What to do with 2 million inherited from dads 401k

[stifeler]

Hi I inherited a 2 million 401k from my dads passing.  i'm 61 years old.  i am not a mustachian per se but i've been very flugal my whole life.  i will now put in one more year at my job and then retire.  I just have no clue how to manage this money.  My goal is to keep it extremely safe such as in CDs? or something comparable, but to make enough interest to beat inflation.  but do I need to spread it around to many financial institutions to get 250K FDIC insurance at each one?  Do I leave it in the account that it sits in now?  "roll it over" to an "IRA"?  no idea what i'm supposed to do.  goals are:  keep it safe as possible, beat inflation.  Any help you can give me is appreciated!

[Gin1984]

How much do you have invested yourself? How much do you spend annually? 

[BNgarden]

@Frankies Girl has answered this (401k inheritance) well in response to other queries, and may be able to copy / paste or point you to some considerations (e.g., tax on estate?).  (Others also, but I can't recall their site names...)  Something about setting up RMDs as inheritor etc.

I have less to say on your cash / nearly cash plans, as there's little info to go on (and I'm likely in another country).

FWIW I think you could likely pull the pin now between the two amounts (inherited 401k, your savings) and if there's any pension /  SS payments I'd be more certain.  BUT, you need to know what you truly spend, what you want to add as extraordinary expenditures and, if you will actually keep the funds mainly in cash, you can't rely on the typically stated 3 - 4% withdrawals without (likely) affecting the principal over time.

Sorry for your loss.  Good luck on the decisions ahead!

[sokoloff]

IMO, a you want at least half of this money in stock-based mutual fund (like Vanguard VTSAX mutual fund).

I think CDs are a good choice for only a small slice of it, maybe 10%, with the remainder that’s not in stock-based mutual fund allocated to bonds or stocks as your personality and other circumstances dictate.

Ironically, playing it “extremely safe” is likely not the best idea with this money, particularly if you have heirs to whom you’d like to give a chance at a similar inheritance.

[boarder42]

Stocks are safe from a protection against inflation standpoint cash and CDs are not.

[Frankies Girl]

First off, I am so sorry for your loss. If you need to, please do take several months to deal with the death and aftermath before doing anything major with the accounts.

The only timely thing right now is to make sure to get the accounts labeled correctly as inherited (IRA/401K) and make sure that the required minimum distributions (RMD) for your dad were taken in the year of his death (this year?) before the end of the year. You'll also need to make sure your inherited accounts have your own RMD set up and ready to go next year, but you do have a bit of time for this. Make sure to ask the financial institutions that hold the accounts about this, as otherwise you could be forced to take the entire 2 million out over a 5 year period, which would suck because taxes are owed on all withdrawals.

https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd
^RMD rules for inherited IRA/401k based off of Fidelity's info

I started out pretty much the same: inherited a large amount from my father's passing. Pretty smart with money, saving at a great rate, frugal and investing (blindly) in my own workplace accounts, but not really understanding how the market and investing in general worked and it was scary realizing what I had suddenly and what I might could do with it if only I wasn't so dumb about the investing/market stuff. But I figured it was too complicated and would always need professional help and I was pretty fearful about "risking" my dad's gift in the markets. I took about 6 months to deal with the loss of my dad, did a whole lot of reading, and likely pestered the crap out of many folks on this forum (and others, but mostly here) until things clicked for me. All those links below are the baby steps I needed to figure it out.

Couple of things:

Who do you have your accounts with? Vanguard, Fidelity and T Rowe are all decent companies with great funds available, and there are a few others I've heard of that aren't terrible. There are some companies that ARE terrible tho, and make a point to have high fees and awful funds for investing, so if you care to share, we can help figure out if you're in a good place as far as that is concerned.

FDIC insurance is only for a bank failure/malfeasance, not investment accounts. Investment firms offer coverage for failure/malfeasance through SIPC (SECURITIES INVESTOR PROTECTION CORPORATION). Depending on who the investment account(s) are with, you are already covered in the very, very unlikely event that the institution will fail, or someone working there plunders your accounts and the company itself won't make you whole for their error.

With 2 million invested, you have a safe withdrawal rate of ~$80K if you leave the accounts invested in broad market funds (like index funds). Putting it all in "safe" things like CDs means that safe withdrawal rate isn't valid as you'll have very slow, if not stagnant growth, and likely spend down that 2 million over the next 20 years if not sooner.

Also to consider: required minimum distributions (RMDs) are going to be a thing if your dad's accounts were tax deferred (so like a 401k or a traditional/rollover IRA). As you are in your 60s, this means the amount on 2 million you're going to have to take out will be a bit higher than if you were in your 30s or if the account was only 100K or less... they will base the amount of RMD off of your life expectancy (as long as you get the inherited accounts set up correctly). So based off of your age/accounts, you will be taking out a rather high amount each year that will be taxable, and depending on other taxable factors, you definitely need to figure in taxes to be paid... this is not a terrible thing, but just be aware if you haven't been in a high tax bracket, you may end up in one going forward because of the RMDs. What I did was have the investment company set up an automatic RMD schedule and include federal tax withheld at about a 25% rate for the first year until I got things figured out, and then I dropped the tax withholding down to cover what I actually needed to pay.

It sounds like you are not very knowledgeable about investing in general, so I'm going to recommend you some reading to get things figured out. If you're not planning on retiring for another year, then use this year to research investing, figure out your plans and set up the accounts to work for you and support your future. Fear is a terrible thing to use as a planning tool, so to eliminate that, you need to do some homework.

http://jlcollinsnh.com/stock-series/
^online or get his book. This series really made all this stuff easy to understand in simple language. This is how I figured out how this stuff works and I am not scared in the least about investing or market drops or what.

All of my recommendations (and most of the others on here) are going to revolve around index investing, basic Bogleheads stuff, based off of John Bogle's amazing fund structures. He wanted investing to make sense, be simple, and allow anyone to be successful - which is why tracking the entire market through index funds is so perfect for just about any investor. You don't have to be an investing wizard to do well at this - you buy index funds in the asset allocation you decide fits your needs (there are stocks and bonds and even real estate index funds out there). And then you leave them alone, only checking once a year if you'd like, to track the market.

https://www.bogleheads.org/wiki/Investment_policy_statement

https://www.bogleheads.org/wiki/Asset_allocation

https://www.bogleheads.org/wiki/Main_Page
https://www.bogleheads.org/wiki/Getting_started


And ask LOTS of questions on forums like this one. There are some great people that are smart and don't mind helping out.

[radram]

wow thanks all for the informative responses.  i had never even heard of the SIPC.  for some reason I just dont feel like putting my money in an index fund tracking the market because it just feels like the market will drop a lot soon.  I understand the can be an opportunity to buy more on sale, but i'd probably panic and sell knowing me.  CDs feel way safer to me.  im probably making everyone cringe and mustaches twirl.  i have the money all in a fidelity money market account for now.  but seeing that the SIPC only covers 500,000 ill have to open a few more accounts to spread it around and get full coverage.  may also buy an annuity so i can get stead income without worrying about how to manage huge balances.

What an incredible gift your father gave to you. I get it. You want to honor him be being a competent manager of "his" money. For us, it has been close to 3 years, and it still does not entirely feel like "ours". I fully expect that feeling to never go away. I am glad for that, as it still feels like he is very much with us and looking after us.

Go here for a good estimate of what the RMD will be:
https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/ira_calculators/beneficiary_rmd

There will very likely be 2 very different RMD amounts; the one the year your father died, and the following year, which will use YOUR life expectancy to calculate increasing RMD's. Just plugging in your father as 93, you as 61 and your father passing January 1st, and 6% growth, I get the 2018 RMD to be about $208,000. The following year it drops to $80,000, and increases slowly until the final year. Make certain that first year is taken according to the rules, or as frankies said, it could force a 5 year maximum withdrawal. Not good. Also make sure you do not take the first year RMD twice. Your father might have already taken it.

Based on frankies' wonderful post, and your reply, I would just like to stress that the ONLY concern you should have now is creating the correct bucket, and taking the proper RMD starting the year of death. What you buy in the bucket is secondary at this point.

You mentioned you have it all in a Fidelity Money Market account right now, but that does not tell the whole story. The only important factor right now is the TYPE of account it has been placed into. Has it been moved into an inherited IRA in your name? If it was not placed into an inherited IRA, you need to see if it is too late to do so.

What you buy with it can be figured out as you go, with one important caveat: Annuity contracts are often irrevocable. Do not make an irrevocable decision until you are sure that is what you want.


There are threads galore talking about annuities. I am not a fan. In general, they are high fee, low growth products that pay a nice commission to the seller. This community, as well as others (boggleheads...) are here to tell you you can do better. I believe we can. You do not buy an annuity as an investment. If you see a specific annuity you are interested in, run it by this community (maybe even this very thread), and be sure it is the product you think it is, and is exactly what you want.

Our experience with annuity contracts was absolutely terrible. The salesman was the salesman of our relative that died, and he tried to convince the beneficiaries the best solution was to enter into a lifetime contract of 3% growth. The pitch was made 2 weeks after death, and we were urged to sign before the new year (2 weeks later). He even stated how disappointed our relative would be in us if we did not sign today. Brought my sister in law to tears. I still get angry about it. We instead transferred the contracts to Vanguard, and have been very happy with them.

One more thought: often earnings on annuities are tax deferred. So are IRA earnings. If you are convinced an annuity is for you, the tax deferred growth could be completely wasted if you buy an annuity in an already tax deferred account.

Keep us posted.

[Catbert]

For OP an annuity might be a decent vehicle.  Talk to your Fidelity rep (with 2 million there they will sign you a "senior" rep to deal with on an on-going basis) about plain vanilla immediate annuities.

If 60K a year is what you need,explore to to get there:  How much social security?  How much pension, if any? Then look at an annuity to fill in the delta.  Put the rest mostly in stock mutual funds.  Fidelity will manage your portfolio (for a fee). 

I realize that this is a sub-optimal plan for others who read this.  However, it is a much better option than all in CDs.   Even paying a fee to have Fidelity manage it is worth it if it prevents OP from panicking and selling when the market dips. 
 

[Gin1984]

For OP an annuity might be a decent vehicle.  Talk to your Fidelity rep (with 2 million there they will sign you a "senior" rep to deal with on an on-going basis) about plain vanilla immediate annuities.

If 60K a year is what you need,explore to to get there:  How much social security?  How much pension, if any? Then look at an annuity to fill in the delta.  Put the rest mostly in stock mutual funds.  Fidelity will manage your portfolio (for a fee). 

I realize that this is a sub-optimal plan for others who read this.  However, it is a much better option than all in CDs.   Even paying a fee to have Fidelity manage it is worth it if it prevents OP from panicking and selling when the market dips.

I agree.  I do financial coaching for some of my mother's friends and run my mom's money.  Sometimes suboptimal is better than attempting perfection and failing.

[SwordGuy]

wow thanks all for the informative responses.  i had never even heard of the SIPC.  for some reason I just dont feel like putting my money in an index fund tracking the market because it just feels like the market will drop a lot soon.  I understand the can be an opportunity to buy more on sale, but i'd probably panic and sell knowing me.  CDs feel way safer to me.  im probably making everyone cringe and mustaches twirl.  i have the money all in a fidelity money market account for now. 

To avoid being mis-understood, I'm going to be damned blunt.   

I'm not being damned blunt to be mean, I'm being damned blunt because the basis for your decision making is wrong.

So, here it comes:

A lot of people make big, important decisions based on how they "feel" about it.   That seems to be your criteria.

Your feelings aren't based on facts, they are based on fear.    Ignorant, uninformed fear.

Go back and re-read the comments by Frankies Girl.   

Seriously.

Re-read them.

Then read the links she provided.

Then re-read them.

Then come back and ask questions.

You now have access to the information you need to make a quality decision.   

Whether you make use of that information or not is up to you.

I wish you the best, so please take this bludgeon of a comment to heart.

[MustacheAnxiety]

I am sorry for your loss and am sure your Father would appreciate you taking the time to learn even while you grieve so that you can both take advantage of this gift and be a good steward of his earnings for future heirs/charitable contributions/whatever would make you happy later.

There is already some great advice here, so I will try and minimize repetition.

RMD calculation starting in 2019:  If there are multiple inheritors this is actually based on the age of the oldest inheritor, not necessarily your age.  This information is surprisingly hard to find if you do not already know it.

Investments Basics/Largely Repetition: You can/should absolutely take the advice of other posters and invest mainly in low fee stock market index funds.  If your annual spending is 60K and your investments are 2.4M, you have a very safe 2.5% withdrawal rate.  After some further reading on stock markets over time this should give you a great deal of security about the great chance you have of maintaining and growing your investments over the next 40 years.  Similarly, the suggested research should help you realize that having 100% cash (e.g. CDs even ones with decent 2.5% return) is very likely to bankrupt you over the course of a 40 year retirement (62% failure rate assuming 60K spending and 100% in cash at 2.7% CD return / this is of course not taking into account and social security or pension).  But it should be very scary to pick an entirely cash based investment with a 60%+ historical failure rate over a largely equity based investment with 0% historical failure rate.

Investments: New Idea - Rising Equity Glidepath: If you fear a near term stock market crash AND you may end up panic selling after a drop if you are 100% invested in equities, consider a rising equity glidepath.  This simply means dividing your fortune between stocks and bonds, e.g. 60% stocks and 40% bonds, and then slowly selling off bonds and buying stocks. This is a good way to hedge against a near term recession, still get the benefits of equity exposure over a long retirement, and help manage panic (make your brain say Yay I get to buy stocks at a discount, instead of oh no, where is all my money going).   The following is a very dense article discussing historical simulations using a rising equity glidepath: https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/ The article is math heavy, so feel free to skip to the conclusion, the highest safe withdrawal rate of 3.47% using historical data is achieved by starting with 60% stocks and 40% bonds and moving .4% from bonds to stocks each month that stocks are not at an all time high.  Good news if this is confusing, it is not needed as you already spend such a low amount compared to your investable assets. But it may help avoid or manage panic if you have a plan that you can execute on at regular intervals rather than just waiting, watching, worrying, and wondering.

[Tyson]

If you invest in stocks (specifically index funds), you might lose some $$ in the short term, but you'll come out way ahead in the medium/long term.  Do you know what is definitely guaranteed to lose $$ in the long term?  Cash.

But, if the market drops that can be stressful.  Here's my advice on how to reduce that stress while having investments.  First, calculate how much $$ it takes for you to live, per year.  Next, calculate how many years you think a market might tank for.  A year?  2 years?  3?  5? 

Take your yearly costs, multiply them by the # of years you think a market crash would last for, and keep that amount of $$ in cash (or better, 3% CDs).  Lets say 3 years is your comfort #.  $60,000 x 3  = $180,000.

Keep $180,000 in cash (or cash equivalent) and invest the rest.  Now you know, for a fact, that no matter what happens in the market, you'll be fine.  Even if it crashes so bad/hard that it takes several years to recover.  You can just live on your cash during those drops. 

On the other hand, a serious drop might not happen in your lifetime.  In which case you've got a huge cash cushion that you'll never really need. 

[radram]

RMD calculation starting in 2019:  If there are multiple inheritors this is actually based on the age of the oldest inheritor, not necessarily your age.  This information is surprisingly hard to find if you do not already know it.

When I first read this, I thought it was just plain wrong. Turns out this situation could happen.

From the fidelity website:
When IRA assets are inherited by several individuals, each beneficiary should set up their own Inherited IRA by December 31 of the year following the year of death. Any beneficiaries who do not separate their inherited IRA assets by that date will generally need to base their RMDs on the age of the oldest remaining beneficiary on the account as of December 31.


Sitting here now, I am struggling to come up with an advantage to not separate an inherited IRA into its beneficiaries. Before today, I never even knew you could refuse to. Anyone have a reason why you would want to do this?

[Catbert]

RMD calculation starting in 2019:  If there are multiple inheritors this is actually based on the age of the oldest inheritor, not necessarily your age.  This information is surprisingly hard to find if you do not already know it.

When I first read this, I thought it was just plain wrong. Turns out this situation could happen.

From the fidelity website:
When IRA assets are inherited by several individuals, each beneficiary should set up their own Inherited IRA by December 31 of the year following the year of death. Any beneficiaries who do not separate their inherited IRA assets by that date will generally need to base their RMDs on the age of the oldest remaining beneficiary on the account as of December 31.


Sitting here now, I am struggling to come up with an advantage to not separate an inherited IRA into its beneficiaries. Before today, I never even knew you could refuse to. Anyone have a reason why you would want to do this?

I suspect that it's people who forget or just don't deal with the issue.

[Rosy]

Just wanted to say - do take Sword Guys post to heart and look at the post by tyort1 because it is a simple approach that gives you plenty of security (at least emotionally) by having cash CDs - don't lock it in for more than a year or two, the rates are going up:)
That should help calm your fears about the market and then you'll be ready to invest the rest without obsessing about the market.

Frankies girl referred you to jlcollins - it is good advice - do have a look at the blog - he is great at explaining everything in simple terms. Read it ten times if you have to, it takes time to let it all sink in, but honestly, it is not rocket science.

Oh and money and feelings - do.not.mix. Nobody has a crystal ball and nobody can predict the market. 

There is no reason you couldn't take time to educate yourself - it is your money now and your dad worked hard for it - so take good care of it:)
Opening a Vanguard account is simple, they'll walk you through it on the phone.
I vote for parking it all in different index funds after you know more about Index funds. But first, look into what you yourself just did - did you set it all up properly as an inheritance and do you understand all the tax implications?
The advisor may stir you away from Index funds at Vanguard because they don't want to lose your portfolio...

Again, Frankie's girl mentioned there are some good brokerage houses and if that is your preference find an advisor that you personally are actually comfortable with.

Remember it is your money and that it is never a good idea to make final - forever decisions while you are still grieving. Stay away from annuities, for now, this is not the time to let yourself be pushed into investments that are as complicated as an annuity, which by the way pays the highest commission of just about any investment vehicle out there - so thread carefully.

Good luck to you and I am sorry for your loss.