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?
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.
The overriding principle you should keep in mind is to "invest in what you know." You clearly have a lot of facility and comfort with investment real estate and if there are good properties in your area, buying more rental property might be an excellent choice. Personally, I invest in common stocks because I know them and understand how you do it. But if you don't, and don't want to find an advisor to do it for you, you'll be fine -- particularly if you can net 11%.
Another consideration, if you are a real estate broker and can be considered to be self-employed, might be to set up a SEP plan. Please talk to your CPA about it. If you do this you can shelter more income from taxes than you could with just a traditional or Roth IRA. If you don't qualify for a SEP, then you should use at least some of your gift money to max out the allowable contributions to an IRA. Also, if it makes sense, consider an HSA -- a health savings account that lets you put away up to $7,000 per year toward current and future health-care expenses, and deduct the annual contribution. (This requires a certain type of health insurance coverage so again, please talk to your CPA.) All of this will allow you to save on current taxes. Use the extra money to invest for the long term. Once your boy is out of college and out on his own, you should be in pretty good shape.
What a kismet! I just helped a female realtor, similar age and similar income, with her tax return. She also has a rental property without any retirement plan. When we finished her return, I was able to show her the differences on the tax payments. Had she had a retirement plan, she would have saved a few thousands of dollars. So, the question becomes: what’s your priority? Reducing tax, saving enough for retirement, or both.
You mentioned there could be a windfall coming in the next three years. If it’s in the form of gift, you don’t even have to pay gift tax. Then, what’s your plan for that? Growing it and withdraw it later to supplement your retirement, or use it to purchase more investment properties?
Also, just because you’re debt-free and kid’s college expenses being taken care off, it doesn’t mean you’re retirement-ready. There are 19 retirement risks to consider, thus getting together with an expert to learn about those hidden risks and run various “what-if” scenarios to see if you’re on track to your retirement age and goals. You still have the time and resources to make the change, and I wish you the best!