Inheriting money, don't want to [mess] anything up

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dontrunaway
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Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

I'm 28 and will be getting 230k in a few months, then another 230k when I'm 30, then another 230k when I'm 35 (sometimes life's good). I'm unsure what I want (out of life)—I'm single and would consider buying a house or a condo if it were a good investment (I'm about to move to Portland, OR), but I don't mind renting indefinitely or forever if you guys think that's the option that will eventuate in my having the most money in 35 years (or whenever). I thought that paying cash for a nice house or condo would be a good investment with the real estate market being so low and on the rise, but other advice I've gotten has counseled that real estate would be a sub-optimal investment, and that if I did buy a house, I should just get a mortgage since my returns from investing would be expected to beat the mortgage rate anyway (can that be true?). So anyway, my hope is that this forum will obviate my need for a financial adviser to tell me what to do. If you could be as specific as possible, I would be eternally grateful—I'm assuming I should put a certain amount in a Roth each year as well, but I don't really know how to go about that.
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ruralavalon
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Re: Inheriting money, don't want to [mess] anything up

Post by ruralavalon »

This is a good place to start reading -- Wiki article link: Managing a windfall .

In general;
1. don't rush, take your time before making any big decision;
2. spend a little on something frivolous and enjoyable; and
3. beware of anyone (friends, relatives, co-workers) trying to sell you anything (insurance, annuity, stock, bond, mutual fund, real estate etc).

As to residential real estate, don't consider buying real estate if you don't plan on living in that location long term. In general, I think of a home as a place to live, not primarily as an investment. Wiki article link: Owning vs Renting . Normally, real estate appreciates at about the rate of inflation or a little more. EDIT: "The underlying housing equity is a real asset, but it is an incredibly poorly returning one. According to economist Robert Shiller, 'the average annual real (net of inflation) increase in home prices was a mere 0.40% ' ", Id.
Last edited by ruralavalon on Fri Apr 12, 2013 4:17 pm, edited 1 time in total.
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NYBoglehead
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Re: Inheriting money, don't want to [mess] anything up

Post by NYBoglehead »

You have an awful lot of money coming your way. As the poster above noted, I recommend buying real estate as a place to live, don't do it purely for an investment (my opinion).

You should be maxing out all tax-advantaged investment space (401k/Roth IRA) and pay off any student loans or other debt.

After that I don't think you can go wrong implementing the 3-fund portfolio with some of the money, using tax-exempt munis for the bond portion for tax efficiency.
livesoft
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Re: Inheriting money, don't want to [mess] anything up

Post by livesoft »

dontrunaway wrote: If you could be as specific as possible, I would be eternally grateful—
There are no shortcuts, so here is the specific advice that you wanted:
Read the following books:
Books (expanded list)
- The Bogleheads' Guide to Investing
- The Investor's Manifesto
- Common Sense on Mutual Funds (updated edition)
- Wise Investing Made Simple
- All About Asset Allocation
- Why Smart People Make Big Money Mistakes
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Twins Fan
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Re: Inheriting money, don't want to [mess] anything up

Post by Twins Fan »

Dang... LUCKY!! Good for you though!! And, you have come to the right place... many knowledgeable folks in here!!

First things first, don't think of a home or condo as an "investment". It will always be a "cost" to you between taxes, repairs, improvements, etc. But, a home or condo can be a good purchase.

Many of your questions will get different opinions from different people... buy vs. rent, take out a mortgage vs. invest, and so on.

My personal take... I see renting as money that just goes away for a place to live. Buying a home or condo gives you something of value. Yes, that value may fluctuate, but net worth wise you have something of value. Over a long enough time period the value of that home should go up.

Some will say that with interest rates so low now one should take out a mortgage at a low rate, and invest other money because the return from investing should be higher in the long run than, say, a 3.5% mortgage. Me... it just doesn't make sense "to me" to agree to pay $200K, for example, for a home now and end up paying $350K in total when all is said and done with the mortgage paid off. That is if someone has cash to pay up front for that home. But, I'm pretty debt averse... meaning I don't like debt and would avoid it. Of course I do not have money coming my way like you do and I have a mortgage.

If I were you, I would pay cash for a modest home with that first chunk... Portland is a great area also!! You're still young with a long investing time ahead of you. And, with no mortgage or rent payment, you will be able to easily max out tax deferred accounts and invest, or save, or party with the rest of your check. :happy Then you still have two more windfalls ($$) coming your way.

A Roth IRA is too easy to get started up. You can do it online even. Think Vanguard... we're big fans around here. There is a maximum yearly contribution one can make to a ROTH though... $5500 for 2013.
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orcycle
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Re: Inheriting money, don't want to [mess] anything up

Post by orcycle »

As a Portland area resident, I would not say that the real estate market is low. It's a bit of a feeding frenzy now with inventory so low, it's like we're back in 2005-2007. So I would proceed with caution and not get caught in a bidding war especially, as others have pointed out, if you don't plan to be here long-term.

Welcome to Portland, hope you like rain! :sharebeer (and beer)
rfburns
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Re: Inheriting money, don't want to [mess] anything up

Post by rfburns »

It would help if we knew the tax status of your inheritance.
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fishnskiguy
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Re: Inheriting money, don't want to [mess] anything up

Post by fishnskiguy »

dontrunaway wrote:I'm assuming I should put a certain amount in a Roth each year as well, but I don't really know how to go about that.
Step 1: Pick up phone.
Step 2: Dial 877-662-7447. That's Vanguard.
Step 3: Tell the person that answers the phone, "I would like to open a Roth IRA".
Step 4: Do what they tell you to do.

Welcome to the forum! See what great advice you get here! :sharebeer

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ruralavalon
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Re: Inheriting money, don't want to [mess] anything up

Post by ruralavalon »

I forgot to add, do some reading from these reading lists: http://www.bogleheads.org/readbooks.htm ; and Wiki article link: Books: Recommendations and Reviews .

Also : Wiki article link: Getting Started .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
otbricki
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Re: Inheriting money, don't want to [mess] anything up

Post by otbricki »

Some random thoughts..

Definitely don't buy unless you know for sure that's where you are going to live. Transaction fees are not small.

Mortgage vs paying cash is a more delicate question. At 3.5% we are looking at unusually favorable rates. In fact you might not see rates like this again in your lifetime.

Advice here that a house is not an investment is absolutely correct. A place to live is an expense. If you want to invest in real estate buy something that gives you broad diversification like REIT funds.

Be careful with your money. Read a lot about investing; the processes described on this site are really quite good. Active strategies are really much less likely to work.

A principle lesson is that stock brokers are salesmen, working on commissions. Not investment experts who care if you make money or not.

There was a great book on investing written more than 50 years ago that you might want to take a look at.

http://www.amazon.com/Where-Are-Custome ... 0471770892
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archbish99
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Re: Inheriting money, don't want to [mess] anything up

Post by archbish99 »

That's a decent amount of money; $690k is not enough to set you up for life, necessarily, but is probably enough to cover a lot of your retirement savings if invested now and invested wisely. I would set the money aside and think of it as a trust for which you are both trustee and beneficiary. You're managing the money for the sake of your future self -- but your present self can only touch it in specific ways that you decide on up-front.

What that might look like:
  • Put the full amount into a taxable account at Vanguard
  • Make the maximum contributions each year to your 401k and a Roth IRA, reimbursing yourself the after-tax equivalent out of the taxable account.
  • Consider paying cash for a house once you know where you plan to live long-term; don't buy until you know that. Once you do buy, if you pay cash, calculate what your mortgage payment would have been and pay that back into your investment accounts. Basically, you'll be holding your own mortgage.
When the amount in the "trust" is ~50x your annual expenses, congratulations -- now you're set for life and can retire. (As a rule of thumb, a portfolio can be expected to sustain withdrawals of 4% for 30 years, 3% for 40 years, or 2% forever. To retire young, I estimate based on 2%.)
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scrabbler1
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Re: Inheriting money, don't want to [mess] anything up

Post by scrabbler1 »

My best friend inherited about $650k late last year and enlisted my help in investing it well, given his other investments and risk tolerance. Most of it is in taxable accounts but some of it is an inherited IRA, both of which include individual stocks. individual bonds, CDs, and mutual funds.

He had bought a co-op apartment in late 2011 so one of his first tasks was to pay off his mortgage which he did last December. With most of his other investments in stocks or stock mutual funds, I tilted his inheritance toward bond funds, some taxable, some tax-exempt, some short-term, some long-term. He and I are both Fidelity clients and have the same Account Executive at our local office. The AE was very helpful in setting up his accounts while providing some limited advice I agreed with.

Once his mortgage was paid off, his monthly living expenses dropped a lot, so he did not need his entire paycheck to cover them. So, to better balance his retirement accounts with his taxable accounts, he began deferring 50% of his paycheck to the 457b plan he is in already (he is a local government employee).

I am also monitoring his cash accounts to make sure they don't build up so much, advising him to move cash to the various mutual funds he is in. He has a friend who is a broker and who gives him some occasional stock tips. He throws some money in that direction, not a lot, just some "playing around" money. The cash builds up from CDs and bonds maturing or being called early, so we have to figure out what to do about this and invest the money elsewhere while maintaining his AA.

It is a lot to oversee but he is happy with how his investments are doing while being able to cover his expenses and keep his tax bill low (I do his taxes, too).
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Padlin
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Re: Inheriting money, don't want to [mess] anything up

Post by Padlin »

Regards | Bob
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Re: Inheriting money, don't want to [mess] anything up

Post by reggiesimpson »

Keep working (or start) your butt off and remain frugal forever. Save your money (get used to that idea). As the windfall comes in realize that you didnt earn it and therefore the probability that you will blow it is very high. Follow the investing advice above and you may, i say MAY, become much wealthier than the mere $690,000 you are inheriting. Good Luck!
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

Thanks for the responses. It's daunting how much info there is on this site, and with every thread I read I feel increasingly inept and hopeless. I've decided to scrap the home-buying plan, and will be renting for at least the next few years. So what to do when the first installment of money comes is my current concern. I have enough savings to last me well over a year, so the money coming in can be viewed purely as capital to invest. I guess I'm just saving for retirement, but only because I have no other real plans for the money.

Should I put 10% into a bond fund, 60% into domestic equities, and 30% into international equities, with 5,500 designated as Roth IRA money, and 17,500 designated as Roth 401k money, then each year draw the max Roth IRA and Roth 401k limits from the non-Roth investments and into those Roth accounts until everything is in those accounts? And those Roth allocations would be in the domestic equities I guess?

What funds/indices/ETFs do you suggest I choose?
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SamGamgee
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Re: Inheriting money, don't want to [mess] anything up

Post by SamGamgee »

dontrunaway wrote:I'm unsure what I want (out of life)
As long as you feel this way, DON'T buy real estate. The last thing you need is to spend a huge chunk of money on transaction costs and then be stuck in a particular location.

My advice: invest that money conservatively, keep working, and find out what you want to do with your life.
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SnapShots
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Re: Inheriting money, don't want to [mess] anything up

Post by SnapShots »

Call Vanguard. You can pay a VG financial advisor for help. VG may offer Free advice but you will get more personalized attention if you pay for it. Then read and keep learning about investments. It's a life long job.

Agree with those who recommend against buying a house. You're very young and not sure what your going to be doing. You could end up losing a lot of money in real-estate.

Best to you.
the best decision many times is the hardest to do
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Re: Inheriting money, don't want to [mess] anything up

Post by JW-Retired »

dontrunaway wrote: Thanks for the responses. It's daunting how much info there is on this site, and with every thread I read I feel increasingly inept and hopeless. I've decided to scrap the home-buying plan, and will be renting for at least the next few years. So what to do when the first installment of money comes is my current concern. I have enough savings to last me well over a year, so the money coming in can be viewed purely as capital to invest. I guess I'm just saving for retirement, but only because I have no other real plans for the money.

Should I put 10% into a bond fund, 60% into domestic equities, and 30% into international equities, with 5,500 designated as Roth IRA money, and 17,500 designated as Roth 401k money, then each year draw the max Roth IRA and Roth 401k limits from the non-Roth investments and into those Roth accounts until everything is in those accounts? And those Roth allocations would be in the domestic equities I guess?

What funds/indices/ETFs do you suggest I choose?
You really shouldn't view this money any differently than you view the savings you have in the bank now.

I doubt if all Roth is a good idea. Usually some mix of Roth and pre-tax accounts is best. But to make any specific suggestions we need more information. What is your tax bracket? How stable is your employment? What are your prospects for being in a high tax bracket in retirement?

It would help us if you can provide your information in the usual format we like?
http://www.bogleheads.org/forum/viewtop ... f=1&t=6212
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ruralavalon
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Re: Inheriting money, don't want to [mess] anything up

Post by ruralavalon »

dontrunaway wrote: . . . So what to do when the first installment of money comes is my current concern. I have enough savings to last me well over a year, so the money coming in can be viewed purely as capital to invest. I guess I'm just saving for retirement, but only because I have no other real plans for the money.

Should I put 10% into a bond fund, 60% into domestic equities, and 30% into international equities, with 5,500 designated as Roth IRA money, and 17,500 designated as Roth 401k money, then each year draw the max Roth IRA and Roth 401k limits from the non-Roth investments and into those Roth accounts until everything is in those accounts? And those Roth allocations would be in the domestic equities I guess?

What funds/indices/ETFs do you suggest I choose?
I'm glad you scrapped the home buying idea for now.

To get specific ideas for how to invest the first installment, please post your financial details in this format -- http://www.bogleheads.org/forum/viewtopic.php?t=6212 . We would need to know some details like: your debt if any; marital status; tax filing status; other investing or retirement accounts such as 401k, 403b, IRAs and details; a desired asset allocation, that is desired stock/bond ratio, and desired domestic/international ratio; intended additional annual contributions to savings etc.

If you have consumer debt or student loans paying that off might be the best place to start, especially if the interest rates on the loans are high.

A lot depends on what choices are offered in your 401k, so list fund names, tickers and expense ratios. Any plan would involve using the best one or two choices in the 401k, where choices are usually very limited.

On asset allocation, please see: Wiki article link: Asset Allocation ; regression http://www.bogleheads.org/forum/viewtop ... 3#p1217243 ; Wiki article link: Domestic/International ; and int'l poll http://www.bogleheads.org/forum/viewtopic.php?p=98922 .

At age 28, a typical stock/bond mix would be about 75/25. A typical international equities allocation would be in the range of 20 - 40% of total equities.
Last edited by ruralavalon on Tue Apr 16, 2013 9:01 am, edited 2 times in total.
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archbish99
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Re: Inheriting money, don't want to [mess] anything up

Post by archbish99 »

dontrunaway wrote:Should I put 10% into a bond fund, 60% into domestic equities, and 30% into international equities, with 5,500 designated as Roth IRA money, and 17,500 designated as Roth 401k money, then each year draw the max Roth IRA and Roth 401k limits from the non-Roth investments and into those Roth accounts until everything is in those accounts? And those Roth allocations would be in the domestic equities I guess?
The investment split looks reasonable, if a bit aggressive for most people's taste on this board. Putting the maximum into Roth accounts will depend heavily on your tax rate. If you're in a particularly low tax bracket otherwise, then yes; if you're not in a low bracket, then Traditional will often make more sense. Particularly if you think you might be able to retire early some day as a result of investing this money, you'll have years with very low taxable income in which you can do Roth conversions and get the money out at lower tax rates.
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BL
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Re: Inheriting money, don't want to [mess] anything up

Post by BL »

Just a comment on your 10% bond comment: since you don't need to choose such a high risk, it seems to me that being conservative will still get you where you want to be. I have read here several times that no one should have less than 25% bonds or more than 75% bonds. "Age in bonds" has been another starting point and going up or down from there. Since you probably have not lived through a 50% drop in equities, I would not be in a rush to start with that high amount when you don't need it.
Austintatious
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Re: Inheriting money, don't want to [mess] anything up

Post by Austintatious »

dontrunaway, I know that you're getting a lot of good responses to think about but you have plenty of time to sift though it all. Take a look at the http://www.longtermreturns.com web site, another excellent learning resource for new investors. Just the posts for Saturday, April 13 will give you some very good food for thought about how you might invest your money. Look at the discussion of Vanguard's Life Strategy funds in question #1. Look at the excellent discussion of a 50/50 portfolio in question # 2. These discussions will give you some important investing concepts and very good options to think about. Do some exploring on the site and, when you're ready, you can present your personal situation to the very knowledgeable individual "behind the curtain" at this site and request advice tailored specifically to your situation. And just like at Bogleheads, you can expect thoughtful, objective advice at zero cost to you. Congratulations are certainly in order for you, not just for the sizable cash installments coming your way but because you're demonstrating the very good judgment to ask these important questions, and to seek responsible, objective advice. Good luck to you!
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

Thanks for all of the insight already. I've put together my information in the standard manner and would love any advice I could get:

Emergency funds: A year's worth of living expenses
Debt: I have none
Filing Status: Single
Tax Rate: 15% Federal; 9% State (Oregon)
State of Residence: Soon to be Oregon (currently California)
Age: 28
Desired Asset Allocation: 60% Stocks / 40% Bonds (I guess, but I'd defer to someone wiser)
Desired International Allocation: 50% (I'm not a big believer in America's long-term prospects vs. the world's, but I'm no expert)

100% of my money is in cash right now; I have no job or previous retirement contributions, and those tax rates are estimates of what job I will get when I move up to Portland in a few weeks. According to my mom (the trustee), the inheritance I'm receiving is not going to be taxed, and although I'm receiving it in three installments, I can call the shots on where it's invested, so you can basically think of it as ~690k of non-taxable money to be invested.

Questions:

1 What specific funds/ETFs/indices should I choose.
2. Where do I put the Roth IRA and Roth 401k designated money, and how much Roth 401k should I allocate each year? (I assume I should max out the Roth IRA every year.)
Twins Fan
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Re: Inheriting money, don't want to [mess] anything up

Post by Twins Fan »

I am not at all familiar with inheritance or windfall situations, so I will leave most of that to others.

As for the Roth IRA though, most of us in bogleheads will recommend going through Vanguard to start up the Roth. They are low cost and easy to use.

Any 401k plan will be through your employer, so got to get a job first before worrying about that part. Unless you're self employed? Then it's a different story.

I think the best advice for you right now is, DON"T RUSH this. There's obviously a lot of stuff you have to figure out first, overall really... like, where to live, job, etc... If this first windfall chunk sits in a bank account for a year while you get everything figured out, big deal. Get situated, settled, and develop a plan first. JMHO
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archbish99
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Re: Inheriting money, don't want to [mess] anything up

Post by archbish99 »

The distributions from the trust to you aren't taxable, but the trust's investment income will be, either to you or to the trust itself. So you want to be tax-efficient with your investments, which means putting as much of your bond investing in tax-advantaged accounts as possible.

If you have investment control over the whole amount, here's what I would do. Start with your target AA:
  • 30% domestic equity
  • 30% international equity
  • 40% bonds
Make the maximum contribution to both a Roth IRA and your 401k (probably Roth, given your tax bracket, but that's debatable given the state tax). For now, and probably for some time to come, that will be entirely in bonds -- I'd consider Intermediate-Term Bond Index (VBIIX / BIV) or Total Bond Market (VBMFX / BND) in the IRA, and whatever your best bond option turns out to be in your 401k. The balance of your bonds being in taxable space, I'd look at Intermediate-Term Tax-Exempt (VWIUX) for the trust. $690k * 40% in bonds * 1.47% yield * 24% tax rate means an extra $1k on your taxes if you go with taxable bonds in the trust -- though if you get a better yield that way, it may be worth considering the same funds as in the tax-advantaged accounts.

For the stocks, I'd start with total-market index funds -- Total International (VTIAX) and Total Stock Market (VTSAX) -- and branch out later if you learn more and decide you want to. When you reach the point where all your bond investments are in tax-protected space, then start moving the Total Stock Market in, and leave International for last.
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WorkToLive
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Re: Inheriting money, don't want to [mess] anything up

Post by WorkToLive »

Are you planning to get a job? That might determine how you want your asset allocation to be arranged. I would suggest working as a way to begin to find out "what you want out of life." Good luck with your move!
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

Thanks again for the replies, especially archbish99 for such a specific write-up. I have a couple follow-up questions in light of your advice: since bonds should have a lower expected return than equities, why should I put bonds in tax-sheltered accounts instead of equities? And I should put $5500 into a Roth IRA of VBIIX / BIV or VBMFX / BND as soon as possible, and the rest of the bond portion (about 270k) into VWIUX, provided VBIIX or VBMFX doesn't have a greater net (taxes factored-in) return?
JW-Retired
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Re: Inheriting money, don't want to [mess] anything up

Post by JW-Retired »

dontrunaway wrote: 100% of my money is in cash right now; I have no job or previous retirement contributions, and those tax rates are estimates of what job I will get when I move up to Portland in a few weeks. According to my mom (the trustee), the inheritance I'm receiving is not going to be taxed, and although I'm receiving it in three installments, I can call the shots on where it's invested, so you can basically think of it as ~690k of non-taxable money to be invested.
Non-taxable money? Not certain I understand what you mean by this? Inherited or gifted money isn't income and isn't taxed as income when you receive it. But once you have it the annual interest or dividends it earns is taxable income.

You do need income from a job to put any money at all into a Roth or traditional IRA. What you put in annually can't exceed the $5k limit or your W-2 form earned income, whichever is smaller. Investment income alone won't do it.
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BL
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Re: Inheriting money, don't want to [mess] anything up

Post by BL »

I-Bonds at treasurydirect.gov are another place for bond-like investments. They pay similar to CDs, are guaranteed safe, are adjusted for inflation, and are not taxed by the state. You can only put in $10,000 per year and they stop paying at 30 years when you need to pay the federal tax.

Don't tell people about your inheritance or you will have a target on your back for friends or salesmen to help you spend it down or "invest" it! It could be gone in a very short while. You may need advisers but be sure you pick them!

If you make 5500 this year you can put it in a Roth IRA at Vanguard and hopefully can fill any 401k with bonds as well. Set aside some of your inheritance specifically so you can max them out even if you have to spend from elsewhere to do it.

There is one rule of thumb that suggests no less than 25% bonds (nor more than 75%) for everyone. I think this is an excellent way to get started and you would not lose quite so much during the next severe bear market. The tax exempt bonds at Vanguard could hold whatever bonds you need and then sell to cover Roth each year if not covered by your wages.
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archbish99
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Re: Inheriting money, don't want to [mess] anything up

Post by archbish99 »

dontrunaway wrote:Thanks again for the replies, especially archbish99 for such a specific write-up. I have a couple follow-up questions in light of your advice: since bonds should have a lower expected return than equities, why should I put bonds in tax-sheltered accounts instead of equities? And I should put $5500 into a Roth IRA of VBIIX / BIV or VBMFX / BND as soon as possible, and the rest of the bond portion (about 270k) into VWIUX, provided VBIIX or VBMFX doesn't have a greater net (taxes factored-in) return?
Bond return consists of interest rate changes and interest itself. The change due to rates evens out over time as the bonds reach maturity, which is why you always want a bond fund whose duration is shorter than how long you plan to hold the fund. Net return on bonds is interest, which if taxable is taxed at your ordinary income rate.

Stocks, on the other hand, have their return as capital gains and dividends, both of which are treated favorably by the US tax code (currently, at least). Read through Principles of Tax-Efficient Fund Placement in the wiki, bearing in mind that the trust is essentially a gigantic taxable account and your tax-advantaged accounts are just getting started.

Taxes shouldn't dictate your allocation, but they can reasonably dictate what goes in which account.
I'm not a financial advisor, I just play one on the Internet.
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Raymond
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Re: Inheriting money, don't want to [mess] anything up

Post by Raymond »

BL wrote:...Don't tell people about your inheritance or you will have a target on your back for friends or salesmen to help you spend it down or "invest" it! It could be gone in a very short while. You may need advisers but be sure you pick them!
"You will have many opportunities in life to keep your mouth shut. You should take advantage of every one of them." :D

Seriously, though, if friends and long-lost relatives find out about your money, you will not lack for many offers to help you spend it :twisted:

Good luck with your move to Oregon!
"Ritter, Tod und Teufel"
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

I'm a bit confused about the interest rates of these bond funds. The Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) shows an interest rate of 1.64%, Total Bond Market (VBMFX) shows 1.48%, and Intermediate-Term Bond Index (VBIIX) 1.70%. Take VWIUX for example: the historic rate of returns graph (on the Vanguard fund overview site) for one year shows an increase of 4.88%.

1) How is it that the interest rate is 1.64% but it returns 4.88%?

2) Why would anyone buy VBMFX over VWIUX when its returns are lower and it isn't tax exempt?

3) The only reason you would buy VBIIX over VWIUX (and grab the .06% yield difference) is if you had Roth space that was unused?

4) Should I buy 10k of I-Bonds (composite yield of 1.76%)? And does the answer change if I move to WA where there is no income tax as opposed to OR with its 9% income tax?
dbr
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Re: Inheriting money, don't want to [mess] anything up

Post by dbr »

dontrunaway wrote:I'm a bit confused about the interest rates of these bond funds. The Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) shows an interest rate of 1.64%, Total Bond Market (VBMFX) shows 1.48%, and Intermediate-Term Bond Index (VBIIX) 1.70%. Take VWIUX for example: the historic rate of returns graph (on the Vanguard fund overview site) for one year shows an increase of 4.88%.

1) How is it that the interest rate is 1.64% but it returns 4.88%?

There is a difference between return and yield. Yield is the dividend paid from interest received on the bonds in the fund. Return is that plus or minus any change in the market value of the fund. When interest rates go down, as they have over more or less continuously over the last 25 years or so, bond prices go up and you get a nice return. If/when interest rates stop going down and start going up, these returns will evaporate and even turn into losses. Past return on a bond fund is not a number anyone should be using to predict future return unless you understand you are also trying to predict future changes in interest rates.

2) Why would anyone buy VBMFX over VWIUX when its returns are lower and it isn't tax exempt?

It might be that you wouldn't, provided what you are comparing is current yields and not past returns. But tax exempt municipal bonds are not the bonds in the total bond market index used by VBMFX. You also have to compare the duration and the credit risk for sets of investments that are not the same thing. Whether or not there is an opportunity for investors with certain priorities to prefer one over the other is a subtle and complex question. I would be biased to sticking with broad index funds unless there is a really good tax exemption offered.

3) The only reason you would buy VBIIX over VWIUX (and grab the .06% yield difference) is if you had Roth space that was unused?

If you have to put bonds in taxable space it is often better to use tax exempts up to a point. Bond yields right now are low enough that the tax cost of any bonds is not the burden it would be at higher yields.

4) Should I buy 10k of I-Bonds (composite yield of 1.76%)? And does the answer change if I move to WA where there is no income tax as opposed to OR with its 9% income tax?

I bonds are a good investment option. Note that all Treasury bonds are state tax exempt in all states. There is a gotcha with I-bonds that the federal tax is deferred for 30 years but could come due during high earning years for a young investor. Also, that yield is really just the current inflation increment. The real yield (real means inflation adjusted) is about zero. This is a bad deal historically, and I bonds have the problem that they cannot be sold and replaced quickly in large amounts when interest rates go up due to the annual purchase restriction. I don't think that is a really good reason to avoid them, however.
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

Thanks for the great write-up, dbr.

It appears that the money will soon be in my command, but I've had a couple thoughts recently. I'm thinking that moving to Seattle instead of Portland would be a better option, simply because of the zero income tax. Even with just a low-paying job and bond income, I would be saving 3–5 thousand a year, and given my original ambivalence between the two cities, I think taxes will actually be the deciding factor.

My other thought was whether I should try to time the market to some degree. I just read Pfau's paper (http://mpra.ub.uni-muenchen.de/29448/1/ ... _29448.pdf) and found it rather compelling. With the PE10 of the market at 22.85, would allocating something more like 25% stocks (split domestically and internationally) and 75% tax-exempt intermediate term bonds (with 5500 in non-tax-exempt intermediate term bonds in a Roth) be reasonable? The plan then being that once the market falls significantly or PE10 gets into the range of mid-teens, I go back to my original AA of 60% stocks and keep it there indefinitely.

I'm conflicted in the I feel I'm not qualified to be timing the market when so many people say it's not prudent; on the other hand, given Pfau's insight and that of some other posters on this board, I feel now may not be the greatest entry point for pure buy-and-hold, and if 10% or so of my holdings were to get wiped out right out of the gate, I'd feel like I had been remiss in not using all the tools available. Thoughts on my above strategy?
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archbish99
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Re: Inheriting money, don't want to [mess] anything up

Post by archbish99 »

Bear in mind that while Oregon has a 9% income tax rate and no sales tax, the Seattle area has no income tax and a 9.5% sales tax rate. That's probably still better for you (and we'd love to have you here!), but don't think you're getting away scot-free on the tax front by coming to Washington state. (We've actually met people who grew up here, going to Oregon for shopping sprees, who think that all states only have one or the other.)
I'm not a financial advisor, I just play one on the Internet.
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BL
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Re: Inheriting money, don't want to [mess] anything up

Post by BL »

Not for the reasons you give, but I suggest you go with the lower stock for now and revisit it at a later date.

Now is the time to concentrate on what you are going to do for the rest of your life. You don't mention education or training but it is important to find something that you can live with and you have the means to accomplish this. Your inheritance won't necessarily make you rich, but you can use it to find just the right thing to do.
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

archbish99 wrote:Bear in mind that while Oregon has a 9% income tax rate and no sales tax, the Seattle area has no income tax and a 9.5% sales tax rate. That's probably still better for you (and we'd love to have you here!), but don't think you're getting away scot-free on the tax front by coming to Washington state. (We've actually met people who grew up here, going to Oregon for shopping sprees, who think that all states only have one or the other.)
It's definitely borne in mind. But since I'm such a frugal spender, and since my only significant expenses are rent and groceries (which are tax-free), I really would be saving thousands by being in Washington.

Does the market-timing strategy seem reasonable to you?
mikefixac
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Re: Inheriting money, don't want to [mess] anything up

Post by mikefixac »

Wow, coming into money, a Boglehead and young---Dude, you've got it going on.

So, not sure where you're at in the career stage, but here's what I'd do:

Listen to what these fine folks here are telling you. And you do seem that you are one of the few young people that actually heeds the wisdom of the older generation, especially those on this board.

For me, I've realized my passion is real estate and construction. I'd look for the cheapest house in a nice neighborhood, and get to learning carpentry and home renovation skills. After living there for two years, (of course renting out the extra rooms), I'd sell the property and keep all the monies up to $250,000, tax free. Rinse and repeat.

Read blogs like Mr Money Mustache, Early Retirement Extreme and Lacking Ambition. Exercising frugality, reading and applying the wisdom on this board, you should be financially set for life.
Twins Fan
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Re: Inheriting money, don't want to [mess] anything up

Post by Twins Fan »

dontrunaway wrote:Does the market-timing strategy seem reasonable to you?
[/quote]

You're in the wrong place if you want a bunch of cheerleaders for your market timing thought. :D

If you are claiming to be a buy and hold type, but say you worry about a 10% drop over the short term, then you need to do some more reading about all this stuff. The part where you said 10% would/might get "wiped out" kind of hints that you do need to read more about this.

There is no set in stone way of investing and there are many different styles out there. You will have to decide what's right for you.
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

Twins Fan wrote: You're in the wrong place if you want a bunch of cheerleaders for your market timing thought. :D

If you are claiming to be a buy and hold type, but say you worry about a 10% drop over the short term, then you need to do some more reading about all this stuff. The part where you said 10% would/might get "wiped out" kind of hints that you do need to read more about this.
I'm definitely not looking for cheerleaders—I just want to do what's most provident with this money. I give full admission that I've been at this financial stuff for about two weeks and am just trying to avoid making any bad mistakes. Which has me wondering, is an asset allocation, albeit only until stock prices come nearer median historical values, of 75% tax-exempt intermediate-term bonds exposing myself to a lot of risk should interest rates rise? Is there a realistic chance that interest rates climb so much that I could lose a significant amount of my holdings in these bonds by waiting for stocks to come down?
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archbish99
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Re: Inheriting money, don't want to [mess] anything up

Post by archbish99 »

Here's the problem.... You can hold on to investments that have gone down, knowing that they'll eventually make up the difference. But you're proposing to take an investment allocation that you don't want to hold for the long term. What if stocks go up? Even from here, they could. What if interest rates go up, and you've lost money in those bonds?

If you want to do something like this, I'd just DCA part of it. Put 50% Intermediate term bonds, 25% equity, and 25% short term bonds. Set up an automatic exchange to move .5%/month from short term bonds into equities.

Not likely to be ideal, but if it helps you sleep better at night, it might be the right allocation for you.
I'm not a financial advisor, I just play one on the Internet.
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

archbish99 wrote:Here's the problem.... You can hold on to investments that have gone down, knowing that they'll eventually make up the difference. But you're proposing to take an investment allocation that you don't want to hold for the long term. What if stocks go up? Even from here, they could. What if interest rates go up, and you've lost money in those bonds?
Then I'm worse for the wear. I'm still not convinced it's the right move, given that my 40-30-30 AA is already fairly conservative for someone my age. But just to entertain the idea, it isn't especially risky to hold 75% in VWIUX, is it? The odds of interest rates rising to cost one 10% of one's bond holdings aren't nearly as high as those of stocks dropping to cost one 10% of one's stock holdings, right?
If you want to do something like this, I'd just DCA part of it. Put 50% Intermediate term bonds, 25% equity, and 25% short term bonds. Set up an automatic exchange to move .5%/month from short term bonds into equities.

Not likely to be ideal, but if it helps you sleep better at night, it might be the right allocation for you.
It seems every answer I get on here illuminates another field I'm ignorant of, and more questions arise: Why would I choose to put 25% in short term bonds, which I would expect to yield 0.37%, as oppose to putting the 25% in intermediate term bonds, which I would expect to yield 1.63%?
Jfet
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Re: Inheriting money, don't want to [mess] anything up

Post by Jfet »

I think I would do some low budget traveling for a couple of years using up maybe $50k of your windfall. Spend some time in the Northwest, Northeast, Southwest, Southeast, maybe even a summer in Alaska. You may find an area of the USA you absolutely love and can then think in the future about real estate...you may even find yourself.
Twins Fan
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Re: Inheriting money, don't want to [mess] anything up

Post by Twins Fan »

dontrunaway wrote:Then I'm worse for the wear. I'm still not convinced it's the right move, given that my 40-30-30 AA is already fairly conservative for someone my age. But just to entertain the idea, it isn't especially risky to hold 75% in VWIUX, is it? The odds of interest rates rising to cost one 10% of one's bond holdings aren't nearly as high as those of stocks dropping to cost one 10% of one's stock holdings, right?
If you held 75% in any one fund or area, then you would be nowhere near your AA would you?

Yes, being too conservative can be risky. As you later pointed out, the yield of the bond funs is pretty low. As in, below the 3% average inflation rate. Parking 75% of your holdings in a bond fund means most of your money isn't even keeping up with inflation, at least for now while yields are so low. That can be considered "risky" in a way.

You really need to figure out your risk assesment here. If a 10% on the equity side is all you can stomach, then you are a VERY conservative investor. The stock side of your portfolio will drop 10% and probably much more than that plenty of times in your investing lifetime. Just realize that. The stock side will also go up 10% and probably much more many times as well.

You will not find many in boglheads, if any, that will recommend this "market timing" thing you're thinking of. Pick an AA you're comfortable with and stick with it. The decision you can make then is whether to lump sum it all into the AA at once, or to DCA it all into the AA over a period of time. There are arguments to be made for both sides of that. But, both of those options and sticking to your AA are much better than the market timing deal.

Have you read about rebalancing yet?
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bigROI
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Re: Inheriting money, don't want to [mess] anything up

Post by bigROI »

I would move to Washington before you take distribution and commute to work, you will save 20k of income tax this way on each distribution if the account is from pretaxed funds Otherwise live like you have lived, invest in 25% bonds 75% equity portfolio if you like a little more risk and max out your Roth and 401k. You might just consider the Wellesley Income fund (if kept in tax advantaged form) for a one stop place to park the funds while you decide what you want to do.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

Another thing I would do when you are in receipt of funds is to roll all your existing retirement into bonds and the taxable stuff into equities or as much as you can respecting your risk tolerance since your tax exposure from dividends and such is high if not in a tax advantaged vehicle.
A penny saved is much more then a penny earned when you consider the tax/SS/medicare cut.
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Re: Inheriting money, don't want to [mess] anything up

Post by Jebediah »

Figuring out the 'right' investment strategy is super daunting. That Pfau paper you found? There are a million more where that came from. Forget it, don't go down that rabbit hole. You have several decades of investing ahead of you so no rush, take it slow and relieve yourself of this burden for now. My suggestion is to invest 10% in a "mini" portfolio over at Vanguard and see how that feels for a year. If 60/40 (within the mini port) is your inclination, just go with that. Spend very little time thinking and tweaking, just pick one of the lazy ports from the wiki, they will all perform about the same given the low allocation. Keep it simple, no need to agonize over it because it's only 10%. Put the other 90% in CDs or savings (check out Ally and PenFed). Get used to how it all feels, maybe get a correction or two under your belt, then consider adding more next year and the year after that.
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archbish99
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Re: Inheriting money, don't want to [mess] anything up

Post by archbish99 »

dontrunaway wrote:
archbish99 wrote: If you want to do something like this, I'd just DCA part of it. Put 50% Intermediate term bonds, 25% equity, and 25% short term bonds. Set up an automatic exchange to move .5%/month from short term bonds into equities.

Not likely to be ideal, but if it helps you sleep better at night, it might be the right allocation for you.
It seems every answer I get on here illuminates another field I'm ignorant of, and more questions arise: Why would I choose to put 25% in short term bonds, which I would expect to yield 0.37%, as oppose to putting the 25% in intermediate term bonds, which I would expect to yield 1.63%?
Because the intermediate-term fund has a duration of 5.1 years, which means every percentage-point rise in interest rates will cause it to decline 5.1%. Limited-Term Tax-Exempt will decline 2.3% with the same interest rate change; Short-Term Tax-Exempt will decline 1%. How quickly will we see a 2% rise in interest rates, to reference your 10% drop scenario? Don't know. The question is this -- stocks are at historic highs (by some measurements) and bonds at historic lows (by pretty much any measurement). What's your goal? If it's to make money in the long term, I think you need to grit your teeth and get a decent allocation you're willing to stick with through different market circumstances, then do that. If it's not to lose money in the short-term, you need to reduce your exposure to risks, both equity and interest rate / term. However, pretty much any time you reduce risk, you also reduce return.

Which brings us back to, you need to find the right balance of risk and expected return that lets you sleep at night. If that's 75% intermediate-term bonds, okay. If that's 80% equities, that's okay too. Ultimately, you're the only one who can identify that balance -- all we (or Wade Pfau, or anyone else writing insightful papers) can do is offer some ideas and considerations of what the risks are.
I'm not a financial advisor, I just play one on the Internet.
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dontrunaway
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Re: Inheriting money, don't want to [mess] anything up

Post by dontrunaway »

Any advice on what to do with my emergency funds/cash, and how much of it to hold outside of investments? I expect my yearly expenses to be around 20k; my car is leased; I can't imagine what reason could arise where I'd need thousands of dollars on short notice. Should I just put like 3k in a checking account, then like 15k in an ally savings account, and invest the rest of my assets according to my AA? It looks like ally savings accounts yield 0.94% APY, which makes me wonder why anyone would buy like a 6-month CD (0.61% APY)—are there significant penalties for withdrawing money from a savings account?
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Re: Inheriting money, don't want to [mess] anything up

Post by ruralavalon »

Seriously, before going much further read something to help your learning curve -- Wiki article link: Books: Recommendations and Reviews . The Bogleheads' Guide to Investing would be my suggestion.

Decide a reasonable asset allocation (Wiki article link: Asset Allocation ) , like 75/25 stocks/bonds. To save on taxes put bonds in tax-protected accounts to the extent possible. In a taxable account use very tax-efficient funds ( Wiki article link: Principles of Tax-Efficient Fund Placement ), like Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX). Keep it simple, live frugally, get an education and a job you enjoy, and have fun.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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