I have just come into a lump sum of money, unfortunately it was through an
But this amount is might be enough for me to give up my job and enjoy the
rest of my life doing what I want to do everyday.
I am looking for some opinions on ways to invest this to carry me for about
40 years(hopefully I live longer, but let's estimate.)
1) What is the best way to limit my taxation on this income?
2)How do I invest it ?
Should I use the money aggressively and try to make more money? any ideas
Should I play it safe and just use it to make some small money but I know
the risk will be limited? any idea?
Should I do a little of both?
I am totally new to this besides my current 401K plan, where my options are
limited as to what I can do with that money.
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
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.
In article ,
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.
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
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.
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
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
The answer on this forum is to buy stocks and some boring income
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
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.
If I were you, I will seek a money management and financial
consultant (through personal referral) to help me manage and invest
that money safely and profitably. Most people lose their money in
investments because they are too emotional and irrational in making
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.
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.
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