What to do with inheritance

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jkers
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What to do with inheritance

Post by jkers » Sat Oct 13, 2018 12:56 am

Hello Bogleheads. First time posting, I’ve recently found out about these boards and am excited to make it my new go to spot for investing/finance info. I just recently received 300k in non taxable inheritance (cash), and am looking for advice on how I can use it to maximize returns based on my current situation. I tried to list all pertinent info below, but if I am missing something I am happy to add. Thanks for reading this and your consideration!

Married, late 30’s, three children in elementary school.

Income:
140k/yr between myself and spouse.

Debt:
House: Value ~500k, owe 130k on a 15yr @ 2.875%. Currently 10yrs left on mortgage.
No credit card/student loan/auto etc.

Savings/Emergency/Bank acct avg: 20k

Retirement:
Two Roth IRAs (spouse/myself), 225k in combined value between both. All is in Vanguard VTIVX (Target Date 2045 retirement fund).
401k (through my employer), 75k in value, all in VINIX (Vanguard Institutional Index Fund).
Spouse will receive a pension (public employee), although I prefer to look at it as gravy, instead of depending on it, since there are another 15-20yrs before she can look at retiring/lots of changes look to be made to it since its liabilities are creating state funding problems.

Currently my thoughts would be:
-Keep some number in savings to I can up my 401k contribution to max ($18,500). Should I consider putting the $18,500 in as soon as possible each calendar year, or leveraging it out over 12 months?
-Continue to max out both Roth IRAs. We already were maxing out the Roths in our pre-inheritance budget, but I was only contributing about 8k yr to 401k. I’d like to keep enough inheritance on hand to start maxing it at 18.5k each year.
-Put 75k into a safe vehicle (CD/other?) to do some remodeling we were planning to do in the next 3-5yrs.

Doing the above would take up ~100k, not sure what the best plan for the other ~200k is.

Goals: Use the remainder of inheritance to boost/maximize future freedom funding financial opportunities (earlier/more secure retirement, family travel, financial flexibility, etc).

Options:
-Pay off house (130k). Based on amortization schedule, it would save ~20k in interest over the remaining 10 years of the loan. Although I would hope I could make more than 2.875%/20k in the market over 10yrs, and should put as much money into the market as possible, and leave the mortgage alone?
-Start 529 plans for the kids. I like that 529s are transferrable, but not the 10% penalty if they are not used for tuition/education. I like the idea of having the kids pay their way through school via scholarships/working/loans etc first, and possibly paying it off for them later or helping with them after they graduate if they prove responsible.
-Put it all in a taxable Vanguard brokerage account with a mix of index funds for the foreseeable future? Any suggestions on the funds I should put it in? I already have all retirement in VINIX/VTIVX, not sure if I should just buy more of the same funds in a taxable account or try and diversify.
-Go to Vegas and put it all on black a couple times. Amirite?
-Other?

Thanks again for reading.

ExitStageLeft
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Re: What to do with inheritance

Post by ExitStageLeft » Sat Oct 13, 2018 9:42 am

Welcome to the forum. There's a Boglehead wiki page called Managing a Windfall that covers some of the basics.

You have pretty well covered the range of options on how to best utilize the inheritance. I'm a big advocate of maximizing your annual tax-advantaged savings, so putting $18.5k in the 401k and $11k in Roth IRAs is a definite yes. Whether to do it all at once or average it in over time is a frequent question, and the statistically correct answer is that a lump sum is better. But if you're more comfortable with a gradual approach then you should take that path. For maximizing employer match, that often requires one to be contributing in every paycheck.

The other items you list all make financial sense (except Vegas!) and you should consider those that will have the most impact on your family well-being.

Edit to add: Any funds you buy in a taxable account should be tax-efficient. Two top contenders from Vanguard are the total market funds for US and international: VTSAX and VTIAX.

delamer
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Re: What to do with inheritance

Post by delamer » Sat Oct 13, 2018 10:21 am

ExitStageLeft wrote:
Sat Oct 13, 2018 9:42 am
Welcome to the forum. There's a Boglehead wiki page called Managing a Windfall that covers some of the basics.

You have pretty well covered the range of options on how to best utilize the inheritance. I'm a big advocate of maximizing your annual tax-advantaged savings, so putting $18.5k in the 401k and $11k in Roth IRAs is a definite yes. Whether to do it all at once or average it in over time is a frequent question, and the statistically correct answer is that a lump sum is better. But if you're more comfortable with a gradual approach then you should take that path. For maximizing employer match, that often requires one to be contributing in every paycheck.

The other items you list all make financial sense (except Vegas!) and you should consider those that will have the most impact on your family well-being.

Edit to add: Any funds you buy in a taxable account should be tax-efficient. Two top contenders from Vanguard are the total market funds for US and international: VTSAX and VTIAX.
Good advice. Although with such a low interest rate on your mortgage, I’d invest the inheritance rather than payoff the mortgage.

Regarding 529 plans, do you receive a reduction in your state income tax if you contribute? If so, that’s an argument for putting some money there. With 3 kids, the odds that at least one will have post-high school training are high.

You should verify this, but I am fairly sure that 529 funds cannot be used to pay off student loans. So take that into account in your decision.

aristotelian
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Re: What to do with inheritance

Post by aristotelian » Sat Oct 13, 2018 10:36 am

I like the idea of paying off your mortgage. Use the cash flow to max your retirement accounts. Any cash left from the mortgage payoff invest in brokerage account. Revisit your overall allocation. Now you have less need to take risk, but greater ability to do so. You could play it either way.

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Watty
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Re: What to do with inheritance

Post by Watty » Sat Oct 13, 2018 10:42 am

ExitStageLeft wrote:
Sat Oct 13, 2018 9:42 am
Welcome to the forum. There's a Boglehead wiki page called Managing a Windfall that covers some of the basics.
+1

Leaving most of the money in a high interest savings account or CD for at least six months is highly recommended.

Maxing out the retirement accounts for 2018 is also a good idea.

A few things that I suggest when people have windfall posts like this;

1) Review your car insurance to make sure that you have high limits and get an umbrella policy if you don't already have one. Now that you have more money you are more likely to be sued.

2) This is just me but one of my pet peeves is people that have plenty of assets who don't drive relatively safe and reliable cars. Consider if your cars are relatively safe and reliable, if not consider replacing them. You don't need to have all of the latest bells and whistles but car safety has improved a lot in the last ten years. In particular ESC became standard in 2012 so if your car is older than that it might not have ESC and that seems to ge a good thing to have. An older high mileage car is more likely to break down in an unsafe location too. With three kids it is probably not the right car for you but I bought a 2018 Corolla for a very reasonable price and it has an amazing list of safety features compared to the 2010 car it replaced. If you get a replacement car now it may be the car your kids learn to drive on.

3) Consider what will happen to the money if you get divorced. Nobody plans on that but it happens way too often.
jkers wrote:
Sat Oct 13, 2018 12:56 am
Start 529 plans for the kids. I like that 529s are transferrable, but not the 10% penalty if they are not used for tuition/education. I like the idea of having the kids pay their way through school via scholarships/working/loans etc first, and possibly paying it off for them later or helping with them after they graduate if they prove responsible.
My understanding that there is an exception to the 10% penalty if a kid gets a scholarship. If one of your kids does not go to college then the money can be used for a different kid or a future grandkid.

There is no one right answer to how much a parent should pay for college but your might want to reconsider your plan and have the money available even if it is not in a 529. It is easy to think that working through college and students loans will will build character and in some cases it might, but college students are already under a lot of pressure and adding more pressure can cause a significant percentage of them to not succeed.

I only have one son and he was never a real strong student even in high school. We paid for him to go to college at a regional state university and he really struggled with it. He was majoring in Computer Science and his grades in general were mediocre and he "hit a wall" with some of the required high level math classes and had to take one class in particular three or four times to pass it, but he finally did. I have no doubt that if he had more financial pressure that he would have given up even before that particular class. With our financial support and lots of TLC he did graduate and is doing very well in his career as a software developer now.

Part of this starts well before college since we had always told him that we would pay most of the costs for a state university so all through middle school and high school there was the expectation that he would go to college. We also kept the option open to use that money to send him to a vocational school to get the skills for a well paid trade since that would be better for some kids than college, but he was never interested in that.

Whatever you decide you need to be very clear with your kids early in high school about what financial support you are willing to provide so they can start building that into their plans. That does not mean that it has to be unconditional money but the conditions need to be clear. In my case we told our son that he he could pick out whatever major he wanted but it had to be one that had a good job placement rate in that field even if it was not high paying.
Last edited by Watty on Sat Oct 13, 2018 10:50 am, edited 1 time in total.

Lafder
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Re: What to do with inheritance

Post by Lafder » Sat Oct 13, 2018 10:46 am

Welcome here!

I would:

Max retirement accounts every year, even if it meant dipping into taxable savings to cover expenses.

Pay off mortgage, then trickle the payments in to the market each month and/or into a savings account to build up your remodeling fund. That is the only guaranteed return of that amount. And a better return than you can get putting the same money into CDs.

You can always fund college with taxable savings or ongoing income. Check your state benefits on 529 and the fees of having them.

Put some amount aside into a "college fund" whether 529 or not. If in a taxable account, keep the money in your and spouse'a names, not the kids so you have control of what it is used for.

If you want to set a remodeling amount aside, go for it. Sure a CD or some investment that is more conservative.

You will still have $$ left for taxable investing.

Are you comfortable with your emergency fund at 20k? You could build it up more.

For example:

300k inheritance

- 130k mortgage
-45k college fund
-75k remodel fund
-20k bolster emergency fund/cover expenses as put more into retirement accounts from paycheck

That leave 30k to start a taxable investment account. Plus you will have the equivalent of the mortgage payment freed up to invest monthly.

Alternatively, don;t pay off the mortgage, and you have an extra 130k to invest in taxable long term investments.

Play around with how much goes where on paper til it looks right to you!

If there is a big market crash in the next few years and your "investments" drop below an amount to pay off your mortgage, you will regret that you invested. If the mortgage is paid off and the market crashes, you will be glad to be buying low with the equivalent of the mortgage payments each month.

The $$$ advantage to paying off the mortgage vs investing the 130k can only be judged retrospectively, and it is not likely to be a HUGE difference dollar wise. So try to imagine which scenario would feel better :)

Is there a nice vacation you have been putting off doing? That is a priceless way to spend a small % of your inheritance and it will create memories to last a lifetime. In the big picture, spending 5-10k on a vacation will be a negligible difference in the $$ in the years to come. The market will vary by more than that over time :)

Bottom line, there is no wrong answer. Either put you in a very fortunate situation :)

lafder

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Watty
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Re: What to do with inheritance

Post by Watty » Sat Oct 13, 2018 11:04 am

jkers wrote:
Sat Oct 13, 2018 12:56 am
-Keep some number in savings to I can up my 401k contribution to max ($18,500). Should I consider putting the $18,500 in as soon as possible each calendar year, or leveraging it out over 12 months?
You should spread it out over 12 months. The reasons are;

1) Some employers have an employer match that they do by paycheck. If you max it out early in the year you will miss out on the match later in the year. The rules on how the employer matching is done varies wildly.

2) You might change jobs and your new employer may have way of matching a 401k contribution.
jkers wrote:
Sat Oct 13, 2018 12:56 am
I’d like to keep enough inheritance on hand to start maxing it at 18.5k each year.
That makes sense but be sure to factor in the taxes. For example if you are in a 25% combined tax bracket then you can do something like this;
1)Increase your payroll withholding by $1,000 a month to a deductible 401k.
2)Spend $750 a month out of your inheritance for your living expenses.

The reason that the numbers are different is that you will have $250 a month in tax savings so only $750 a month is needed to replace your spendable income.

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Toons
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Re: What to do with inheritance

Post by Toons » Sat Oct 13, 2018 7:21 pm

Use Patience,
There is no hurry.
Gather Your Thoughts
Gather Information.
As you use patience
and process the information that you acquire
The decisions will come to you,
Go ahead and pay off the mortgage.
That will have you rethinking the left monies.

:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

blastoff
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Re: What to do with inheritance

Post by blastoff » Sat Oct 13, 2018 7:41 pm

I wouldn't go quick in the mortgage. Your rate is good. And looking better by the day.

Considering maxing retirement is smart. Just you with 401k? (Wife doesn't have any access as public employee No 403b or 457b?). That could put you near 12% bracket?

Agree with others about 529.

Don't be in a hurry. Make a plan and try to stick to it.

Darth Xanadu
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Re: What to do with inheritance

Post by Darth Xanadu » Sat Oct 13, 2018 8:26 pm

blastoff wrote:
Sat Oct 13, 2018 7:41 pm
I wouldn't go quick in the mortgage. Your rate is good. And looking better by the day.

Considering maxing retirement is smart. Just you with 401k? (Wife doesn't have any access as public employee No 403b or 457b?). That could put you near 12% bracket?

Agree with others about 529.

Don't be in a hurry. Make a plan and try to stick to it.
Agree with this, and previous posters who also said maxing tax-advantaged accounts is the top priority. The inheritance will allow you to do this. I would not pay off the mortgage, but it certainly is a viable and defensible option. Spread the 401k contributions over the full year. Max Roth IRA in January each year.

If you go the gambling route, put 90% on red, and the other 10% on #9.
"A courageous teacher, failure is."

ProfWengen
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Re: What to do with inheritance

Post by ProfWengen » Sat Oct 13, 2018 11:23 pm

I wouldn't pay off the house. You could just put the $130k you owe into a 10yr bond and come out ahead so I don't see paying off the house as a good option. FWIW, I'd put it all into index funds.

Or you can just put it all on black in vegas then start a new thread asking what to do with $400k. ;)

CurlyDave
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Re: What to do with inheritance

Post by CurlyDave » Sun Oct 14, 2018 12:30 am

ProfWengen wrote:
Sat Oct 13, 2018 11:23 pm
I wouldn't pay off the house. You could just put the $130k you owe into a 10yr bond and come out ahead so I don't see paying off the house as a good option. FWIW, I'd put it all into index funds...
+1 on index funds. +1 on not paying off house.

andrew99999
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Re: What to do with inheritance

Post by andrew99999 » Sun Oct 14, 2018 2:48 am

ProfWengen wrote:
Sat Oct 13, 2018 11:23 pm
I wouldn't pay off the house. You could just put the $130k you owe into a 10yr bond and come out ahead so I don't see paying off the house as a good option. FWIW, I'd put it all into index funds.
+2 on investing in an asset allocation and not paying off the house.
Seems crazy to me to pay off something when you are on an interest rate that is pretty much inflation!

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grabiner
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Re: What to do with inheritance

Post by grabiner » Sun Oct 14, 2018 8:01 am

ProfWengen wrote:
Sat Oct 13, 2018 11:23 pm
I wouldn't pay off the house. You could just put the $130k you owe into a 10yr bond and come out ahead so I don't see paying off the house as a good option. FWIW, I'd put it all into index funds.
This is discussed on the wiki: Paying down loans versus investing If you pay off the mortgage, rather than paying it down, you are gaining a fixed amount every month for the next ten years; this would be equivalent to buying a bond portfolio with a five-year duration. Therefore, the right comparison is 5-year bonds, rather than 10-year bonds.

Unless you donate a lot to charity, you cannot deduct your mortgage interest under the new tax laws, so you would get a 2.875% risk-free return by paying it off. You would get a 2.71% return by buying low-risk 5-year muni bonds (Vanguard Intermediate-Term Tax-Exempt Admiral shares) and about 3.4% by buying bonds in a tax-deferred account (3.54% yield on Intermediate-Term Bond Index with a 6-year duration). Therefore, you can come out ahead by not paying down your mortgage and taking tax-deferred savings, and would have a slight loss if you have to save in a tax-deferred account.

Since you will have enough left over to contribute more to your 401(k) and 529, and the mortgage would be gone anyway by the time you need to use the 529, I would prefer paying it down. This will improve your cash flow by $15K per year, which would be enough to max out the 401(k) if you wish, and also contribute more to the 529. But it's a close decision, and depends on the psychological value of having a paid-off home.
Wiki David Grabiner

terran
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Re: What to do with inheritance

Post by terran » Sun Oct 14, 2018 8:30 am

Something to consider regarding setting aside some of the money to max out retirement accounts in the future...

Since you've now decided that this money should be invested, it doesn't actually matter where it's invested because the investing decision (to invest it) and the account decision (where to invest it) are separate. You should invest in taxable now and sell as needed to cover living expenses not covered now that more of your paycheck is going to your 401(k). This way you achieve your goal of investing now, and then just slowly move that invested money (through the intermediary of salary deductions) to other accounts. If the markets go down you'll be able to move the money from taxable to tax advantaged more quickly because retirement accounts have dollar limits (not share limits), but you still transfer the same amount of shares.

I know this seems counterintuitive, and I struggled with it myself for awhile, because the usual advice is not to invest money you need within 5 years, but you don't really need this money short term, this is long term money which should be invested, you're just going to move it to different accounts short term.

jkers
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Re: What to do with inheritance

Post by jkers » Wed Oct 17, 2018 12:10 am

Thanks all!

You guys brought up a bunch of options and points I hadn't thought about, like the car/umbrella insurance limit increase, the potential need to contribute to 401k each paycheck to get the match, the wife's options with 403/457b, etc. All of your replies are helping me look at different options regarding the mortgage and alternatives, I appreciate all you guys' time and info.

NYCwriter
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Re: What to do with inheritance

Post by NYCwriter » Wed Oct 17, 2018 1:54 am

All your ideas look good. Some years ago I received a smaller inheritance, split with a sibling. Your living situation is different from mine, and you seem well-situated in terms of long-term retirement savings and household income. Definitely consider maxing out retirement. I also have a 403b/457b and wish I had started the 457b tax-deferred compensation fund earlier.

Good things:

--It's okay to wait a while before making big decisions.
--I'd say pay down small debts, but you have none. Weeee! The wiki on paying down loans v investing is useful for more complicated debts. However, consider recent tax laws if deciding to reduce mortgage debt. Even partial debt reduction is usually a psychological freeing experience :)
--Maximize retirement contributions. This can help enormously with taxes that will result from having a larger taxable portfolio. You should absolutely start looking for tax advantaged strategies.
--Develop a new financial plan. Map out or visualize different "blocks" where money is needed or can be used: Taxable portfolio, Increasing emergency fund, mortgage, home improvements, college savings plans for children.

Bad things:
--Not putting the balance into an interest-earning vehicle while you decide. At least keep it where it's earning something!
--Spending too much. If you don't already have a budget, you might want to create one. It's easy to slip upwards with spending when you have a windfall. Maybe reserve a large chunk somewhere where it's not mingled with your accessible cash in the interim.
--Feeling guilt or conflict over how to use the money. Set aside time to talk about financial ideas with spouse.
--Stressing too much over various accounts. Make a list of priorities, and maybe go for simplicity in a taxable account, adding chunks at a time if that works. You could choose a tax-efficient two-fund portfolio that isn't duplicated in your tax advantaged funds.

One other thing: an inheritance of any size (especially from a parent) is a gift. So taking the family on a vacation, or using some money for a family outing, and taking that time to reflect on and enjoy family is always a good thing.

MJS
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Re: What to do with inheritance

Post by MJS » Wed Oct 17, 2018 2:54 am

Perhaps a Fund for major repairs & replacements, in addition to your Emergency Fund: New car(s,) roof, fences, HVAC system, water harvesting, solar power, septic system, water heater, Home Owner Association (HOA) emergencies? If your house is less than 10 years old, these aren't a big issue, but around the 15th-20th year, they start piling up.

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