'We have $40,000 in credit-card debt, two financed vehicles with $100,000 in debt combined'
Dear Quentin,
My husband and I are empty nesters in our mid-40s. Our kids are grown and self-sufficient. We are self-employed and make $115,000 per year combined. We have $40,000 in credit-card debt, two financed vehicles with $100,000 in debt combined, and owe $220,000 on our home at a 3% interest rate. We don't have any savings or retirement funds.
We are expecting a $300,000 (all profit, post-tax) lump sum in the near future. What to do with the money? We have agreed to pay off the credit cards and close them - no credit cards ever again for us! We are debating paying off the house versus buying an investment property with cash to generate rental income.
The current interest rate makes us think it would be better to use our money to pay cash for the investment property. We both have a strong background in real estate, property management and construction. We have discussed paying off the vehicles, but I don't think it is a good idea because I know we will just end up with another car payment in the future.
I'm not really worried about funding retirement accounts if I can generate income through rentals. How can we leverage this lump sum to put us in a more secure financial position?
Waiting for the Windfall
Related: Will Trump's policies lead to a recession? I'm 62 and earn $50,000 a year. How should I invest $100,000?
Dear Waiting,
Empty nesters in your mid-40s? You have the world at your feet.
And soon you'll be $300,000 richer, which is a huge bonus. Your instincts are, of course, correct: Pay off that credit-card debt on day one. That $300,000 will take you far, but it won't take you over the finish line for retirement, so ask yourselves what led you to take out $40,000 in credit-card debt. That's a hell of a lot of money to have on 20%-plus interest. Hate the credit cards, sure, but understand the reason for the debt so it doesn't happen again.
You've got a pretty nice interest rate on your mortgage. With the average 30-year mortgage rate now hovering at 6.8%, you and your wife are living on Easy Street with a rate that is only slightly above the 2.3% inflation rate recorded in April. For that reason, you are exercising sensible restraint regarding a possible mortgage for this rental project. You don't say where you live, so I'm assuming $300,000 can take you further than in most metropolitan areas.
But before you get dazzled by the prospect of being a landlord, think about investing in a Roth IRA, putting money aside for an emergency fund (at least six months of expenses) and paying off at least some of your mortgage if you have found it challenging to keep up with your outgoings in recent times (given your large amount of credit-card debt). You already have a home, so I caution against putting all of your wealth in one asset class.
Don't make a decision based on status
You're in step with a large percentage of Americans (more than one-third, in fact) who say that real estate is the best investment. It's up there, of course, especially if you have a tenant paying off your debt and 20-plus years to wait for your equity to build. Some 36% of Americans believe real estate is the best long-term investment, according to Gallup, followed by gold (23%), savings accounts or CDs (13%), bonds (5%) and cryptocurrency (3%).
Whether you choose stocks or property, your success will depend on rent, property taxes, maintenance, price of the property and the number of years you plan on holding the investment. And timing. If you bought real estate after the 2008 crash? Of course, you would be sitting on bigger returns now. But it's 2025, not 2015. For what it's worth, the S&P 500 historically has an annualized return of 10%, excluding dividends, versus 4% to 8% for real estate.
The S&P 500 historically has an annualized return of 10%, excluding dividends, versus 4% to 8% for real estate.
Property comes with status, so beware of false gods. "While real estate often provides more stable and tangible assets, especially in times of economic uncertainty, it typically lacks the explosive growth potential seen in equities, particularly in bull markets," says the Luxury Playbook, an investment-research group. "However, real estate offers other advantages such as leverage, tax benefits and passive income through rental properties."
"Stocks tend to be more liquid, allowing for easier buying and selling, while real-estate investments can be more illiquid and require a longer-term commitment," the Luxury Playbook adds. "Real-estate returns are often less volatile than stocks, offering steady income through rental yields, whereas stock markets can experience significant short-term fluctuations. For many investors, a well-diversified portfolio includes both asset classes."
Stocks, real estate and liquidity
Speaking of liquidity and cash, high-yield savings accounts are more liquid than CDs, meaning you can take your money out more easily. Typically, withdrawals are limited to half a dozen per month. With CDs, you are committing to a set period of time. But interest rates can change with high-yield savings accounts - even after you deposit your money - based on the Federal Reserve's benchmark rate.
When you buy a CD, the rate does not change. CDs are investment vehicles with set interest rates that attract people looking for a safe haven for their cash. CD rates typically track the federal-funds rate, which, after the Fed's most recent meeting in early May, remains in the range of 4.25% to 4.5%. In May, you still can get CD rates of around 4.4%. CD ladders allow you to buy one-, two-, three-, four- and five-year CDs, so that you have one maturing every year.
But if you're paying more on your credit cards and automobile loans, you should get rid of those before you start investing your money. Keep your outgoings low, minimize your debt, and think about realistic options that will give you a modest income in retirement. If you inherit that $300,000 today, you don't have to make a decision tomorrow. You are understandably full of excitement right now, so take your time before deciding.
And a job well done on that empty nest.
Related: 'I can afford to be generous': How much should I give my stepdaughter for her wedding gift? I want to be fair.
You can email The Moneyist with any financial and ethical questions at [email protected], and follow Quentin Fottrell on X, the platform formerly known as Twitter.
The Moneyist regrets he cannot reply to questions individually.
Previous columns by Quentin Fottrell:
My husband will inherit $180K. I think we should invest the money. He wants to pay off his $168K mortgage. Who's right?
'I'm at a loss': My boyfriend of nearly 10 years is naming his elderly parents as beneficiaries and giving them power of attorney. Am I right to be upset?
'We have no prenuptial agreement': Will my wife be able to take my money if I transfer it to my retirement account?
Check out the Moneyist private Facebook group, where we look for answers to life's thorniest money issues. Post your questions or weigh in on the latest Moneyist columns.
By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
-Quentin Fottrell
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.