I am 48 years old and just inherited 2.25 million dollars. I want to make that last the rest of my life. Here is what I am thinking of doing. Pay off the mortgage. There is 230,000 left. That is the equivalent of a 5% interest rate, but more important is the psychological impact of only having to pay interest and insurance, the new monthly payment will be about 1,300 a month. Eventually I will sell this house and buy a new one and that should leave me with about another 400,000. Now what to do with the money. I can without difficulty get a 100% safe 3%, but I would rather have around 100K a year income. While nothing is absolutely safe, what kind of investments are very safe, and will yield closer to 5%? And if no one here feels like doing this can you suggest a website where there may be greater interest?
Why would you buy a bigger/more expensive house? Better to move to a less expensive area and buy more house for less money.
2.5M is really not all that much to live on. It will allow you to live a comfortable middle class existence if you are frugal. Even in my area a $400,000 home is just completely unecessary and foolish for someone trying to live on a fixed income.
No, I would move out of this bigger, more expensive house and buy a new one. After selling the old and buying the new, I should sill have no mortgage and an additional 400,000. After paying off the current mortgage I would sell in a few years when hopefully the market will pick up some.
Why would your monthly payment be $1300 after paying off the mortgage?
That would be taxes and insurance. The current house is very large and very expensive. I would buy a house worth about half as much, so after that taxes plus insurance should be about 500 per month.
Go to www.napfa.org.
This is the associaton of fee only financial planners. These are folks who will not make money based on products or solutions they recommend. This is the level of financial issue that should not be hashed out on a message board. You need a plan that is sensitive to taxes as well as risk and that takes into account your unique situation and family dynamics.
Most people in your situation muddle through and then go find some financial product salesman who one of their friends or family members recommends. The right approach is similar to how you would find a good doctor or attorney. Like a doctor or attorney you will pay them for the time they spend working with you.
Good luck!
With some basic assumptions, if invested properly, 2.25MM should come to about $4.5k per month after taxes in perpetuity. That’s about the equivalent of having a $100k per year job without having to work. So yes, one could live on that much and many do so on much less. It may not make you Warren Buffet but properly managed it will keep you going for the rest of your life.
I have a friend who is a retired insurance executive who does that. He has about $5MM and lives off the after-tax interest (about 10k per month). He says he doesn’t spend it most of the time and it gets plowed back in.
I don’t know where you live, but in the Seattle area, $400,000 will buy a modest older home of about 2500-3000 sq ft, 2-3 bedrooms, 1-1.5 baths. We live in one. New, single family homes are much more.
Not to derail (well, maybe to derail), but I find house price discrepancies fascinating. Just the other day, I was reading on another forum, someone talking about buying a reasonably nice house for under $200,000 in Texas. Where I live, I really couldn’t get any livable house in a decent neighborhood (without having to drive two hours to work) for under $600,000, and for something truly “nice” I’d be looking at a lot more. Really, the houses I actually like around here are over $1 million, without being all that big (some are well under 2k sf). Which is why I haven’t bought one yet.
A house that is 2500-3000 square feet sounds just fine. And actually that would likely be 3 bedrooms, and 2 1/2 baths, at least around here. As I said, taxes and insurance are expected to be about 600/month. Say utilities and upkeep another 1K/month. I might get a job to supplement, at least in the near future. And I could expect to add about 400K to the savings when the house sells. Further, 20 years down the line I can probably expect another 2K per month from Social security. I am looking for a middle class environment, when where I can life comfortably and still afford to eat out and buy presents for family members.
As far as financial planners are concerned, my brother is quite successful at that, and if not willing to take control of the investing, he would at least be willing to advise me.
Also, I don’t know how to calculate it, but what if I was willing to run out of money on my 90th birthday. How much could I distribute then, including decreasing the principle for that to occur.
That is more difficult than it sounds. You won’t have an investment pool with a steady rate of return and you will have to adjust for inflation over time. The general rule is that you can draw 4% of the value of your portfolio over time and adjust for inflation. So this would leave you with $100,000 from the $2.5 million annually with inflation adjustment.
There are a number of problems with that though. First is that it presumes you are willing to invest half or more the funds in stocks, some people may not be. Second, it is based on past data sets and we don’t know whether that will continue into the future. Finally, it is very conservative in some ways in that most of the time you will be left with a substantial amount of money that in unspent at the theoretical end of your life. The 4% rule is meant to succeed even in quite adverse circumstances, so if everything goes fine you are left with a pile of money.
I think the closes thing to what you are asking would be to actuallly buy an annuity. The insurance company would assume the investment risk and the payout would cease at your death.
Hmmm, an annuity. Sounds interesting. I will start searching around, but do you have any websites you might suggest?
Yeah, it’s fascinating to me, too. I live in Chicago, so it’s not the cheapest place in the world to live, but $600K will get you a shitload of house. I live in a 1200 square foot house (not counting the basement, which is another 600 square feet), with a garage on a 4000 square foot lot, in a reasonable neighborhood in the city proper, and it’s about $150K.
I am in roughly this same situation as is most of my extended family. I can tell you what me, my father, and my brothers are doing right now. Very little except safe investments. It takes time for this stuff to sink in and I promise your plans and priorities will shift and take on a new form if you just hold mostly steady for a year or so. I bought everyone subscriptions to Money and Fortune magazines which have lots of good info that is easy to read. I also got accepted to the private financial advice forums on The Motely Fool www.fool.com (fill out an application on the site if you are interested in that). That is a very helpful website in general for this type of things and it has an active message board where you can ask detailed questions that are still of general interest to others. Several other little sub-tribes of family members have broken off and done everything from quitting their jobs to buying a helicopter school. I hope the make it a fun decade because they are going to be broke at the end of it, Don’t make any rash decisions. Take your time.
I don’t understand the numbers in the OP. You’ve inherited 2.25 million and want to use the majority of it to pay off the mortgage, leaving you with roughly 250,000, meaning that your home is worth 2 million or so. But you’re planning to sell it, and buy a smaller, less expensive house that will add 400,000 to your cash pile. Meaning that the new house is still 1.6 million. That’s still a ridiculously expensive house for most of the country. I’d recommend not paying down the mortgage but instead investing the majority of it and then later move to a less expensive area.
And as someone asked, why would you still have a $1,300 monthly payment for interest and insurance? Insurance I can understand but what are you paying interest on?
I thought he meant the mortgage only has $230,000 left on it.
By the way, if you can’t find a way to live off over $2m, you’re not doing it right. That’s plenty for a decent, if unspectacular, life.
He probably means property taxes, not interest, though that seems low for property taxes, depending on where he is (and most places where normal houses are over a million are places with high property taxes).
Well, buy 4 4-plexes. Just use the cash for down-payments, using the interest payments on the properties as a tax deduction. With 4 seperate buildings, you’ll reduce you tax rate to near zero if you are smart enough to work a Band-Aid. Keep the rents reasonable, the units maintained and they’ll stay rented, if you are any kind of a decent landlord. They will pay for themselves and make you a slice on the side. Invest the rest of the money in “realitivly” short-term vehicles at the best rate you can get, rolling them over to higher yields from time to time as rates fluctuate. In the meantime, you are building equity, equity, equity! When you get older and tired of messing around with tenants, sell them off.
Quit work, collect old cars, ski and ride motorcycles. I know people who have done this with a *whole lot less *than 2.25M to work with! 
Set for life!
Of course, this plan isn’t going to work in New York City or The Bay Area. Move to where the livin’ in cheap, there is no “rent-control” and kooky renter-friendly laws on the books (I’m lookin’ at you, California!). Lots of other nice places to live, however.