Newbie and how to manage a large inheritance

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Minou33
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Newbie and how to manage a large inheritance

Post by Minou33 »

How would you manage a 500k inheritance? My husband and I haven't been that great with money and are kind of winging it. We have looked into financial advisors and don't know who to trust. We are both professionals in our mid-30's with no children. We have paid down all outstanding credit card/car loan debt totaling $27k and aside from a 1.90% student loan, are debt free. We both opened fully funded Roth-IRAs for 2014 and plan to do the same for 2015, however, as of now this money is just sitting in our accounts because we have no clue about how to invest in mutual funds. We have never paid into any retirement plan before and are behind. We're small business owners and are also considering opening a fully funded Simple-IRA as well. We don't own a home--but are planning on buying a modest, older home in cash. We'd also like to put a down payment on a rental property as well. My husband will probably play a bit with the stock market. Any advice on how/where to invest is appreciated. We don't plan on using this money to buy toys and are hoping being debt and mortgage free will give us a big boost on savings since we're probably far behind most people our age.
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Steelersfan
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Re: Newbie and how to manage a large inheritance

Post by Steelersfan »

The bogleheads wikipedia has an entry to get you started:

http://www.bogleheads.org/wiki/Windfall ... a_windfall
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Garco
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Re: Newbie and how to manage a large inheritance

Post by Garco »

There's a lot going on in your post. I think you should take a systematic look at how this "found money" fits into your lifetime investment plan.

If this were invested properly, there's a reasonable chance it would amount to $3-4 million+ by the time you reach retirement age. Of course that's nominal, not inflation adjusted. But you get the idea.

And pending your having aplan, I would ditch (permanently) the idea of that your husband "will play a bit with the stock market." In short, GET A PLAN. Don't play Las Vegas casino with this inheritance.
livesoft
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Re: Newbie and how to manage a large inheritance

Post by livesoft »

The stock market is not for playing. Folks who play end up losing lots of money. They pay. Get serious and get a plan. This forum is good, but reading some books will demonstrate the seriousness that this deserves. Please pick two or three books from the recommended reading list and read them.
Wiki This signature message sponsored by sscritic: Learn to fish.
Laura
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Re: Newbie and how to manage a large inheritance

Post by Laura »

Hello and welcome,

You have come to the right place. Investing isn't difficult and the ironic part is that to pick a good adviser you need to know enough about investing to identify them. Once you know enough, you don't need them anymore. We can help you work through this step-by-step. To begin, do nothing. Just make sure the money is protected in FDIC insured accounts if it is sitting in the bank.

Next, you need to build an investment plan for yourselves. If you look at Investment Planning and Asking Portfolio Questions and post the requested information we can help you work through all of this. The most important thing is to select your asset allocation. This is the split between stocks and bonds that will basically set the risk level in your portfolio. That risk level is what will be responsible for your return. Fund selection is the very last step in the process.

Turning to your point about owning rental property, make sure you understand this is basically a second job. As a business owner do you really have the time or energy to manage a rental property? You can invest in real estate through a mutual fund rather than owning property yourself. You already have a house so buying more real estate is not diversifying at all. I would not advise this as your first step.

Next, you husband's idea to play around in the stock market isn't a good investment plan. Buying individual stocks is a losers game. You want to make sure you are fully diversified and there is no way to do that sufficiently with individual stocks. If he does play around then think of this as "Vegas gambling money" so if you lose it, you just stop playing. The costs will be high and the returns low.

Next, you should look into Vanguard small business plans. There are many different options so take a look then give Vanguard a call. They can help you select the best option for your particular situation. Hurry and do this because some of them have calendar year deadlines for contributions. Remember that you can make some contributions directly from your company then use that inheritance money to cover your living expenses for the month if needed. This may allow you to make a large contribution quickly before the end of the year and it is a way of sheltering some of this inherited money for future growth.

Having roths is good and we can help you select which funds would be best. You should look at all of your accounts and money together as one unified portfolio. We will help you keep it simple to manage, low cost, and broadly diversified. You can easily do all of this yourselves. Take a look at the links and then come on back and share more information. You can do it!

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
Minou33
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Re: Newbie and how to manage a large inheritance

Post by Minou33 »

Thanks for the replies. When I said "playing around with the stock market" I didn't mean it to sound so irresponsible or 'Vegas-style'. We have looked into steady stocks for some time but didn't have the means to invest before. I have a personal brokerage account that I opened when the market was at rock bottom and my small investment back then has since more than doubled.

What mutual funds would you suggest for an IRA? I have been looking at Vanguard Prime Cap VPMCX. But I don't really understand how to read the details and the cost seems high. At Schwab they recommended a Schwab Target Date mutual fund that becomes more conservative over time.

Good advice about the real estate. We have friends with real estate and they have managed pretty well. They also have full-time jobs where our business allow us a lot more flexibility. I think we figured it makes sense to have tangible investments outside of the stock market, but I guess it may just be more work than its worth. I will definitely look at those links and start from there. Thanks again!
Laura
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Re: Newbie and how to manage a large inheritance

Post by Laura »

You would also benefit from looking at the wiki page on the principals of tax efficient fund placement. The key in your case will be that most of your assets are in a taxable account so you will need to focus on tax efficiency. You will also experience a taxable event if you decide to make any change. This means you need to think about your plan carefully before executing.

Individual stocks still are not a good idea. You may have doubled in value but do you know what the market did in that time frame? It is very easy to under perform the market and you don't even realize it.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Lafder
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Re: Newbie and how to manage a large inheritance

Post by Lafder »

Welcome!

As a business owner you may be able to do a SEP or solo 401k.

Read up on it quickly. You can open an account at Vanguard and make an initial deposit, then you would still have until your tax filing date to make the full contribution of pretax dollars. The amount per person can be up to 25% of income or $52,000 so you can put MUCH more away pretax than with a traditional IRA or post tax Roth.

You can keep it simple and pick a Target Date Retirement fund or Lifestrategy Growth until you get more comfortable learning about stock and bond mutual funds. But even then you may decide to keep it simple with one fund.

Come up with a plan for your $$ and if you want extra feedback before you act on it, add to your thread here.

Making the decision of what to do with the $$ is hard for me, it gets much easier once that decision is made to act on it.

Note holding cash is not keeping up with inflation. If you are most comfortable with holding funds at a bank, do look at CDs or laddered CDs. Pehaps putting some $$ into investing will be easier with some FDIC insured accounts as your back up ?

Best wishes,
lafder
eschaef
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Re: Newbie and how to manage a large inheritance

Post by eschaef »

I'm going to go slightly against the grain and say not to rush through the process to attempt to make SEP or Solo401k contributions for this year.

Based on your post, you both have a lot to learn about managing a windfall like this. It is a GREAT thing that you recognize it. This windfall has the potential to transform your life. Congratulations! :beer :beer What matters now is whether you will make it a lasting positive transformation or not.

Step 1. Do nothing. Really. It is perfectly acceptable to let this money sit untouched in FDIC insured bank accounts (with account balances below the insurance limit) for 6 months to a year while you develop your game plan. You have absolutely no reason to rush any decisions here.
Step 2. Read, research. Read the "How to Manage a Windfall" post suggested above. Choose something off the recommended reading list. If you have questions, ask here and read another book.
Step 3. Sit down together and have a discussion about your priorities. What do you want your life now, your life in the future to look like? How can this money be put to work to make that happen?
Step 4. Make a plan that best accomplishes your goals.
Step 5. Implement the plan, Stick to the plan. Repeat step 5.

Don't buy individual stocks. (At least, not right now... The Vegas comments aren't just warning against flashy day trading, penny stocks, or flavor of the month investing. There is real risk involved in owning even "blue chip" individual stocks that must be accounted for before you include them in your investment plan. If, after Steps 1, 2, and 3, you decide that certain individual stocks have a place in your plan, that's different than just buying some stocks now because you can finally afford it.)

Don't ignore your real risk tolerance. If you stray from this you increase the risk that you will make a rash decision out of panic or stress.

Don't invest anything with anyone who approaches YOU about your money. Seriously, sharks can smell a drop of blood in the water from surprisingly far away...

And lastly... welcome and good luck! You have been given an incredible opportunity to shape your life in a way many do not ever get. Savor it.
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Hawkeye5
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Re: Newbie and how to manage a large inheritance

Post by Hawkeye5 »

1. Thank your lucky stars you choose to join this forum.
2. Chill. Read, learn, and write a plan that both of you agree is the direction in which you want to proceed. Commit to the plan and don’t stray.
3. Ask questions. While we don’t all agree, most of the time there are very good suggestions offered that may be alternatives worth consideration.
4. Thank your lucky stars you choose to join this forum.
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Watty
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Re: Newbie and how to manage a large inheritance

Post by Watty »

eschaef wrote:Step 1. Do nothing. Really. It is perfectly acceptable to let this money sit untouched in FDIC insured bank accounts (with account balances below the insurance limit) for 6 months to a year while you develop your game plan. You have absolutely no reason to rush any decisions here.
+1

Well there are a few thing you should probably do.

a) Review your car insurance to make sure that you have a decent amount of coverage.
b) Get an umbrella policy.

Now that you have some assets there is more chance of there being a lawsuit.

I like your idea of buying a modest house. Without rent or a mortgage payment you can then save more each month.
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Minou33
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Re: Newbie and how to manage a large inheritance

Post by Minou33 »

I have read the links posted and my husband I both started reading the Boglehead Investment Guide. We also listened to some interviews and read some articles by Bogle. We like the philosophy, although I don't how much of it we are really understanding.

What I've gotten from this so far is: 1.) Individual stocks are too volatile and should be avoided.
2.) Mutual Funds are bad because of high fees. Buy Index Funds. Although when I did the Vanguard questionnaire online it
recommended The Vanguard LifeStrategy Moderate Growth Mutual Fund. Which confuses me....
3.) Based on our age, we should buy a fund with about 30% in bonds--however, I think also read something that conflicts with this
about how bonds are not a safe investment.

So some additional questions I now have are:

1.) We just opened Roth-IRAs at Schwab. I guess that means we would have to move this over to Vanguard if we wanted to use their
products without fees? Or does Schwab offer similar products? How much thought/time should we spend researching this? Right
now the money is just sitting in the account. I am not sure if there is a deadline for us to invest this for 2014 since the money has
already been deposited. Not knowing what to do with this seems stressful...
2.) Should retirement be our priority? Since we have never had any retirement accounts at all, should we be focusing on maxing out \ retirement as much as possible since we are so far behind? Or are there potential problems with focusing too much on retirement
accounts?
3.) I have a small brokerage account with a little under 10k in stocks. Is it wiser to sell and use the money to purchase some Mutual or
Index Funds in its place?
4. Would it be silly to buy a house in cash if we could get a low enough mortgage rate and just invest the money instead?
5. How do we really know our financial goals to come up with a plan? The only goals I think we've ever had were to be debt free
(including mortgage) and to be able to retire abroad as soon as we could. Other than that I am not sure what the plan should entail.
ulrichw
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Re: Newbie and how to manage a large inheritance

Post by ulrichw »

Minou33 wrote:I have read the links posted and my husband I both started reading the Boglehead Investment Guide. We also listened to some interviews and read some articles by Bogle. We like the philosophy, although I don't how much of it we are really understanding.
Excellent! You're on the right path (in my opinion)
Minou33 wrote: What I've gotten from this so far is: 1.) Individual stocks are too volatile and should be avoided.
Right!
Minou33 wrote: 2.) Mutual Funds are bad because of high fees. Buy Index Funds. Although when I did the Vanguard questionnaire online it
recommended The Vanguard LifeStrategy Moderate Growth Mutual Fund. Which confuses me....
Not quite: It's not that mutual funds are bad - it's the fees that are bad. Some mutual funds have higher fees than others - avoid those unless you really feel they're going to outperform (and if you're a boglehead, you won't believe that any funds can signficantly outperform)
Minou33 wrote: 3.) Based on our age, we should buy a fund with about 30% in bonds--however, I think also read something that conflicts with this
about how bonds are not a safe investment.
This is where things get complicated: There is no one universal truth about investing, and you'll find sources out there to argue just about any strategy. The other thing is the disclaimer I'm sure you've heard before - something like: "Past Performance is Not Indicative of Future Results" - Unfortunately this holds very true in investing - so just because somebody had great results with a given strategy doesn't mean that strategy will succeed in the future. In fact, if you look at the people who did the best in various crises, it's virtually a rule that their results weren't sustained later (they just got lucky to have a strategy that matched the crisis well).
The upshot is that you'll have to educate yourself in the options out there and pick what you believe the most. The one rule I'd suggest always keeping in mind is "If it sounds too good to be true, it probably is." - Beware of people touting strategies that are "guaranteed" to do something - there is no panacea, and if someone found one, they'd be keeping it to themselves, not sharing it with other people.
Minou33 wrote: So some additional questions I now have are:
1.) We just opened Roth-IRAs at Schwab. I guess that means we would have to move this over to Vanguard if we wanted to use their
products without fees? Or does Schwab offer similar products? How much thought/time should we spend researching this? Right
now the money is just sitting in the account. I am not sure if there is a deadline for us to invest this for 2014 since the money has
already been deposited. Not knowing what to do with this seems stressful...
Don't panic - if you follow a Boglehead strategy, you'll be doing so few transactions that the fees will become next to irrelevant. Sure, you can do a little better by trading accounts, but picking the wrong strategy is far more expensive than picking the wrong trading account. You can always switch later, as well. With a Roth IRA there will be no tax implications from liquidating (and even with taxable accounts, you can do a full account transfer). This is not the thing to stress over.
Minou33 wrote: 2.) Should retirement be our priority? Since we have never had any retirement accounts at all, should we be focusing on maxing out /retirement as much as possible since we are so far behind? Or are there potential problems with focusing too much on retirement accounts?
This is a personal decision, and goes with your question #5. As other advice has suggested, take the time to flesh this out.
Minou33 wrote: 3.) I have a small brokerage account with a little under 10k in stocks. Is it wiser to sell and use the money to purchase some Mutual or Index Funds in its place?
Conventional (Boglehead) wisdom would say "yes". I would potentially consider saying keep these stocks - it's a small portion of your (new) net worth, and will probably provide valuable lessons on the risks (and rewards) of owning individual stocks. I'd advise investing any new money the Boglehead way, but it doesn't hurt to have a small "play" account.
Minou33 wrote: 4. Would it be silly to buy a house in cash if we could get a low enough mortgage rate and just invest the money instead?
In my opinion this wouldn't be a big mistake. Remember that investing entails risk, and while you may end up better off by getting the loan and investing, you also might end up considerably worse off. This goes toward your financial goals.
Minou33 wrote: 5. How do we really know our financial goals to come up with a plan? The only goals I think we've ever had were to be debt free (including mortgage) and to be able to retire abroad as soon as we could. Other than that I am not sure what the plan should entail.
This is sufficient, in my view. Now that you're that much closer to reaching your goals, you should re-evaluate and start connecting the dots to get there. For example, you said you want to retire abroad. Is this an expense-based decision - with your windfall, you might be able to grow it to the point you can retire here (though it will take more time).
Another thing to do is to use a little bit of your windfall to vet your goals - take a trip to the place "abroad" you think you may want to retire, and see if it will really work for you (there are other forums that can advise you on the pluses and minuses of expatriate retirement).

Mostly, don't worry too much - you're on a great path, and as long as you do your research and don't get carried away with high-risk strategies, you'll do fine.
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Minou33
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Re: Newbie and how to manage a large inheritance

Post by Minou33 »

Great advice, ulrichw. And much appreciated! :D
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gardemanger
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Re: Newbie and how to manage a large inheritance

Post by gardemanger »

Point of information: Index [mutual] funds ARE mutual funds. They are just a specific type of mutual fund.

The other kind of mutual fund is an "actively managed" fund. They cost more to own because you are paying a lot of overhead for the mutual fund company to employ a bunch of people to pick stocks to buy and sell and hypothetically beat the market. Which in any one year, an actively managed mutual fund may or may not do. An index fund, on the other hand, is run by a computer to match a particular market index.

The Target Retirement and Lifestrategy mutual funds at Vanguard are each composed of a blend of different index funds in order to achieve a certain asset allocation for a specific goal.

I would echo the advice of some others that you should sit on this money until you have had enough time to understand what all these basic terms mean and then thoroughly understand your options. Do not worry that you absolutely have to "do something" before the end of 2014. You don't. For six months or so, you absolutely do not have to worry about meeting or beating inflation or "getting into the market" - you just need the money to be safe and not under the mattress.

It's a lot better to do nothing than to do the wrong thing, and it's also free of charge.
rakaye47
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Re: Newbie and how to manage a large inheritance

Post by rakaye47 »

Minou33 wrote:How would you manage a 500k inheritance? My husband and I haven't been that great with money and are kind of winging it. We have looked into financial advisors and don't know who to trust. We are both professionals in our mid-30's with no children. We have paid down all outstanding credit card/car loan debt totaling $27k and aside from a 1.90% student loan, are debt free. We both opened fully funded Roth-IRAs for 2014 and plan to do the same for 2015, however, as of now this money is just sitting in our accounts because we have no clue about how to invest in mutual funds. We have never paid into any retirement plan before and are behind. We're small business owners and are also considering opening a fully funded Simple-IRA as well. We don't own a home--but are planning on buying a modest, older home in cash. We'd also like to put a down payment on a rental property as well. My husband will probably play a bit with the stock market. Any advice on how/where to invest is appreciated. We don't plan on using this money to buy toys and are hoping being debt and mortgage free will give us a big boost on savings since we're probably far behind most people our age.
You should use your $500k to buy a house for yourself and a rental property both in CASH.
an_asker
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Re: Newbie and how to manage a large inheritance

Post by an_asker »

Minou33 wrote:[...]I have a personal brokerage account that I opened when the market was at rock bottom and my small investment back then has since more than doubled.[...]
Before you pat yourself on the back, do note that the market has tripled since its bottom in 03/2009.
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BL
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Re: Newbie and how to manage a large inheritance

Post by BL »

You have received good advice. Take your time. If your Roth IRA is set for 2014, one option is to leave it alone for now and just start one at Vanguard for 2015. There is no rush, but you can contribute $5500 each any time from now until next April 2016. You may have to pay $95/person to close the Schwab accounts. (AFAIK, Vanguard doesn't have closing out costs. But do accept e-statements at V to avoid account fees until you have about $50,000 there.)

Here is another little booklet online to get you going (maybe consider it a mini-version of the Boglehead's book:
http://www.etf.com/docs/IfYouCan.pdf

Vanguard has an option to pay someone 0.3% for advice and management of your accounts. I think it might be worth considering (you can actually call them to find out about it!), since you have so much all at once. You could pay for it for a year and then decide if it is worth it or not. The thing is, V doesn't operate like other companies that are working on commissions or other possible conflicts of interest like you see at the big or little brokers that would like to handle your money so they can get income from loads, 1+% AUM management fees, 12B-1 fees off the ERs you pay on funds, and/or other expensive investment or insurance products. So whatever funds they suggest at V are pretty cheap (low ER costs), and they won't try to sell you other stuff.
Fidelity and Schwab also have some low-cost funds, but they would love to sell you their expensive stuff along with higher management fees.
ShiftF5
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Re: Newbie and how to manage a large inheritance

Post by ShiftF5 »

Laura wrote:Hello and welcome,

You have come to the right place. Investing isn't difficult and the ironic part is that to pick a good adviser you need to know enough about investing to identify them. Once you know enough, you don't need them anymore. We can help you work through this step-by-step. To begin, do nothing. Just make sure the money is protected in FDIC insured accounts if it is sitting in the bank.

Next, you need to build an investment plan for yourselves. If you look at Investment Planning and Asking Portfolio Questions and post the requested information we can help you work through all of this. The most important thing is to select your asset allocation. This is the split between stocks and bonds that will basically set the risk level in your portfolio. That risk level is what will be responsible for your return. Fund selection is the very last step in the process.

Turning to your point about owning rental property, make sure you understand this is basically a second job. As a business owner do you really have the time or energy to manage a rental property? You can invest in real estate through a mutual fund rather than owning property yourself. You already have a house so buying more real estate is not diversifying at all. I would not advise this as your first step.

Next, you husband's idea to play around in the stock market isn't a good investment plan. Buying individual stocks is a losers game. You want to make sure you are fully diversified and there is no way to do that sufficiently with individual stocks. If he does play around then think of this as "Vegas gambling money" so if you lose it, you just stop playing. The costs will be high and the returns low.

Next, you should look into Vanguard small business plans. There are many different options so take a look then give Vanguard a call. They can help you select the best option for your particular situation. Hurry and do this because some of them have calendar year deadlines for contributions. Remember that you can make some contributions directly from your company then use that inheritance money to cover your living expenses for the month if needed. This may allow you to make a large contribution quickly before the end of the year and it is a way of sheltering some of this inherited money for future growth.

Having roths is good and we can help you select which funds would be best. You should look at all of your accounts and money together as one unified portfolio. We will help you keep it simple to manage, low cost, and broadly diversified. You can easily do all of this yourselves. Take a look at the links and then come on back and share more information. You can do it!

Laura
You won't find better advice at ANY price.

And the "Financial Advisor" will end up with 1/2 of your inheritance.

I hope you take time to consider everything Laura suggested.

Best wishes.
deikel
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Re: Newbie and how to manage a large inheritance

Post by deikel »

You post suggests that you are currently thinking anything and everything and what can be done with the money.

I would suggets to follow the standard rules promoted on this forum and follow the usual steps:

1) pay off all high APR debt (arguably you student debt would fall into this as well, I would kill that as well)
1) fund an emergency savings account worth 6-12 months of your current expenses, especially important for self employed
2) If you think about a house, you now have the funds to buy one cash (and consider this a low return investment in real estate) - as long as you buy a house size that you need vs one that you can currently afford, this should make sense in the long term (assuming you are likely to stay in your current locales)
3) Skip the idea of a rental unit - with your own house, a good part of your money is already in real estate, no sense to add more with a rental, especially if you have no prior experience with rentals or real estate at all - thats just fancy fluff for later.
4) whatever is left at this point should go to a brokerage account (200k I am guessing) and invested in simple index funds (if you want to get fancy, stock up on foreign funds for tax reasons and mix in some bonds for volatility protection) - this should give you annual payments of 8-10k towards living expenses or funding other retirement options
5) a self employed 401k can only be invested in with profits of your business(es?), so this is somewhat independnant of the inheritance. If you currently make small profits that you need to live vs invest in simpleIRAs than taking the money out of a brokerage account to fund on simple IRA (or IRA or ROth) only gives you a reduction in tax liability vs immidiate access to money if needed (think early retirement), so that is something you can decide later (same goes for funding T-IRAs (or Roths) with the inheritance money over time)


Having your own house (no rent), no more debt payments and some income from a brokerage account should allow you to start funding IRAs and/or become more fancyful in your investment choices - plenty of time for that to think about in the next twleve months after buying and moving into a house and the other fun...

my 2 cents
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
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BL
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Re: Newbie and how to manage a large inheritance

Post by BL »

Agree with ShiftF5. Laura is the best!
jackholloway
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Re: Newbie and how to manage a large inheritance

Post by jackholloway »

I had a windfall worth about 5% of my portfolio about four years ago, and invested it in a mishmash of funds based on some stuff I read here, some books from the library, and a few articles on fundamental investing. I then spent a year reading finance books seriously, and decided that i rather like simplicity, a comprehensible plan, and a portfolio of no more that 70% stocks. I am not a fan of factors, international investing, or anything i do not understand.

To unwind the mishmash would require paying capital gains, and they were not expensive or bad choices, just complicated. They stay in the portfolio to remind me that I do not have to hurry.

This turned out to be a blessing in disguise, because I inherited a windfall worth 20% of my portfolio, and this time, I have a written asset allocation and investment plan like Laura reccomended. I stuffed it all in an FDIC insured bank account for six months, and worked out whether this meant I should change my plan. It turns out that having 55% in the Vanguard total stock market index fund, 10% in the vanguard total international, and 35% in the vanguard total bond fund still seems ok. Further, while lump sums classically do well, I am risk averse enough that dollar value averaging works for me. i am executing on the plan I wrote out three years ago now.

Do as Laura suggested - write out a plan. Do not rush to start, and let it bake in a safe bank account while you learn enough to build the plan and understand the pieces. Investing is simple, but not easy.
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