Investing Inheritance

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Newinvest
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Investing Inheritance

Post by Newinvest » Fri Mar 01, 2013 11:38 pm

Greetings Group,

I am new here, and very new to investing. First off, I'd like to say that the way that I will inherit money is under very unfortunate circumstances and I'd give it back in a second to have this person in my life again.

After everything is completed (estate-wise) I expect to end up with approximately 500,000. So, a little background on myself: I am in my early thirties and only have small investments by way of a Roth-IRA and a Trad-IRA. I have had intermittent work during the past few years and am due to be laid off soon so my finances are in no way very healthy at this time. I will be going back to school next year and will probably have very little income during this time (probably for a period of about four years). I do have an emergency fund and should be able to manage the first of the four years that are remaining of my schooling so this will leave me needing to either use school loans/grants/scholarships etc... or use some of the inheritance money to live on and pay tuition for three years.

This is probably going to sound like a "cake and eating it too" kind of question, and so here is where I'd like advice: If I were to invest the entire 500,000 in lets say a Vanguard Dividend Growth Fund (VDIGX) would I be able to preserve the principal, grow some of the principal, and receive some cash-money during the investing process of 3-5 years? If I am dreaming please set me straight and offer some alternatives. My expenses in school and over the next few years will be very low...I do not own a home or have a mortgage, and I do not have any large expeditures such as a car payment.

Thanks for any advice.

Occupier
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Re: Investing Inheritance

Post by Occupier » Sat Mar 02, 2013 11:06 am

100% equity is considered higher risk investing even if it is in the blue chip stocks the fund you mentioned holds. Frankly if I was investing with a 3-5 year timeline I would be mostly bonds. That is the only way to assure preservation of principle. If you want just one fund look at the 2020 target retirement. Your time line is sort of like retiring in 5 years. Dave

ResNullius
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Re: Investing Inheritance

Post by ResNullius » Sat Mar 02, 2013 11:17 am

A lot of details could change the answers to your question, but without knowing those details, I would suggest that you put $400K in either (or split) SP500 index or Total Market index at Vanguard, with the other $100K in the short term investment grade bond fund at Vanguard. This should generate annual distributions of around $10K per year, plus the $400K in equities would continue to grow with the market. Yes, the market could go down, but I would simply buy and hold. If need be, use the $100K to cover your additional expenses. You might want to get some part-time work during college, and certainly you should try to get scholorships or grants. I likely would try to avoid loans if it were me. This amount of money can change your stars, since it came to you so early in life, so protect it, but don't bury it in a hole in the ground, and don't spent too much of it now. Good luck.

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nydad
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Re: Investing Inheritance

Post by nydad » Sat Mar 02, 2013 12:21 pm

There is no investment that will beat the guaranteed cost of a student loan (which I think is around 6-7% these days?), so if you can avoid the loan I think you probably should.

As for the investment, another option is to do as follows
1) Set aside $150k to pay for living expenses and tuition over next 4 years. Put this in CD ladders or very short term, high quality bond indexes (with the understanding that by going for a bit more yield, you risk losing some principle). Apply now for scholarships/grants before you get your windfall...

2) Set up retirement portfolio with $350k. Think of this money as money you will not touch until you're 65 or so.

I'm assuming you have $30k in your IRAs for this example
IRAs: 100% total bond market (and max out to $5500k each year - including 2012 if you haven't done so)
Taxable:
$180k in VG total stock market admiral
$120k in VG total international market admiral
$50k in VG intermediate term tax exempt admiral (VWIUX)
then rebalance annually.
===
result: $380k portfolio, allocated as ~80% stocks, 20% bonds, with 60/40 domestic/international split. This is a little bit aggressive for your age, so you can also make it 70/30 split if you choose - it depends on how much risk you want to take. Each year you can move another $5000 from the bond in taxable to the bond in IRA, unless you have other income/cash on hand to do so.

You can turn off dividend re-investing, and spend the dividend income from this portfolio if you need it over the next few years.

A bigger question is about the schooling - going back for 4 year schooling in mid-30s suggests either a change in career or a PhD program. In either case, are you confident that both this field of study, the investment you are making in your education, and your earning potential when you get out will be worth the cost?

And, buy the bogleheads guide to investing, or pick it up at the library.

Fallible
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Re: Investing Inheritance

Post by Fallible » Sat Mar 02, 2013 12:53 pm

Be sure to read "Managing a Windfall" on the BH wiki: http://www.bogleheads.org/wiki/Managing_a_windfall
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

MN Finance
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Re: Investing Inheritance

Post by MN Finance » Sat Mar 02, 2013 2:44 pm

Is the inheritance itself in cash or inside a retirement account already?

Newinvest
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Re: Investing Inheritance

Post by Newinvest » Sat Mar 02, 2013 2:48 pm

Thanks everyone for your advice. To answer a couple of the questions my intent is in fact, to complete some school I have left and possibly enroll in a PhD program; so my timeline would be about 4 years. During this time, at least for a couple of those years I'd like to work part-time so I can contribute to my IRAs and slow some of the hemmoraging. I hope scholarships and grants will help considerably of course...I don't know how much financial aid I would receive if any, if my assets baloon as I anticipate. One thing I thought about with the loans is that (about 4% is what I think student loans are these days) I would have the opportunity and the time to invest the principal of that money until probably 6 mos after graduation as opposed to paying for school up front.

I just ordered the bogleheads guide to investing.

Newinvest
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Re: Investing Inheritance

Post by Newinvest » Sat Mar 02, 2013 2:49 pm

MN Finance wrote:Is the inheritance itself in cash or inside a retirement account already?
I have yet to receive it, but it will be in cash.

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grabiner
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Re: Investing Inheritance

Post by grabiner » Sat Mar 02, 2013 5:41 pm

Newinvest wrote:
MN Finance wrote:Is the inheritance itself in cash or inside a retirement account already?
I have yet to receive it, but it will be in cash.
In that case, once you receive it, you won't get any need-based financial aid. Need-based aid assumes that the student will spend a fraction of his or her own money, so if you have $500K in the bank, or in a brokerage account, the school will assume you can afford to pay your own tuition.

But now that you have all this money, you can spend it and avoid leaving school with a huge debt. The money you are planning to spend on tuition should be left in a bank account, possibly in CDs which mature in the year that the tuition will be due.

When you are in school, you should convert your traditional IRA to a Roth IRA; since you have very low income, the tax cost on the conversion will be very low (possibly even zero if the Lifetime Learning Credit wipes out your tax bill), and you will avoid future taxes in retirement.

Investing the rest of your money (beyond an emergency fund, and any other short-term needs such as a car) as part of your retirement portfolio makes sense, as this is money that you don't expect to need. Count that money together with your IRAs, and treat it all as one allocation; if you want 80% stock, the IRAs can be all bonds if they are less than 20% of the total.
David Grabiner

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Aptenodytes
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Re: Investing Inheritance

Post by Aptenodytes » Sun Mar 03, 2013 8:03 am

Do what nydad says with the money.

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tuckeverlasting
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Re: Investing Inheritance

Post by tuckeverlasting » Sun Mar 03, 2013 4:36 pm

Welcome newinvest,

I hope you can take comfort in knowing that the loved one who left you this gift would doubtless be proud that you are making the most of your inheritance and going about it the smart way (by coming to the Bogleheads). IMO, fortunate are those find their way here with a windfall .

Good luck!
It's Good To Be A Boglehead

ResNullius
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Re: Investing Inheritance

Post by ResNullius » Sun Mar 03, 2013 4:44 pm

To the OP. You originally mentioned that you want to finish your undergrad degree and possibly get a PhD. If you go the PhD route, there's a decent chance you'll be at least in the running for a fellowship, which would pay your tuition, fees, and a stipend. This is what my son is doing right now. He's currently completing his PhD, but it has cost him nothing. The school pays for everything, including health insurance and $2K per month stipend, plus all tuition and fees. Be sure to check into all of this. Even if you don't get the whole thing covered, you still might get more than you think, and you won't have to pay anything back.

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mickeyd
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Re: Investing Inheritance

Post by mickeyd » Sun Mar 03, 2013 6:48 pm

I just ordered the bogleheads guide to investing.
That's an excellent investment.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

Newinvest
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Re: Investing Inheritance

Post by Newinvest » Mon Mar 04, 2013 11:36 pm

tuckeverlasting wrote:Welcome newinvest,

I hope you can take comfort in knowing that the loved one who left you this gift would doubtless be proud that you are making the most of your inheritance and going about it the smart way (by coming to the Bogleheads). IMO, fortunate are those find their way here with a windfall .

Good luck!

Thank you. I loved this person deeply, and their passing was sudden and unexpected.

Thanks everyone for such great advice.

Newinvest
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Re: Investing Inheritance

Post by Newinvest » Wed Mar 13, 2013 11:17 pm

nydad wrote:There is no investment that will beat the guaranteed cost of a student loan (which I think is around 6-7% these days?), so if you can avoid the loan I think you probably should.

As for the investment, another option is to do as follows
1) Set aside $150k to pay for living expenses and tuition over next 4 years. Put this in CD ladders or very short term, high quality bond indexes (with the understanding that by going for a bit more yield, you risk losing some principle). Apply now for scholarships/grants before you get your windfall...

2) Set up retirement portfolio with $350k. Think of this money as money you will not touch until you're 65 or so.

I'm assuming you have $30k in your IRAs for this example
IRAs: 100% total bond market (and max out to $5500k each year - including 2012 if you haven't done so)
Taxable:
$180k in VG total stock market admiral
$120k in VG total international market admiral
$50k in VG intermediate term tax exempt admiral (VWIUX)
then rebalance annually.
===
result: $380k portfolio, allocated as ~80% stocks, 20% bonds, with 60/40 domestic/international split. This is a little bit aggressive for your age, so you can also make it 70/30 split if you choose - it depends on how much risk you want to take. Each year you can move another $5000 from the bond in taxable to the bond in IRA, unless you have other income/cash on hand to do so.

You can turn off dividend re-investing, and spend the dividend income from this portfolio if you need it over the next few years.

A bigger question is about the schooling - going back for 4 year schooling in mid-30s suggests either a change in career or a PhD program. In either case, are you confident that both this field of study, the investment you are making in your education, and your earning potential when you get out will be worth the cost?

And, buy the bogleheads guide to investing, or pick it up at the library.

Thanks NY Dad. If I set up an 80/20 Stocks/Bonds in index funds and needed (lets say it took me some time to find work after school) money could I sell a portion of my portfolio without penalty and rebalance to 80/20. I guess what I am asking is: are index funds fairly "liquid"?

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BL
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Re: Investing Inheritance

Post by BL » Wed Mar 13, 2013 11:44 pm

Even though the advice you have been given is good, I would suggest you consider a more conservative investment for a few years as it is possible that you might panic and sell when/if the stocks lose, say, 50% in a fairly short time. If you have a 60/40 or even a 40/60 stock/bond mix to start with, there is time to get used to the huge ups and downs of the market and hopefully not panic and sell when the stock portion looses half its value. You can always increase the stock portion in a few years. The other thing is the stress of losing a loved one can cloud one's judgement and the standard advice is not to make any more decisions than necessary for a period of about a year. If you socked everything away in CDs for a while (maybe split between several banks if your bank can't arrange it all to be covered by FDIC insurance), you could take your time in making this decision. Meanwhile, don't let anybody talk you into spending which would benefit them more than you (brokers, bankers, insurance people, etc.) I do hope the studies you are considering will yield a job that pays fairly well. You can't expect to make much on your money in 4-5 years although you may get a bit of income.

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nydad
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Re: Investing Inheritance

Post by nydad » Wed Mar 13, 2013 11:55 pm

Thanks NY Dad. If I set up an 80/20 Stocks/Bonds in index funds and needed (lets say it took me some time to find work after school) money could I sell a portion of my portfolio without penalty and rebalance to 80/20. I guess what I am asking is: are index funds fairly "liquid"?
Not sure what you mean by "without penalty" - if the money is in a taxable account, then you will pay capital gains taxes if you made money. That's not a bad thing - it's better than taking a loss of course! However, if you think you will need money after school, you may want to set aside a portion for that - normally it is not suggested to hold stocks for any needs which are short term (e.g. within a few years) - you don't want to end up having to sell equities when they're down - the point is not avoidance of cap gains tax, the point is equities are volatile. In any case, that's really what your emergency fund should be for - safe cash you can tap when needed.

And when you say "liquid", I assume you mean, can you sell it quickly? If so, yes - an index fund has a net-asset-value which is calculated every day - and when you sell it, Vanguard will give you that exact amount back (# of shares X net asset value per share) - with a mutual fund you can say "I want to sell $10,000 dollars today" - and you will get $10,000 that day. If it's an ETF, you have to sell on the stock market, but it is equally liquid especially for broad-market Vanguard ETFs - ETFs are in a way *more* liquid, as you can sell them immediately when the market is open, whereas with mutual funds the sale closes at the end of the day I think. In any case, no worries about liquidity on either mutual funds or ETFs.

sprasad03
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Re: Investing Inheritance

Post by sprasad03 » Thu Mar 14, 2013 10:51 am

TBH, I would do this.

1. Set an amount of what you need to live, advance career, and emergency aside. (~100K)
2. Get a broker (Referred and analyze past history). He will set your risk tolerance and manage it daily, and make decisions based on your behalf if you give him that permission. (~300K)
3. Take the last amount of money, read and learn how to invest, and do it. (~100K)

During your paychecks, whatever your contribution amount is, I would put (75% in your broker, 25% in you). You can change these allocations depending on the performance.

Don't get me wrong if you are completely confident in your ability, then you could manage this fund yourself. But if you working on a job where you cant watch it, throwing your stuff in bunds, ETFs, Mutual Funds, lead to growth but slow. You need to figure out how much you want to make at the end of day.

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hoppy08520
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Re: Investing Inheritance

Post by hoppy08520 » Thu Mar 14, 2013 12:10 pm

My $0.02:
sprasad03 wrote:TBH, I would do this.

1. Set an amount of what you need to live, advance career, and emergency aside. (~100K)
2. Get a broker (Referred and analyze past history). He will set your risk tolerance and manage it daily, and make decisions based on your behalf if you give him that permission. (~300K)
3. Take the last amount of money, read and learn how to invest, and do it. (~100K)

During your paychecks, whatever your contribution amount is, I would put (75% in your broker, 25% in you). You can change these allocations depending on the performance.

Don't get me wrong if you are completely confident in your ability, then you could manage this fund yourself. But if you working on a job where you cant watch it, throwing your stuff in bunds, ETFs, Mutual Funds, lead to growth but slow. You need to figure out how much you want to make at the end of day.
I would NOT follow this advice above. Almost any broker will try to steer you into front-load mutual funds that will skim off around 5% of your balance right from the beginning and give that money to the broker as a commission so he can pay for his child's education instead of your education, which is what the person close to you who died intended for that bequest. If you invest with a broker, then the $300,000 you'd invest will turn into $285,000 in one day after the sales loads are deducted (unless they put you in no-load funds). Then they'll put you in expensive actively-managed funds (where you'll lose another ~$2,000 annually) and on top of that charge you around 1% a year ($2,850) to "manage" your money. Rather than doing this, just follow the advice from NYDad and keep more of your money for yourself.

Other points:
  • As another person wrote, I generally agree with what NYDad wrote
  • I can also see the case for a 60/40 (stock/bond) portfolio rather than a more aggressive 80/20 portfolio if you're a new/untested investor who doesn't yet have a sense of your risk comfort level (see one of the other replies on this theme)
  • If you can manage to get a fellowship that pays you ordinary taxable income during your school years, then you should be sure to contribute $5,500 to a Roth IRA (the annual max) each year. I don't know if universities have these for students, but if so then you should also contribute as much as you can to the 401(k)/403(b), up to ever dollar you earn. For example, if you earn $15,000 of taxable income, then contribute $5,500 to a Roth IRA and $9,500 to the 403(b). Even if you cannot afford to do that on your income, then just draw from your taxable savings to afford to do this; doing so is essentially transferring money from your taxable investments into your tax-exempt (Roth) investments, which is a smart thing to do.
Finally, I've very sorry about your loss.

MN Finance
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Re: Investing Inheritance

Post by MN Finance » Thu Mar 14, 2013 5:26 pm

sprasad03 wrote:TBH, I would do this.

1. Set an amount of what you need to live, advance career, and emergency aside. (~100K)
2. Get a broker (Referred and analyze past history). He will set your risk tolerance and manage it daily, and make decisions based on your behalf if you give him that permission. (~300K)
3. Take the last amount of money, read and learn how to invest, and do it. (~100K)

During your paychecks, whatever your contribution amount is, I would put (75% in your broker, 25% in you). You can change these allocations depending on the performance.
Don't get me wrong if you are completely confident in your ability, then you could manage this fund yourself. But if you working on a job where you cant watch it, throwing your stuff in bunds, ETFs, Mutual Funds, lead to growth but slow. You need to figure out how much you want to make at the end of day.
Without the thread veering violently off topic; these implied statements in the above post are (some provably) false:
1 - a broker is needed (maybe an independent RIA or fee only planner, but not broker).
2 - that a broker "manages" the portfolio "daily" (ie, more often than you do); false, brokers are lucky to look at your portfolio 2-3 times a year.
3 - that past performance in indicative of skill and ability (it's not) and is repeatable (it's not).
4 - that past performance can actually be analyzed and presented to a client (it cannot).
5 - that allocations should change with performance success/failure (they should change with need/willingness/ability to take risk).
6 - that DIY makes less than a broker (quite the opposite).
7 - that it takes incredible oversight to do it yourself (some, not much).

Should you choose not to do it yourself, that's valid, but the decision is not one made out of fear.

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