What to do with this "windfall?"

[MPMD]

I find myself in an interesting situation:

 

• 2 MD couple, early-mid 30s, no kids.


• AGI last year ~$650k basically all W2.


• Income will drop a bit going forward as kids come may to $550k or so.


• Student loan debt: none


• Consumer debt: $20k ish on a car, financed bc rate was so low


• Other debt is minimal, we have a small loan at 0% (weird story, you read that right)


• Owe about $700k on a house worth about $850k


• Retirement: $540k


• Max out for both: 401k/457b/backdoor Roth/HSA


• Found out recently that we are being given a business share worth ~$500k.

 

So I kind of woke up one day and realized that we are technically millionaires and at the age of 36 I have a $1.12M net worth. Given scenarios on both sides of the family it's pretty certain that we'll inherit minimum $750k more although that will be well off in the future. Far more likely that figure is over $1M.

Obviously, I'm very happy with our scenario and feel very lucky.

My question is about our 457b. Given that we probably could stop saving for retirement now and be ok (not wildly wealthy but solvent) I'm trying to decide whether or not to stop the 457b and just pay off my house or turbocharge 529s in the upcoming years.

The shop we work for is ridiculously solvent and the investment options and withdrawal process in the 457b if we leave are not onerous.

Any thoughts? I'm basically talking about going from about a 20% savings rate to a 15% savings rate.

 

[TheGipper]

MPMD wrote:

I find myself in an interesting situation:

 

• 2 MD couple, early-mid 30s, no kids.


• AGI last year ~$650k basically all W2.


• Income will drop a bit going forward as kids come may to $550k or so.


• Student loan debt: none


• Consumer debt: $20k ish on a car, financed bc rate was so low


• Other debt is minimal, we have a small loan at 0% (weird story, you read that right)


• Owe about $700k on a house worth about $850k


• Retirement: $540k


• Max out for both: 401k/457b/backdoor Roth/HSA


• Found out recently that we are being given a business share worth ~$500k.

 

So I kind of woke up one day and realized that we are technically millionaires and at the age of 36 I have a $1.12M net worth. Given scenarios on both sides of the family it’s pretty certain that we’ll inherit minimum $750k more although that will be well off in the future. Far more likely that figure is over $1M.

Obviously, I’m very happy with our scenario and feel very lucky.

My question is about our 457b. Given that we probably could stop saving for retirement now and be ok (not wildly wealthy but solvent) I’m trying to decide whether or not to stop the 457b and just pay off my house or turbocharge 529s in the upcoming years.

The shop we work for is ridiculously solvent and the investment options and withdrawal process in the 457b if we leave are not onerous.

Any thoughts? I’m basically talking about going from about a 20% savings rate to a 15% savings rate.

 

Click to expand...

Your scenario is pretty similar to ours a few years back.

1) No reason to not keep contributing to the 457b if the company is solvent and the withdrawal terms are favorable.  Why give up the tax deferral?

2) At your income levels and situation, if you wanted to, you could probably achieve a 40-50% savings rate.  You really could start aggressively funding your 529, investing more in taxable account, AND accelerate mortgage payoff, even without the windfall.  I'd do all three.  This has been endlessly debated and you'll get different answers from everyone.

3) As to the "windfall" no wrong choice here.  I personally would just split it up between taxable account, 529s, and mortgage payoff.  One option would be to pay down the 700k mortgage to below the conforming (non-jumbo) loan amount in your zipcode, and then refi into a 15 year mortgage at a lower rate (assuming you currently have a 30 yr).

 

 

[MPMD]

TheGipper wrote:

MPMD wrote:

I find myself in an interesting situation:

 

• 2 MD couple, early-mid 30s, no kids.


• AGI last year ~$650k basically all W2.


• Income will drop a bit going forward as kids come may to $550k or so.


• Student loan debt: none


• Consumer debt: $20k ish on a car, financed bc rate was so low


• Other debt is minimal, we have a small loan at 0% (weird story, you read that right)


• Owe about $700k on a house worth about $850k


• Retirement: $540k


• Max out for both: 401k/457b/backdoor Roth/HSA


• Found out recently that we are being given a business share worth ~$500k.

 

So I kind of woke up one day and realized that we are technically millionaires and at the age of 36 I have a $1.12M net worth. Given scenarios on both sides of the family it’s pretty certain that we’ll inherit minimum $750k more although that will be well off in the future. Far more likely that figure is over $1M.

Obviously, I’m very happy with our scenario and feel very lucky.

My question is about our 457b. Given that we probably could stop saving for retirement now and be ok (not wildly wealthy but solvent) I’m trying to decide whether or not to stop the 457b and just pay off my house or turbocharge 529s in the upcoming years.

The shop we work for is ridiculously solvent and the investment options and withdrawal process in the 457b if we leave are not onerous.

Any thoughts? I’m basically talking about going from about a 20% savings rate to a 15% savings rate.

 

Click to expand…

Your scenario is pretty similar to ours a few years back.

1) No reason to not keep contributing to the 457b if the company is solvent and the withdrawal terms are favorable.  Why give up the tax deferral?

2) At your income levels and situation, if you wanted to, you could probably achieve a 40-50% savings rate.  You really could start aggressively funding your 529, investing more in taxable account, AND accelerate mortgage payoff, even without the windfall.  I’d do all three.  This has been endlessly debated and you’ll get different answers from everyone.

3) As to the “windfall” no wrong choice here.  I personally would just split it up between taxable account, 529s, and mortgage payoff.  One option would be to pay down the 700k mortgage to below the conforming (non-jumbo) loan amount in your zipcode, and then refi into a 15 year mortgage at a lower rate (assuming you currently have a 30 yr).

 

 

Click to expand...

Thanks for reply. It's actually a share in the business not a cash windfall. Business will generate income at some point in the future but not now.

If you count student loan payment as savings rate (I know that WCI tends to) we were probably at about a 40% rate last year.

Yeah we have a 30 year. We bought into the "flexibility" argument, but then again to be fair we used the excess cash to absolutely maul the loans.

[TheGipper]

MPMD wrote:

TheGipper wrote:

MPMD wrote:

I find myself in an interesting situation:

 

• 2 MD couple, early-mid 30s, no kids.


• AGI last year ~$650k basically all W2.


• Income will drop a bit going forward as kids come may to $550k or so.


• Student loan debt: none


• Consumer debt: $20k ish on a car, financed bc rate was so low


• Other debt is minimal, we have a small loan at 0% (weird story, you read that right)


• Owe about $700k on a house worth about $850k


• Retirement: $540k


• Max out for both: 401k/457b/backdoor Roth/HSA


• Found out recently that we are being given a business share worth ~$500k.

 

So I kind of woke up one day and realized that we are technically millionaires and at the age of 36 I have a $1.12M net worth. Given scenarios on both sides of the family it’s pretty certain that we’ll inherit minimum $750k more although that will be well off in the future. Far more likely that figure is over $1M.

Obviously, I’m very happy with our scenario and feel very lucky.

My question is about our 457b. Given that we probably could stop saving for retirement now and be ok (not wildly wealthy but solvent) I’m trying to decide whether or not to stop the 457b and just pay off my house or turbocharge 529s in the upcoming years.

The shop we work for is ridiculously solvent and the investment options and withdrawal process in the 457b if we leave are not onerous.

Any thoughts? I’m basically talking about going from about a 20% savings rate to a 15% savings rate.

 

Click to expand…

Your scenario is pretty similar to ours a few years back.

1) No reason to not keep contributing to the 457b if the company is solvent and the withdrawal terms are favorable.  Why give up the tax deferral?

2) At your income levels and situation, if you wanted to, you could probably achieve a 40-50% savings rate.  You really could start aggressively funding your 529, investing more in taxable account, AND accelerate mortgage payoff, even without the windfall.  I’d do all three.  This has been endlessly debated and you’ll get different answers from everyone.

3) As to the “windfall” no wrong choice here.  I personally would just split it up between taxable account, 529s, and mortgage payoff.  One option would be to pay down the 700k mortgage to below the conforming (non-jumbo) loan amount in your zipcode, and then refi into a 15 year mortgage at a lower rate (assuming you currently have a 30 yr).

 

 

Click to expand…

Thanks for reply. It’s actually a share in the business not a cash windfall. Business will generate income at some point in the future but not now.

If you count student loan payment as savings rate (I know that WCI tends to) we were probably at about a 40% rate last year.

Yeah we have a 30 year. We bought into the “flexibility” argument, but then again to be fair we used the excess cash to absolutely maul the loans.

Click to expand...

No, you're approach of killing the student loans first was probably the right one.  I just hate 30 year mortgages.  There are others on this board who would advocate for never pre-paying your mortgage and would probably take a 60 yr if it was available.  To me, getting even 2-3% risk free return (after adjusting for tax deductions) still seems a good deal.

[MPMD]

I certainly don't "like" them.

We were in a scenario where my wife was starting her real job and we still had about $150k in student loans and we were both just worried about cash flow. In hindsight it wasn't logical.

That said, in a very real sense the 30 vs. 15 is the worst financial decision we have made so far. It was on a home purchase that is way less than 2X our annual salary, so I'm ok with where we are  

[ENT Doc]

Walk me through the sale of the share.  Only has value if there is a market with a willing participant to buy at that price.  Sounds like you just hit the end of your student loan road.  Nice.  When are the kids expected?  Sounds like your savings rate will jump significantly now.  I don't think I'd ride off into the sunset just yet.  I'd max the retirement accounts, save like a banshee, and when the kids come along max the 529s.  Would also Pre-pay a bit on the mortgage - especially if the inheritance and business share value materialize.  You can do all this at your income.

[StarTrekDoc]

With your current status you can do anything and still smell like a rose.

457b option is solid so never leave dollars on the table. If you're looking to be certain on kids, fund a 529 to child A.

After that, really depends on your investing goals, style and wishes. You can attack the mortgage to get to true financial Independence and have absolutely no worries in two years.

Want a second Maui home? Boat? Jet setting? Those are serious options now too as a luxury before kids. Just a thought. Once kids, the world changes....a lot. ❤️

[PhysicianOnFIRE]

I don't think shares in a business that might be worth $500,000 but is not producing income right now changes the picture for you.

Even if you were handed $500,000 in cash, I would continue maxing out the 457(b). Defer all the tax you possibly can in the top income tax bracket.

[MPMD]

ENT Doc wrote:

Walk me through the sale of the share.  Only has value if there is a market with a willing participant to buy at that price.  Sounds like you just hit the end of your student loan road.  Nice.  When are the kids expected?  Sounds like your savings rate will jump significantly now.  I don’t think I’d ride off into the sunset just yet.  I’d max the retirement accounts, save like a banshee, and when the kids come along max the 529s.  Would also Pre-pay a bit on the mortgage – especially if the inheritance and business share value materialize.  You can do all this at your income.

Click to expand...

thanks all for the thoughts! interesting that the consensus seems to be to stick w/ 457

 

gipper: i think the 30 vs 15 on a home <2X annual income is the "worst" financial decision we've made

ENTdoc: it's actually a family biz that growing and doing well. didn't know what our "stake" was going to be and now know. i definitely can't sell it, at least not if i want to stay married and be welcome on Christmas!

StarTrekDoc: not sure we have enough time between now and kids to go crazy.

PoF: helpful thoughts. you're right that this isn't exactly kicking off money to us at the moment. not sure what the plan is for future income to be honest need to figure that out. the one convo i had with the owner said his projections are an 8% return/year.

 

[ENT Doc]

MPMD wrote:

ENT Doc wrote:

Walk me through the sale of the share.  Only has value if there is a market with a willing participant to buy at that price.  Sounds like you just hit the end of your student loan road.  Nice.  When are the kids expected?  Sounds like your savings rate will jump significantly now.  I don’t think I’d ride off into the sunset just yet.  I’d max the retirement accounts, save like a banshee, and when the kids come along max the 529s.  Would also Pre-pay a bit on the mortgage – especially if the inheritance and business share value materialize.  You can do all this at your income.

Click to expand…

thanks all for the thoughts! interesting that the consensus seems to be to stick w/ 457

 

gipper: i think the 30 vs 15 on a home <2X annual income is the “worst” financial decision we’ve made ?

ENTdoc: it’s actually a family biz that growing and doing well. didn’t know what our “stake” was going to be and now know. i definitely can’t sell it, at least not if i want to stay married and be welcome on Christmas!

StarTrekDoc: not sure we have enough time between now and kids to go crazy.

PoF: helpful thoughts. you’re right that this isn’t exactly kicking off money to us at the moment. not sure what the plan is for future income to be honest need to figure that out. the one convo i had with the owner said his projections are an 8% return/year.

 

Click to expand...

8% for how long?  Obviously, that can't happen in perpetuity.  Wouldn't even let that $500k share factor into your net worth until things start materializing.  Don't worry, you'll still be a millionaire before 40.   

[MPMD]

i'm hoping until my private jet is paid off

[The White Coat Investor]

Not sure you have any definite windfall yet. A business that doesn't produce any income is far from a sure thing. I don't view my business value as anywhere near a sure thing (generally discount it 30-50% when calculating net worth) and it produces lots of income.

[MPMD]

The White Coat Investor wrote:

Not sure you have any definite windfall yet. A business that doesn’t produce any income is far from a sure thing. I don’t view my business value as anywhere near a sure thing (generally discount it 30-50% when calculating net worth) and it produces lots of income.

Click to expand...

interesting.

 

is that a common practice in the FP world or is that just a WCI rule of thumb?

[The White Coat Investor]

Lots of people discount a business like 30% if it is particularly illiquid.

[adventure]

The White Coat Investor wrote:

Lots of people discount a business like 30% if it is particularly illiquid.

Click to expand...

Agreed. Risk and liquidity factor in here. Also, if:

MPMD wrote:

It’s actually a share in the business not a cash windfall. Business will generate income at some point in the future but not now.

Click to expand...

That implies the business may not be making sufficient funds to sustain itself. Will there be a capital call? Is this a good business? Does it make money now? Does it have a solid management? Will you have to pay in to the business for any reason? Are there any risks for taking on this (share of the) business?

If someone handed me 500k of Microsoft stock, that'd be awesome. If someone handed me 500k of a business that doesn't make any money - there is a chance I wouldn't take it. It'd have to depend on the leaders, financials, and business plan.

It's likely a cool deal - just lacking all of the details. Congrats on the sound financial picture. ... What is your 10 year plan? When do you want to retire? Work less? Work elsewhere? Work as parents? Go surfing? Run a non profit? Etc. Good time to re-review the future plan.