Financial Help needed- inheritance

I am sorry to hear that someone close to you has passed.

A few more details would help us with your questions. How old are you? We need to be sure that 40 years is the correct time horizon. You can expect to statistically live into your early 80s, but most financial planners err on the side of caution and use 90-95 as a planning base.

Exactly how much money did you inherit? Is it safe to assume the inheritance has already cleared probate and free of estate taxes? If it was a large estate, are there any trusts or estate planning vehicles that stand in your way? You will have drastically different answers based on how much and how accesible the money is.

What is your current asset/liability profile? Mortgages, auto loans, college tuition, credit card debt?

Lastly, how much do expect to need annually? It is common to hear that you may need as much as 16-25x your expected annual income to sustain yourself through an expected life span. Its overly simplistic and we'll be able to provide better insight once we know more, but its a decent starting place.

Its the same issue the newly retired face, so there is a fair amount of literature on it, e.g. fidelity.com. The process is called "income investing".

One strategy is to invest in in a balanced fund-

60-40 or 50-50 stocks and bonds anf only take out 4% a year. Over the long term this mix has returned 4% plus inflation.

The other is partial annuitization. Say buy an immediate annuity using no more than one third of your inheritance. These pay you a guaranteed income for life. However at your age the payout is a smidgen over 30-year treasuries or about 5.5% a year. And this is not inflation protected which would cut this in fourth over 40 years. You can also buy a term-annuity which pays out slightly more, but might take you up to social security age that would replace this annuity. The other 2/3rds you invest in a balanced fund and use as necessary. Some people like the idea of having some of their income "guaranteed" and not subject to market variations.

A third method of income investing is high income yielding funds usually bonds or dividend stocks. These are sometimes called "widow stocks" and used to be utiltiies with regulated returns until utility deregulation came about in the Enron age. The game is to beat the 30-year treasury (@5%). You can probably believe the claims 3% above or less. Anything higher may have considerable risk.

You didn't give enough details about either you, your life, or this lump sum. You did give a list of questions. These are pretty profound questions--you are asking about lifestyle and making decisions that have 20, 40, or more year lifespans. The big thing that I see here is that you need time to sort out these questions. My strategy would be to find a wealth manager, such as one at a major bank or large brokerage firm, and get this money put into a good money market fund (or equivalent higher return buy fully liquid parking place). Keep the money totally liquid--don't get talked into anything. Then let things ruminate for 6 months or so. Once you get past the grief factor and get your options sorted out, then you will be able to tell your money manager what he or she needs to know in order to set you up for no matter what track you want to take. Take your time and think about it. There may be some things you need to do right away, so hand it off to a wealth manager to do that for you. You don't want to be reading IRS books and doing forms just after a close relative has passed on.

-john-

First of all I see a lot of people spend too much time worrying about taxation. Your first question is about taxation, which shows me that you worry about it too much.

In your situation you need to generate current income plus growth. You need to speak to a couple of financial planners to first get some general idea. The general recommendation is that you cab make your money last a long long time if you spend no more than 4% of it every year.

Without knowing more, I would suggest building a diversified portfolio of stocks and bonds (say, 60% stocks, 30% bonds, 10% cash, plus or minus 10% either way).

I would consult with a knowledgeable accountant (not a drive-through hack) first, regarding taxation issues. You can then invest the money in a low fee money market fund, such as Vanguard, and carefully ponder where you may want to invest it for the long run. Do not overlook non-financial-market possibilities such as acquiring a house with several rental apartments.

i

Probably not.

Consider a 3% inflation rate. $1 will be worth 50 cents in 24 years. It will be worth 31 cents in 40 years.

Let's say you get 5% on a CD and pay 25% (state and federal) tax. This leaves you with 3.75%. If you inflation adjust your money (-3%) you have .75% (less than 1%) left. Can you live on 1% of this sum?

Do you want to be totally retired or mostly retired? Real Estate is a good part time job for people who can be on call to do a few hours of work a month (except for filling vacancies, which is a lot of work) over a period of years. I'm a landlord. This really depends on the prevaling CAP rate and appreciation in your area. Some areas are good and some are terrible.

Real wealth usually comes form businesses. The guys who trim my trees and fix my sprinklers charge $100 an hour and have a shiny new pickup truck. The guys they drop off to actually do the work make $10 an hour. If you can afford a pickup truck you could be the guy who gets the difference. You could be a slient partner in a franchise, etc. Or you could buy stocks, which is what most of the people on this forum do.

Real estate rarely has large tax bills. I've had several years of 0% tax as a landlord even though I was making a couple thousand a month. (I had a couple thousand a month in depreciation.) Given the interest deduction I could make my net income pretty much whatever I wanted.

Or you could work (earned income) just enough to contrubute to a Roth IRA.

The answer on this forum is to buy stocks and some boring income investments.

Ray Lucia's "Buckets of Money" strategy is good. 1/3 of your money in CDs. You live off this for the next 5 - 10 years. 1/3 of your money in 5 - 10 year investments (CD, bond, insurance products). 1/3 of your money in ETF's or mutual funds. You don't touch this for 15 years minimum.

Best of Luck to You!

Other information that is needed in order to answer your questions: Whether or not you are married or are planning to be married, how many children you have, whether or not you may need to care for parents in the future, and related family matters. In addition to the good advice other people have given you about investing in equities, please do not overlook real estate. Do you own your home free and clear? If not, pay off the mortgage at once, or if you are renting, consider buying a house or condo soon with part of the money. If you can make your interests and investments mesh, that is a good strategy. For example, if you like to ski, consider buying a vacation condo near a ski resort. If you like beaches and sunshine, get a condo on the ocean, etc. Hold on to the properties for the long term and you will come out ahead. All this assumes that the amount you have inherited is more than needed to pay off all credit card debts, any other loans, fund your retirement plans, buy enough insurance to take care of your wife and kids, and other immediate concerns.

I read the OP's tax question to be about the inheritence, which, if any tax were due, should come from the estate of the deceased.

Right on target. Since OP didn't state what the sum was, nor what his lifestyle required for income, he might be in fat city, or doomed to outspend the money in 15-20 years, or anything in between, of course. JOE

How is this windfall invested now? Why do you think you will need to make a lot of changes to the way it is now invested? I ask, because if you think you need to make changes, then you've already been learning about investing and already have some ideas. If you're not sure about making changes, then you need to learn more about how the current status of this sum would provide for you. If this is a sum large enough for you to think you can live off it for another 40 years, then there is likely someone who has been managing this money for the decedent. Talk to this manager; this is a person who can help you move in the direction you want.

Elizabeth Richardson

Huh? How would you know? If he inherited 100 million dollars it's still not enough?

Not know what the sum is, you are coming to an unwarranted conclusion.

An excellent point.

Since you are dealing with a considerable about of money for you (everyone's 'considerable' is different), and you are a novice, you need professional financial help. Way too many factors are involved for someone to give complete advice on a message list (though the people on here ARE very knowledgeable).

I would first consider whether you *really* want to retire. Since you want your money to last 40 years, I'll assume you are in your mid-40's, give or take 5 years. As great a early retirement sounds, the reality is that very few that actually do it, stick with it. Often they will take 'a break' of a few years, to do some fun things, only find out that you can only fish and golf *so much* (especially when all of your best fishing and golfing buddies are working). At this point they return to work in a new role/job/career. The mindset when you don't 'have' to work often completely changes your outlook on the work itself.

Try reading

keep this article handy when I find myself dreaming of earlyretirement.

I agree. I came into a lump sum of money several years back, not through an inheritance but because the startup company I'd been working for was bought out. At that time I thought that I'd be able to afford to retire in another 5 years or so.... but then in the meantime I was diagnosed with a serious illness. While I was sick I realized how important it was for my sanity to have productive work to do and a "normal" kind of day-to-day lifestyle revolving around work instead of my medical stuff. Now that's past, and I'm working pretty much on my own terms -- full-time, but with a telecommuting job, so I can live wherever I want and keep my own schedule. Another big plus of continuing to work is that I get health insurance through my employer. At some point I might wish to cut back to part-time so I have a little more leisure to travel or pursue hobbies, but for now I think I'd be happier continuing to work full-time since I can.

Anyway, I'd join the chorus of those urging the OP not to do anything in a rush. Park the money in a money-market or bank savings account until you learn about investments and retirement planning, and don't hand in your resignation from your job until you have a plan for what to do next.

-Sandra the cynic