Best use of inherited assets to get to retirement soon

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PHD-2
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Joined: Mon May 14, 2018 2:36 pm

Best use of inherited assets to get to retirement soon

Post by PHD-2 » Thu May 17, 2018 3:29 am

Ok, I've read much here and learned a lot but it's time to post to take advantage of the significant body of knowledge here.

I'm 51 and in 2 years I would like to retire, or more likely leave the rat race and do some part time consulting or something that lets me spend more time with the kids (4) than my current high stress gig even though it pays well. My target retirement income is $100k though if I can build enough assets I'd prefer $120k. It's likely that in the beginning, in addition to SOME income that I'll continue to generate, my wife will also continue working to afford us access to healthcare without having to rely on the ACA exchange.

Current situation:

Assets
$830,000 in taxable accounts
$960,000 in pre tax accounts
---------------------------------------
Total $1,79M

The pre tax accounts are a mix as follows
$40,000 in an individual IRA
$40,000 in my wifes individual IRA
$750,000 in a previous employers 401k
$130,000 in my current employers 401k

Debt
$235,000 remaining on a 30 yr mortgage at 3.875% (23 years left)

I am inheriting part of an estate that is not subject to any estate or inheritance taxes. My current assets have significant unrealized gain so the fact that the inheritance is coming to me with a stepped up cost basis affords me a unique opportunity. Normally to have this much liquidity I'd have to realize a gain. I'm considering a few options and wanted to surface them here and get some input.

The assets I have inherited are
$70,000 in a 457(b) plan
$9,000 in a Roth IRA
$300,000 in taxable accounts
50% Share in a nearby home worth about $425,000

What I am considering:
1) Roll the 457(b) and Roth to inherited IRA's
2) RMD's are required on the 457 rollover of $2,900/year. Invest these for the next 2 years.
3) Pay off the house (I won't be itemizing under the new tax code)
4) Invest the remaining $65,000 in taxable accounts.
5) Using some money freed from not having a house payment, increase my monthly 401k contribution to an amount that will equal $24,500 this year and next (catch up contributions).
6) Keep the inherited house as a rental with my half of expected net income of $900/month and invest this for the next 2 years.

This would leave me with approximately
$1.039M in pre tax accounts
$905,000 in taxable accounts
$212,500 as a 50% share in a rental property
-----------------------------------------------------------
$2.156M total and no debt.

Assets will hopefully total $2.5M in 2 years and I would begin drawing from them at perhaps 1-2% for the first few years while my wife and I both continue to work on a limited basis. Especially if we keep it to 1% this may allow the assets to grow further to $3M and allow me to hit my upper retirement income goal of $120k.

I've been on the fence paying off the house as that $235,000 could likely do a bit better than 3.875% in the market but this long bull market run has me worried and a 3.875% sure thing kinda sounds good right now.

What have I missed? I know I've missed something. Pros/Cons on this vs alternatives?

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Epsilon Delta
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Re: Best use of inherited assets to get to retirement soon

Post by Epsilon Delta » Thu May 17, 2018 8:45 am

The rules for 457(b) plans are weird.

If it's a non-government plan you may not be able to roll it over at all. OTOH you may be able to roll it to a Roth IRA (paying taxes now rather than later).

These may have already considered this, or it may not apply to you, or you may not care. But there is a small chance this will cause you to tweak your plan.

123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Best use of inherited assets to get to retirement soon

Post by 123 » Thu May 17, 2018 4:45 pm

Just a couple of observations/comments.

If the inherited Roth IRA is $9,000 I would just cash it in. While there may be a sentimental issue the RMDs will not be a significant financial factor long-term and by withdrawing all funds that is one less account to have to keep track of.

I would recommend selling the inherited real estate. Co-ownership of real estate can cause complications and having it involve a rental property can become messy. You don't indicate any experience as a landlord and it can become a headache. If the co-owner and/or tenant are friends or family you can get mired in issues that involve business versus family. Better to clear all "estate issues" now, have the property sold, make you own seperate purchase of a rental property if you really want one, odds are you won't. If the co-owner and/or tenant is the spouse of the deceased you may be stuck.
The closest helping hand is at the end of your own arm.

ryman554
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Re: Best use of inherited assets to get to retirement soon

Post by ryman554 » Fri May 18, 2018 9:04 am

+1 for selling the rental. You're only getting 5% on it, and you haven't talked about maintenance/new roof. Plus, you're no longer doing business with family. That's never a good idea. Have your relative buy you out or force a sale.

I am, additionally, somewhat uneasy on your 2.15M to 2.5M to 3M assumptions.... If you sold your rental, you would be looking at something like 7% CAGR for the 2.15 to 2.5 in two years. That seems.... optimistic, even if it is historically average.

Otherwise, I agree, use the inheritance to get rid of the house payment and add to your own portfolio.

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Watty
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Re: Best use of inherited assets to get to retirement soon

Post by Watty » Fri May 18, 2018 9:24 am

ryman554 wrote:
Fri May 18, 2018 9:04 am
+1 for selling the rental.
Another +1 on selling the rental, or if you don't do that then buy the other half from the other person.

I would assume the other half is owned but someone like a sibling. Having a 50/50 ownership like that can be a nightmare since you will run into situations like when one of you wants to spend $50K to remodel the kitchen and the other person doesn't. Things like that will can put a lot of stress on your relationship.

It will be even worse ten years from now if one of you wants to sell it and the other does not.

If you do buy the other half then there could also be awkwardness if the home price goes up or down dramatically in value.

What often happens is that one person ends of doing most of the work on the rental and there can be resentment about that too.

You also need to look at what will happen when one of you dies. At that point the other half might be split between their three kids and six grandkids so there would be even more complications like if you want to sell it then all of the people might need to agree to sell it. If something like a new roof needs to be put on it then it can also be hard to get the grandkid that has never seen the house to come up with their share of the cost.

Trying to manage joint property like that can easily split families apart. Even if you are not close to the person that owns the other half you really don't want to be on bad terms with them.
Last edited by Watty on Fri May 18, 2018 3:47 pm, edited 1 time in total.

basspond
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Re: Best use of inherited assets to get to retirement soon

Post by basspond » Fri May 18, 2018 9:35 am

From my personal experience I would pay off the house before retiring. I would sell your 50% stake in the inherited house. I have had dual ownership agreements and the emotional stress it adds outways any other benefit you might have or perceive.

PhilosophyAndrew
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Re: Best use of inherited assets to get to retirement soon

Post by PhilosophyAndrew » Fri May 18, 2018 9:46 am

OP, I don’t think you have yet provided enough specific information about your exact financial situation.

My initial sense is that toy don’t have sufficient assets to retire without depending on earned income from your spouse, but i can’t be sure based on the information you have provided.

I also think it is imprudent to plan for a date-certain retirement because you have no idea how your investments will perform — instead, I suggest you set a specific investable asset target amount that will safely support your retirement.

Can you say more about your proposed asset allocations both pre- and post-retirement?

Also, how much earned income will your spouse continue to provide, and for how many years? What are your health care plans in case she does not or cannot work until you both reach age 65, and what would it cost to implement those plans? What are your expected social security benefits, and when do you plan to take those?

Finally, your total expenses closer to $100,000 or $120,000 per year, and does this include tax payments? How confident are you that you could maintain a $100,000 per year total budget if necessary?

It might be useful to edit your query to include all the information used in a full Boglehead portfolio review.

Andy.

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Best use of inherited assets to get to retirement soon

Post by delamer » Fri May 18, 2018 12:25 pm

PhilosophyAndrew wrote:
Fri May 18, 2018 9:46 am
OP, I don’t think you have yet provided enough specific information about your exact financial situation.

My initial sense is that toy don’t have sufficient assets to retire without depending on earned income from your spouse, but i can’t be sure based on the information you have provided.

I also think it is imprudent to plan for a date-certain retirement because you have no idea how your investments will perform — instead, I suggest you set a specific investable asset target amount that will safely support your retirement.

Can you say more about your proposed asset allocations both pre- and post-retirement?

Also, how much earned income will your spouse continue to provide, and for how many years? What are your health care plans in case she does not or cannot work until you both reach age 65, and what would it cost to implement those plans? What are your expected social security benefits, and when do you plan to take those?

Finally, your total expenses closer to $100,000 or $120,000 per year, and does this include tax payments? How confident are you that you could maintain a $100,000 per year total budget if necessary?

It might be useful to edit your query to include all the information used in a full Boglehead portfolio review.

Andy.
Good comments, and particularly want to emphasize the point about income taxes. Do your expense amounts include them? If not, you are underestimating your costs in retirement.

Also, do your expenses include a paid off house?

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