Author Topic: How would you invest my parents' windfall?  (Read 4024 times)

Apocalyptica602

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How would you invest my parents' windfall?
« on: April 11, 2016, 08:36:58 AM »
Hi all,

My father is in the process of finally settling my aunts' relatively modest estate after nearly 5 years of headache and heartache (moral of the story, make sure your affairs are in order!)

Because there was no will, the estate is liquidated, taxes are taken, and my dad will essentially be disbursed a check for ~$200,000.

My parents aren't mustachian at all and don't have significant savings considering they are in their mid 60s but due to my dads' pension and social securities they're essentially at around $90,000 per year.

They've never had any kind of investments and don't know the first thing about it. Their entire method of operating financially is 'every month we get our pension / SS checks'. They're spenders / gamblers. They don't rack up huge debt but they also don't have a lot left over at the end of the month. If I were to let things be I'd imagine that $200,000 would sit in a bank account and be squandered within a few years.

SOMEHOW I've managed to convince them to let me invest their windfall and set up automatic disbursements so they have 'extra money' each month.

My question is: How would you handle this? I'm still in accumulation phase and am 100% equities, primarily in retirement accounts and am certainly not selling anything anytime soon. But for my retired parents, I'm less 'practiced' on the proper course of action since this will all be taxable. I don't want them to get killed by short-term capital gains, but I want it to be as hands off and automatic as possible.

4% of 200k works out to like $666/month. I communicated $500/month as a conservative estimate to them. They're happy with that amount. They don't want to leave it alone entirely to grow because they 'want to enjoy it', and that's their right.

Thanks for any and all advice.
« Last Edit: April 11, 2016, 08:39:12 AM by Apocalyptica602 »

rubybeth

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Re: How would you invest my parents' windfall?
« Reply #1 on: April 11, 2016, 09:06:21 AM »
I would probably call Vanguard and ask which funds have the highest dividends, preferably ones that pay out monthly, like the ones mention in this article: http://www.morningstar.com/cover/videocenter.aspx?id=683909

If you can get the $500 mostly from dividends and not have to touch the main $200k investment, or very little, I think that would be ideal.

pbkmaine

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Re: How would you invest my parents' windfall?
« Reply #2 on: April 11, 2016, 09:07:37 AM »
Vanguard Target Retirement Income (index) or Vanguard Wellesley Income (active).

Metric Mouse

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Re: How would you invest my parents' windfall?
« Reply #3 on: April 11, 2016, 09:16:30 AM »
Sounds to me like their income is more than enough and at 60 they are retired and have no reason to scrimp. Throw it in Vanguard if you wish, but it's their money and if they want to enjoy it. 200k taken out at $500 a month is 33 years at zero growth. That doesn't math well... So setting them up for that withdrawl rate at their age is dogshit.  If they want to spend it, set them up to draw out some principle every month and aim for it to last 25 years. That should give them a much higher withdrawl amount without sacrificing the benefits of growth.

Or, if you're and or they are concerned about them having something left over at the end of their lives, throw the money into your account and pay them $500/month and pocket the difference.

Chrissy

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Re: How would you invest my parents' windfall?
« Reply #4 on: April 11, 2016, 09:40:11 AM »

My question is: How would you handle this? ...  I don't want them to get killed by short-term capital gains, but I want it to be as hands off and automatic as possible.

4% of 200k works out to like $666/month. I communicated $500/month as a conservative estimate to them. They're happy with that amount. They don't want to leave it alone entirely to grow because they 'want to enjoy it', and that's their right.

You're doing exactly what I would do if my parents were big spenders/gamblers, right down to the dollar amount.  I assume you told them $500 instead of $600/mo because you want the principle to grow in anticipation of using the it for their end-of-life care.  Smart.  Check out the investments others have mentioned. 

nobody123

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Re: How would you invest my parents' windfall?
« Reply #5 on: April 11, 2016, 09:52:46 AM »
It depends on their goals, as others have stated, but if you essentially want them to have some extra "fun money" every month what about Vanguard High-Yield Corporate Fund Admiral Shares (VWEAX)?  $200K gets you around 35,700 shares that would distribute about $890/month to them in dividends.  Or, maybe invest enough in that to get them the $500/month you promised, then the rest in VTSAX for a more long-term view.

Whatever you do, remember it is their money, so make sure you have their goals in mind and not yours.

Apocalyptica602

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Re: How would you invest my parents' windfall?
« Reply #6 on: April 11, 2016, 11:21:37 AM »
Thanks for all of the advice so far. I do want to make it clear that I do not need or expect a dime of inheritance. My wife and I hope to be FIRE long before they start to reach the point where they need end-of-life care hopefully.

I just don't want them to feed $200k into slot machines and scratch off tickets over the next few years.

It is their money to do what they please but I feel like I can give adequate guidance to maximize their enjoyment long term. Even if my parents said they'd be more comfortable throwing all $200k at their low interest mortgage I'd be okay with that too even if it's not mathematically ideal.

I'll take a look at the funds suggested. Are there any major tax implications between taking dividend disbursements in cash versus selling shares of stock monthly in a taxable account? The only taxable events I've done in my accounts personally is tax-loss-harvesting.


nobody123

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Re: How would you invest my parents' windfall?
« Reply #7 on: April 11, 2016, 11:39:07 AM »
Even if my parents said they'd be more comfortable throwing all $200k at their low interest mortgage I'd be okay with that too even if it's not mathematically ideal.

Hang on, they still have a mortgage?  Would the $200K pay it off and free up at least the $500/month cash flow?  If the mortgage is more than $200K, could they put it towards it and recast to free up $500/month in cash flow?  I would do one of those things especially if my parents were more loose with their money and might be tempted to give up on the $500 cash flow stream in 6 months and take $100K out to buy new cars.  If you're counting on the money to provide some liquid funds for long-term care, etc., what are the odds they will actually leave it alone for the long haul, especially if the market takes a dip and they see paper losses on their account?

Dividends from the bond fund I mentioned would be taxed as ordinary income.  You can probably find a tax-free muni bond fund for their locale if you are looking for tax-free income.  You'd have to see how the rest of their taxes are calculated to judge what option is better for them.

doggyfizzle

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Re: How would you invest my parents' windfall?
« Reply #8 on: April 11, 2016, 11:41:10 AM »
Vanguard Target Retirement Income (index) or Vanguard Wellesley Income (active).

Go Wellesley (VWINX); 30 day SEC yield right now is almost 3%, so you're looking at about $500/month without touching principal.  Just set up a checking account that the dividends (which are paid quarterly) can sweep to, and then have your parents pull $500/month from that account.  Capital gains should reinvest, so over time your parents are likely to grow dividends due to more shares accumulated through capital gains re-investment.

Apocalyptica602

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Re: How would you invest my parents' windfall?
« Reply #9 on: April 11, 2016, 11:50:06 AM »
Even if my parents said they'd be more comfortable throwing all $200k at their low interest mortgage I'd be okay with that too even if it's not mathematically ideal.

Hang on, they still have a mortgage?  Would the $200K pay it off and free up at least the $500/month cash flow?  If the mortgage is more than $200K, could they put it towards it and recast to free up $500/month in cash flow?  I would do one of those things especially if my parents were more loose with their money and might be tempted to give up on the $500 cash flow stream in 6 months and take $100K out to buy new cars.  If you're counting on the money to provide some liquid funds for long-term care, etc., what are the odds they will actually leave it alone for the long haul, especially if the market takes a dip and they see paper losses on their account?

Dividends from the bond fund I mentioned would be taxed as ordinary income.  You can probably find a tax-free muni bond fund for their locale if you are looking for tax-free income.  You'd have to see how the rest of their taxes are calculated to judge what option is better for them.

They still have a large mortgage (~$300k) on a ~$600k house. I'm not sure if their rate exactly but I'd imagine it's around 4.5%? I'll present that as an option as well. Pay it down, not have to worry about investments, and refinance to a 10 / 15 year with a lower rate / payment / balance.

AZDude

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Re: How would you invest my parents' windfall?
« Reply #10 on: April 11, 2016, 11:54:14 AM »
$500 seems low, given their age. An REIT could probably get almost twice that without touching the principle.

Jeremy E.

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Re: How would you invest my parents' windfall?
« Reply #11 on: April 11, 2016, 12:03:02 PM »
I think I wouldn’t get involved with this situation unless I was asked for my advice. If I was asked for my advice, I would ask them if they would like to leave the money for friends/family/donations when they pass. If they want to do one of those, I’d invest whatever amount they want to leave in VTSAX and add that it go to X in their will. If not, I would just let them spend it as they wish, even if they blow it all on gambling, they’ll still have plenty money coming in every month. If they want extra money every month, I’d consider either an annuity or a 50/50 mix of VTSAX and VBMFX, with the latter option I would do like a 7% withdrawal rate considering their age. If they really want to optimize this, they can also max an IRA every year.

P.S. Money can be more fun for people the younger they are, it's likely that spending it over the next 10-20 years while they are still able to travel, have better health/memory, etc. will be a lot more beneficial to them.
« Last Edit: April 11, 2016, 12:08:50 PM by Jeremy E. »

Fuzz

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Re: How would you invest my parents' windfall?
« Reply #12 on: April 11, 2016, 04:30:40 PM »
Talk to an estate planning professional. One or both of your parents is likely to have significant end of life care costs. Whether those costs comes out of the $200K or medicare/medicaid could depend on what you do next. And those questions are way out of my skillset. Use it as an excuse to get them to do some planning now, while making it clear it's not about you and an inheritance.

It's possible that they will have $200K in medical costs at some point. If they refrain from blowing their cash, they pay for it. If they blow their cash, the government pays for it. Incentives for seniors get screwy. It's worth at least thinking through that with a professional.

GreenEggs

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Re: How would you invest my parents' windfall?
« Reply #13 on: April 11, 2016, 04:42:50 PM »
Talk to an estate planning professional. One or both of your parents is likely to have significant end of life care costs. Whether those costs comes out of the $200K or medicare/medicaid could depend on what you do next. And those questions are way out of my skillset. Use it as an excuse to get them to do some planning now, while making it clear it's not about you and an inheritance.

It's possible that they will have $200K in medical costs at some point. If they refrain from blowing their cash, they pay for it. If they blow their cash, the government pays for it. Incentives for seniors get screwy. It's worth at least thinking through that with a professional.

DITTO!

Exactly my thoughts.  Old folks homes can be pricey too, and you never know how long one of them might live.  $5000+ per month in the dementia wing adds up quick.