Author Topic: SOS !! Lump sum investment  (Read 494 times)

everysecondcounts

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SOS !! Lump sum investment
« on: January 23, 2019, 02:22:22 PM »
Hello everyone excited to post for the first time!! Been listening and learning for some time now my question is I need advice on a lump sum of money I have come into. Iím 32 years old work full time and would like to get off this hamster wheel sooner then later. I sat with a advisor and explained FIRE to him he kinda got it but his concern was me being taxed hard on he lump sum. He showed me different avenues to take like annuities and Rothís but thatís not till 59 all Iíve ever heard was VTSAK route I do have a 401 k with my employer. do I still invest for later in life or just put it all in the index and let it ride any help or advice would be greatly appreciated

terran

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Re: SOS !! Lump sum investment
« Reply #1 on: January 23, 2019, 03:43:39 PM »
I think this would be a good read for you: https://www.bogleheads.org/wiki/Managing_a_windfall

Here's Vanguard's thinking on investing a lump sum all at once vs investing it slowly over time: https://personal.vanguard.com/pdf/ISGDCA.pdf. The cliff notes version is that mathematically, investing all at once outperforms 67% of the time, so the only reason to invest slowly over time is as a behavioral trick so you don't freak out if the markets going down right after you start investing.

VTSAX is a vanguard mutual fund. It's a type of investment. A Roth IRA (or traditional IRA, 401(k), taxable brokerage account, etc) are types of accounts. You can put money in an account, and you invest the money in the account in an investment. So putting money in an IRA and investing that money in VTSAX is something you can do, they're not mutually exclusive.

If you want help from the forum members figuring out whether your new money will allow you to FIRE you'll need to post the amount and some thoughts on your current/expected expenses. You might consider posting a full case study in the case study part of the forum.

everysecondcounts

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Re: SOS !! Lump sum investment
« Reply #2 on: January 24, 2019, 11:34:55 AM »
Thank you for the great feedback Terran the article provided much needed info !

Boofinator

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Re: SOS !! Lump sum investment
« Reply #3 on: January 24, 2019, 11:42:22 AM »
Sounds like you might be new to the personal finance game.

General rule #1: Fire the financial advisor. They almost never have your best interest in mind when advising you. And in your case, someone even mentioning annuity (especially at 32!) is a giant red flag.

terran is pointing you in the right direction with Bogleheads. There's a ton of great information on that site (and here!), and it will help point you in the right direction. Are you maxing out your tax-deferred assets (like 401k)? If not, that would be my recommendation for at least some of that windfall.

Telecaster

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Re: SOS !! Lump sum investment
« Reply #4 on: January 24, 2019, 01:02:35 PM »
Good advice in this thread.  Fire the financial adviser.  If you like, you can simply pay to talk to a tax accountant for half an hour or hour, if taxes on the windfall are a concern.  If you got the windfall in 2018, you have until April 15 2019 to make an IRA contribution for 2018, so don't have to decide anything this minute.

Based on what you've said (and without knowing more) it sounds like a traditional IRA might be a better than a Roth for your situation and here's why:   With a traditional IRA, you get a tax break now, and then pay taxes when you withdraw the money.  With a Roth, you pay taxes on the money now, and the withdrawals are tax free in the future.   If all things are equal, it works out to be exactly the same, tax-wise.  That's assuming tax rates stay the same, which nobody knows of course.

But all things aren't equal (or probably not, anyway).   If you go with the traditional IRA, you'll get to keep more of your windfall, which you can then invest in a regular taxable account, so you'll wind up with more money in retirement.  Plus, you get the tax deduction at your highest marginal tax rate.   Presumably, when you retire your income goes down, and hence your tax rate goes down.  So, in theory, you'll pay less tax overall.   

You'll want to look into this some more of course.  But that should at least give you an idea what to think about and what questions to ask.