Inheritance Advice for Newbie:

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CheeseHeadInParadise
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Inheritance Advice for Newbie:

Post by CheeseHeadInParadise »

Greetings:
This is my second post to the Bogleheads forum, but I’ve been a fan of the general philosophy for several years. Any advice for this newbie is greatly appreciated.

Emergency funds: One year of expenses.
Debt: Mortgage $90,000 at 2.5%
Tax Filing Status: Married Filing Jointly with 2 dependent children
Tax Rate: 22% Federal, 6% State
State of Residence: Wisconsin
Age: 57
Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 20% of stocks

Current Portfolio: $1M (plus another $1M inheritance)

Current retirement assets

Taxable
$1M cash inheritance

His 403b at TIAA (legacy)
7% TIAA Traditional

His 403b at Transamerica
46% TIAA-CREF Lifecycle Index 2030 Instl (TLHIX) (.245)

His Roth IRA at Vanguard
17% Vanguard Target Retirement 2030 Fund (VTHRX) (.14)

His Rollover IRA at Vanguard
16% Vanguard Target Retirement 2030 Fund (VTHRX) (.14)

Her 457
4% Vanguard Institutional 500 Index Trust (.01) 27000

Her Roth IRA at Vanguard
10% Vanguard Target Retirement 2035 Fund (VTTHX) (.14)

Overall Asset Allocation
61% Equities (39% US, 22% I
35% Fixed Income (17% US, 6% International, 12% TIAA Trad Annuity)
2% Real Estate
2% Cash

Current Contributions
$4,000 his 403b (4% employer match, $4,000 max)
$0 her 457
$3,000 her defined benefits plan ($3,000 employer match)
$7,000 his Roth IRA
$7,000 her Roth IRA
$7,900 Health Savings Account (cash flow current expenses; save for post-retirement)

Proposed Annual Contributions
$25,000 his 403b (4% employer match, $4,000 max)
$25,000 her 457
$3,000 her defined benefits plan ($3,000 employer match)
$7,000 his Roth IRA
$7,000 her Roth IRA
$7,900 Health Savings Account (cash flow current expenses; save for post-retirement)
Payoff mortgage ($90,00)?
College Funding
Cash flow college expenses beginning in 2 years (due to my profession, my children are eligible for tuition remission (free) from numerous universities)



Funds available in his 403b
Vanguard Total Bond Market Index Admiral (VBTLX) (.195)
Western Asset Core Plus Bond IS (WACPX) (.575)
Vanguard Inflation Protected Secs Admiral (VAIPX) (.245)
MassMutual Premier High Yield I (MPHZX) (.685)
PIMCO International Bond (USD Hedged) Institutional (PFORX) (.705)
American Beacon Bridgeway Large Value R6 (BWLRX) (.845)
Vanguard FTSE Social Index Investor (VFTSX) (.325)
Vanguard Institutional Index I (VINIX ) (.175)
T. Rowe Price Blue Chip Growth I (TRBCX) (.715)
Vanguard Extended Market Idx Adm (VEXAX ) (.225)
Wells Fargo Special Small Cap Value R6 (ESPRX) (1.035)
Brown Capital Mgmt Small Co Instl (BCSSX ) (1.205)
Cohen & Steers Real Estate Securities Z (CSZIX) (.945)
MFS International Value R6 (MINJX) (.775)
Vanguard Total Intl Stock Index Admiral (VTIAX) (.255)
T. Rowe Price Internatnl Discovery I (PRIDX) (1.215)
Fidelity Emerging Markets (FEMKX) (1.105)
Schwab Personal Choice Retirement Account (.145 wrap)

Funds available in her 457
Vanguard Target Retirement Inc Trust I (.07)
Vanguard Target Retirement 2015 Trust I (.07)
Vanguard Target Retirement 2025 Trust I (.07)
Vanguard Target Retirement 2035 Trust I (.07)
Vanguard Target Retirement 2045 Trust I (.07)
Vanguard Target Retirement 2055 Trust I (.07)
American Funds EuroPacific Gr R6
BlackRock EAFE Equity Index Coll T (.06)
BlackRock Russell 2000 Index Coll T (.05)
DFA US Micro Cap I (.52) (DFSCX)
BlackRock Mid Cap Equity Index - Coll F (.07)
T. Rowe Price Instl Mid-Cap Equity Gr (.61) (PMEGX)
American Beacon Bridgwy Lg Cp Val I CIT (.55)
Calvert US Large Cap Core Resp Index R6 (.19) (CSXRX)
Fidelity Contrafund Commingled Pool Cl 2 (.38)
Vanguard Institutional 500 Index Trust (.01)
Vanguard Wellington Adm (.17) (VWENX)
BlackRock US Debt Index Fund Coll W (.04)
Federated US Government Securities 2-5yr (.59) (FIGTX)
Vanguard Long-Term Investment Grade Adm (.12) (VWETX)

Questions
Upon the recent death of my father I have inherited 1 million dollars, doubling my investable assets. Ironically, my father was an active trader and while I prefer the Boglehead philosophy. I’ve kept the inheritance in cash for the past few months until I could formulate a proposed plan for input from others.

I seek advice on the following:

1.) How appropriate is my plan to change my future contributions as follows?

Proposed Annual Contributions
$25,000 his 403b (4% employer match, $4,000 max)
$25,000 her 457
$3,000 her defined benefits plan ($3,000 employer match)
$7,000 his Roth IRA
$7,000 her Roth IRA
$7,900 Health Savings Account (cash flow current expenses; save for post-retirement health costs)
Payoff mortgage ($90,000)?

2.) If proposed plan is appropriate, should I invest remaining funds in lump sum? Dollar cost average over 2+ years?

3.) Should all bonds be placed in tax-deferred accounts for better tax efficiency?

4.) What else am I missing in my blind spot?
Last edited by CheeseHeadInParadise on Wed Apr 10, 2019 10:23 am, edited 1 time in total.
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Sandtrap
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Re: Inheritance Advice for Newbie:

Post by Sandtrap »

IMHO this really really applies to your situation.

TAYLOR LARIMORE ON “SIMPLICTY”
https://www.bogleheads.org/forum/viewt ... p?t=156505

Current income or FIRE?
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msk
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Re: Inheritance Advice for Newbie:

Post by msk »

Wow! How can anyone keep track of all that? Presumably you are happy with that existing lot, including the $90k mortgage (I call mortgages negative bonds/leveraging). Yes? Leave it alone. Put the new million $ in VT (Vanguard World) and be done. Lump sum in and leave it alone till retirement. VT has about 55% US and 45% ex-US including Emerging Markets. So, averaging out with your existing million that should be around 22% ex-US, close to your desired 20%. You can also be fancy and use 2 ETFs US and ex-US. As for going in lump sum vs DCA well, you stand a 60% better chance with lump sum, but nobody knows. How have you fared by sitting on the million for a year?
delamer
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Re: Inheritance Advice for Newbie:

Post by delamer »

If you make your proposed annual contributions to the above accounts, will you need any funds from the inheritance to cover day-to-day expenses?

It sounds like these are increases from your pre-inheritance contributions.
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CheeseHeadInParadise
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Location: Wisconsin/Florida/Repeat

Re: Inheritance Advice for Newbie:

Post by CheeseHeadInParadise »

Delamer-

You are correct. I have updated the original post with my current contributions. Basically, I'm trying to max out all tax deferred savings opportunities, simplify from target date funds to a 3 fund model, and invest in a tax efficient way. I would need $10-20K from inheritance for current/annual expenses.

Current Annual Contributions
$4,000 his 403b (4% employer match, $4,000 max)
$0 her 457
$3,000 her defined benefits plan ($3,000 employer match)
$7,000 his Roth IRA
$7,000 her Roth IRA
$7,900 Health Savings Account (cash flow current expenses; save for post-retirement)
Payoff mortgage ($90,00)?

Thank you for the clarification.
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Re: Inheritance Advice for Newbie:

Post by Grt2bOutdoors »

Tell no one the dollar figure of inheritance - moneytalk outside of this forum (sometimes here too, we’re human) seems to bring the worse out in people.
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fposte
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Re: Inheritance Advice for Newbie:

Post by fposte »

This doesn't look all that complicated to me, to be honest; it seems pretty standard for people in government/education who've been able to make contributions to more than one plan. (I'm guessing the TIAA account is from a former job?) You could simplify it a little further, but I'm actually going to suggest going the other way--have you checked to see if you have access to a 457b and your wife has access to a 403b? That would allow you to use even more tax-deferred space each year and would put you in a favorable income bracket.

Question 1: it all looks fine; mortgage is a taste call, dependent also on the interest rate and whether you're itemizing tax deductions.

Question 2: Put the amount for shorter-term use in short-term stable assets of your choice (if you can get a good CD rate those work well, but Vanguard Money Market is actually paying pretty well at the moment too) for the immediate duration.

I drew on an inheritance to max out contributions for a long time; I have access to both a 403b and a 457b and file singly, so contributions meant my income was low enough that my capital gains tax to liquidate assets was minimal even several years down the road. It's worth having an idea of what kind of headroom you have in your capital gains space and are likely to have in future if you're expecting to keep drawing on the inheritance throughout your career.

Question 3: yes, if you can keep bonds to tax-deferred that's best. You've got the Total Bond Fund in your 403b (since I'm guessing you can't add to TIAA Trad) and that's an excellent choice.
delamer
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Re: Inheritance Advice for Newbie:

Post by delamer »

CheeseHeadInParadise wrote: Wed Apr 10, 2019 10:27 am Delamer-

You are correct. I have updated the original post with my current contributions. Basically, I'm trying to max out all tax deferred savings opportunities, simplify from target date funds to a 3 fund model, and invest in a tax efficient way. I would need $10-20K from inheritance for current/annual expenses.

Current Annual Contributions
$4,000 his 403b (4% employer match, $4,000 max)
$0 her 457
$3,000 her defined benefits plan ($3,000 employer match)
$7,000 his Roth IRA
$7,000 her Roth IRA
$7,900 Health Savings Account (cash flow current expenses; save for post-retirement)
Payoff mortgage ($90,00)?

Thank you for the clarification.
Your plan makes sense in regards to maxing out your tax deferred space. Consider setting aside the money you need to cover current expenses in a CD ladder or high yield savings account. You don’t want that money invested like your retirement portfolio. If you have 8 years to cover until you retire (for example) then set aside $100,000 to $150,000.

We were in a similar situation with an inheritance and mortgage. We elected to keep the mortgage because the rate was so low, and we only have 6 years left. But paying it off is a reasonable decision too.

It is useful to have some funds in taxable accounts in retirement. Take a look at your current and future rates and expected RMDs, so you don’t have any tax surprises at 70.5.

Good luck.
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CheeseHeadInParadise
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Re: Inheritance Advice for Newbie:

Post by CheeseHeadInParadise »

Thanks for the advice on my wife’s employer. The State of Wisconsin offers her BOTH 403b and 457 opportunities allowing us to defer more income tax. Wisconsin also has a very well managed defined benefit retirement plan and is adequately funded unlike our friends in Illinois.
Last edited by CheeseHeadInParadise on Wed Apr 10, 2019 3:54 pm, edited 1 time in total.
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BolderBoy
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Re: Inheritance Advice for Newbie:

Post by BolderBoy »

CheeseHeadInParadise wrote: Wed Apr 10, 2019 10:27 amI would need $10-20K from inheritance for current/annual expenses.
If you put $800k of the inheritance in the Interm Term Tax-Exempt Fund it will throw off approx $1900/mo.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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CheeseHeadInParadise
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Re: Inheritance Advice for Newbie:

Post by CheeseHeadInParadise »

CheeseHeadInParadise wrote: Wed Apr 10, 2019 1:30 pm Thanks for the advice on my wife’s employer. The State of Wisconsin offers her BOTH 403b and 457 opportunities allowing us to defer even more income tax. Wisconsin also has a very well managed defined benefit retirement plan and is adequately funded unlike our friends in Illinois.
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Re: Inheritance Advice for Newbie:

Post by letsgobobby »

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Last edited by letsgobobby on Thu Apr 18, 2019 12:16 am, edited 1 time in total.
aristotelian
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Re: Inheritance Advice for Newbie:

Post by aristotelian »

Whether to use the liquidity to max your retirement accounts depends on the tax benefit. With $1M in taxable accounts, you might end up in a higher bracket in retirement than you had thought. If you have a pension on top of your inheritance and retirement accounts and SS, you could end up in a high bracket. You might want to consider Roth.

I say yes to bonds in tax deferred. Normally I would pay off the mortgage, but you have a great interest rate plus access to TIAA Traditional, so you are be getting a good arbitrage there if you keep the mortgage and overweight TIAA Traditional.

I dont see what 2% in TIAA RE does for you.
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Re: Inheritance Advice for Newbie:

Post by Duckie »

CheeseHeadInParadise wrote:Age: 57
Desired Asset allocation: 65% stocks / 35% bonds
35% bonds is a little low for age 57 but not unreasonable.
Desired International allocation: 20% of stocks
That breaks down to 52% US stocks, 13% international stocks, and 35% bonds.
Funds available in his 403b
The best options are:
  • Vanguard Institutional Index (VINIX ) (.175) -- Large caps, 80% of US stocks
  • Vanguard Extended Market Index(VEXAX ) (.225) -- Mid/small caps, 20% of US stocks
  • Vanguard Total Intl Stock Index (VTIAX) (.255) -- Complete international stocks
  • Vanguard Total Bond Market Index (VBTLX) (.195) -- US bonds
Funds available in her 457
The best options are:
  • Vanguard Institutional 500 Index (.01) -- Large caps, 80% of US stocks
  • BlackRock Russell 2000 Index (.05) -- Small caps, 14% of US stocks
  • BlackRock EAFE Equity Index (.06) -- Developed markets, 75% of international stocks
  • BlackRock US Debt Index (.04) -- US bonds
Is this 457b governmental or non-governmental?
How appropriate is my plan to change my future contributions as follows?
Very appropriate. Definitely pay off the mortgage (and all other bills).
If proposed plan is appropriate, should I invest remaining funds in lump sum? Dollar cost average over 2+ years?
I'd invest $200K now and spread the rest over the year. So ~$100K each month starting in May (minus increased contributions and mortgage payoff).
Should all bonds be placed in tax-deferred accounts for better tax efficiency?
Yes, you have room.
What else am I missing in my blind spot?
Mixing individual funds and balanced funds (funds with both stocks and bonds) isn't the best way, especially in your case where your taxable account is so large. You need a large percentage of your tax-sheltered assets to be bonds, so using individual bond funds would be better than using the target-date funds you currently have.
_______________

The following example has an AA close to 52/13/35. You could have:

Taxable at Vanguard -- 50%
50% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

His 403b at TIAA (legacy) -- 3.5%
3.5% (N/A) TIAA Traditional Annuity

His 403b at Transamerica -- 23%
23% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.195%)

Her 457b -- 2%
2% (N/A) BlackRock US Debt Index Fund Class W (0.04%)

His Rollover IRA at Vanguard -- 8%
8% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

His Roth IRA at Vanguard -- 8.5%
8.5% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- 5%
5% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Just some possibilities.
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