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How should I use and invest $400,000 in a better way to secure my retirement?

I'm 46 years old, female, single, and I have a son who is in college. I have total assets worth $700,000. I have paid off all of my mortgage and car loans. I work in real estate and plan to keep working till age 60. My average annual income is between $60,000 and $80,000. I have no retirement account or any other investment vehicles except my two rental properties that have a ROI of 11 percent. I'm expecting to receive gift money from my parents in the next three years totaling about $400,000. How should I use and invest the money wisely to secure my retirement and have a quality life?

Debt, Financial Planning, Retirement, Estate Planning, Women & Money
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March 2019

Congratulations on your financial situation. A net worth of $700,000 with no personal debt at 46 is quite an accomplishment. Sounds like you also have a healthy income to boot.

If you do not already have one, I would make sure you have an emergency fund in place invested in a high-yielding (2%+) FDIC savings account representing at least 6 months of gross income.

If there are mortgages on the 2 rental properties, consideration should be given to paying down some of the debt associated with those investments. You might discuss this with your tax advisor and go over the pros and cons associated with doing so.

Regarding investing for retirement (long-term), an 11% ROI is impressive in comparison to domestic large-cap stocks historically averaging about 10.5% from 1970 through 2017. You might strongly consider continuing with your real estate investing but keep in mind property values may be considerably elevated at this time and you should be prepared for a valuation drop on the properties you invest in.

If you are considering diversifying your long-term investments away from real estate with this windfall, it is no secret that investing in stocks and bonds is an alternative.

If you choose to go this route, you will need to determine an appropriate asset allocation (the mix of stocks and bonds) for your situation. You could complete an online “investor questionnaire” and consider various asset allocations of professionally managed target date mutual funds to determine an asset allocation that you might utilize until retirement. As an example, Vanguard Target Retirement 2030 (VTHRX) is allocated about 70% in Stocks and 30% in Bonds.

It is important for you to understand how the various asset allocations you consider have performed historically and confirm you are comfortable with the loss potential before investing. Per my research, a 70/30 allocation would have lost more than 21% during the dot.com bubble (2000-2002) and almost 27% during the financial crisis in 2008. If you don’t feel you could tolerate that sort of loss in the next decade, you should consider a lower allocation to stocks.

Once you have settled on an asset allocation, build your portfolio with low-cost investment components. Be careful to utilize investments that will not have potentially high taxable distributions in any given year because you will most likely be investing under a taxable account heading that has annual tax ramifications.

Hope this is helpful.

March 2019
March 2019