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It is currently Fri Dec 19, 2014 6:41 am




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 Post subject: inheritance
PostPosted: Mon Mar 18, 2013 10:15 am 

Joined: Mon Mar 18, 2013 9:48 am
Posts: 15
My mom recently passed away and I'm starting the process of settling her estate. Doing the paperwork with insurance/annuity companies and her banks outside of probate, it looks like I will be receiving about $200,000 outside of probabe and am undecided about how best to allocate this money. Once the house is sold and the probate process concludes, my conservative estimate after fees and other payouts is an additional $125,000.

I (along with my husband) have a mortgage of $220,000 on a 15 year term, 2.875 interest rate. We refinanced in November from a 30 year mortgage and a higher rate. We have no other debt. I contribute maximum amount to the Simple IRA offered by my firm as well as contribute maximum amounts on both our IRA accounts. We have a $21,000 emergency fund and about $70,000 invested in non-retirement accounts. About 1/3 of my income (husband is not currently working) is used to fund our montly expenses and simple lifestyle, the rest is saved for future wants (home updates) or needs (replacement vehicle) and invested for long-term goals. We were later bloomers to the personal finance/retirement savings and are doing out level best to ensure our home is paid off before retirement as well as save as much as we can for the future.

Our initial impulse was to pay down our mortgage with half and save the other half, but it does not feel right with the low rate on our mortgage. Suggestions anyone?


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 Post subject: Re: inheritance
PostPosted: Mon Mar 18, 2013 10:28 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 855
1st, sorry to hear about the passing of a loved one.

2nd, we all have different tolerances to debt. So, if the mortgage is keeping you up at night, pay it down. If doesn't bother you, perhaps throw a little at it. Perhaps not. I would personally invest it. Many people here will point out increased cash flow if you pay it down, but since your cost of capital is low (under 3%), I would put it to work in the stock market according to your investing plan. I will also point out that many of those who advocate paying off the mortgage do so not solely b/c of their aversion to debt, but b/c they lack the knowledge on how to invest it in the market. JMO. Good luck.

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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: inheritance
PostPosted: Mon Mar 18, 2013 1:13 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1977
I'm in total agreement with Bichon on this one, for what it's worth.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 2:50 am 

Joined: Sat Dec 10, 2011 7:25 am
Posts: 816
I respectfully strongly disagree! I have to ask what are you thinking?

Ask yourself would you go out and borrow $200,000 to invest in the stock market? I hope your answer is no! As great as the market has been doing there are no guarentees that a war won't break out in the middle east and drive oil to $150 a barrel. You know what that would do to the market? My point is the stok market is very fragile. Putting your inheritance into the market when you have $200k of debt is no different.

Take the money and pay off your mortgage! I don't care what he interest rate is. It is debt! Every time I came into money- bonus, inheritance, tax return, whatever I spent a little then at first paid off all debt after that I built the retirement pile. Ask yourself how would it feel if you didnt have a mortgage payment?

If the money is in your hand wouldn't there also be a temptation to buy some toys? Ive observed many friends who came into money always find a way to spend it.

Sounds like you have been doing well...keep up the good work!

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RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 7:24 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 855
3 Comments:

1) That last post came off as predictable as I could have ever guessed.
2) How quick we are to forget what happened with housing prices just 3 or 4 years ago. Sure, if you don't need to sell it doesn't matter. Same principal applies to equities.
3) Yes, if someone wanted to offer me $200k @ under 3% for 30 years, I'd be more than happy to invest it in the market.

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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: inheritance
PostPosted: Tue Mar 19, 2013 7:39 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1977
RayinPenn wrote:
I respectfully strongly disagree! I have to ask what are you thinking?

Ask yourself would you go out and borrow $200,000 to invest in the stock market? I hope your answer is no! As great as the market has been doing there are no guarentees that a war won't break out in the middle east and drive oil to $150 a barrel. You know what that would do to the market? My point is the stok market is very fragile. Putting your inheritance into the market when you have $200k of debt is no different.

Take the money and pay off your mortgage! I don't care what he interest rate is. It is debt! Every time I came into money- bonus, inheritance, tax return, whatever I spent a little then at first paid off all debt after that I built the retirement pile. Ask yourself how would it feel if you didnt have a mortgage payment?

If the money is in your hand wouldn't there also be a temptation to buy some toys? Ive observed many friends who came into money always find a way to spend it.

Sounds like you have been doing well...keep up the good work!

Oh great. A Ramseyite.

Okay, I can't speak for BF, but I'll tell you what I was thinking. I use 2 tools: math and risk analysis.

Basically their interest rate is around 2%, after the tax deduction is taken. The stock market has historically gained around 10%/year on average (a little less if you're just talking large caps, like the SP500). Yes, there's risk in the market. Always has been, always will be. That's why it pays more -- risk pays.

Now the OP's mortgage is a new one, refinanced in November. This means that under the new, more stringent lending rules, the bank considers them a good risk to make payments. Note also that the OP is on track to pay it off before they retire. Is there a risk that something bad will happen and they won't be able to pay it off? Maybe. Depends on how well they're insured, whether their EF is sufficient, etc. Again, I point out that the bank thinks they're a good risk. Now if they throw the entire windfall into the mortgage, does their risk still exist? Yes! The windfall is not enough to pay off the mortgage! It's true that the debt is smaller, but it's still there! So tell me: if all debt is bad, why take out any mortgage at all?

Now let's look at some other factors. The OP has a 15-year mortgage and is on track to pay it off by retirement. They're also late to the personal finance game. I'd guess that from this information, they're in their late 40s/early 50s. They may be behind the curve in saving, but doing a nice job in catching up if she's maxing out the Simple IRA (contribution limit to a Simple IRA in 2013 is $13K) and IRAs. It's hard to tell, since she doesn't say what the value of their retirement accounts is. We do know the value of their non-retirement accounts is $70K.

Anyway, given the risks involved on both the mortgage and the market, it makes sense to use cheap money to boost their potential gains. Is there a chance the market could tank? Or course! But if their asset allocation is right, that risk is mitigated. The real unknown is the value of their retirement accounts, which would affect their risk profile. If it's big enough, they'll have a long enough time horizon to recover from any market downturn.

Edit: note too, that the mortgage is a hedge against inflation. As prices rise, the mortgage payment takes up a smaller and smaller percentage of income as the years go by. In the meantime, the investments continue to go up as returns compound.

Oh, and what happens if, in 15 years, they have a house paid off but not enough saved to retire? Following your methods, that's a real possibility.


Last edited by VinTek on Tue Mar 19, 2013 10:20 am, edited 1 time in total.

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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 9:53 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1633
Location: Seattle, WA
Bichon Frise wrote:
1) That last post came off as predictable as I could have ever guessed.


That was too perfect. Admit it, RayinPenn is your shill/troll account.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 10:14 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 855
stannius wrote:
Bichon Frise wrote:
1) That last post came off as predictable as I could have ever guessed.


That was too perfect. Admit it, RayinPenn is your shill/troll account.


I can neither confirm, nor deny that. I'll make the admins "bust" me for doing such. :rofl:

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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: inheritance
PostPosted: Tue Mar 19, 2013 10:19 am 

Joined: Mon Mar 18, 2013 9:48 am
Posts: 15
Thanks for all the replies and advice. I sleep just fine with our mortgage payment and have tended to lean more toward the investing option, yet I was having difficulty articulating why I feel that way. Our biggest financial mistakes have occurred when we did not have a goal or a plan to achieve it, and paying down the mortgage just did not feel right. After reading the advice here and from others we trust, we are going to invest the money from mom and use paychecks to pay a little extra on the mortgage each month, just enough to be sure it's completely paid off by the time I'm 65.

VinTek is correct about our ages: we are 52 (me) and 54 (DH). Our "late entry" into the personal finance realm was 12 years ago, but we jumped in with both feet once our credit card and student loan debts were paid and our savings reserves built up a bit. Our retirement accounts were about $350,000 at the end of 2012, with another $26,000 being added in monthly allotments this year. I think we're doing okay, but we're not especially frugal. Our interests are mostly outdoor related, and we have a line item in our monthly spending plan to cover the cost of our weekend adventuring and periodic upgrades to our equipment.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 10:24 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1792
Location: Ottawa, Canada
VinTek wrote:
The stock market has historically gained around 10%/year on average


Has it?

Are you sure about that?

How far back are you going? And are you including the last 15 years?

How relevant is it to me today what the market did in 1940? Isn't what it did from 2003 - 2013 (hint: not 10%) far more relevant?

Spoiler alert: It's 6%. Not 10. And things in 2003 looked a lot nicer than they do today, economically speaking.

How confident are you going forward that the market will somehow magically go back to the heady days of the 80's and 90's and produce 10-12%/year? Because personally, I think it'll limp along more like it has been in the preceding decade, returning 6-ish%, for at least a couple more decades.

Your whole argument really hinges on your assumption for future returns. If you pull a rosy, unrealistic figure out of the air, like 10%, you can make it sound like a no-brainer. But it ignores the myriad subtle complexities of the modern economic environment.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 10:31 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1977
kombat wrote:
VinTek wrote:
The stock market has historically gained around 10%/year on average


Has it?

Are you sure about that?

How far back are you going? And are you including the last 15 years?

How relevant is it to me today what the market did in 1940? Isn't what it did from 2003 - 2013 (hint: not 10%) far more relevant?

Spoiler alert: It's 6%. Not 10. And things in 2003 looked a lot nicer than they do today, economically speaking.

How confident are you going forward that the market will somehow magically go back to the heady days of the 80's and 90's and produce 10-12%/year? Because personally, I think it'll limp along more like it has been in the preceding decade, returning 6-ish%, for at least a couple more decades.

Your whole argument really hinges on your assumption for future returns. If you pull a rosy, unrealistic figure out of the air, like 10%, you can make it sound like a no-brainer. But it ignores the myriad subtle complexities of the modern economic environment.

Take any 30-year period. Don't cherry-pick shorter periods. Then come back with an answer. And don't forget to add dividends. You'll find that the downturns in 2000 and 2007, as bad as they were, were a reversion to the mean after the go-go 80s and 90s. Refer to this discussion to refresh your memory.

And I made money like a bandit during the last downturn as I DCA'd into the recession. My guess is that you did too. If you didn't, you weren't doing it right.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 5:19 pm 

Joined: Sat Dec 10, 2011 7:25 am
Posts: 816
You say you use math and risk analysis eh?
1) If I recall those PhDs at Long Term Capital Management used math and risk analysis too. They nearly distroyed the countries financial system! I guess I'm not as smart as you or them. I think they called it being over leveraged. Yeah leveraged isn't that debt? I think one of them developed the Black scholes option valuation model. He was a very smart guy too.
2) Didnt those fellows at JP Morgan lose a couple of billion using math and risk analysis this past spring? Credit derivatives wasnt it? Arent those bets on the market too? smart fellows they are all too.
3) Of course I am a simple country fellow and not well versed in finances but didn't I learn in highschool that those poor souls that jumped from the windows during the great crash borrowed money to do what? Oh yeah invest in the stock market.. I think they were smart fellows too.
4) Your risk analysis uses some assumptions doesn't it. The market has averaged 10% Yet so many believe that may not be so going forward. My point being no one knows what the market will do or interest rates. What we do know for certain is no one ever foreclosed on a house without a mortgage.
5) Then there's that silly human factor - how many people pulled their money out of the market when it crashed? The money is gone forever. Funny thing with my house when the value went down I didn't feel any temptation to sell the house I just went on living here. But of course that risk and math stuff is over my head.

The choice to invest borrowed money may work for you because you are well capitalized and could cover any losses ...but it does not represent the safe and prudent play...cheers.


Oh and shill. Bichon I think not....

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RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain


Last edited by RayinPenn on Tue Mar 19, 2013 6:04 pm, edited 5 times in total.

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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 5:24 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1977
RayinPenn wrote:
You say you use math and risk analysis eh?
1) If I recall those PhDs at Long Term Capital Management used math and risk analysis too. They nearly distroyed the countries financial system! I guess I'm not as smart as you or them. I think they called it being over leveraged. Yeah leveraged isn't that debt? I think one of them developed the Black scholes option valuation model. He was a very smart guy too.
2) Didnt those fellows at JP Morgan lose a couple of billion using math and risk analysis this past spring? Credit derivatives wasnt it? Arent those bets on the market too? smart fellows they are all too.
3) Of course I am a simple country fellow and not well versed in finances but didn't I learn in highschool that those poor souls that jumped from the windows during the great crash browsed money to do what? Oh yeah invest in the stock market.. I think they were smart fellows too.
4) Your risk analysis uses some assumptions doesn't it. The market has averaged 10% Yet so many believe that may not be so going forward. My point being no one knows what the market will do or interest rates. What we do know for certain is no one every foreclosed on a house without a mortgage.
5) Then there's that silly human factor - how many people pulled there money out of the market when it crashed? The money is gone forever. Funny thing with my house when the value went down I didn't feel any temptation to sell the house I just went on living here. But of course I that risk and math stuff is over my head.

To borrow to invest in the market was folly in the 20's and it is folly today...

You didn't answer the question. What happens when they have a paid-off house in 15 years and not enough to retire on? Outliving your savings seems to be a risk that all too many people are facing today. Let's talk about real people, not investment firms, shall we?

And when my investment portfolio went down, I didn't feel any temptation to sell my funds, I just went on investing. Not very different from your house analogy, except my portfolio probably appreciated a lot more than your house did.


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 5:33 pm 

Joined: Sat Dec 10, 2011 7:25 am
Posts: 816
Ah you didn't feel any temptation to sell...but too too many did. It isn't always about the math sometimes it's about human nature. Flashback to what must be four years ago. The market is crashing and a longtime fifty something friend from work calls distraught considering cashing out. It's all she has for retirement she can't afford to lose any more. I beg her not to sell - of course she sells and is decimated. She is one of thousands and thousands..

I imagine they could save the 1800 bucks a month they are currently putting to the mortgage..probably would add up to a nice pile...No matter the choice I think these guys will prosper.

Have a great night.
You too Bichon...

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RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain


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 Post subject: Re: inheritance
PostPosted: Tue Mar 19, 2013 6:19 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1227
RayinPenn wrote:
What we do know for certain is no one ever foreclosed on a house without a mortgage.

Not so fast! Still gotta pay those pesky property taxes.


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