Inheritance help

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Puddy
Posts: 2
Joined: Mon Oct 22, 2018 7:08 pm

Inheritance help

Post by Puddy » Mon Oct 22, 2018 7:30 pm

I recently received $400,000 inheritence. $30,000 in an inherited traditional ira which I will be taking the required rmd over the course of my life and the rest in cash. My wife and I are 40 years old with only $20,000 in retirement funds ( 8,000 in her 401k, no match and bad investment line up and the remainder in iras as I do not have access to a 401k) and 10,000 emergency fund. No childern. Our current income is $40,000 a year. We owe 119,000 on our house at 5.25%, car 1- 20,000 at 1.9% and car 2- 20000 at 3.5%. No other debt. As you can see this is huge for us! My thoughts are to be ultra conservative and don't touch the money. Keep it in a taxable account in vanguard federal money market fund and each year withdrawal only to max out our iras and put it in vanguard 2045 fund. Any thoughts? What would you do keeping in mind that this is 10 times our salaries?

mbasherp
Posts: 138
Joined: Mon Jun 26, 2017 8:48 am

Re: Inheritence help

Post by mbasherp » Mon Oct 22, 2018 8:02 pm

You’re going to get some great responses here, but here are my three initial thoughts:

Read “managing a windfall” in the wiki and really settle down with the whole thing.

Consider paying off the house at 5.25% and then investing your old mortgage payment each month.

You’re correct to want to fill IRAs with the money. But don’t wait to invest it and have it sit in a money market for years as you do so. Find out what your asset allocation should be now and invest it accordingly in the taxable account. Then each year, withdraw what you need to max the Roth IRAs, keeping your overall asset allocation unchanged.

It’s great that you see this as the massive gift that it is. Being responsible with it, as you seem to intend, is a great way to honor the life of your loved one.

Gill
Posts: 4817
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Inheritence help

Post by Gill » Mon Oct 22, 2018 8:05 pm

You should at least consider paying off the mortgage and car loans and then saving the amounts you will no longer be paying on the loans. It seems unwise to keep funds in a money market fund while paying those interest rates.
Gill

User avatar
Peter Foley
Posts: 4609
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Inheritence help

Post by Peter Foley » Mon Oct 22, 2018 8:10 pm

Welcome to the forum. Sorry for your loss.

You are currently in a very low tax bracket which leads me to suggest that you take the money out of the IRA a little faster than you propose. For example, if you took out $5000/year you would exhaust that account in 6 to 7 years. Putting $10,000 per year in your IRAs would negate that additional income and in fact even lower your taxable income.

If you want to be conservative with the money you would be better off paying off the higher interest car loan than keeping that $20,000 in a money market earning much less. That would improve your over all cash flow.

I do think a portion of the inheritance would be invested in equities and a target retirement fund a Vanguard would be a good approach. How much should go into that fund is the question. I am personally debt averse so I would be inclined to pay off one car loan and some of the house loan, double or triple your emergency funds, and hold enough fairly liquid - as you suggest- to future fund a few years of IRA contributions. The balance, maybe $100,000 could go into the target retirement fund for longer term savings.

Gill and I were writing at the same time. He was more concise than I was.

Puddy
Posts: 2
Joined: Mon Oct 22, 2018 7:08 pm

Re: Inheritence help

Post by Puddy » Mon Oct 22, 2018 8:22 pm

Thank you for the help. Does it make sense to pay off the house if planning on moving within 3 years? Also we have just straightened out our finances. I am a little afraid that if we pay off debt and free up cash flow it will make it easier to spend more money. If I keep it in a seperate account that we don't see or use it will be easier to stay the course. Any investment advice if I do that? Maybe long term cds, treasuries or highly rated corporates?

Nissanzx1
Posts: 345
Joined: Wed Jul 18, 2018 11:13 pm

Re: Inheritence help

Post by Nissanzx1 » Mon Oct 22, 2018 8:29 pm

Sorry for the loss, buy a CD for 6 month or 12 months and process the loss. It's important to not do anything rash.

Your cars are insane with your income level, I would sell both and buy two $5000-8000 cars. Your cars are worth as much as your annual income. Not something you can afford to watch depreciate like that.

After a year or so I'd be paying off the house and investing the rest in about 3 well known index funds.

With your low income you really will have to work hard to save Roth IRA money.

Gill
Posts: 4817
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Inheritence help

Post by Gill » Mon Oct 22, 2018 8:34 pm

Puddy wrote:
Mon Oct 22, 2018 8:22 pm
Thank you for the help. Does it make sense to pay off the house if planning on moving within 3 years? Also we have just straightened out our finances. I am a little afraid that if we pay off debt and free up cash flow it will make it easier to spend more money. If I keep it in a seperate account that we don't see or use it will be easier to stay the course. Any investment advice if I do that? Maybe long term cds, treasuries or highly rated corporates?
Back of the envelope calculation, you would have a net savings over three years by paying off the mortgage vs. a money market account of at least $12,000. I can understand your concern about freeing up funds and finding it easier to spend. I would suggest using a disciplined form of investing such as having a monthly transfer to Vanguard from your checking account to avoid that risk. Many here would suggest you simply use a target date retirement fund for you regular savings as well as investing your inheritance.
Gill

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Inheritence help

Post by megabad » Mon Oct 22, 2018 9:31 pm

Puddy wrote:
Mon Oct 22, 2018 7:30 pm
I recently received $400,000 inheritence. $30,000 in an inherited traditional ira which I will be taking the required rmd over the course of my life and the rest in cash. My wife and I are 40 years old with only $20,000 in retirement funds ( 8,000 in her 401k, no match and bad investment line up and the remainder in iras as I do not have access to a 401k) and 10,000 emergency fund. No childern. Our current income is $40,000 a year. We owe 119,000 on our house at 5.25%, car 1- 20,000 at 1.9% and car 2- 20000 at 3.5%. No other debt. As you can see this is huge for us! My thoughts are to be ultra conservative and don't touch the money. Keep it in a taxable account in vanguard federal money market fund and each year withdrawal only to max out our iras and put it in vanguard 2045 fund. Any thoughts? What would you do keeping in mind that this is 10 times our salaries?
You seem to be in 0% bracket. If your tax situation remains similar over the long term, you may not derive much benefit from tax advantage accounts over taxable brokerage accounts. As such, I would likely pay off house first. Next I would invest the maximum in ROTH IRAs every year (slowly pulling money from what will be your taxable brokerage account). I would invest the remainder immediately in taxable equity index funds in a taxable brokerage account (ie. Vanguard Total Stock Mrkt Index, Vanguard Total International Index). You should not see much immediate tax drag on these accounts if you are in 0% tax bracket and I would invest these funds for the long term (ie. not only in money market). Investing in equity funds and not fixed income might allow you to stay in the 0% income tax bracket as well. You will want to stay beneath ACA income limits though so I would work toward getting the money from your taxable brokerage to your Roth IRAs over the years. If you are concerned about spending what you would have spent on your mortgage, than I would setup automatic transfers from your bank account to vanguard.

Post Reply