How would you invest $100,000?
Tell me what you would do with it and why.
Of course, you may go on a flight of fancy if you like but I hope for real-world answers.
If you needed to invest so as to make retirement livable and can’t risk losing the entire amount, what do you do?
That’s the crux of the matter - what do you need that $100,000 to do for you? Is for retirement? How far away is retirement? If it’s not for retirement - what’s it for? Supplementing general living expenses right now? Building an estate to pass to your kids?
All of those change the answer to the question.
Right now, $100,000 (about £75k) would go straight on the house to pay off the mortgage. It wouldn’t pay the whole thing off - we have about £100k left on it - but it would certainly cut the monthly bill.
I think right now I’d use that $100k to pay off my house. That’s about exactly what I owe.
Now, I only pay I think 3.75% interest on my mortgage, and my IRA stands to make, what, 8-12%? So it would behoove me to then make sure I’m taking money I would have put towards my mortgage and putting it in my IRA. I’d also have to make my property tax payments, which are rolled into my mortgage payments.
After maxing out the IRA contributions and paying property tax, I’d be ahead $2500 a year. Honestly, that is going to have to go into a fund for home improvements - namely the inevitable roof that every long-term homeowner is going to have to buy.
So, when can I expect a check?
I imagine I’d invest it for the long term- 20+ years. Not in specific retirement funds, as I’m currently on track to be fine with my own retirement, and my wife’s better off than I am in that regard, and we stand to have inherited some stuff from parents and grandparents once they pass, so it wouldn’t be a necessity to throw it in with the retirement funds. Nor do I think I’d like the idea of it being so locked down as retirement accounts tend to be. I suspect it would probably end up being some kind of fund for cool stuff to do when retired, like traveling or home renovations.
Paying off the house (or most of what’s left) would be stupid for me to do, because at the interest rate I have now, most reasonable investments are going to gain more value than I’m paying out in interest. In other words, over the time remaining on the mortgage, I’d actually lose money by paying the mortgage off vs. keeping it and investing the same amount of money for the same amount of time. Same thing with my student loans, only more so, as my interest rate there is like 1.7%
This is a question that I had to answer for myself recently.
I opened an account at Vanguard and bought some of their no-load index funds.
This is not without risk, the market fluctuates, and the long term outlook is less certain than one might wish. However, there really isn’t anything that you can do that is risk free, up to and including keeping it under your mattress.
I also have some money in government I-bonds. This is less risky than an index fund, for lower return of course, but it is at least guaranteed to match inflation. You can only put 10K a year in those, but they are good to have as part of a diversified portfolio.
Just my 2 cents.
Definitely the mortgage, with what’s leftover to buy a new economical car.
Good point. I paid off the mortgage first also.
I don’t have a house to pay off. With a windfall like that, it might not be a bad idea to buy one in cash, but now’s not the right time for that, for me, because I’m still looking for a permanent job, and I don’t know where it would be.
I’d go with stocks. Mostly index funds, some in hand-picked stocks, mixed between well-established companies that I think will continue to do well and a few high-risk startups.
I don’t know anything about you so I can only answer this question for me. I’m still working and saving for retirement. Other than a small mortgage at a low interest rate, I have any debt to speak of and I already have a decent cash reserve for unexpected expenses. I already contribute to a retirement plan so I get my employer’s matching contribution. Does that sound a little like you?
If that’s where I stood, I would use the $100,000 to buy a Vanguard Target Retirement Fund with the target date closest to the date I plan to retire. It’s a very simple portfolio that doesn’t need a lot of attention and it suits my needs. The Vanguard Target Retirement funds invest in a low-cost portfolio of domestic stocks, foreign stocks, and bonds that is designed to reduce risk through diversification. It still goes up and down with the market but over time, I believe it will generate better returns for the amount of risk I am taking than just about any other portfolio. The funds rebalance automatically over time, so as you get closer to retirement (based on the target date of the fund) it moves more of its portfolio into safer investments to further reduce your risk.
Learn more here: Vanguard Target Retirement Funds | Vanguard
If I were really cautious, I would pick the Vanguard Target Retirement fund with a target date just before I plan to retire. If I were willing to take a bit more risk in hopes of getting a better return (and I am), I would pick the one with a target date just after I plan to retire (which is what I actually do).
Because I am still earning, I can contribute to a Roth IRA, so the first $5,500 would go into a Roth IRA.* Putting money in a Roth IRA allows the money to grow tax free. You can also withdraw the money when you retire (and under some other circumstances) without paying any taxes.
Because the market is very high right now and I am worried that it might drop, I would put only about half the remaining money into the same fund in a taxable account. I would put the remaining $50,000 into a money market fund at Vanguard and set up automatic investments each month to move $4,000 from the money market fund to the taxable Target Retirement Account for the next year. If the market dropped a lot (let’s say 20%) before the year were up, I would move whatever money I had left into the taxable Target Retirement fund account. Once it was fully invested, I wouldn’t really worry about the money until I needed it.
Each year, at the beginning of the calendar year, I would move the maximum amount I could contribute to a Roth IRA account from the taxable account into the Roth account. That will shield more and more money each year from taxation.
- Your ability to do this might be affected by contribution limits but we could talk more about that.
Some people say hookers and coke. Those people are idiots. What you really want are hookers made out of coke. If you can’t find that, then put the money in index funds or to pay off your highest interest debts.
Not s moment of hesitation in my mind: broad index funds with low fees. Set it and forget it, and let the time value of money and the miracle of compounding interest be your friend. (Especially if you’re young.)
Down payment on a duplex. Rent that sucker out. Nothing better than other people building wealth for you.
Pay off the house, take 10% of what’s left and have fun, throw the rest in a mutual fund.
I’d invest it in one of the various funds I have my other investments in and make it part of my overall retirement portfolio. We (my wife and I) will start using some of those funds in another few years, so this would be one targeted for further down the roads use.
What others would use it for is dependent on what their needs are and what they want the money to do. I certainly wouldn’t pay off my mortgage, since in my case my interest is pretty low and locked in. If I had some particularly high interest debt I might use some of it to pay that off I suppose. If I was feeling in a more risky vein I would invest it in some of the higher risk/return vehicles out there, if I was more risk adverse I might go with bonds or T-bills or even some sort of deferment or maybe a whole life plan with an eye towards taxes or as a place I could have access to give myself loans in the future. There are myriad strategies out there.
Or perhaps I splurge on hookers and blow in one last blowout in Las Vegas. 
Depends.
How old are you? How many years until retirement?
I would most likely do what I’ve done with my own excess liquidity, which is invest in a mix of index funds across the S&P 500, Russell 2000, International growth equities. I wouldn’t pay down my mortgage, as my mortgage is below 4% interest and the average earnings potential for the next few years across the funds I referred to are expected to be approx. 8-10%, so I would be missing out on the 4-6% arbitrage.
Thanks everyone. I noticed no advise to buy gold or annuities.
Omar, really as much as 8-10%? That is very good.
Munch, what if I am retired now. What would you do?
If you’re retired now, then it depends on how much longer you expect to live, and what you want to do for your heirs, and what retirement income you already have. In that situation, I’d probably set up college savings accounts for whatever generation of my heirs are next going to be reaching college age.