Investment Advice for a College Senior

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Egl820
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Joined: Sun Dec 16, 2012 10:21 am

Investment Advice for a College Senior

Post by Egl820 »

Hey everyone, this is my first post on here and I figured it would be a good starting point to get advice on my current situation. I'm a 22 year old senior in college, and I received a significant life insurance policy (six figures) a few months after my father's passing. I know that I can't just let this money sit around in a savings account, and so I decided to make a post after browsing through this site for a while. I am lucky enough to be graduating college without any kind of debt, and will be continuing on to a PhD program next year (the tuition is covered by the school and I'll be receiving a modest stipend [25k-30k] for teaching and research.) I plan on putting a significant portion of the money in a long term CD (or potentially laddering it) since I don't plan on needing it anytime soon, but I'd like to potentially look into other options such as mutual funds as investments. My main question is, what are the best options for investments taking into account the fact that I won't have any major expenses over the next few years (buying a house, car, etc.)? As a side note, I'm planning on searching the forums for a good investing book before making any major decisions.
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wjo
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Re: Investment Advice for a College Senior

Post by wjo »

Hi!

Welcome to the forum. You sound like a very prudent and thoughtful individual. Kudos to you for wanting to preserve the life insurance policy proceeds. I am sure that providing for your long term future is what your father would have wanted.

Some thoughts:
1. Plan to live on your stipend. This will preserve the principal and you will learn/reinforce some good habits of living frugally. You also will be in the same place as the rest of the grad students!
2. Set aside about one years stipend as an emergency fund. Most grad students don't have that luxury. Short term CDs are a good place for this as the CD vehicle prevents dipping in to the funds as mad money while still allowing easy access should you need the money. This will also be a good reserve as you transition from a completed phd to your next job.
3. Since you will be earning income, you can fund an IRA - suggest a ROTH - each year. You might not be able to do that with your stipend, but you can use your insurance proceeds to fund it each year.
4. You are right to read carefully and prepare an investment plan before doing anything with the money. I am partial to author William (Bill) Bernstein's books - The Investor's Manifestor and/or The Four Pillars of Investing, but the wiki on this board has a good list of others.
5. FWIW, if you think of your emergency fund as a bond portfolio, you can invest mostly in stocks with the rest. Since they will be in a taxable account, think of tax efficient funds - either broad market index funds or tax managed funds. Putting my advice above together, an investment plan for $100k might be:
-$25k emergency funds (most in CDs, some in cash)
-$25k in $5k cash and the rest in laddered CDs maturing in 1,2,3, and 4 years. These are timed to mature in $5k increments to invest in a ROTH IRA this year (year 0) and the next 4.
-$50k to invest in a diversified portfolio of broad index or tax managed funds. Say $30k in Total Market and $20k in Tax Managed International (both Vanguard). It doesn't really matter at this point what the balance or mix of funds is as long as you are investing in tax efficient funds. If you don't want to invest all $50k in a lump sum, you can invest it periodically over a year.
- invest $5k each year in a ROTH - use the ROTH IRA to rebalance your stock and bond allocation to the extent possible - you will probably want to at first put the money in bonds to give you that flexibility.

Good luck! You are off to a great start.
-
Marjimmy
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Re: Investment Advice for a College Senior

Post by Marjimmy »

wjo wrote:4. You are right to read carefully and prepare an investment plan before doing anything with the money. I am partial to author William (Bill) Bernstein's books - The Investor's Manifestor and/or The Four Pillars of Investing, but the wiki on this board has a good list of others.
I also will vouge for these books as many others will. "A Random Walk Down Wall Street" aswell. I'd recommend opening up a Roth IRA with in the next two weeks before 2013 rolls around so you can contribute $5,000 this year and $5,500 in 2013 (contribution limit increased).
Egl820 wrote: I plan on putting a significant portion of the money in a long term CD

Depending on what rate you can find, I would suggest almost not tying your money up for the long term effect and investing it in a taxable account instead. If you are in no need of the money for a good 5+ years let's say, then you'd be able to make the best return on opening one. On the contrary, if you're looking for something safer, there are many money managment savings accounts that pay almost just as much interest rate as a cd does without having to tie up your money. There are also options such as Ibonds and high yield savings accounts. Up to you really o.O

Best regards,
Marjimmy
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
Bob's not my name
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Re: Investment Advice for a College Senior

Post by Bob's not my name »

Don't pay your final undergraduate semester tuition bill before January 1. http://thefinancebuff.com/how-to-save-4 ... taxes.html
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happymob
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Re: Investment Advice for a College Senior

Post by happymob »

wjo wrote:It doesn't really matter at this point what the balance or mix of funds is as long as you are investing in tax efficient funds.
Though at his tax bracket, the tax efficiency probably won't matter much. Some mix of straight total VTSMX and VGTSX should be fine.

The rest of the advice is absolutely spot on. Live on your stipend (consider the PhD program as your job - you should always be able to live off the salary of your job alone). Fund your Roth every year. Have an emergency fund. Invest the rest in a fairly aggressive way following Boglehead principles.
Bob's not my name
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Re: Investment Advice for a College Senior

Post by Bob's not my name »

happymob wrote:Fund your Roth every year.
Unless you're in an education credit phaseout, in which case you'd be in a very high bracket and a deductible TIRA would be strongly preferred (even if you convert it to Roth in the following tax year).
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happymob
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Re: Investment Advice for a College Senior

Post by happymob »

Bob's not my name wrote:
happymob wrote:Fund your Roth every year.
Unless you're in an education credit phaseout, in which case you'd be in a very high bracket and a deductible TIRA would be strongly preferred (even if you convert it to Roth in the following tax year).
But, we're talking $25,000/year stipend + whatever dividend and capital gains income his investments spin off. We're nowhere near the phaseout levels in this particular case. But in general, I agree, be aware of where tax credit phaseouts occur and plan accordingly. Even at a relatively (I say relatively because the really harsh phaseouts are all well above the median household income in the US) low tax bracket, a traditional IRA might make more sense than a Roth.
Bob's not my name
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Re: Investment Advice for a College Senior

Post by Bob's not my name »

Yes, I agree. In 2013 presumably his income will be only a third of the stipend, plus summer earnings, plus investment income. The exception to "every year" may be his PhD graduation year, depending on whether any of his education costs qualify for a credit in that year (maybe they won't if they are covered by the assistantships).
Caduceus
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Re: Investment Advice for a College Senior

Post by Caduceus »

Welcome to the forum!

The suggestion by others to contribute to a Roth is a great one, but do take note that depending on how your fellowship is characterized, you may not be eligible to contribute to an IRA in the first place. IRS Publication 590 states that "scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2." What that means is that to the extent that your university considers your fellowship a grant (and not compensation for work), you will not receive a W-2, and you will not pass the safe harbor rule for income that qualifies as compensation for the purposes of contributing to an IRA. Different universities characterize their fellowship payments differently, and it may be difficult to know until they actually issue the tax forms; for instance, my school represents the "teaching" component of the stipend and the "grant" component of the stipend on two separate forms.

$25,000 - $30,000 can get you very far for the lifestyle of a graduate student. You are going to be taxed at a very low effective rate, and though this depends on your university, you will most likely have access to: subsidized graduate student housing, lots of free food (at talks, conferences, events), free social events, free internet, and free health coverage. I know people at my university on a similar stipend who saved more than $100,000 (after-tax) over 5 years; living simply and working two out of the five summers (internship or on-campus job) could easily push one over the 6-figure savings mark. You may not choose to live so frugally, but the graduate student lifestyle is so highly subsidized that even what might seem like a modest stipend goes really far.

Good luck on beginning your Ph.d. - it is going to be such an exciting journey! Those years were among the best of my life. The time to read, think, write and grow - to explore in the broadest sense of the word - was truly invaluable and an immense privilege.
Topic Author
Egl820
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Re: Investment Advice for a College Senior

Post by Egl820 »

First off, I really appreciate everyone taking the time to give me advice. I already have an emergency fund setup for a little over a year's stipend value (although I won't be starting the program until September of next year.) To clarify, the PhD program I'll be starting is essentially a year-round job, so I won't be making any extra money during the summer. Since I don't know exactly what school I'm going to be attending yet, I won't know how they categorize the fellowships/assistantships. Caduceus, I really am excited for graduate school, and I definitely plan on living a normal grad student life off my stipend. There are still a few things I'm not sure about:

1) What exactly do the tax credit phaseouts involve? I paid for my fall tuition this past year, but the only work I've been doing has been in a lab on a volunteer basis, so would the tax credit really benefit me at all?

2) For investing in bonds, is it better to look at something like the Vanguard Total Bond Market fund? I have a good grasp on mutual funds, but I'm a little unsure when it comes to bonds.
Bob's not my name
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Re: Investment Advice for a College Senior

Post by Bob's not my name »

You can read about the education credits in Pub 970. If you have no income for the year then a credit doesn't do much for you. It wasn't clear to me whether you might have a paying job next summer before starting graduate school.
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