I need a plan.

[ineedaplan]

So, I have been reading YM off-and-on for some time, and I hope you guys can give me some advice and point out any potential problems with my situation, so here goes:

I am about to sell my business. It's my family's primary source of income, but I have been doing the "own your own business thing" for 8 years now, and I am tired. I have a legitimate offer from a reputable company, and we are down to the lawyers and signing the final paperwork. The price is set, and I don't want to discuss the business or price. What I would like your opinions on, is the personal finance side of this decision. I will walk away from this with $500K before taxes, I owe $260K on our home which we bought last year with 10% down at a fixed rate of 4.875%.
Our mortgage payment is $1800 and my paycheck covered this expense. I want to take at least a month off after the sale and then I will start working as a "PRN" person for several companies in the area, as I have an excellent network of friends in my field and PRN workers are always needed. I plan to do this to help me decide where and how I want to be employed next (I would really like to work part time to be at home more with my children).
I owe 18K on some 0% cc stuff, one expires in June the other expires in November.
We also need a new family vehicle within the next year, as our current vehicle is a 2002 with 175K miles on it.
The big problem that I need the most advice/help with is our retirement, we are "light" at only 100K. (ETA: the majority of this is in two Roths, the rest is split between my SIRA and my husband's 401K)

I've tried to provide a lot of information to give you an idea of all the things that are going through my head, as I am grappling with changing my employment status, hoping to be home more, getting our retirement straight, etc.... Ask your questions!

ETA: We have 6 months expenses in savings and no other debt

[plugginaway22]

First thing they will ask, is how old are you and spouse?

[ineedaplan]

Sorry, I edited this post several times, and I must have deleted that by accident. I am 35, he's 38.

[Gardening Grandma]

If you both are planning to work til you are mid 60's, then you have about 30 years. The next step (imo) would be to figure out about how much you'll need to have in order to retire comfortably. Subtract what you have ($100k) and divide the remainder by 30 years to see (again, roughly) how much you need to save annually. Anything that you put into retirement from the sale of the business would reduce the amount that you need to save annually.

[phil5185]

The most common reason that winners of lotteries, settlements, inheritances - are broke again within 7 yrs is that they apply the cash to 'several solid investments' (in their mind). Ie, they pay off the house, buy a new car (safe & reliable seems to be the main 'reason'), and pay off all consumer debt.

I would keep the $500k intact (except for any taxes due) and invest it - as you say, you are 'light', and you will need it in only 23 yrs.

I would invest the net ($450k or so) into 10% to 12% funds (with a no-load company) and let it grow for 15 yrs, that is about $2,200,000. Then, at age 53, start the transition from wealth building to wealth preservation - slowly move from 11%/yr products to 5% or 6% products (bonds) - with a goal of nearly doubling in the 8 yrs until dh is 65 - ie, a goal of >$4M.

Keep the 4.875% loan for the full term and use 100% financing to buy a car when required - and sell the old one privately for $3 or $4k and add that cash to your investment. Don't direct your income stream to prepay low interest loans at the expense of derailing a $4M plan.

[DVM gone riding]

What ever you do I wouldn't bother pre-paying that mortgage!! I wish I had one at that rate I would pay off the CC those rates are going to reset, they are drags on your credit if you do want to borrow more money, and when they reset they sometimes do "back" interest if you haven't got them paid off on time and i have seen them "reset" about 2 week earlier then you were thinking-has to do with billing cycles.
I would for sure max both IRAs for last year if you haven't already and again this year and then I would stick the money somewhere you can't touch it easily and wait 3 months to re-evaluate where your life is at and how much you are working

Can your husband cover the mortgage payment or do you have to either work or borrow from this money to pay that??

This can either be your retirement future or it can be a "life style improver" its unlikely to do both so you have to decide what you want. Outside of a small amount I would be looking at it as the rest of your retirement!

[ineedaplan]

Feb 5, 2011 12:21:09 GMT -5 phil5185 said:

The most common reason that winners of lotteries, settlements, inheritances - are broke again within 7 yrs is that they apply the cash to 'several solid investments' (in their mind). Ie, they pay off the house, buy a new car (safe & reliable seems to be the main 'reason'), and pay off all consumer debt.

I would keep the $500k intact (except for any taxes due) and invest it - as you say, you are 'light', and you will need it in only 23 yrs.

I would invest the net ($450k or so) into 10% to 12% funds (with a no-load company) and let it grow for 15 yrs, that is about $2,200,000. Then, at age 53, start the transition from wealth building to wealth preservation - slowly move from 11%/yr products to 5% or 6% products (bonds) - with a goal of nearly doubling in the 8 yrs until dh is 65 - ie, a goal of >$4M.

Keep the 4.875% loan for the full term and use 100% financing to buy a car when required - and sell the old one privately for $3 or $4k and add that cash to your investment. Don't direct your income stream to prepay low interest loans at the expense of derailing a $4M plan.

Phil: Thanks, this is what I "thought" I needed to do, but needed to know some hard numbers. What company(s) would you recommend? Would you stick with one company? TIA

[ineedaplan]

Feb 5, 2011 12:26:34 GMT -5 DVM gone riding said:

What ever you do I wouldn't bother pre-paying that mortgage!! I wish I had one at that rate I would pay off the CC those rates are going to reset, they are drags on your credit if you do want to borrow more money, and when they reset they sometimes do "back" interest if you haven't got them paid off on time and i have seen them "reset" about 2 week earlier then you were thinking-has to do with billing cycles.
Reply: I know I will have to pay off the one in June from this money, it's about 7K, but I do have alot of 0% offers from another card, so I dunno, I might play with putting them both on one....
I would for sure max both IRAs for last year if you haven't already and again this year and then I would stick the money somewhere you can't touch it easily and wait 3 months to re-evaluate where your life is at and how much you are working

Reply: Last year is done, this year needs to be done.

Can your husband cover the mortgage payment or do you have to either work or borrow from this money to pay that??

Reply: Hubby's paycheck covers everything else, except the mortgage, so some money from somewhere (this money or the EF) will need to cover the mortgage for a month while I relax.

This can either be your retirement future or it can be a "life style improver" its unlikely to do both so you have to decide what you want. Outside of a small amount I would be looking at it as the rest of your retirement!

Reply: I think the majority (90% or greater) will go to retirement, I just need to see what I can come up with in terms of my next career to get the "lifestyle improvement" of more time off. Working PRN as an independent contractor could net me some serious $$$ for far less time worked, but I need to see if I can really make it happen at a steady enough pace to depend on it and make the people I work with happy.

[The J]

I'd go with one mutual fund company -- Vanguard or Fidelity. I'd also spend a little bit of that money to sit down with a fee only financial planner to get some personalized advice.

[Gardening Grandma]

I'd go with one mutual fund company -- Vanguard or Fidelity. I'd also spend a little bit of that money to sit down with a fee only financial planner to get some personalized advice.

I second this advice. You DO get what you pay for...

[ineedaplan]

Feb 5, 2011 12:45:30 GMT -5 Gardening Grandma said:

I'd go with one mutual fund company -- Vanguard or Fidelity. I'd also spend a little bit of that money to sit down with a fee only financial planner to get some personalized advice.

I second this advice. You DO get what you pay for...

Here's my dumb question: Isn't a fee-only financial planner still going to try to sell me something??

[Gardening Grandma]

Isn't a fee-only financial planner still going to try to sell me something??

Not a dumb question. A "fee- only" financial planner sells you their time and knowledge. Not insurance, not annuities. If they try to sell you insurance or annuities, run. Lots of people bills themselves as "Financial Planners". Look for a Certified Financial Planner. Start by asking around, interview them and then make a choice.

[phil5185]

Phil: Thanks, this is what I "thought" I needed to do, but needed to know some hard numbers. What company(s) would you recommend? Would you stick with one company?

I would go to either Vanguard or Fidelity and invest in a Target 2040 fund, it is diversified, it automatically re-allocates as you age, it grows tax-deferred (except for a small portion), it gets the favorable capital gains tax treatment, and the fees are low.

You could use the Target2040 for all 3 of the tax statuses - ie, posttax (roth), pretax (401k), and taxable.

[lurkyloo]

I'm admittedly not up on the business end, but I'd be very surprised if you paid only $50k taxes on $500k net gain? Even at capital gains rate of 15%, it'd be 75K...

The point of a fee-only financial planner is that they make a set amount of money just for consulting with you. The difference is that financial planners who are not fee-only, make their money by charging a percentage of whatever money you invest. How much money they make is highly dependent on what products they sell you; therefore they tend to nudge you into products that make more money for them, as opposed to the products that would be best for you. Google fee-only financial planner; there are websites that list them by area. I third the suggestion, btw

Vanguard and Fidelity are both excellent choices for brokerages; T. Rowe Price is another. Target funds are nice because they're pretty well set-it-and-forget-it; the fund manager eases the focus of the fund from mostly stocks to more stable investments (e.g. bonds) as you get closer to retirement. Another popular choice is to put money in index funds--funds that mimic indices like the Dow or the S&P as closely as possible. It's generally quite difficult to reliably beat the market; index funds are sort of a "safe" choice with the added benefit of very low expense ratios.

One last bit of advice: don't get too attached to Phil and his 10-12% annual return investments. If you can find a fund that guarantees a 10% annual return...you should double-check that the manager's last name isn't Madoff.

[ineedaplan]

Feb 5, 2011 22:15:48 GMT -5 lurkyloo said:

I'm admittedly not up on the business end, but I'd be very surprised if you paid only $50k taxes on $500k net gain? Even at capital gains rate of 15%, it'd be 75K...

The point of a fee-only financial planner is that they make a set amount of money just for consulting with you. The difference is that financial planners who are not fee-only, make their money by charging a percentage of whatever money you invest. How much money they make is highly dependent on what products they sell you; therefore they tend to nudge you into products that make more money for them, as opposed to the products that would be best for you. Google fee-only financial planner; there are websites that list them by area. I third the suggestion, btw

Vanguard and Fidelity are both excellent choices for brokerages; T. Rowe Price is another. Target funds are nice because they're pretty well set-it-and-forget-it; the fund manager eases the focus of the fund from mostly stocks to more stable investments (e.g. bonds) as you get closer to retirement. Another popular choice is to put money in index funds--funds that mimic indices like the Dow or the S&P as closely as possible. It's generally quite difficult to reliably beat the market; index funds are sort of a "safe" choice with the added benefit of very low expense ratios.

One last bit of advice: don't get too attached to Phil and his 10-12% annual return investments. If you can find a fund that guarantees a 10% annual return...you should double-check that the manager's last name isn't Madoff.

Thanks lurkyloo. I meet with my regular accountant this week to discuss how much and when I have to pay ole uncle sam his part (I hate to pay the IRS a second before I have to). With the index funds, can you purchase those in any kind of account? Pre-tax or post-tax accounts? Are those available from anyone? I live in a smallish town (especially compared to some of you folks on YM) and all the certified financial planners are associated with some company like Fidelity or Merrill Lynch? Is that typical?

[DVM gone riding]

you can buy index funds out of any type of acct and with any type of "brokerage" on your own or with a planner

Target funds vary a little by the "brokerage" house/planner

[Gardening Grandma]

the certified financial planners are associated with some company like Fidelity or Merrill Lynch? Is that typical?

I don't know if it's typical, but I don't think it's unusual. Our CFP is with Smith Barney.

[lurkyloo]

Here's a link to a function to search for a nearby fee-only financial advisor (click the big blue button):

www.napfa.org/

You could also ask your accountant if he/she has any recommendations.

Whoever you meet with, it's absolutely fair to ask how they make their money. If you meet with a non-fee-only planner, my advice would be: absolutely don't sign up for any investment on the spot! Ask for literature--prospectuses, terms, fee disclosures, what have you; take them home and chew them over. And then come post on the boards so we can give you eight pages of conflicting YM advice on what to do. Seriously, though, just don't let anyone push you into doing anything you're not sure about.

As dvm said, index funds are available both as taxable or retirement accounts; every major brokerage house will have them although they may vary slightly. One thing you may want to consider is all-at-once vs. gradual (dollar cost averaging) investing. Oh, and it's a good idea to double-check the rules for Roth IRAs: if you've got >170K or so of MFJ income in a given year, you can't contribute directly (you can contribute to a non-deductible IRA and then convert, though).

Good luck!

[ineedaplan]

Feb 6, 2011 15:22:12 GMT -5 lurkyloo said:

Here's a link to a function to search for a nearby fee-only financial advisor (click the big blue button):

www.napfa.org/

THANKS!!! and bummer, the closest is 90 miles away.

You could also ask your accountant if he/she has any recommendations.

Good idea.

Whoever you meet with, it's absolutely fair to ask how they make their money. If you meet with a non-fee-only planner, my advice would be: absolutely don't sign up for any investment on the spot! Ask for literature--prospectuses, terms, fee disclosures, what have you; take them home and chew them over. And then come post on the boards so we can give you eight pages of conflicting YM advice on what to do.

LOL.

Seriously, though, just don't let anyone push you into doing anything you're not sure about.

As dvm said, index funds are available both as taxable or retirement accounts; every major brokerage house will have them although they may vary slightly. One thing you may want to consider is all-at-once vs. gradual (dollar cost averaging) investing.

Can you provide any further education on this??? I've been trying to find something to read on this, b/c I only have a VERY vague idea about this concept.

Oh, and it's a good idea to double-check the rules for Roth IRAs: if you've got >170K or so of MFJ income in a given year, you can't contribute directly (you can contribute to a non-deductible IRA and then convert, though).

Yep, we tried to make this deal happen closer to the end of last year, with a "split" payment in between 2010 and 2011, but we couldn't get all the details ironed out in time.

Good luck!

Thanks a bunch!

[lurkyloo]

The idea behind dollar cost averaging is that the stock market fluctuates a LOT and it's not particularly predictable. So as an example, I think the S&P was around 1200 last March, then dropped to just over 1000, then started climbing again. If you'd put 100K in all at once in March, it would have dropped to 83K, then slowly rebounded and you'd have maybe 104K by now. Conversely, if you'd correctly timed the bottom of the market last summer and put it all in then, you'd now have maybe 125K? Problem is, it's really hard to know when the bottom is. So, the dollar cost averager puts in, say, 10K per month. That way, you put in money in both high markets and low markets, and you're somewhat protected from both higher highs (sadly) and lower lows (which is good). Too lazy to do the calculation, but the example above would probably wind up around 115K.

(Note that this doesn't protect all that well against major market crashes like fall 2008, although if you were still in the process of getting in at that point you could have picked some stocks up pretty cheap post-crash...)

[ineedaplan]

Thanks, that's what I needed to know for my situation. So much information just refers to 401K, stocks and roth IRA stuff month by month or weekly. Would you (you YM'ers) do 10K a month?

[phil5185]

Would you (you YM'ers) do 10K a month?

I wouldn't - that would take 45 months to get $450k invested, ie, some of the money would be sitting idle for nearly 4 yrs.

As you say, most of us invest incrementally, either in 401k, Roth, Taxable, as we build wealth. So we do DCA by default. But there are also studies that say it doesn't really matter, it is neither better nor worse.

Personally, when I have sold rental houses, etc, and had a large lump sum, I have always broken it into 3 or 4 lumps and invested it within a yr. And every time I have been wrong, LOL - each time I would have done better by putting it all in. Yet, if I had to place $500k, I would break it into 3 or 4 and spend about a yr placing it - right or wrong.

Yes, you could have avoided the 2008 fall (maybe) - but that isn't really the goal. The goal is to get lots of money working in the market so that in 25 yrs it will be worth 14 times as much - it doesn't matter HOW it gets there. During 25 yrs it will go thru many ups & downs, that is how markets function - and whether or not you miss the first one is of little importance to the 25-yr number (14 X $450,000 = $6.3M).

[Deleted]

First of all, a CFP is not the same as a Fee only planner. A fee only planner may be a CFP but then so are a bunch of sales people who work for the brokerage houses (e.g Merrill Lynch, Smith Barney et cetera). If they offer to prepare the plan for you for free then they are a salesperson. Nothing wrong with that but understand that their job is to sell you their company's products, not necessaryly the best products. Many of these so called "financial planners" should be able to prepare a plan for you based on age, income, assets et cetera. This can be beneficial but as someone posted early, thank them for their work and then go home and start your research. No spot purchases!

DH and I are at an investment milestone ourselves. I've found the information at Morningstar really helpful. You can get a free subscription but would need to pay for any of their "premium" reports. There's a ton of information with their free subscription and the reports are very helpful. They will often list similar funds side by side, so for example I was looking into intermediate bond funds last week and it was easy for me to compare the Vanguard Interm Bond fund with USAA's Interm Bond Fund as Fidelity's Interm Bond fun.

Good luck and congratulations on this important milestone in your life!

[Deleted]

Can you afford all your expenses without your job? Would you be able to afford not to work or would you be dipping into the sale money for the month you are off?

[ineedaplan]

gin: I can pull from my 6 mo savings or the sale money. The only expense we can't afford without my job is the mortgage, so we are talking $1800 for the month off, which is totally worth it to me.

[ineedaplan]

Feb 7, 2011 9:01:32 GMT -5 @bonnap said:

First of all, a CFP is not the same as a Fee only planner. A fee only planner may be a CFP but then so are a bunch of sales people who work for the brokerage houses (e.g Merrill Lynch, Smith Barney et cetera). If they offer to prepare the plan for you for free then they are a salesperson. Nothing wrong with that but understand that their job is to sell you their company's products, not necessaryly the best products. Many of these so called "financial planners" should be able to prepare a plan for you based on age, income, assets et cetera. This can be beneficial but as someone posted early, thank them for their work and then go home and start your research. No spot purchases!

DH and I are at an investment milestone ourselves. I've found the information at Morningstar really helpful. You can get a free subscription but would need to pay for any of their "premium" reports. There's a ton of information with their free subscription and the reports are very helpful. They will often list similar funds side by side, so for example I was looking into intermediate bond funds last week and it was easy for me to compare the Vanguard Interm Bond fund with USAA's Interm Bond Fund as Fidelity's Interm Bond fun.

Good luck and congratulations on this important milestone in your life!

Thanks for the ideas, the CFP (fee-only) is my stumbling block due to the lack of this type of planner in my area. I'm hoping there is one here, but they just aren't well advertised in this area apparently.

[Deleted]

"lack of this type of planner in my area"

You don't need to limit yourself to a planner in your area. We're having a telephone conference with our Wealth Management consultant. We're in Germany for another 18 months and she's in AZ. We'll be moving to the SF Bay Area when we return. I've already scanned her our 401k and 457 plan holdings along with some spread sheets. Of course she knows what we have with her bank.

She works for USAA and while the plan will be fine (they don't work on commission but I'm sure they are expected to push USAA products) we'll investigate the products she recommends. The important thing is having the sit down conversation with your DH and discussings goals and options and coming up with a plan. Once you agree on a plan you can research products via Morningstar and here. You'll get some good advice.