Need advice on investing $150,000

Hello,

I just found these forums and thought this would be the perfect place to get some advice on what to do with my savings. Before I get to that though, I thought it might be good to let you know where I currently stand.

My wife and I are both 32 years old with our first child on the way, due in January of '08. We have both made pretty good money these last 3-4 years, and have been averaging about $150,000 in income over that time.

We have both been coming close to maxing out our 401k's at work, and we are debt free except for our house, which we owe $115,000 on.

We have diligently socked away money these last 5-6 years and I am projecting that we will have right at $150,000 in cash by years end. We currently have about $130,000 in cash, broken up between a 7 month CD ($100,000) at 5.35% APR, and a high yield savings account ($30,000) at 4.75%.

As you can see, we aren't doing too bad between the two, and will most likely get a return of over 5% on the money, so I'm not sure if we really need to be doing anything else.

I am VERY risk averse when it comes to our hard earned and saved money. My thoughts are, we are very much exposed to risk and the stock market between our two 401k's. We have approximately $225,000 in the market between the two of us.

All that being said, I am looking for some suggestions and alternatives to how we might better leverage our cash position for greater returns, keeping in mind my very low tolerance for risk, and the fact that we have plenty of money in the market and continue to put 16% of our salaries into it.

I hope that wasn't too long, lol. Thanks, and I appreciate everyone's response!

With the prequalifier that you are absolutely unwilling to take on additional MARKET risk, you will need to turn to your tax treatments to increase realized returns. Very conservative investors such as yourselves can still fund two tax-exempt Roth IRAs (assuming $150k combined income) with a CD or high yield savings account, and your annual tax bill on the IRA amounts will be reduced to zero while keeping you liquid.

You can also reduce taxes by funding Coverdell Education IRAs for your child with CDs or money market equivalents, but the contribution limits are low for these vehicles. You may also want to look into pre-paid tuition programs that are guaranteed to keep pace with the Higher Education inflation rate, currently around 7% annually. This is a guaranteed inflation-defeating strategy and in some cases can be a nice tax deduction.

Also, you may be an exceptional example of when paying down your mortgage before investing works well. The investment is your home and relatively safe, and you and your spouse can walk away with $500,000 of appreciation tax free when you sell it. It remains semi-liquid in the form of home equity.

Longer term government bonds (direct-purchase) can also be a nice, safe hedge against short-term interest rates while deferring Federal taxes.

And dare I say it...? After you completely max out your 401ks and IRAs, you may want to research fixed deferred annuities or highly over-funded cash value life policies. These vehicles are both looonnggg term strategies (10-20 years) with potentially big advantages, but are relatively non-liquid for the near future.

The general idea is that by deferring or eliminating taxation of your MARKET-risk free savings, you essentially can increase your realized rate of return. I stress "market" risk, because being so safe with your hard earned dollars puts you at risk in an even more insidious form...inflation and purchasing power. You may see your money as safe and growing, but if it fails to outpace inflation, you are LOSING money. You will see this the next time your fixed instruments are producing 1% or less per year, while the riskier market is producing double-digit AVERAGE returns.

Hope this helps.

I would pay off the mortgage. Otherwise, you are essentially borrowing money at 6% to buy 5% CDs.

ichoy, while brig and his wife may want to pay off their mortgage early ... it is not because of your math. they are most certainly NOT borrowing at 6% to make 5%. his 6% mortgage is really only costing him about 3.9%.

banks make BILLIONS of dollars on a 25basis point spread and good ol brig here has a 1.1% spread.

this is exactly why getting financial advice from the GINC (guy in the next cubicle) is folly.

p.s. brig did not mention that he was paying 6% on his mortgage. you know what "assuming" does ... right?

Hey Opai, if your math is correct, you sir are assuming brig pays no income taxes on his CD interest. Go back to your cubicle.

ichiroy,

If they move all of their cash from CDs to their mortgage (as you suggest), they lose diversification (what happens if the stock market and the real estate market flop?) as well as any emergency savings.

Pricespector covered many options that brig2221 could consider. The more investment options they expose themselves to earlier on in their lives (32 yrs old), the more comfortable they will be in investing toward their retirement over the years.

After maxing out your 401K & your IRA's, I would look to the Health Savings Account. The HSA gets no respect on this message board. The family maximum is $5,850 a year. Currently these are mainly held to Money Market accounts, but with your risk tolorence that shouldn't be a problem. These returns are just like an IRA's and don't need to go to medical expenses after retirement. As far as whether you should pay off the house, at some piont you may find that your interest write off is eclipsed by you taking the standard deduction. when this happens I'd work to pay it off ASAP. As I've stated here before, We've managed to pay off our house now we take the standard deduction, max out our 401K's, IRAs and HSA. If anyone out there knows of a better way to play this please let me know. That's about 45K off our taxable income + the standard deduction. Not to mention not one drop of interest paid. Some people forget that the home interest deduction benefit is only beneficial up to the standard deduction. The standard deduction is currently close to 10.5K for a family.

ichiroy, that was the point of my post. you are making assumptions for facts not in evidence. i can most certainly guarantee a 6% rate of return tax deferred. this is equivalent to about 8% tax equivalent. thus a spread between 3.1 and 8% (for planning) and 3.1 and 6 in reality.

sir, i made no assumption about his CD at all.

btw, bjk pointed out the primary reason paying off the mortgage may be appropriate (elimination of tax deductibility of mortgage once standard deduction is exceeded).

Dingo, the real estate market doesn't matter since they do not plan on selling. And paying off their mortgage would still leave $35,000 which is 3-6 months of an emergency fund. PLUS, their income will build whatever savings they need rather quickly.

Opai, where does it say they are making 8%?? They have a 5.35% CD and 4.75% savings account. Their scenario is no different than if they had no mortgage, took out a loan to fund their savings account/CD. It's the same thing!

Too many assumptions. It does not say they could not move 5-10 years down the road (or less if they have to relocate) and $35,000 is not quite 3 months emergency savings.Paying off the house is not the best option with the information that was provided. We don't even know where they are located.

They also have a baby on the way. All the more reason to have a little more cash on hand.

ichiroy, no offense man ... but you need to up your E&O Insurance. your assumptions and misconceptions (get a loan to fund savings) would suggest you may want a 3/10MM policy.

... still no acknowledgement nor respect for the HSA. The HSA is the Rodney Dangerfield of investing apparantly..

i agree with the HSA. i recommend it when appropriate. it is just sooooo dull.

... Income tax deductabilty, compounding interest gains, tax free (medical) or tax deferred (retirement) growth... Opai, it takes alot to thrill ya ...

Where would this NOT be appropriate?

Doesn't the HSA give all the benefits of an IRA plus no required withdrawls at retirement AND allows for income-tax free expenses on medical? Wouldn't a 100K surgery cost you 125K after retirement (coming out of your IRA) & 135K before (with the penalty)? ... now that's EXCITING!

Why.. next year alone I'm planning to save 1K in income tax after paying for my daughters braces out of my HSA ..

ho hum......

Opai, sooner or later they'll allow for these HSA's to go outside of money markets and into funds ... and having not recommended it early on ... well... let's just say .. you'll be wishin' you'd given the red-headed stepchild of investments a bit more respect.. ha

I agree with Ichiroy. The poster says he is not into risk. Pay off the mortgage. He will auotmatically be saving the interest rate of the mortgage guaranteed. As for putting himself at risk to the real estate market, he already did that by buying the house. Whether he pays it off or makes mortgage payments, his exposure is the same. I've already posted my argument (In a different thread) as to why mortgages are more expensive than the interest rate advertised. The only other suggestion I would make is that the poster doesn't sound as educated as some of the others that have answered this e-mail so I would choose a page from Warren Buffet and concentrate his efforts of investing a more narrow band of investment(s) he may actually undertstand. Brig2221, is there a particular investment vehicle you already know something about? It seems to me that with all the opportunities out there and different ways to make money work for you there must be something you are comfortable with. Sounded to me in your original posting you are doing pretty well already. 1 Mo is right when he says don't listen to the guy in the next cubicle, except that you should research all ideas yourself and then make decisions that work for your zone of comfort, not what someone else tells you is right. That doesn't mean that any of us are wrong, I'm sure in our own worlds what we do works for us. And it just may be that something we do will work for you. Just don't follow blindly. I don't think you will. I believe you have more financial sense than you give yourself credit for. Again, for my part I say, pay off the mortgage. Then take what you were paying towards the mortgage and invest it in a way you are comfortable with. If need be, hire a professional to work for you. You definitely have enough money that a good professional would be willing to work with/for you. Hope that helped more than it confused.

brig2221,

What percentage of both of your 401(k)s is in stocks and in bonds? That percentage could affect how much cash you should be holding.

At age 32, 36+% in cash seems a little high.

What ideas are you even considering at this point?

ichoy, while brig and his wife may want to pay off their mortgage early ... it is not because of your math. they are most certainly NOT borrowing at 6% to make 5%. his 6% mortgage is really only costing him about 3.9%.

banks make BILLIONS of dollars on a 25basis point spread and good ol brig here has a 1.1% spread.

this is exactly why getting financial advice from the GINC (guy in the next cubicle) is folly.

p.s. brig did not mention that he was paying 6% on his mortgage. you know what "assuming" does ... right?

Wow, I have been busy and haven't been able to check back on my post for some time. I am still reading all of the replies. Thanks to everyone that has responded.

To clarify the first question I saw, my current mortgage interest rate is 5.875% on a 30 year term. We purchased the home at $153,900, and put $30,000 down, leaving us with $123,900 to finance. We are approximately 4.5 years into the loan and have a current payoff amount of around $115,500.

Edit- I think someone also wanted to know where I live. We live in McKinney Texas, a Northern suburb of Dallas Texas.

brig2221,

What percentage of both of your 401(k)s is in stocks and in bonds? That percentage could affect how much cash you should be holding.

At age 32, 36+% in cash seems a little high.

What ideas are you even considering at this point?

Well, I haven't had the heart to check on our 401k's and IRA's since Wall-Street lost it's mind this week. Last I checked, we probably have a 75/25 blend of stocks/mutual funds to bonds/money markets.

Uh, couldn't help myself, but I just checked all of our balanced as of the end of business 8/16/07. We have about $215,000 invested in the percentage of funds mentioned above.

Also to answer another posters question about my financial knowledge. I certainly wouldn't call myself an expert. That said, I do a lot of reading and would consider myself very informed on a common sense level regarding fund types, fees, diversification, etc. That said, right or wrong, I have sort of a fundamental belief that NOBODY really knows where the stock market is going, certainly not specifica funds and or company stock. However, I certainly acknowlege the potential returns that the market offers to those who participate in it, OVER THE LONG TERM.

I already know that investing in CD's right now is just a stop gap measure given the relatively high interest rates being offered right now. That said, I'm sure it won't be too long before traditional CD's and Money Market accounts are back to 2% or lower. At that point, I'm going to have to move into something with more risk. The big question is what. Well, thats a tough one to figure out, especially if you hold the belief that nobody really knows where the market or any fund is going.

That said, I really have liked a lot of the advice that has come across the thread as it pertains to tax situations, etc. I welcome more advice and options. Thanks a lot!

I think you might be a little too bond/cash strong at your age, but you said you are not willing to take too much risk. You can always make your bond portfolio a little more aggressive by looking into corporate bonds. They have dropped over the past several weeks, making buying at discount easier (as well as an increase in already high interest rates).