Best Investment Options for Inheritance

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anonymous1
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Best Investment Options for Inheritance

Post by anonymous1 » Sun Jul 16, 2017 9:58 pm

Hello everyone. I believe I have studied up on this well, but am looking for confirmation please, or other ideas if I am off base. I am married, and both my spouse and I are in our early forties, work decent jobs, and we have both maxed out our 401k contributions, and our Roth IRA contributions for a few years now. Now we are dealing with a inheritance of around $700,000.00 (mostly stocks inherited at a stepped up basis) and we are wondering the best account type to place this in.
I believe, I would have to go to a taxable brokerage account(which I already have with Vanguard anyway), and I believe the best investment option is the Vanguard Total Stock Market Index Fund.
Something I am a little uncertain of, is, if and when it makes sense to look at an annuity?
I don't mind risk, and assume this will all or mostly go to future generations, and our IRA's and company retirement plans are all invested in Vanguard Index funds, so I'm pretty much planning to leave this invested in stocks, and mainly just wondering if there are options past a standard taxable brokerage account?
"Most people will be about as happy as they make up their minds to be" - Abraham Lincoln

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WoodSpinner
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Re: Best Investment Options for Inheritance

Post by WoodSpinner » Sun Jul 16, 2017 10:36 pm

anonymous1 wrote:Hello everyone. I believe I have studied up on this well, but am looking for confirmation please, or other ideas if I am off base. I am married, and both my spouse and I are in our early forties, work decent jobs, and we have both maxed out our 401k contributions, and our Roth IRA contributions for a few years now. Now we are dealing with a inheritance of around $700,000.00 (mostly stocks inherited at a stepped up basis) and we are wondering the best account type to place this in.
I believe, I would have to go to a taxable brokerage account(which I already have with Vanguard anyway), and I believe the best investment option is the Vanguard Total Stock Market Index Fund.
Something I am a little uncertain of, is, if and when it makes sense to look at an annuity?
I don't mind risk, and assume this will all or mostly go to future generations, and our IRA's and company retirement plans are all invested in Vanguard Index funds, so I'm pretty much planning to leave this invested in stocks, and mainly just wondering if there are options past a standard taxable brokerage account?
Op,

I like your plan, shift the assets to an allocation you are comfortable with, VTI is a reasonable choice, but keep to your AA.

At this point, I don't think annuities are that great a deal, especially for someone your age. You van always shift direction later if things change.

Good luck 8-)

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Watty
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Re: Best Investment Options for Inheritance

Post by Watty » Sun Jul 16, 2017 11:06 pm

anonymous1 wrote:Something I am a little uncertain of, is, if and when it makes sense to look at an annuity?
There are lots of totally different things that are called annunities but most of them are expensive confusing products that are sold to people so that salespeople and financial firms can make a lot of money off of people.

About the only one that makes sense for some people is a Single Premium Immediate Annunity(SPIA) from a carefully selected company that is not too expensive. This is basically like buying a pension.

The best time to buy a SPIA is when you actually need the income since it makes little sense to buy one and then just put the "pension" income into an investment account. This pretty well limits the right time to buy one to be sometime after you retire.

Inflation can be a problem with most SPIAs so instead of buying one large one when you are 65 buying a series of smaller ones at 65,70,75, etc will allow you to have your annunity income keep up with iflation
anonymous1 wrote: and assume this will all or mostly go to future generations,
If you still have a mortage then one option would be to use the money to pay off the mortage you could then invest your "mortage payment" and the future generations would inherit both the paid off house and the investments you have saved up over the years.

Unless you can retire today then I think that it is mistake to just earmark the money for future generations and invest it overly agressively. I would just include it with all your other investments and invest it in a manner that is appropriate for you. Once you get to the point where you can retire then you could work another five or ten years and earmark that income for future generations if you want to.

GreenGrowTheDollars
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Re: Best Investment Options for Inheritance

Post by GreenGrowTheDollars » Sun Jul 16, 2017 11:10 pm

Since this is an inheritance, it is probably the property of one of you, not both. If you're both agreed on how to handle it, that's fine -- but I believe that putting in a joint account might convert it to marital property in some states.

A vanilla taxable account sounds fine, matched with a set it and (just about) forget it 3 fund portfolio.

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celia
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Re: Best Investment Options for Inheritance

Post by celia » Mon Jul 17, 2017 3:57 am

A $700K taxable account has the potential to generate lots of taxable distributions and dividends. So keep tax efficiency in mind and choose funds with "index" in their name.

trasmuss
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Re: Best Investment Options for Inheritance

Post by trasmuss » Mon Jul 17, 2017 4:25 am

I don't see a need or benefit to a brokerage account. Just put the entire amount into either the Vanguard Total Stock Market fund or Index 500 fund in a taxable account. Use your 401k or IRA's for bonds.

Avoid complicating things with annuities and leave the account to your heirs on a stepped up basis.

Either reinvest the dividends or use them for those enjoyable things that you may not do otherwise.

Jack FFR1846
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Re: Best Investment Options for Inheritance

Post by Jack FFR1846 » Mon Jul 17, 2017 6:01 am

I completely agree that annuities are a bad choice, even if it's a SPIA, which is the only product that isn't a rip off with 8% of the cost going to the salesman.

Think about how these things are set up. They take into account the current interest environment, which is near zero now. In 20 years, will interest rates increase? Probably, right? If they do, you're stuck with a low interest product that you can't get out of. The time to consider an annuity....and specifically an SPIA is when you're retired and want to convert a pile of money into an income stream.

I like the idea of paying off the mortgage. Although many, including Ric Edelman think this is the wrong way to go, it's a zero risk way to use the money to reduce interest payments and costs. What's left can go into a taxable account and used for something like Total US Stock as you've asked about. Be sure to pay attention to what your AA is and if it changes with this extra money, adjust to increase bonds in your tax deferred accounts.
Bogle: Smart Beta is stupid

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CyclingDuo
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Re: Best Investment Options for Inheritance

Post by CyclingDuo » Mon Jul 17, 2017 6:15 am

anonymous1 wrote:Hello everyone. I believe I have studied up on this well, but am looking for confirmation please, or other ideas if I am off base. I am married, and both my spouse and I are in our early forties, work decent jobs, and we have both maxed out our 401k contributions, and our Roth IRA contributions for a few years now. Now we are dealing with a inheritance of around $700,000.00 (mostly stocks inherited at a stepped up basis) and we are wondering the best account type to place this in.
I believe, I would have to go to a taxable brokerage account(which I already have with Vanguard anyway), and I believe the best investment option is the Vanguard Total Stock Market Index Fund.
Something I am a little uncertain of, is, if and when it makes sense to look at an annuity?
I don't mind risk, and assume this will all or mostly go to future generations, and our IRA's and company retirement plans are all invested in Vanguard Index funds, so I'm pretty much planning to leave this invested in stocks, and mainly just wondering if there are options past a standard taxable brokerage account?
Condolences on your loss of family. We went through the same thing recently, and everyone pointed us to the Wiki on managing a windfall. We highly suggest reading it and taking your time figuring out what to do with the $700K.

https://www.bogleheads.org/wiki/Managing_a_windfall

If moving the stocks over in kind from where they currently are to Vanguard, yes you would need a brokerage account at Vanguard to do that. That's easy to open online and takes just a few minutes. It doesn't cost anything to open, and is a nice tool to have even if you do not keep the money in individual stocks as your eventual choice.

The dividends that you receive every quarter from the stocks could be used to go into purchasing shares of the TSM fund to get started while you figure out what to do with the stocks. $700K in stocks will probably give you about $13-17K per year in dividends depending on their yield. Spend time looking at all of the individual holdings to see what they are, how diverse they are, and if some of them make sense to keep within your AA.

Plenty of BH's own individual stocks in addition to index funds.
Something I am a little uncertain of, is, if and when it makes sense to look at an annuity?
At your age, the only type worth looking at might be a tax deferred variable annuity (Vanguard and Fidelity have the best). You could shuttle some of the inherited money into one of Vanguard's variable annuity portfolios (they use their own index funds for this) and you have 17 different "portfolio" choices. The money grows tax deferred, but you are not allowed to take it out before 59 1/2 without a penalty. It acts just like a tax-deferred retirement account (401K or 403b) where the funds are invested in a few mutual funds. The exception being - you will not have any required RMD's when you hit age 70. You will be taxed as ordinary income on the gains when you do withdraw it. ER fees are a bit higher for the administration of the annuity than say the underlying Vanguard funds would be in a taxable account, and you would probably pay ER fees of .46 - .54 at Vanguard for one of their 17 portfolios in the variable annuity (we pay .36 at Fidelity).

https://investor.vanguard.com/annuity/variable

You could also, at any given age in retirement, convert that into a SPIA or a SPIA ladder to have a fixed, guaranteed monthly income through the Vanguard SPIA's. You could also add the rider for guaranteed income from the variable annuity at any point up to age 90.

Not saying this is something you need to do as you are both already fully funding your 401K plans and ROTH's. We were just pointing it out since you asked about annuities, and a possible place to park some of the inheritance besides in a taxable account.

NotWhoYouThink
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Re: Best Investment Options for Inheritance

Post by NotWhoYouThink » Mon Jul 17, 2017 7:46 am

Something I am a little uncertain of, is, if and when it makes sense to look at an annuity?
Just out of curiosity, how did the thought of an annuity even occur to you in this context? My guess is that you have talked to or been solicited by a commission based "financial advisor", or maybe someone else who shared in the inheritance has had that experience.

Your plan to go with TSM in an after tax account sounds fine to me. Growth in the account will be taxed as capital gains rather than ordinary income, and if it is left as an inheritance the heirs can get a stepped up basis. Your costs will be low. Sounds good all around.

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BolderBoy
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Re: Best Investment Options for Inheritance

Post by BolderBoy » Mon Jul 17, 2017 9:27 am

You don't need an annuity.

What I did with my inheritance was: 1) look at my overall asset allocation and 2) keep that allocation in place by using total stock market index and (in my case) intermediate term tax-exempt bond.

Presto - simplicity.
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