1. put 6 months of expenses in a high-yield savings account that is easily accessible + liquid in case of emergencies
2. max out tax-advantaged accounts. $19.5k/yr 401k + $6k/yr IRA. allocate into anything similar to a target date retirement fund with healthy exposure to US total market/probably light bonds depending on age
3. put the rest in a brokerage account, allocated in the same things your 401k + IRA are allocated in (target date retirement funds that track things similar to VOO/SPY/VTI/FZROX/etc.)
That's good retirement planning advice for normal situations. Having a $450k cash windfall adds a few wrinkles -- there are more investment options available (e.g. buy a house with cash), and the tax consequences of those various options can be very different.
I don't think most people need a financial advisor, but if I had a $450k pile of cash and I wanted to understand the tax consequences of various investments I would definitely pay for a consultation.
For what it's worth, at 2.675% interest on a 30-year fixed, buying a house in cash makes very little sense, and a mortgage can counterintuitively earn you money.
1. In general, since the 1970s, house prices have across the United States tracked inflation. The price per square foot on a house, on average, is exactly the same as it was back then (houses are more expensive because the average US house has gotten bigger, and in some metros like SF, city councils have flatly refused to allow building to buff up house prices).
2. A mortgage is basically free when you discount inflation and deduct the interest. The fed target for in the US is roughly 2%. This means that a 2% interest mortgage is free money, i.e. while you pay a 2% interest rate, the principal is worth 2% less, as you get to pay off the 2020 house price using 2021 dollars. So a 2.675% APR mortgage has an effective cost of 0.675%.
3. If you're working you get to deduct the entire 2.675% (of the first $750,000 in mortgage), so you get back up to 45% of it if you're in the top tax bracket. As such, the effective interest rate discounting inflation and interest tax deduction is negative, -0.53% APR.
4. On top of the interest rate on a 30-year fixed being effectively negative (i.e. generating value), you can invest the other 80% of $450,000. You should have no trouble generating 7% per year on that $360,000.
5. In aggregate, your return on capital by making a 20% down-payment on a $450,000 house at 2.675% APR in the top tax bracket could easily be ((0.53% + 7%) * $360,000) per year, plus your house should appreciate in value at inflation, but because it's a 5X leveraged investment, you're generating (2% * $450,000) per year on a $90,000 down-payment.
So, your total return could be:
1. $90,000 @ 10% + $360,000 @ 7.53% or...
2. $450,000 @ 2%.
Given the lack of fees or penalties for pre-payment, you can always pull the ripcord if your situation no longer makes sense by just paying it off.
With the new tax laws the home mortgage deduction is useless for most people. If you are married filing jointly, the standard deduction is $24000. I paid around $10K in interest last year on a $330K mortgage in its fourth year.
Indeed although you own the house in both cases right, so you can factor that out when making the comparison. It'll impact your total returns equally in both cases, unless I'm misunderstanding you?
On average this analysis makes sense but cash flow is also important to consider. If the thing you’re investing in to get 7% doesn’t make payments, or has a single bad year and doesn’t yield like it’s supposed to, you could be up the creek.
Indeed, I was basing the 7% return on the S&P hence assuming liquidity in the investment. Liquidity matters and, yeah, YMMV. Still works if you invest in CDs instead but it’s not nearly as attractive.
Option 1 is a 20% down payment on a $450K mortgage, so a $90K down-payment (10% yield) and a $360K investment in the market (7%) and a $360K mortgage (0.53%).
Option 2 is a $450K cash purchase of a house, which, on average, appreciates at the fed target inflation rate of 2%.
Indeed although in both cases you own the home and are subject to the same depreciation risk right? Although if you're willing to take a credit hit, I suppose you're shifting that depreciation onto the bank.
> I don't think most people need a financial advisor, but if I had a $450k pile of cash and I wanted to understand the tax consequences of various investments I would definitely pay for a consultation.
I think you have to be a little careful with this.
Shockingly, most financial professionals do not have a fiduciary duty to their clients. If you pay for advice, I'd definitely recommend getting one that does have a fiduciary duty to their clients.
Indeed, the Trump administration rolled-back an Obama era rule that financial advisors must be fiduciaries. I'm not sure most people realized that happened.
Sorry if that came off as political, I mentioned the leadership at the time as epoch markers as I didn't recall off-hand the specific dates. I suspect people didn't realize that the fiduciary rule wasn't a thing prior to 2015, let alone that it was over by 2018, and it is my understanding the Trump administration was looking at resurrecting the rule.
The choice between regular and tax-managed funds, and also the choice between regular and tax-exempt bonds, is not straightforward.
There are quite a few caveats in that wiki article, e.g. stuff like this:
> Your actual tax cost will be higher if you owe state taxes (add your state tax rate on the dividend yield, reduced by your federal tax rate if you itemize deductions and are not over the limit for deducting state taxes) or are in the phase-out range for some tax benefit such as the child tax credit (add 5% to all tax rates) or the personal exemption phase-out for the Alternative Minimum Tax (add 7% to all tax rates, but your overall tax on non-qualified dividends is 28%).
That's a bit complicated. I would still recommend paying for at least a one-time consultation with a financial and/or tax advisor before choosing where to put $450k.
Given the current tax rates vs reasonably projected future tax rates, I'd be quite inclined to put money into a Roth 401(k)/IRA than a traditional. I'd rather lock in today's rates than take exposure to 2040, 2050, or 2060 rates.
I'd expand upon the emergency fund. I always feel when someone just says "put X in an emergency fund" and leaves it at that, they're missing the big picture of emergency planning. Emergencies can be long, slow burns, they can be short and acute, they can involve lack of access to financial institutions. I like to keep different tranches of emergency assets set aside for different kinds emergencies:
1. Something like Series I bonds for long-term future economic downturns or inflation
2. A CD ladder or money market for temporary job loss
3. Cash in a mattress and food/water for natural disasters
4. Guns, ammo, and containers of gasoline for the zombie apocalypse.
Weight each tranche by your assessment of each event's probability. You diversify the rest of your portfolio, why not diversify your emergency fund?
1. put 6 months of expenses in a high-yield savings account that is easily accessible + liquid in case of emergencies
2. max out tax-advantaged accounts. $19.5k/yr 401k + $6k/yr IRA. allocate into anything similar to a target date retirement fund with healthy exposure to US total market/probably light bonds depending on age
3. put the rest in a brokerage account, allocated in the same things your 401k + IRA are allocated in (target date retirement funds that track things similar to VOO/SPY/VTI/FZROX/etc.)