Help a Reader: Managing an Inheritance

Here's a question I recently received from a reader:

I will be inheriting roughly 500,000 to 750,000 thousand dollars and I am 22, I have a career job (commercial A/C tech) that I am moving up in and my soon to be wife is a software engineer and makes good money, we already have a house and I am only in 4000 dollars of dept and she just owns money for a car and house, about 320,000 of that is stocks and investments.

Any advice on what to do with roughly 300,000 CASH? We are both pretty good with money but never saw this one coming in out early life. It is overwhelming but I want to be smart and try to make millions someday with it.

What's your advice for him?

Comments

[Josh Stein]

Well, clearly the pittance of debt will go away. I'd max out the dual IRAs with it annually, especially considering that $10,000 on a $300,000 amount just isn't a large percentage - and if the $300K is used to grow income elsewise, the $10K annually will remain a small percentage.

Beyond that, I'm not much help. I come from po' folk.

[Tyler]

I assume you have decided to keep the 320k that is invested in those investments and that is why you are only asking about 300k cash.

I would pay off the 4k car loan because its annoying. I wouldnt do anything special with the housing debt- keep paying it as you were planning.

Keep the 300k in cash/cash equivalents (low risk, short term bonds) for 6 months to a year. Reasoning: 1. You need to get accustomed to having this money. Monitor the 320k that is invested already. 2. Putting 100% of the cash to work right out of the gate is making a market timing call.

Opportunities come and go. Do not try to make money off this money right out of the gate. Don't fear missing a few opportunities. (That duplex your friend says is the opportunity of a lifetime probably isnt.) You're 22, I promise you will see a lot of deals over the next 40 years of your life.

After 6 months to a year decide how to breakup the 320k in smaller amounts- 10-25% every quarter, 25% every year... whatever you want. Only at this point in time should you spend any of it on "lifestyle" or vacation.

This process will make you more comfortable and save you money in the end. I've screwed this up a few times in my life. Fortunately my life has allowed for a few mistakes.

One sad example- guy I know received 6-10mm in his 20s. He was smart, lived cheaply, and through his upbringing was familiar with money. He invested. He started companies. He was involved in so many things trying to "make money" off his money. He is not yet 30, and he is broke. Almost everything has flopped. Get used to having the money and take it slow.

[Bad_Brad]

Let me get this straight ...

You're 22, you have a house, almost no debt, and $320k in investments ... and you want advice from someone else?

I'd say just keep doing what you're doing and the heck with everyone else. Take the inheritance and invest it, mostly in stocks since you are so young.

[Tyler]

I could be wrong, but I think 320k is part of the inheritance. 320k is invested already, and 300k is in cash. 300k+320k= 620k which is the middle of the rage provided for the total inheritance.

If I am reading the post correctly, his soon to be wife has house and car debt. (So they dont really "own" a house; they've bought a house.)

The only time age is ever relevant is when one is trying to reduce volatility. Buying something because you're young, regardless of other factors, is bad- sorry.

[TL]

I really like what Tyler had to say. Get used to having the money and don't go too far down a path you can't get back from.

You're still really young, but there are a lot of things you need to think about regarding this money. You said "soon to be" married. Pre-nup? Not sure how well that would go over with the future Mrs., but give it some thought.

Since your just starting out, give some thought to what your life will be like 5 yrs + down the road. Are kids in your future? You or the wife going to work from home? Would you like to start your own commercial A/C business? All these things will affect how you invest the money.

Yours is a prime example of someone who should seek out a financial planner. Someone with a CFP designation, at a minimum, and maybe an estate planning attorney. Pay the fee versus commission based advice like a stock broker.

Educate yourself. Don't just follow blindly on others recommedations. You're in the right spot, and will likely get good advice here.

Good luck.

[MattJ]

In your shoes, I would probably take the whole chunk of change to Vanguard Brokerage Services and let them invest as they see fit.

Alternatively, break the money up into 3 or 4 equal chunks and find several fee-based financial planners to manage it for you.

Finally, find a copy of the book "Money For Nothing" about the lottery annuity buyout industry. The author got in on the ground floor, convincing lottery winners to sell his company portions (or all) of their annuity for "Cash now". That part isn't very relevant to your situation, but he spends a lot of time talking about all of the problems that folks who recieve sudden wealth can get themselves into.

Reading about all of that (and having your wife-to-be read about it as well) could be a huge benefit to you, and help you avoid the typical mistakes that people can make. The stories could help prepare you to defend yourself against old friends and semi-distant relatives coming out of the woodwork with reasonable-sounding requests for help with college, medical bills, or business opportunities.

[Budgeting in the Fun Stuff]

I'd personally hold on to it in ING for at least 3-6 months before doing anything else with it...just bask in it's existence so it feels like real money (feels worse to lose "real" money). Then I'd pay off the house and car since I hate debt. Obviously this will not net you a huge return (just your APR's), but it's safe and I love the idea of debt freedom. :-)

Whatever you decide, I hope it works out great for you!!! Good luck!

[justme]

PRE-NUP!

[cb]

Not trying to be a jerk, but I would definitely use some of it to advance your education. How you write can affect your career advancement and how people treat you and your money.

[sasha]

I am trying to understand the question as it is posed. The grammar and structure of it are quite confusing, so I am not sure that the situation is as rosy as many people are assuming.

It sounds (to me) like this young man has $4000 in debt. His fiance also has debt (car and a mortgage on a house - amount of her debt unknown). From what has been stated, the OP and his fiance have no assets unencumbered by debt themselves - this inheritance is what is providing them with any real assets.

If that is the case (that the inheritance is what is giving them any true savings), then the OP needs to pay off his car loan, and sit on his newfound money for at least 6 months. He should also consult with a lawyer about a pre-nup so that this money doesn't get mixed in as marital assets (unless that is what he wants). I would then suggest that he keep some of the money liquid (for a good sized emergency fund - maybe 25K), and invest the remainder over time into a Roth IRA if he is income eligible, or in tax efficient low cost index funds if he is not eligible to invest in a ROTH. If his job offers a 401(k) -I would also suggest upping any contribution to the maximum allowable $16.5K.

I would not use this money to go on any kind of spending spree, or any kind of speculative "business" venture that the OP, his fiance or any of their friends/acquaintances might think is a really good opportunity. If you weren't a business person before this inheritance - don't fool yourself into believing that you can be one now. You have over 40 years to let that money grow - time and compounding are on your side. If you invested 275K of that money right now, made 10K in ROTH contributions every year, and put the maximum allowable in your 401K - in 40 years at 5% interest (conservative) - you would have over $7 million dollars.

If you just invested that 275K without ever adding another penny - in 40 years at 5% increases a year - you would have just over $2 million at age 62.

If you feel like you need to just be able to spend some of the money upfront to play with - restrain yourself to only tsking 1% - or $3000.

This inheritance can be a building block to a comfortable retirement - but you shouldn't try to change your lifestyle or the money will be gone before you blink your eyes. This is the time to be conservative and to leave the money to grow. Good luck.

[MattJ]

One thing that perhaps should go without saying is that the FDIC only insures up to $250,000 per depositor per bank, and since the amounts you're talking about are larger than that, you need to have any bank deposits split up so that you do not have more than that in any one bank (unless you want to put it in your wife-to-be's name, which I would advise against).

[Quinton S]

For Matt J, to cover that $250,000 limit..http://www.cdars.com/

Simple Advice:

Pay off the debt.

Keep $50,000 for "play" money..(face it, as humans we are tempted to have some toys.)

Put the rest in investments THAT YOU UNDERSTAND!

Don't understand anything? Then follow what the best investor in USA's last 50 years advice..Put it into Low fee ETF'/mutual Funds at Vanguard or Fidelity.

""What advice would you give to someone who is not a professional investor? Where should they put their money?"

Answer from Buffett: "Well, if they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time."

[Rob]

I am going to echo the comments of others that said to sit on the money for a few months to a year. Pay off your debt first. Then start investing some of the money, preferably into Roth IRAs if you are not above the income limits.

[ee]

Common theme that I agree with most here is TAKE YOUR TIME! Set the money aside. Someplace safe. Seek the advice of a certified financial planner AFTER you figure out what your short term goals will be. Financial planner can help with long term strategies.
By the way, why be in a hurry to get married? Again, take your time. A pre-nup is a great thing to consider if you can talk her into it. If she truely loves you she won't have a problem with it.

[ee]

Every guy out there that got racked over the coals in a divorce thought that it would never happen to them because they were "SURE" that their love was strong enough to have a successful marriage. PRE-NUP!!!!

[Doug Warshauer]

My recommendation would be to put the entire amount - not just the amount currently in cash - into a Total Stock Market index fund. I would leave it there, not just for a few months, but for at least a decade.

Here's why: First, it's a lot of money if you save it, not if you spend it. If he uses it to live a more luxurious lifestyle, it will be gone before he reaches 40. Second, for most people, an index fund is the best possible investment. If he wants to try to do better than an index fund, his chances are much better at age 32 than at age 22. So let it grow for ten years, and then, if you want to try a different investment strategy, try it then.

[Benjamin Bankruptcy]

Put $150 000 in bonds, $150 000 in an index fund and rebalance quarterly, then focus on enjoying your job because well your pretty much sorted

[BillV]

If after all this good advice, still are unsure what to do, i have the perfect solution.

Send me the the money, then don't call me, I call you in 20 years.

Just kidding in case I needed to say that.

[Jeffinwesternwa]

Avoid the ameteurs and "sayers" along with the DITY types, You both have a great opportunity.... HIRE a professional CFP/planning firm after interviewing at least 3.....

[CPA Abroad]

The one thing I have never been able to understand, perhaps because I grew up in a house where money in real terms was not discussed alot (we talked about saving, living below your means, etc., but no dollar amounts) is why people insist on telling others how much they have/make. If I got an inheritence, the only thing my friends need to know is that I got one, if that. No numbers involved. Two reasons for that, 1) it is none of their business and 2) if they do not know how much, they have no reason to come to you with get rich quick ideas that involve spending YOUR money. (this is in no way directed at the OP, because he has a legit question, just building upon what some other people indirectly mentioned)

Please do not take any of that rant to mean that you should not seek advice of a financial planner when needed, because that is not what I am saying. A lot of people get in trouble with a windfall because everyone else knows about it and that is when the hands come out.

In short, go slow. Nothing good happens when you go fast with this type of stuff. And if you interview a "financial planner" that wants to sell you a bunch of insurance policies, annuities, etc., walk away, they are a salesman, not a financial planner.

[zoranian]

It really depends on what your knowledge and skills are, as well as what part of the country you live in and how long you plan to live there. Since you seem to have some construction/mechanical skills, you could always try to get into the real estate market if it's a good decision in your area (In my real estate market a $90,000 house will rent for $900 a month, meaning HUGE positive cash flow). You will have a LOT of time investment with rental properties, but may be able to increase income and build wealth if the right opportunities are available in your area.

If you want to spend as little time as possible making money, find a fee-only financial advisor who can help you determine the best method to utilize your inheritance regarding investment vehicles and investment choices. Either way, you probably do want to sign some form of pre-nup. I am a debt counselor and have seen a lot of clients in some really terrible situations do to divorce. You don't want to expect a divorce, but think if it like life insurance, you don't want it to happen, but if it does, you want to make sure the process will be as easy and smooth as possible.

Another way some people get wealthy is to start their own business or invest in a business start-up. If this is something you've always wanted to do (and if you have the skill-set for it) definitely limit your investment. A huge percentage of businesses fail in the first few years. Be sure that you have a positive cash flow in your business and personal life and avoid debt at all costs.

[Tyler]

Since you clearly want to learn and take responsibility for your own investments, hiring an FA/CFP seems less desirable. (The poster didnt ask how to hire an FA.) Furthermore, 600k is not a massive amount of money that cant be managed by yourself. Wall Street is not the friend of the common investor and at those dollar amounts your a common investor. Successful and talented FA's really wont be interested in someone at 750k investable assets. I'm not an FA (so glad!) but I wouldnt give you the time of day- its not enough to be worth my time.

So... the poster has a desire to manage it himself, its not an amount of money that cant be managed or would benefit from major planning, and its not enough money to be appealing to an A+ FA.

[Squirrelers]

First off, that is quite a financial start in life.

Now, my honest answer in trying to recommend what's best for you is to not comingle that money. What I mean is, keep it in an account that's entirely in your name only. Don't put any other money unrelated to the inheritance in that account. And talk to a local attorney, in your state, to find out exactly how to protect your inheritance. A pre-nup may be necessary.

I say that because you are so young, and life can take so many turns that you don't anticipate when you are that young. Protect yourself, and the inheritance that was given to you personally.

I'm conflicted telling you this, because I believe people and relationships are much more important than money. I believe in joint finances, operating as a team when married. That said, I still think that protecting the inheritance is sound advice given your age and intention to marry young. And do this while being 100% open and honest with her, as she deserves it.

I wish you and your soon to be wife all the best.

[Old Limey]

We have a couple of nice bequests to grandchildren in our will but we are making them wait until they are 35 before they get it.

Twenty two year olds don't have the maturity to be able to deal sensibly with large amounts of someone else's hard earned money that fall into their lap - Period

[Hong]

I'm sorry it came from the death of a family member. From the amount inherited, I assume it is from someone close that cares for you a lot.

It looks like you were already off to a great start and have your financial house in order even before your inheritance. I would consider hiring a CFP at least for a second opinion on your choices.

Just a note on the first comment regarding opening an IRA, I would wait until the end of the year. Your income might be too high to allow you an IRA contribution (Roth or traditional if you have a company sponsored plan). Although the inheritance isn't income taxable, the resulting gains, interests, and dividends added to your regular income may put you over the eligibility limit.