The Moneyist: My wife and I are in our 50s. We lost our house in 2008, declared bankruptcy and finally bought another home. We will inherit $200K. How should we invest it?

In 2014, we were able to purchase our current home, but we had a sizable down payment and had to finance the balance through a private lender (individual) at 8% interest. The down payment was $50,000 (we worked hard to save) and we financed $105,000.

This went well until 2015, when I lost my job and we filed for bankruptcy. We paid the entire bankruptcy off, and were released in April this year. This prevented us from refinancing our home.

As we had a private mortgage, we did not include our home in the bankruptcy and continued to make our payment. We have no other debt and have an annual household income of $98,500. I’ve been in my current job for six years and plan to retire here (God willing).

Thankfully, the home has appreciated in value, and it is currently appraised at $205,000. Unfortunately, our financial struggles continue to challenge us and we have only set aside $40,000 in our 401(k). 

Recently, a close relative passed away and left my siblings and me her entire estate, estimated at about $1 million. I have three sisters and one brother.

After the estate settles, we anticipate receiving about $200,000 each. My uncle worked, saved and lived a frugal lifestyle for many years, and I want to honor this gift and use it wisely.

The question now: Do I pay off my home ($82,000 left on the mortgage) and invest the balance for retirement, or invest the entire amount and try to refinance my home? I’ve been told it could take two years to get a refinance after bankruptcy. 

Again, this is such a blessing for my family. I want to make the right choice. I’m planning to work until I’m 65 and will be contributing the max allowed to my 401(k) for the next five years.

Blessed, but Confused

Dear Blessed,

Your letter gives me hope.

Your thoughtfulness and calm recounting these various financial crises will, I hope, help to inspire other people to never give up, even if the odds seem stacked against them. I admire your determination to soldier on, to keep saving, and to start again. You and millions of Americans have had to start from scratch. Bravo!

Here is my hot take: Pay off your mortgage, especially given that you have a loan with 8% interest (the sooner you get rid of that burden, the better); maximize your 401(k); and put at least six months of expenses aside in an emergency fund should you have any other unforeseen medical or financial events.

A cautionary note for others: Your inheritance could have been at risk had you received it earlier. “The general consensus among the courts is that monies received by a debtor from a POD account during the 180 days following a bankruptcy filing are not to be considered property of the estate,” according to Foster Swift.

As for you, $40,000 is a modest sum in your 401(k) for your time of life. But Lorraine Ell, CEO and senior financial adviser of Better Money Decisions, a financial advisory firm near Albuquerque, says, “It’s never too late to save for retirement. The $200,000 is a windfall and he is right to respect the value of this gift.”

Greg McBride, chief financial analyst at Bankrate.com, recommends you set up a Roth IRA for yourself and your spouse. Contribute the maximum of $7,000 each — that includes a $1,000 catch-up contribution for each of you — this year and next. “In short order, you would each have a Roth IRA valued at $14,000,” he says.

Do you have health insurance through your employer? Is a high-deductible plan with a Health Savings Account an option? “If so, you can set aside $7,300 plus an additional $1,000 catch-up contribution for 2022 that will grow and can be used tax-free for future healthcare expenses,” McBride adds.

The goal is to minimize your monthly expenses, maximize your annual retirement contributions and have a safe cash cushion. “Aim to pay current healthcare costs out of pocket — remember that plump emergency fund — so the money in the HSA can grow and compound for use in your later years,” he says.

Modest lifestyle in retirement

Ell also suggests working to 67 in order to maximize your full Social Security benefits. “A paid-for home will enable you to not only save more in retirement accounts … but will also enable you to live a modest lifestyle in retirement. Social Security benefits go a long way if you do not have to pay for housing,” she says.

Setting goals is the fun part. “The remaining $120,000 needs to be invested in a joint taxable account; then every year, take some of the money and contribute to a Roth IRA,” she adds. “That money will be available in five years to withdraw tax-free and the growth, interest and dividends will also be tax-free when withdrawn.”

Leonard C. Wright, a CFP and current chair of the American Institute of Certified Public Accountants, also recommends the benefits of aggressively saving in your company 401(k) plan. “If the investments you have appreciated at 7% per year over the next 10 years, the $120,000 plus $40,000 may grow to $320,000.”

“This is a wonderful gift in your times of need — not to mention the impact of saving over the next five years with more discretionary income. A financial plan would clearly guide your peace of mind,” he adds. “Your resolve has held you through! Vision, values, and goals. I think you are better off than you give yourself credit for.”

Continue to display the discipline and patience you have shown thus far, and keep your eye on a modest, healthy — and happy — retirement.

You can email The Moneyist with any financial and ethical questions related to coronavirus at [email protected], and follow Quentin Fottrell on Twitter.

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More from Quentin Fottrell:

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