Author Topic: Inheritance Advice  (Read 2269 times)

alyx

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Inheritance Advice
« on: November 17, 2018, 12:37:30 PM »
Hello fellow mustachians,

I have been a reader on this site for years. It's helped me shape how I think about finances and retirement. Thanks to the blogs on this site, I was motivated a few years back to pay off all my CC debt and save as much as I could each paycheck I received. I've also created a small stock portfolio and put the maximum into an IRA each year. I am 32 years old and I just started to get a handle on things recently. Then, out of the blue, a family friend with no children passed away and I got news that I would be receiving an inheritance. Took a year to get the paperwork straightened out, but I just heard from her lawyer that I will be receiving between 250 and 350K.

Before I receive the checks from the lawyer (in the coming months), I currently only have a federal loan out for college (15K) and no other debt. I have about 22K in the stock market (mostly Apple, Disney, Spotify, and FB--I really need to diversify). And the rest is in my IRA ( 11K). Oh, I have about 9K in a checkings account right now and some 20K more coming from freelance gigs I already completed. So I have a nest egg in case of an emergency.

I reached out to a friend/mentor of mine who is smart with finances. He used to be VP at a big financial institution, and after he retired he got a graduate degree and created a curriculum in order to give people in the community free financial advice. I spoke with him, and he told me that I should put most of it in a money market (I believe that's what it's called) type situation. When I get the check, he said I can set up a meeting with him and we can go over the money market in person. To prepare I've created an account with Schwab.

I also have a dream of purchasing a 2-flat (I live in Chicago). I've worked hard to get my credit score up and it's around 752 right now (according to mint.com). As a freelancer with income from various streams that are not all from related fields of work, I've found that it might be a bit difficult to get a mortgage for anything more than say 75 - 100K. I've spoken with Chase bank and also a smaller mortgage company. The smaller company looked at my taxes and said she could work with me and get me a decent mortgage, but then she ghosted on me lol. I need to stop back in after I file taxes next year.

Any and all advice is welcome on what to do with this inheritance is welcome. If you have advice about money markets/mutual funds, real estate, down payment on homes/apartment buildings, or anything else--please let me know.  Thank you so much.

-alyx

alyx

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Re: Inheritance Advice
« Reply #1 on: November 17, 2018, 12:54:27 PM »
hey! I'm sorry! I had  such an extremely difficult time posting. It kept telling me the letter verification failed, and then the answers to the questions were failing. And when I would try and hit post, it would just hang forever and not go anywhere. Now, there are 3 of the same exact posts and I can't delete two of them ( I tried ). So sorry, didn't mean to spam the board. If a moderator can delete two of the 3 posts, please do!

Rocketman

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Re: Inheritance Advice
« Reply #2 on: November 17, 2018, 01:42:01 PM »
The answer to what you should do with the money will come from you. Itís the questions that are hard to figure out. If you ask yourself the right question - you will get the right answer.

What are your goals? 1year 5year 10year 30year?

Which goals need the funds? Are there other (more important) goals that need the funds more?

Purchasing housing with the money would be good - saving it for retirement would be good - other goals (..., etc.) would be good too.

Now, which one is best for you?!?!?!

Good Luck

Catbert

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Re: Inheritance Advice
« Reply #3 on: November 17, 2018, 02:31:18 PM »
Personally I would pay off those student loans first thing no matter how low the interest rates are.  Many would have a different opinion, but I would just want them done.

Are you on track to max out all IRA/401k type accounts in 2018?  If not I would work quickly to do that.  Raise your 401k payroll deduction as much as necessary max and use some of these inherited funds to live off in the meantime.  You have until April 15 2019 to make 2018 IRA contributions but 401ks close the door on Dec 31st.  Then think about 2019 and how to max out the tax advantaged accounts.

Are you sure that the money is coming all at once in a check?   Or is part of the inheritance in 401k/IRA vehicles?  If some or all is in 401k/IRAs make sure you understand the tax implications and required minimum distribution rules.

After your friend make recommendations don't be too quick to implement them.  Take time to think about them and come here to discuss his thoughts.

alyx

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Re: Inheritance Advice
« Reply #4 on: November 17, 2018, 02:37:41 PM »
Thank you so far to both people who've replied. I really like the questions you asked me to ask your self (Rocketman) and I like the advice you gave me (Catbert).

Catbert - to answer your questions. Yes, I'm pretty sure it's coming in one lump sum. I was told I could pick up the check or have it mailed overnight as soon as everyone signs the paperwork and gets it back to the lawyer (there were over 10 people/orgs who were left money). I already signed the paperwork asap, got it certified, and sent it back. Also, since I work for myself, I don't have a 401K but I defnitiely have been maxing out my IRA each year... I think the max you can put in now is 6,500 as of next year--is that true?

Also, I was told by my friend that we won't be getting taxed on the inheritance which I was happy to learn! I will definitely come back and let you all know what he says... but I know for now that he is very keen on me investing in money markets that are earnings based. He has always told me that it's important to look at the earnings reports of a company... and not the value/etc.


Dave1442397

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Re: Inheritance Advice
« Reply #5 on: November 17, 2018, 06:07:09 PM »
I'd say pay the student loans off, and then follow this guy's advice and put all that cash into Vanguard's VTSAX fund.

https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/

Check out some of his other articles too.

As for real estate, markets are local, and I know nothing about Chicago. If you do your research and find out what the trends are, you'll know if buying vs renting is better for you. Don't forget, if you buy a place with HOA fees/maintenance fees, those fees will go up over the years.

marty998

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Re: Inheritance Advice
« Reply #6 on: November 17, 2018, 06:41:13 PM »
I'd say pay the student loans off, and then follow this guy's advice and put all that cash into Vanguard's VTSAX fund.

https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/

Check out some of his other articles too.

As for real estate, markets are local, and I know nothing about Chicago. If you do your research and find out what the trends are, you'll know if buying vs renting is better for you. Don't forget, if you buy a place with HOA fees/maintenance fees, those fees will go up over the years.

@Dave1442397 this is really really bad advice. The kid has a dream to buy a flat (which you admit you know nothing about) and you tell him to throw everything at VTSAX?

Honestly? I would not be too quick to lock it away in VTSAX or any other investment right now. Not for market timing reasons or anything, but I think it's important our OP gets used to having money first before they start investing. Spend a bit of time learning not to blow and spend it just because it is there.

OP doesn't have much in the way of assets and is still finding their financial feet. I would absolutely hate for them to dump $250k in VTSAX, the markets to fall 30% and then OP panics and sells when they see their house deposit get whittled away.

The best advice course of action is the one already being taken. Lock it up in a savings account or money market account for 6 months and develop a well considered and thought-through life plan in the meantime.

« Last Edit: November 17, 2018, 06:43:18 PM by marty998 »

Frankies Girl

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Re: Inheritance Advice
« Reply #7 on: November 17, 2018, 07:19:23 PM »
Agree with marty998.

I inherited a life changing amount of money when my dad died. I knew nothing about investing and other than having a company 401k (and asked a friend to help me pick mutual funds so really didn't even understand what I had), I really didn't understand what I could do with the inheritance, but I knew this was a life changer and I needed to educate myself.

So first: https://www.bogleheads.org/wiki/Managing_a_windfall

The part I agree with VERY STRONGLY is to do literally nothing with the money if you don't have a dire need for it (drowning in debt or whathaveyou). Park it someplace safe, where it might earn a few bucks like a high interest savings or money market fund.

And then figure out what you want to do with it exactly. What are your goals? What are your plans for your career? Your place of living, country location good for now, or really wanted to live in X state or Y city?

And read about money management, investing and financial planning. I can already tell you are not really utilizing and maximizing your current situation, because if you are self employed, you CAN (and absolutely should) have already set up a solo 401k or similar retirement account. You are paying YOURSELF by doing so, and by saving money (and putting it to work) now, you could potentially reduce your taxes as well, because all the money you stuff into a 401k can reduce the taxable income they look at when it comes to what you'll owe at tax time...

And when I say "read about blahblahblah" and "do research" don't automatically assume you have to become a 117th level magician and ace the tests that certified public accounting folks take. You do enough to understand the basics, and then explore a bit more if anything seems cloudy. You are the best person to deal with your money, and it doesn't have to be that hard, and again - you're not making any major decisions for at least 6+ months. So take that time and read a few simple basic things, ask questions here, and get up to speed and then start making moves that make the most sense to you.

Some of the money you receive absolutely could go into buying a residence if you deem it the most suitable and financially prudent move. You could use all of it, or just fund a partial amount and get a mortgage (if mortgage rates are much less than what you could earn by investing, that makes sense).

But you need to get the basics of money management down so you know what to use the money for, and how much of it to this or that. And whether investing a good portion might be the most sensible.

So where to get the knowledge?

Very simple, easy to read, and SHORT but oh so sweet: https://www.etf.com/docs/IfYouCan.pdf

https://jlcollinsnh.com/stock-series/ Jim Collins' blog above is my #1 go-to. Again, I knew nothing. I lucked into his blog and it was eye-opening. I can not even begin to tell you how much his blog (and now available in an updated book form if you prefer reading/ebook) helped me to see how simple this can be. And yes, I'm the one he's quoting on that landing page. I've been a VERY vocal cheerleader for his work, mostly because I was terrified after my dad died that I'd never understand all this stuff, and it was such a huge, scary responsibility that I felt like I had to get right for my dad's sake, and Mr. Collins' blog gave the confidence and understanding that I hadn't been able to process before (and I'd read several investing for dummies type stuff and was seeing plaid after a few pages...). I felt like it was a Dorothy opening the door to Munchkin Land type of epiphany level for me. And I'm a "creative" (illustrator and designer) and not typically associated with being a logical/analytically wired enough to do math or financial stuff easily. But I can, and do. And if I can, then literally ANYONE that has basic intelligence can too.

I am a Boglehead and as such, I'll always recommend their wiki: https://www.bogleheads.org/wiki/Getting_started


So once you figure out (again use those 6 months to make plans, change plans, scrap plans, add things in and take things out) your goals, you can then write an investor policy statement, which is your blueprint for how you're going to handle your money, investments, what your goals are, what you'll do if this thing or that happens... and then use it to refer back to and occasionally revise it as times and circumstances change.

And then you'll move forward to using some funds for debt, or to buy an abode of some kind, and quite possibly invest a good portion. And also I do hope you'll get going on a savings/investing plan for your self employment part as well, because again, not having a decent amount in a solo 401k or similar already in place has cost you time in the market and taxes and money better put to work for you instead of the other way around (which is the ultimate goal for most of anyway).

And I'm so sorry for your loss of the family friend, but what an incredibly wonderful gift they've left you. This is technically a life changing amount of money that could be the catalyst that launches you into freedom if you so choose to use it that way.
« Last Edit: November 17, 2018, 07:21:09 PM by Frankies Girl »

TomTX

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Re: Inheritance Advice
« Reply #8 on: November 17, 2018, 07:26:27 PM »
Also, since I work for myself, I don't have a 401K but I defnitiely have been maxing out my IRA each year...
Since you work for yourself, you can open a Solo 401k at Vanguard* and max it out.

https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k


*Or somewhere else, but use Vanguard as a benchmark for costs. It was super easy for me to start a Simple IRA (employer plan) with Vanguard for the small business I worked for.

alyx

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Re: Inheritance Advice
« Reply #9 on: November 18, 2018, 07:56:58 AM »
to work for you instead of the other way around (which is the ultimate goal for most of anyway).

And I'm so sorry for your loss of the family friend, but what an incredibly wonderful gift they've left you. This is technically a life changing amount of money that could be the catalyst that launches you into freedom if you so choose to use it that way.

Thank you so much for sharing a bit of your story, and all the resources. I am reading them all now. I will respond more after I've read them. Thank you! I know for now though the best thing is to do nothing for a while! Thanks :)

alyx

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Re: Inheritance Advice
« Reply #10 on: November 18, 2018, 07:58:58 AM »

Since you work for yourself, you can open a Solo 401k at Vanguard* and max it out.

https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k


*Or somewhere else, but use Vanguard as a benchmark for costs. It was super easy for me to start a Simple IRA (employer plan) with Vanguard for the small business I worked for.

Oh, I didn't know that!! I have an IRA with Vanguard so I will look into opening a individual solo 401k with them too!! thanks!!

radram

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Re: Inheritance Advice
« Reply #11 on: November 18, 2018, 08:31:12 AM »

Since you work for yourself, you can open a Solo 401k at Vanguard* and max it out.

https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k


*Or somewhere else, but use Vanguard as a benchmark for costs. It was super easy for me to start a Simple IRA (employer plan) with Vanguard for the small business I worked for.

Oh, I didn't know that!! I have an IRA with Vanguard so I will look into opening a individual solo 401k with them too!! thanks!!

You would most likely qualify for a solo 401k and a SEP IRA. Here is a nice comparison:
https://investorjunkie.com/13066/sep-ira-solo-401k/

frugaliknowit

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Re: Inheritance Advice
« Reply #12 on: November 18, 2018, 12:18:17 PM »
Take your time, there's no rush!

In considering a 2 flat or home:  How much square footage do you live in now?  For example, if you are happy with 500 SF, then buying a home where you live in 2000SF (even if you are renting one unit out) is a less than optimal use of capital.  Are you committed to Chicago for 10 years or more?  If you don't want the square footage and or am not committed to staying, then don't do it (just rent or buy a small condo).

As for VTSAX:  Nope.  Here's why:  http://paulmerriman.com/10-reasons-dont-like-vanguards-total-stock-market-index-fund/

Optimal Portfolio (yep, it's more work, but you only need to re-balance once per year):  https://paulmerriman.com/vanguard/

RWD

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Re: Inheritance Advice
« Reply #13 on: November 18, 2018, 02:20:04 PM »
As for VTSAX:  Nope.  Here's why:  http://paulmerriman.com/10-reasons-dont-like-vanguards-total-stock-market-index-fund/

Optimal Portfolio (yep, it's more work, but you only need to re-balance once per year):  https://paulmerriman.com/vanguard/

Is there a written version of that? I don't really want to listen to a half-hour podcast. How can we tell that some mix of a dozen funds will outperform VTSAX?

skiersailor

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Re: Inheritance Advice
« Reply #14 on: November 19, 2018, 10:50:48 AM »
Definitely take your time, and don't commit the majority of this money to anything until you've gotten used to having it.  At first it may seem like a life changing amount of money, but it would be very easy to over-commit to a higher level of spending and pretty soon the money won't be enough to give you a sense of security any longer.  Plenty of people have $250K of equity in their homes, but that feels very different than an equivalent bank account balance.

Some people feel more secure when they own their own property and there is no landlord who can evict them or raise their rent.  Others feel secure with a fat portfolio and high liquidity and don't care so much about the uncertainty of renting.  You may not know which type of person you are yet, so my advice would be to enjoy the fat bank account for a while before you commit it to something.  As you get used to increased financial security, your perspectives and priorities will likely change.

frugaliknowit

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Re: Inheritance Advice
« Reply #15 on: November 19, 2018, 11:02:16 AM »
As for VTSAX:  Nope.  Here's why:  http://paulmerriman.com/10-reasons-dont-like-vanguards-total-stock-market-index-fund/

Optimal Portfolio (yep, it's more work, but you only need to re-balance once per year):  https://paulmerriman.com/vanguard/

Is there a written version of that? I don't really want to listen to a half-hour podcast. How can we tell that some mix of a dozen funds will outperform VTSAX?

https://paulmerriman.com/the-ultimate-buy-and-hold-strategy-2018-edition/

RWD

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Re: Inheritance Advice
« Reply #16 on: November 19, 2018, 12:21:13 PM »
As for VTSAX:  Nope.  Here's why:  http://paulmerriman.com/10-reasons-dont-like-vanguards-total-stock-market-index-fund/

Optimal Portfolio (yep, it's more work, but you only need to re-balance once per year):  https://paulmerriman.com/vanguard/

Is there a written version of that? I don't really want to listen to a half-hour podcast. How can we tell that some mix of a dozen funds will outperform VTSAX?

https://paulmerriman.com/the-ultimate-buy-and-hold-strategy-2018-edition/

Past performance does not equal future returns. To me it just looks like he cherry picked 10 assets that have performed well so far but didn't give any justification for why he thought they would continue to do so.

I plugged the assets into Portfolio Charts and yes, it has done well. 9.0% real average return since 1970 and 17.2% standard deviation (compared to 7.9% return / 17.0% deviation for the total domestic market). Though you can get practically just as good [back-tested] returns with a single asset class, REITs: 8.8% average return with 17.0% standard deviation. But as long as we are chasing returns why not go for a simple 50/50 US/Intl SCV mix? 11.3% real returns and only marginally higher standard deviation at 18.0%!

I am still very skeptical that managing a 10 fund portfolio offers any real advantages over a 2-4 fund portfolio.

BicycleB

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Re: Inheritance Advice
« Reply #17 on: November 19, 2018, 01:26:01 PM »
@alyx, consider making these calculations:

1. What is the long term cost per month of your current lifestyle?

2. What would the long term cost per month of your lifestyle be if you bought a 2 flat?

3. Using the 4% rule, how much income can you rely on from the resources you will have after the inheritance?


By making these calculations, you can develop an understanding of the effect your decisions will have when you decide how to use/invest the inheritance. I'd then ask questions like:

4. Will my new resources make me financially independent in my current lifestyle?
5. Same question, but for my lifestyle if I buy a 2 flat?
6. How much more money do I need to save to be FI in my current lifestyle?
7. How much more money do I need to save to be FI with the 2 flat?
8. Based on my income, how long will it take to reach FI in current lifestyle?
9. Same question as 8, but for 2 flat?

PS. There are dreams about real estate that are about the glamor and pride of home ownership, and ones about beating the system by saving money on rent; ones about having friends be impressed that you own a hip location, and ones about having a safe space that no one raise the rent on, and ones about meeting a significant other who will want to raise little Alyxes right in that very nest. What is your 2 flat dream about? (The answer helps determine what other advice, if any, to give.)
« Last Edit: November 19, 2018, 04:00:22 PM by BicycleB »

jodelino

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Re: Inheritance Advice
« Reply #18 on: November 20, 2018, 01:05:39 AM »
I didn't know what a 2-flat is, but googling turned up this listing on Zillow. Looks like you could buy a handsome (from the curb, at least) 2-flat for $350K. Listing says this one needs work. I don't know the Chicago market, don't know if this is an appealing neighborhood, don't know what renovations would cost, or what kind of rent you could charge for the unit you wanted to rent out while you live in the other, or what the taxes are like. And all the advice about parking the money while you think and do research is excellent. But looking at real estate, going to open houses, and checking out neighborhoods and markets can be fun and educational....

https://www.zillow.com/homes/for_sale/Chicago-IL/pmf,pf_pt/2087004488_zpid/17426_rid/Brick-2-Flat-Building_att/globalrelevanceex_sort/42.173073,-87.237626,41.493663,-88.226395_rect/9_zm/

skiersailor

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Re: Inheritance Advice
« Reply #19 on: November 20, 2018, 11:02:48 AM »
Although I don't claim to be an expert on Chicago real estate, it doesn't bode well for future real estate prices that Chicago has seen its third consecutive year of population decline.  Of the 100 largest metro areas in the US, only 10 have experienced recent population decline, so Chicago is definitely an outlier.  I would also be concerned about the state's inability to balance its budget, its underfunded pension plans and already high tax rates.  Uncontrolled spending combined with declining population means that everyone who can afford to pay more will pay more.  Perhaps now would be buying at the bottom, but the people I know from Chicago have zero confidence in the problem solving abilities of their elected representatives.

If I lived in Chicago, I would be a renter rather than an owner.

Lucky Recardito

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Re: Inheritance Advice
« Reply #20 on: November 20, 2018, 12:10:02 PM »
Chicagoan here. Two-flat owner.

Generally speaking, +1 to all here who have said some version of "sock that inheritance away for 6-12 months before you do anything big." There's no rush -- give yourself time.

That said, I wanted to pipe in to say that I'm a big proponent of the two-flat life in Chicago. For us, it's made it possible to own a beautiful building in a beautiful neighborhood (in a city we love) without breaking the bank, and it gives us a ton of options for the future (continuing w/ a long-term rental; converting to AirBnB; additional income from renting parking; housing family; converting to single-family; adding a basement unit for additional income...). There's a reason there are so many two-flats in the city: they work well, both for owners and for renters.

That said, give yourself time to really think about what you want, and find a smart way to get it. You live in Chicago -- presumably you know your neighborhoods. Be really thoughtful about what neighborhood(s) appeal to you. Think hard about how long you plan to stay (if you're considering buying, the answer should be "for a gosh-darned long time"). Think about your plans for family (marriage/partnership, kids, pets, whatever). Think about whether you want to live upstairs or down; whether you want stone, brick, or frame construction; whether you want an attic for a duplex-up; whether you want a finished (or finish-able) basement for a duplex-down; whether you want something with the original woodwork (including the dining room hutch) intact/unpainted; whether you're up for the challenges and quirks of a 100-year-old building; whether radiators are your jam; whether you want something that's been heavily updated/renovated or not; whether it's important to you to find a building on a 30-foot lot (where bedroom/dining room typically have bayed windows) or if 25-foot (un-bayed walls) is okay. Think about whether a yard is important to you. And garage. Think about whether you want a S-N or E-W orientation. (There are no right answers here; it's all up to you. If you've lived in Chicago for long enough, you've either lived in or visited the main layouts/building types you're going to find -- know your preferences.) Check out property taxes in your desired 'hood(s), and make sure to look specifically at 2019 assessed values (hint: the entire north side just got a walloping re-assessment). Think about your commute; think about the El; think about access to bike lanes and expressways and parks and the lake. In my experience, there are LOT of two-flats for sale at any given time in Chicago, but finding the right mix of features takes some patience (these are all old buildings with varied, unpredictable histories) -- set up some alerts/searches on Redfin and spend the next 6-12 months understanding what's available, and what it costs. And if this is still what you want a year from now, go out and get it.