An unexpected boost

Well our net worth just got a happy and unexpected boost this past month. My wife used to work for a major bank, but left that job a couple years ago.  They are currently making buyout offers on the pensions of those long time workers and that includes an option for a full cash distribution of the payment.  This was obviously a happy surprise,

Trying to hedge

Recently, I’ve been trying to hedge our investments over the past year or two, as I’m expecting a significant downturn in the stock market, at least for a short period in the near future.

In rough percentages, this is how we’re currently positioned.

30% invested in various index funds with Vanguard
20% invested in individual stock picks. (with just a break even year in 2016)
15% invested in instruments that bet on a market downturn
35% invested in cash.

Choices, choices, choices

This unexpected windfall brought back the memory of academic financial puzzles from my MBA days years ago.  Basically it’s a future value calculation.

The options that the company offered were as follows:

  1. Do nothing and start collection your pension at age 65. $903.86
  2. Start a payment immediately of $386 with no survivor benefit
  3. Start a payment immediately of $368 with a spouse survivor benefit of 50% of that amount
  4. Take a lump sum of $85,000

The $64,000…err..$85,000 question

Can you guess which one we decided? Yeah, it’s the lump sum payment.

First, we’re just kind of betting that the Mrs. will outlive me, just based on gender averages. Also, with so many municipality pension plans near insolvency we just feel safer if we’re managing that money.

I recently signed up for Wealthfront, which offers tax-loss harvesting during market downturns. I find this concept intriguing, because it avoids some wash sale rules which can cost you big tax write offs if you’re not careful. The government prevents you from writing off a loss on your taxes, if you’ve traded that stock (or industry in many cases) 30 days before or 30 days after a loss is booked.

I call it the “infield fly rule” of stocks. You can’t have a stock underwater in a loss, and sell it and then buy it back the next day. Well, you can, but you can’t claim the loss on your taxes. That also goes for stocks in a similar category. You can’t sell Exxon at a loss one day, and then buy Chevron the next. That’s also considered a wash. However, what Wealthfront has supposedly identified is a way to get you out and back in within a diversification of the industry without triggering a wash sale and hence, maximizing your tax loss harvest. If you happen to sign up through my referral link here for Wealthfront, they will manage an extra $5K of funds for no fee. They manage the first $10K for free, but with the referral they will manage $15K for free. It’s not a bad way to test them out, and in the interest of full disclosure, I will get an extra $5K of funds managed for free too. Other than that, I have no association with the company.

The plan…sort of

With that being said, I’m going to ladder this specific amount into a basket of about 6 different mutual funds that will be based on the distribution I currently have in my taxable Wealthfront account. I’ve been with them for about 8 months and I liked the risk assessment survey they had me complete and their fund picks have done well for me so far this year. Plus, I really like their tax-loss harvesting strategy, which can add a little boost to returns over the course of time.

I’m going to detail specifically how this amount gets invested in a future post. It will take a month for the money to show up in the account. We’re actually on the fence about using some of this money for a budget splurge trip to Italy or for investing in some real estate. Also, for a future post is a little more detail on what lead me to wanting a consolidation tool like Wealthfront. After a hospital stay back in January I realized that I had all the keys to the castle and if I weren’t here, it’d be quite a chore for my wife to figure out the full road map. Planning never ends.

What would you do with an unexpected windfall?

How would you invest a cash windfall?