 2012 4:55 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1785
Location: Ottawa, Canada
jaiko wrote:
[Life insurance] is one of the very few ways you can leave substantial amounts free of income tax (although the face amount IS counted in your overall estate worth total, for estate tax purposes).


I don't believe that's true. I don't think life insurance benefits are ever counted in the estate of the deceased.

The benefit from a life insurance policy belongs to the beneficiary - not the insured individual. The amount should never ever be counted as an asset of the deceased, because it never belonged to them. It belongs entirely to the beneficiary.

The only way I can think of where the payout from a life insurance policy would be counted in the estate of the deceased would be if you could somehow name yourself (i.e, your estate) as the beneficiary of your own policy, and I don't believe that's possible, is it?


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 Post subject: Re: Another windfall question
PostPosted: Wed Oct 10, 2012 6:47 am 
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jaiko wrote:
3) Talk to a financial advisor – WITH fiduciary responsibility, like a CFP. Someone who works for an hourly fee is fine. Get your financial and legal papers in order, come with a rough outline of your goals, and the advisor can get right to work on analyzing your situation and giving you recommendations.


I disagree. If that advisor is really cheap and only charges you 1% a year, that's a $10000 bill you'll have to pay. Then there will be the commissions on all the crap he sells you.

And why on earth would the advisor make the proper recommendation to pay off debt? Telling you to pay off the mortgage costs the advisor his fee on $500000. That's $5000 a year. I suspect he will convince you it's better not to pay off the mortgage for some reason. Then he'll surely try to sell you annuities, which you most certainly do NOT need.

Buy a few good books, Read them. Let your wife read them. Talk to each other. Reach a consensus then act. Until then, lock the money up in a 2 year CD so you are not tempted to do something rash.


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 Post subject: Re: Another windfall question
PostPosted: Wed Oct 10, 2012 7:28 am 

Joined: Fri May 04, 2012 2:23 pm
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kombat wrote:
jaiko wrote:
[Life insurance] is one of the very few ways you can leave substantial amounts free of income tax (although the face amount IS counted in your overall estate worth total, for estate tax purposes).


I don't believe that's true. I don't think life insurance benefits are ever counted in the estate of the deceased.

The benefit from a life insurance policy belongs to the beneficiary - not the insured individual. The amount should never ever be counted as an asset of the deceased, because it never belonged to them. It belongs entirely to the beneficiary.

The only way I can think of where the payout from a life insurance policy would be counted in the estate of the deceased would be if you could somehow name yourself (i.e, your estate) as the beneficiary of your own policy, and I don't believe that's possible, is it?


Not always. There are cases where a LI benefit can be taxed. The so called "unholy trinity." Or, if the benefit was explicitly obtained to relieve the estate of its obligations.

But generally, LI proceeds bypass probate and taxation.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Another windfall question
PostPosted: Wed Oct 10, 2012 9:09 am 

Joined: Mon Jul 30, 2012 3:59 pm
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Congrats on the success. You've sort of hit the lottery so now's the time to avoid the mistakes that lottery winners make.

- Pay off all debts - that leaves you with ~$950k
- Mark $100k as an EF
- Term LI is cheap ($100 to $250/year each for you and wife) at your age if you have good health so I'd recommend it for at least 10 years but if you can get a term that will take the kids through high-school that would be better
- Educate yourself in financial planning as others have advised (read a few books specifically on planning but also read some of the general classic money management books - your wife should also read them)
- Talking to a Fin Planner can go bad if you get a bad one and are easily "sold". You can likely get a decent plan on his forum if you ask but you need money skills so learn before you have that talk unless there's no cost and you know you won't "buy" anything until you've educated yourself
- You may be a good candidate for financial planning from one of the big, low cost, mutual fund firms - they'll offer a fairly priced planning session if you invest the amount that you have but they'll of course put you in their funds. But it's not a bad way to go - As part of you education process you may want to start by devouring the articles at the Morningstar website. They often point out the low cost funds in their articles and they have a good reputation.
- Avoid annuities as someone else posted
- I'd park the money in a several money market account for a few months until you've educated yourself. Putting all the money in one is not a lot of risk but I'm
conservative so I'd spread it around several institutions. Plan to be ready to implement your plan by 1/1/13. This is an aggressive deadline so be ready to work.
- Does your company match 401K contributions? If so, up your 401K contribution to max that out. Otherwise, you need to save more (although the windfall has helped, as long as you don't blow it).
- You have a nice position but I see it as having gone from a fair position to a strong position rather than having gone to great position to a "never have to worry about anything again" position.
- Guessing the age of your kids means $100k will go to private school tuition
- College will take another $100k each
- Put a will in place with an experienced estate attorney and start the process before you implement the investment of your windfall as the will will impact how you set-up the investment accounts

Continued good luck.

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 Post subject: Re: Another windfall question
PostPosted: Wed Oct 10, 2012 9:50 am 

Joined: Tue Oct 09, 2012 12:20 pm
Posts: 10
Thanks to all for the great infos. Here's what I'm getting from this in summary;

- Park the $$ for a while first. 2 year CD was mentioned, as was multiple money markets. I'm partial to the former, since it would require less management, though might go for less than 2 years - will check rates.
- Life ins, apparently it's cheap enough to not take much of a hit, will check rates there too
- Pretty clear that getting a FA that is independent and paid hourly makes most sense, but will definitely do a ton of reading first. I have a big spreadsheet started to get everything where I can see it, maybe run some scenarios first, then see what a FA can add.
- Need to understand retirement accounts better, wikipedia should get me started
- Clearly pay off the student loans and whatever other misc debts


It sounds like most would suggest paying current mortgage. I'm most in favor of that and then expanding the house when we need to. Not doing this for luxury or a big in-house theatre, I just live in an expensive town and want my kids to have their own rooms, a bigger yard, and get the cats out of the laundry room. Where I live, 2500sqft/4br is $1.1M. Moving < upgrading though with real estate and moving fees, etc...

Not sure about the math where $1M each = $30k/year/person.... that suggests 33 yr retirement and the $$ is in a checking account the whole time - not to mention I'm still working and w/o a mortgage I will be saving more. The underlying point is good though - don't relax and get lazy. The way I've figured it, I need to have a base amount of ~$3.5M to have a reasonable expectation to be in the clear and be able to leave that principle to my kids - that is my preliminary target.

Not sure what else, but my main concern was what to do in the first few months. Pay off obvious debts, park the balance, get a FA/education, get will in place, get wife on board with something reasonable.

many thanks!


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 Post subject: Re: Another windfall question
PostPosted: Wed Oct 10, 2012 10:00 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
I would actually suggest 5 yr CD's. With someone like Ally Bank, the penalty is low for breaking the contract (2 month's interest) and you comeout ahead after a couple of months. This money stays very liquid. If you are certain you don't need the money for a year, you could shove $20k into i bonds. Small potato for you, but, every little bit helps. We'll know the new rates on ibonds next week.

instead of wikipedia, I'd suggest reading at the Bogleheads' wiki.

http://www.bogleheads.org/wiki/Main_Page

One final suggestion, no loans or gifts to friends or family.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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