19 y/o Windfall Questions

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micarpenter09
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19 y/o Windfall Questions

Postby micarpenter09 » Mon Jun 19, 2017 10:26 am

Daughter just received a life insurance policy from ex great-grandmothers passing for $45,000. Wondering what the best course of action should be. The money is sitting in Vanguard settlement fund. She doesn't have immediate use for the funds, but would like to remain liquid, so looking for the most tax efficient.

19 years old - Michigan
Single
15% marginal tax rate (approx $15k/year GI)

My initial thought was to have her put in VTSAX or a similar stock fund, but figured I'd ask for any input here.

Thanks in advance!

aristotelian
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Re: 19 y/o Windfall Questions

Postby aristotelian » Mon Jun 19, 2017 10:29 am

Does she plan to attend college?

micarpenter09
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Re: 19 y/o Windfall Questions

Postby micarpenter09 » Mon Jun 19, 2017 10:42 am

aristotelian wrote:Does she plan to attend college?


She is currently attending. 4 years taken care of from same great grandmother via Michigan Education Trust.

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flamesabers
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Re: 19 y/o Windfall Questions

Postby flamesabers » Mon Jun 19, 2017 10:51 am

If she has earned income, I would recommend she max out her Roth IRA contribution for this year. She could setup a CD ladder for the next few years so that she's on course to contribute to her IRA every year.

Putting the money in VTSAX or another equity fund I think makes most sense if she's not going to need the money for the next ten years or so.

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ruralavalon
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Re: 19 y/o Windfall Questions

Postby ruralavalon » Mon Jun 19, 2017 11:00 am

micarpenter09 wrote:Daughter just received a life insurance policy from ex great-grandmothers passing for $45,000. Wondering what the best course of action should be. The money is sitting in Vanguard settlement fund. She doesn't have immediate use for the funds, but would like to remain liquid, so looking for the most tax efficient.

19 years old - Michigan
Single
15% marginal tax rate (approx $15k/year GI)

My initial thought was to have her put in VTSAX or a similar stock fund, but figured I'd ask for any input here.

Thanks in advance!

micarpenter09 wrote:
aristotelian wrote:Does she plan to attend college?


She is currently attending. 4 years taken care of from same great grandmother via Michigan Education Trust.

She could open a Roth IRA at Vanguard, contribute $5.5k now, and contribute another $5.5k in January 2018.

She could invest the rest, $34k, in an individual taxable account at Vanguard, investing in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%.

She could invest the Roth IRA in Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%.

That gives an asset allocation of about 75/25 stocks/bonds, is tax-efficient and liquid.
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Spirit Rider
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Re: 19 y/o Windfall Questions

Postby Spirit Rider » Mon Jun 19, 2017 2:49 pm

micarpenter09 wrote:She doesn't have immediate use for the funds, but would like to remain liquid, so looking for the most tax efficient.

...

My initial thought was to have her put in VTSAX or a similar stock fund, but figured I'd ask for any input here.

Define liquid. If it is access with little risk, TSM is not appropriate. Is she going to need some money in a few years to buy a car, etc...

Someone who is 19 with no investing experience has not identified their willingness to take risk. Unless this is being invested for retirement, I think something like a 60:40 asset allocation is probably a better idea.

I am actually a believer in asset allocation with training wheels for young people. My oldest girl was in a balanced fund 2008 - 2009. She was concerned, but didn't panic like others around her with 100% equity asset allocations who bailed at the bottom. She felt confident increasing asset allocation 2010 - 2012, when the others were too scared to invest are now asking if this would be a good time to get back in.

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FelixTheCat
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Re: 19 y/o Windfall Questions

Postby FelixTheCat » Mon Jun 19, 2017 3:00 pm

Tax efficient is Total Stock Market Index and maybe a short/intermediate term municipal bond fund for a 10 year investment horizon.

Liquid is a FDIC insured savings account.
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Meg77
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Re: 19 y/o Windfall Questions

Postby Meg77 » Mon Jun 19, 2017 3:13 pm

I would leave it in cash for now to support "extra" education expenses. She may want to use it to study abroad one summer or to go to graduate school or to live off while she takes an unpaid internship in New York after college. Once she has graduated and has a full time job, she may want to use some of the money to move or buy a car or put down on her first home purchase.

It is definitely smart to max out a Roth IRA as soon as she has earned income, so some of the money can be used for that once she is working (even summer jobs and part time income count). Also if she gets a full time job at a company with a 401k after college and has no other short term financial goals, she can max out her 401k for a year or two and draw down that investment pot to live on instead, effectively moving it into a tax advantaged account to grow for the long term.
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ruralavalon
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Re: 19 y/o Windfall Questions

Postby ruralavalon » Mon Jun 19, 2017 3:27 pm

The term "liquid" refers to an investment that can be quickly and easily converted to cash at little or no cost or penalty.

Any Vanguard mutual fund held in a taxable account or a Roth IRA is liquid.
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Spirit Rider
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Re: 19 y/o Windfall Questions

Postby Spirit Rider » Mon Jun 19, 2017 3:43 pm

I certainly understand what the definition of liquid is when referring to investments.

However, when a new member has started two threads, it is reasonable to ask for a clarification exactly what the OP meant.

Especially, considering in those two thread's the OP started, the OP is 25 years old AND has a 19 year old daughter.

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flamesabers
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Re: 19 y/o Windfall Questions

Postby flamesabers » Mon Jun 19, 2017 4:01 pm

Spirit Rider wrote:Especially, considering in those two thread's the OP started, the OP is 25 years old AND has a 19 year old daughter.


Daughter is most likely a stepchild for OP as OP has a 39 year old partner.

micarpenter09
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Re: 19 y/o Windfall Questions

Postby micarpenter09 » Mon Jun 19, 2017 4:32 pm

flamesabers wrote:
Spirit Rider wrote:Especially, considering in those two thread's the OP started, the OP is 25 years old AND has a 19 year old daughter.


Daughter is most likely a stepchild for OP as OP has a 39 year old partner.


Thank you. It is an unmarried step child, but didn't feel the need to go into full detail with this post. After discussing it with her, she is unsure what her intentions are after college, thus she is wanting to maintain liquidity in case of wanting to put down towards a house, etc. Unknown when she will need any portion of it, but my best guess is 5+ years at the very soonest, if at all. Graduate school is not in the plans at this time, but as with any 19 year old, things may change. This life insurance policy was unexpected, so there hasn't been much time to make a definite game plan on long term goals. We hadn't considered the Roth, but like the idea of having her set that up. Has anyone ever played around with the idea of harvesting tax gains each year? Being that her earned income is so low, she can essentially grow her taxable account at 0% at this point in time.

I did try and assess her risk tolerance by asking "if you view your monthly statement and it lost $1,000 in value last month, would you be concerned and want to sell out?". She said no, but unsure if thats truly the case.

Spiritrider, I do like that idea of "training wheels" at say 60/40 and increasing equity allocation once she is more comfortable with the concept. I suggested maybe she start with half of the money in a TSM fund and leave the remaining in the settlement fund.

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Re: 19 y/o Windfall Questions

Postby aristotelian » Mon Jun 19, 2017 4:47 pm

Probably the best thing you could do for her is take $20 of the $45K and buy the Bogleheads Guide, then let her decide how to invest it.

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flamesabers
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Re: 19 y/o Windfall Questions

Postby flamesabers » Mon Jun 19, 2017 4:53 pm

micarpenter09 wrote: We hadn't considered the Roth, but like the idea of having her set that up. Has anyone ever played around with the idea of harvesting tax gains each year? Being that her earned income is so low, she can essentially grow her taxable account at 0% at this point in time.


At her age and her low tax bracket, I think it's best she gets as much as possible in a Roth IRA.

micarpenter09 wrote:
Spiritrider, I do like that idea of "training wheels" at say 60/40 and increasing equity allocation once she is more comfortable with the concept. I suggested maybe she start with half of the money in a TSM fund and leave the remaining in the settlement fund.


Something like a balanced fund would be a good choice I think if she's going to go with the 60/40 allocation.

aristotelian wrote:Probably the best thing you could do for her is take $20 of the $45K and buy the Bogleheads Guide, then let her decide how to invest it.


I think this is an excellent idea. When the next recession comes about, she should know the last thing you do is pull all of your money out of the market.

micarpenter09
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Re: 19 y/o Windfall Questions

Postby micarpenter09 » Mon Jun 19, 2017 5:01 pm

aristotelian wrote:Probably the best thing you could do for her is take $20 of the $45K and buy the Bogleheads Guide, then let her decide how to invest it.


I would love to do this, however being a 19 year old girl, it would not maintain more than 30 seconds of her attention at a time. I own it and have read it and am trying to guide her in the right direction.

BanditKing
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Re: 19 y/o Windfall Questions

Postby BanditKing » Mon Jun 19, 2017 5:09 pm

aristotelian wrote:Probably the best thing you could do for her is take $20 of the $45K and buy the Bogleheads Guide, then let her decide how to invest it.



^^^ This

mouses
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Re: 19 y/o Windfall Questions

Postby mouses » Mon Jun 19, 2017 5:16 pm

micarpenter09 wrote:I would love to do this, however being a 19 year old girl, it would not maintain more than 30 seconds of her attention at a time.


Perhaps this is true of her, but perhaps it is an unwarranted assumption about 19 year olds and "girls."

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BL
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Re: 19 y/o Windfall Questions

Postby BL » Mon Jun 19, 2017 5:50 pm

Here is a great 16-page pdf that recommended author, William Bernstein, wrote for his young adult children and might be just short enough for her to read it:
https://www.etf.com/docs/IfYouCan.pdf

Read it and see what you think.

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Re: 19 y/o Windfall Questions

Postby inbox788 » Mon Jun 19, 2017 7:27 pm

Spirit Rider wrote:I certainly understand what the definition of liquid is when referring to investments.

However, when a new member has started two threads, it is reasonable to ask for a clarification exactly what the OP meant.

Especially, considering in those two thread's the OP started, the OP is 25 years old AND has a 19 year old daughter.

That seems odd, but I found no reference to 25 year old in this thread. On the other thread,
Myself
25 years old
...
Partner
39 years old

viewtopic.php?f=1&t=190033

So I assume it's highly unlike to impossible that OP parented a child at age 5, but perhaps Partner parented a child at age 18. In any case, not sure how much if anything this particular situation would have on the original question regarding what the 19 year old should do with a windfall.

The answer mainly depends on how long to invest before it needs to be used, and the risk tolerance. I wouldn't lock it up in a retirement account, but using up Roth space is a good idea. And since the timeframe is indefinite, a likely use would be buying a home in 5-10 years, so a modest (60/40) to aggressive (80/20)+ AA is reasonable.

sco
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Re: 19 y/o Windfall Questions

Postby sco » Tue Jun 20, 2017 12:14 am

Taxable account in either Total Stock Market or an Age based Target fund. Every year she has earned income move that amount (up to $5500) from the taxable account to a Roth contribution. Re-evaluate in 5 years.

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Re: 19 y/o Windfall Questions

Postby itstoomuch » Tue Jun 20, 2017 12:58 am

^@SCO.
This we did this, 1985-2006 with our contributions and gifts. The remainder in 2014 was used to fund son's home purchase along with his personal savings and a loan from us, secured by stock in Facebook, other stocks, and stock options. He went 4 years minimally funding 401k while in the 25% marginal tax b.h
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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Re: 19 y/o Windfall Questions

Postby sapphire96 » Tue Jun 20, 2017 7:32 am

micarpenter09 wrote:
flamesabers wrote:
Spirit Rider wrote:Especially, considering in those two thread's the OP started, the OP is 25 years old AND has a 19 year old daughter.


Daughter is most likely a stepchild for OP as OP has a 39 year old partner.


Thank you. It is an unmarried step child, but didn't feel the need to go into full detail with this post. After discussing it with her, she is unsure what her intentions are after college, thus she is wanting to maintain liquidity in case of wanting to put down towards a house, etc. Unknown when she will need any portion of it, but my best guess is 5+ years at the very soonest, if at all. Graduate school is not in the plans at this time, but as with any 19 year old, things may change. This life insurance policy was unexpected, so there hasn't been much time to make a definite game plan on long term goals. We hadn't considered the Roth, but like the idea of having her set that up. Has anyone ever played around with the idea of harvesting tax gains each year? Being that her earned income is so low, she can essentially grow her taxable account at 0% at this point in time.

I did try and assess her risk tolerance by asking "if you view your monthly statement and it lost $1,000 in value last month, would you be concerned and want to sell out?". She said no, but unsure if thats truly the case.

Spiritrider, I do like that idea of "training wheels" at say 60/40 and increasing equity allocation once she is more comfortable with the concept. I suggested maybe she start with half of the money in a TSM fund and leave the remaining in the settlement fund.


One of my favorite Vanguard funds is Wellesley -- 40/60 fund and has a very steady return. A LOT can happen within four years, especially in college. https://personal.vanguard.com/us/funds/ ... IntExt=INT

micarpenter09
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Re: 19 y/o Windfall Questions

Postby micarpenter09 » Tue Jun 20, 2017 9:42 am

Perhaps that may not be true of all 19 year old girls, but it is of this one; I know her well. Thank you to those who replied with constructive responses based on the facts I gave; that is exactly what we were looking for. The Roth seems like a great option, especially since she can withdrawal the basis without penalty and has a first home exception.

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Re: 19 y/o Windfall Questions

Postby grabiner » Tue Jun 20, 2017 8:09 pm

And the natural fund to put in the Roth IRA would be Vanguard Target Retirement 2060 (possibly moving to 2065 when Vanguard opens such a fund, but the two will be identical for years). This fund will manage itself to keep a reasonable allocation for an investor who expects to retire around 2060, and she can always change this allocation if she wants to get more involved in managing her portfolio.
David Grabiner

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Re: 19 y/o Windfall Questions

Postby micarpenter09 » Tue Jun 20, 2017 8:10 pm

grabiner wrote:And the natural fund to put in the Roth IRA would be Vanguard Target Retirement 2060 (possibly moving to 2065 when Vanguard opens such a fund, but the two will be identical for years). This fund will manage itself to keep a reasonable allocation for an investor who expects to retire around 2060, and she can always change this allocation if she wants to get more involved in managing her portfolio.


That was my next question. We transferred $40,000 into Vanguard, will transfer $5,500 right away into a Roth. How should she balance funds between the 2 accounts? Or purchase the same fund for both?

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Re: 19 y/o Windfall Questions

Postby grabiner » Tue Jun 20, 2017 8:33 pm

micarpenter09 wrote:
grabiner wrote:And the natural fund to put in the Roth IRA would be Vanguard Target Retirement 2060 (possibly moving to 2065 when Vanguard opens such a fund, but the two will be identical for years). This fund will manage itself to keep a reasonable allocation for an investor who expects to retire around 2060, and she can always change this allocation if she wants to get more involved in managing her portfolio.


That was my next question. We transferred $40,000 into Vanguard, will transfer $5,500 right away into a Roth. How should she balance funds between the 2 accounts? Or purchase the same fund for both?


As long as she stays in the 15% tax bracket, the tax cost of switching funds in the taxable account won't matter much, although she would owe MI tax.

Thus money which is being saved for retirement in the taxable account can be in the same target-date fund. (However, there is one possible tax issue if the market declines; see Wash sale on the wiki for what she would need to do in order to deduct her capital loss. Essentially, if the market is down, she needs to wait 31 days after selling the fund in her taxable account to buy the same fund in the Roth, or she will not be able to deduct the loss. She could sell the taxable account on January 2 and use the money to invest in something not substantially identical in the Roth, then move the Roth money to the correct fund on February 2.)

Money which is not being saved for retirement should probably be left in a savings account (for current spending), or in CDs which will mature when the money is needed (for future spending, such as a car she might want to buy when she graduates).
David Grabiner


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