A podcast listener asks:
I’m 32, single, make 120k/year, own my house with 85k left on the mortgage (3.5%) no other debt and I just got a million-dollar bonus from the sale of a small company. I was planning to either put it all in Betterment or in the famous Boglehead 3 fund recommendation. I don’t need the cash for anything other than trying to retire early, but I’m scared of this inverted yield curve for the past quarter. What should I do, cash @2.3%, bonds, 50/50 bonds/stocks, help!
This is an extremely specific question. It may not be applicable in any way, shape, or form to my dear readers’ personal situation.
It’s not specifically applicable to my personal situation either.
But the framework required to think through this type of decision can be helpful for investors and savers of all walks of life. The process involved is more important than the actual portfolio chosen here because no portfolio is ever going to be perfect.
After reading through this question, there’s good news and bad news.
The good news:
- You’re still young (that’s your greatest asset to allow for compounding).
- You earn a nice income.
- You have little in the way of debt.
- You’re looking at low-cost portfolio solutions.
- You just received more money than the majority of the population will ever see in a lifetime.
The bad news:
- You’re focused on some of the wrong stuff.
Ask any retiree to list their biggest financial regrets and putting money to work in the markets at a young age during an inverted yield curve would be roughly 13,793,215 on the list.
Could this be an inopportune short-term entry point to put a lump sum into the stock market?
Definitely.
Does an inopportune short-term entry point in the stock market mean the end of your retirement dreams?
Wouldn’t it be wonderful if we could all perfectly time the market to make retirement planning easier?
Of course.
In lieu of perfect timing and foresight of market and macro events, investors are forced to deal with uncertainty in planning out what will happen to their savings.
The other good news here is that the good news far outweighs the bad. That means the worst thing that could happen here is taking unnecessary or avoidable risks with your money to screw things up.
I could offer portfolio or asset allocation guidance but that stuff is pretty far down the list in terms of importance when thinking through the decisions involved here.
So instead of offering portfolio management advice, here’s some emotional management advice on how I would walk through something like this:
Don’t be in a hurry. Regret minimization is always a decent way to approach long-term financial decisions but this is true more so when dealing with lump sums. Mistiming this decision will likely feel ten times worse than threading the needle perfectly.
Proceeds from the sale of a business create additional money issues as well because that’s emotional capital you’re dealing with.
There’s no rule that says you need to rush into this decision. That could mean dollar-cost averaging into your chosen asset allocation or simply taking your time and thinking through your options.
Think about pre-paying some future responsibilities. Retiring is certainly a huge future financial responsibility but there are other potential milestones to plan for.
Maybe you’ll stay single forever but life could always change. Weddings can run in the $30-$40k range on average.
Maybe you’ll want a bigger house someday. Maybe you’ll want to start another business. Or maybe you just need a rainy day fund for something unexpected.
Whatever it is, there are other goals and time horizons to work through beyond retirement that could be helpful for the purposes of planning this out.
What do you want from early retirement? Selling a business for a seven-figure bonus in your early-30s isn’t a bad deal. But it also puts some pressure on you to speed up the financial planning process and figure out the rest of your life right away.
Early retirement sounds nice. But there’s more to life than financial freedom.
Most people assume financial planning is all about numbers, spreadsheets, and logical choices.
In reality, it’s more about life planning, changing preferences, and feelings.
The “right” decision is often different for different people depending on their circumstances, personality, and emotional make-up.
The same is true when planning something as ambitious as early retirement. This is true whether you already have enough money to claim financial freedom or are put in the position to get there in the near future.
Don’t allow newfound money to change good habits. It sounds like this reader has already developed good financial habits. One of the best things they can do is avoid letting a big bonus change those habits.
Further Reading:
What Should I Do With My Inheritance?
