Investing a Windfall (and Making Up for a Late Start)

A reader that I’ll call Diane recently wrote in with a question about investing a windfall. She says:

I am getting some extra money — about $10k — and I have no idea what to do with it.

I am 57 years old and have no debt. I have about $9k in my company’s 401(k), and that is my only savings right now. I also purchased a house about three months ago.

The problem is that I have no knowledge on how to invest, but I do have a couple of people in my life with some understanding of investing.

Do you have any suggestions, or could you give me some resources that could help me make this decision?

This is an excellent question, and there are actually several issues here.

For starters, I’m not sure if that “no debt” statement means that she has no debt period, or that she has no consumer debt, but perhaps has a mortgage associated with the recent home purchase. The lack of high interest consumer debt is great. If there is a mortgage, I’m hoping that it’s at least at a low rate. Given the recent interest rate landscape, that should be the case.

Regardless, the thing that really stuck out to me was that she’s approaching 60 and has very little in the way of retirement (or other) savings. While it’s certainly nice to have an extra $10k to invest (and talk about this further in a minute), that money won’t make much of a difference if she doesn’t find a way to free up some extra cash flow and make saving/investing a priority.

The reason I say this is that, even if she can earn 8% returns on that money, it will only grow to $18.5k by the time she turns 65. And honestly, 8% returns aren’t particularly likely unless she takes on a good bit of risk between now and then. Obviously, this isn’t the sort of money that will free Diane up to retire in comfort, but it’s a start.

Spending and saving

So my first suggestion — even though she didn’t really ask about this — would be to take a very careful look at her spending patterns and figure out what she can do to free up extra cash that can be directed into an investment portfolio each and every month. Cut the cable, downsize the cell phone plan, reduce utility costs, quit dining out, etc.

Of course, spending is only one part of the equation, so Diane should also look closely at her income and try to figure out ways of earning extra money. Given that she’s been able to stay out of debt based on what she’s already earning, this extra money could be used to supercharge her savings – an absolute necessity given that she’s starting so late.

Now… Returning to that $10k windfall… If it were me, the first thing I would do would be to establish an emergency fund. Depending on Diane’s circumstances, this could be as little as $1k (at least to start), though it might need to be considerably more.

Learning and planning

At the same time, I would recommend that she start learning about investing. Yes, she said that there are some people in her life with “some understanding of investing, ” but it’s hard to know exactly what this means. What I can say for certain is that nobody cares about your own financial well being as much as you do. Thus, you need to put yourself in a position to make informed decisions.

For this, I would start by reading my two go-to books about investing: The Bogleheads’ Guide to Investing and The Four Pillars of Investing. Hopefully these books will be available from the library. If not, I consider buying both of them to be money well spent.

From there, the goal should be to develop (and implement!) a plan. What are her goals? What’s her timeframe? How risk tolerant is she? Etc. By answering these questions honestly, it should be possible for Diane to develop an appropriate asset allocation — both for the $10k windfall and for the ongoing investment of her newfound savings.

If she’s still uncomfortable with her finances after doing a bit of self-education, it might be worth spending a few hundred dollars to talk to buy some time with a reputable fee-only financial planner who can help her get her ducks in a row – though I would only recommend doing this after reading the books. Once again, this will likely be money well spent.

Putting the plan into action

As for where to stash this money, the 401(k) may be a great option — or maybe not. It depends on her investment choices (and the associated fees) as well as whether or not her employer offers a matching contribution. While she can’t just contribute the $10k directly to her 401(k), she can crank up her contributions to a ridiculous level for the rest of the year and use the $10k to make up the shortfall, effectively transferring the money from her savings account into the 401(k)*. Money is fungible.

Or, for maximal flexibility (but without the employer match), she could open a traditional or Roth IRA at a low-cost provider like Vanguard. The current contribution limit is the smaller of your taxable compensation for 2011 or $5k for people under 50. This max rises to a max of $6k if you, like Diane, are over 50 years of age. She could opt for a single fund, like one of the Target Retirement options, or a simple mix of broad market index stock and bond funds.

While much of what I’ve written above might sound like Greek to the uninitiated, it’s really not that complex, and the two books that I’ve linked above should explain everything in sufficient detail to at least get started.

As always, if you have any suggestions of your own, please don’t hesitate to leave a comment.

*Note: Depending on how the employer match is structured — for example, if it’s capped each month — a more gradual approach might be advisable. The devil is in the details.

10 Responses to “Investing a Windfall (and Making Up for a Late Start)”

  1. Anonymous

    Hello all,
    I am in an even worse predicament than Diane, and it’s a scary feeling. I’m 57, divorced, in a low-paying office job (unemployment is bad here), and have only about $3,000 in a defined-benefit pension plan through my job.

    My only asset is a newer car which was a gift to me, worth about $10,000. I need a reliable car to get to work, otherwise I would have sold it. I have debt that I can no longer pay, and am considering bankruptcy. My health is only average. It seems pretty hopeless and bleak.

  2. Anonymous

    Have to agree with Ginger here, open a Roth IRA. The money will grow tax free, but she can also withdraw the contributions without taxes or penalties if need be. That will be important since she has no other savings.

    As to where to invest the money, fixed income all the way! She has no investment experience, so taking a crash course may confuse more than help. And with the market looking wobbly, this is no time to take chances. She has a relatively short investment horizon as well, so she won’t be able to recover from a large loss. If she does go with stocks, maybe take a minority position in index funds.

  3. Anonymous

    Diane, if you go to you can open a Roth IRA. You can have anything in a Roth IRA that you want, stocks, bonds, cash etc. but your best best is to just set and forget because you have too much else on your plate to spend time trying to figure out investments. So at fidelity that have a target date fund. You pick when you will retire and they have a fund designed with the “right” mix of stocks and bonds for retiring at that time. It is not perfect but for a beginner it is useful.
    Diane, instead of spending money on the books either go get them at the library or join swagbucks to get free amazon gift cards. Swagbucks is a search engine that uses google and and gives away points that you can use to get amazon gift cards. I get about $50-$70/year.

  4. Anonymous

    Such little savings, so late in life…
    Unless there is a pension in her portfolio somewhere, Diane will likely need to continue working for the foreseeable future.

  5. Anonymous

    I would take a hard look at a Roth 401k. She’s 57 and there could be some risk there that she’s not comfortable with…but assuming she’s going to work for another 10 years I’d look into equities driving a higher yield. $9k in retirement? Wow…I hope that’s truly not the full extent of her retirement holdings and I hope she put a huge amount down on her new house.


  6. Anonymous

    Definitely educate yourself with books and/or a professional planner before investing. Picking the right stocks or funds is not easy without some help. Without the guidance, keeping it simple with one of the Vanguard Target Retirement funds is a good idea. Either way, be smart with the extra money and put it away for your future.

  7. Anonymous

    I thought you gave her very good ideas and suggestions. I personally think her best shot for success is to buy a mix of stock shares and funds. Although, they are a little more risky, I think she could do a 60/40 split for stocks/funds and the rest into a IRA.

  8. Anonymous

    Check with your utility provider and see if they offer anything to help with an energy audit for your house. Sealing windows and doors, insulating, replacing ancient furnaces. These things can have an impressive return on investment as well as improve the value of the house if you pick some of the low-hanging fruit. Look at these improvements just like any other investment. Does it retain it’s value, does it reduce your costs, Is there a tax credit associated with it, etc.

    Maxing your employer’s 401(k) match will probably be the best investment because it has an immediate increase in value.

  9. Anonymous

    Wow, what a surprise to see my story here. So here is some more info. I do have a mortgage — no consumer debt. My mortgage is 4.5%. I purchased the house at an auction for almost 40K less than it was assessed for since the housing market fell. I will get the 2 books you recommended. I can get them for about $6 each on Amazon.
    I also will increase the amount of $ going into my 401K. My employer does contribute. I don’t know if it is capped each month. I will find that out.
    Ginger (in the comments) said the put $ in a target date fund in a Roth — is that a particular type of Roth?
    I do understand I am not in a good position financially. I really get that.
    What is in my favor is that I do understand I need to take drastic measures. I am in very good health and have longevity on both sides of my family.
    I am looking into starting a business at home with my computer. I don’t have a lot of extra expenses. My biggest on-going expense right now is the cost of the internet. I don’t know is this house will be expensive during the winter.
    Thank you so much for the help you have given me.

  10. Anonymous

    If all she has is the $9000 in her 401k and the $10,000 windfall, I think the last thing she needs worry about is what to do with that money. She needs to figure out how to cut her expenses and fast. She is 57 with basically no retirement savings. Is she planning to live on social security? Put the $10,000 in a high yield checking and up your retirement savings to the max and cut every optional cost you have. Then start putting money in a target date fund in a Roth.

Leave a Reply