Author Topic: Suddenly FI -Help with 2 million dollars  (Read 2493 times)

Rags2Riches

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Suddenly FI -Help with 2 million dollars
« on: April 09, 2019, 04:08:13 PM »
I suddenly have 2 million extra dollars. Iím planning to open 529s for nieces and nephews using about 400k. Iím currently thinking to invest the rest in 75% VTSAX and 25% VTIAX. I realize going all equity is fairly aggressive but Iím kind of anti bond as it seems they barely beat inflation and are not tax friendly. Also I feel I can ride out some downturns given this is more money than I anticipate needing.

I am debt free with a paid off home but do have a 100k loan on a rental that currently nets $300 per month after PTI. I have $40k cash in a money market account for unforeseen expenses in life or either house. I have $260k in retirement accounts that are invested in the equivalent of 25% VTIAX and 75% VTSAX. My household expenses are about $1000 per month including food. I donít expect my standard of living to increase much other than turning the heater up in my house 😜. I work 20 hours a week in a low stress job with good benefits and flexibility but social worker pay. Iím staying employed for now because Iím sad and depressed because my amazing and healthy 39 year old husband died suddenly last year (hence the money) and I feel the routine and forced socialization is good for me.  Someday I will want to spend money on travel again and maybe renew my pilots license so I will have more expenses when I regain the desire to live. Unsure if Iíll continue to work at that time.

Thoughts on my allocations? Completely insane? I want to keep it simple and would probably just rebalance yearly and not put much effort into tax loss harvesting, etc.

Iíve always lump summed our IRAs each January which was a fair amount of money in my old life but I felt totally comfortable doing so. However I am not brave enough to lump sum 1.6 million. DCA 250k every month? Every 2 months?

Iíve never had investments in a taxable account before. I get the dividend taxation but what amount should I expect on the turn over on 1 million dollars of VTSAX for example? Anything turned over in the first year is short term gains and thereafter typically long term?

My understanding is that International investments get a US tax break due to already being taxed in another country. Are the reported dividends for VTIAX post the foreign tax amount?

What considerations am I missing? Itís all a bit overwhelming. Thanks for any input.

sisto

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Re: Suddenly FI -Help with 2 million dollars
« Reply #1 on: April 09, 2019, 04:32:01 PM »
I just wanted to pop on and say, I am so very sorry for your loss. I can only imagine the emotional toll this has taken on you. I would also agree with you in not investing in bonds. I also am of the mind set that it's all almost always long term investment so keeping it in stocks is fine. You have a decent cash buffer and enough money to withstand a down turn in the market. I am not qualified to answer the tax questions @MDM would be your best bet for that. Take care and good luck!

BTDretire

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Re: Suddenly FI -Help with 2 million dollars
« Reply #2 on: April 09, 2019, 04:42:08 PM »
Slow down. Very sorry to hear of your loss.
 Why would have this sudden urge to give away $400,000. $2M is a lot of money, but it only generates $80,000, a nice living but
only 35% above the US median household income. $1.6M puts you almost at median household income.
 I would take the time to learn how to get invested properly and maybe you could have enough cash flow to start investing in the 529s. I don't know how old these nieces are, if they are young, $200k over 15 years could easily be $800k. I don't know what happens to 529 money after school costs, but you should. A wild child could buy years of easy drug addition.
 Spend some time here, I'm sure others will chime in, but please take your time, and also make sure whatever you invest in has low costs. If you use an investment service that charges 1%, that $20k per year, $200k in ten years, although if you double your money in 10 years, now your fee is $40k a year. I see you use Vanguard, you are on the right track.
  I like the idea that you are staying involved in your job, wise of you to know to take care of yourself like that.

Rags2Riches

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Re: Suddenly FI -Help with 2 million dollars
« Reply #3 on: April 09, 2019, 05:46:39 PM »
Thank you for the support sisto. We had so many FIRE plans together and worked hard. To get here alone and have the money feel like a responsibility is...ironic I guess?

cincystache

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Re: Suddenly FI -Help with 2 million dollars
« Reply #4 on: April 09, 2019, 05:47:13 PM »
I'm sorry for your loss, that is heartbreaking.

I would agree with what has been said so far, hold off on the 529 plans, they are over rated in my opinion and if you want to help with college you can always write a check if and when the time comes.

For simplicity sake, you could pay off the 100k rental mortgage or even sell the house if you don't feel like being a landlord anymore. It is completely up to you.

DCA'ing into VTSAX/VTIAX sounds good, 250k/month is fine, I would target being fully invested by the end of 2019 at the latest.

If you're only spending 1,000 per month and your dividends are ~3,400 per month I see no problem having 100% equities, its not like you'll need the money anytime soon. If/when you decide to fully retire and/or increase your spending above your current rate you can allocate more to bonds. Cross that bridge when you get there.

Lastly, your questions about taxes sound a bit like the tail wagging the dog. Both VTSAX and VTIAX are highly tax efficient funds so trying to optimize something that is already pretty optimal isn't worth the brain space in my opinion. The tax owed will be AT MOST 6k on 40,000 in dividend income, likely much less depending on your other sources of income. If these dividends were your only source of income you would owe 0% tax at the federal level on them assuming the standard deduction.


BicycleB

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Re: Suddenly FI -Help with 2 million dollars
« Reply #5 on: April 09, 2019, 05:50:22 PM »
Hi, @Rags2Riches. Sorry for your loss.

I agree that stock is tax efficient. Fwiw, my understanding is that dividend rates are zero under $39,375 income and 15% over that.

https://smartasset.com/taxes/dividend-tax-rate

So for example if your income is:

32,200 gross salary
45,000 dividends
--------
77,200 total

I think the tax calculation is roughly:
 32,200 gross salary
-12,200 standard deduction
---------
 20,000 ordinary income subject to tax ==> federal income tax = 9700x10% + 10,300x12% = 970+1236 = $2,206.

https://taxfoundation.org/2019-tax-brackets/

 39,375 size of bracket with zero percent dividend tax rate
-20,000 used for ordinary income
______
 19,375 dividends that pay zero percent tax

 45,000 dividends
-19,375
 --------
 25,625 dividends at 15% tax rate
 x 15%
 --------
 $3,844 dividend tax

Total tax:
$2,206 ordinary income tax
$3,844 dividend tax
______
$6,050 income tax liability

I think that VTIAX will record in its 1099-DIV form the details about where the foreign tax is different from US tax, but it will probably be close to the US result. I think (not giving professional advice here!!).

Of course, you could use 401k or traditional IRA type plans to avoid some of the tax. If the above example's ordinary income were reduced by $20,000 due to 401k contributions, ordinary income tax would drop to zero. Dividend tax would drop as below, roughly:

 45,000 dividends
-39,375 tax bracket of zero dividend rate
______
  5,625 dividends subject to tax
 x15%
_____
$ 844 total tax

I will defer to wiser commenters, but like your allocation. Because I think you can keep taxes so low, it might be advantageous to put less in the 529s than you are planning. You can always give them gifts later, but if their life path doesn't end up using the funds for education, the 529 might cause you to suffer a 10% penalty when reclaiming the 529 funds. Just a thought.


« Last Edit: April 09, 2019, 06:37:46 PM by BicycleB »

MDM

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Re: Suddenly FI -Help with 2 million dollars
« Reply #6 on: April 09, 2019, 05:58:00 PM »
Rags2Riches, sorry for your loss.

Some reading that might be worthwhile: Managing a windfall - Bogleheads.  No need to follow that exactly, but it may give you some good ideas.

VTSAX dividend yield is often ~2%, or ~$20K on $1 million.  You aren't required to "turn over" (aka sell) any of that in a given year, but you always may do so if desired.

See also
Getting started - Bogleheads
Investment Order
Stock Series
www.etf.com/docs/IfYouCan.pdf
for background.  Might be a refresher or new - perhaps worth (re)reading in either case.

Rags2Riches

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Re: Suddenly FI -Help with 2 million dollars
« Reply #7 on: April 09, 2019, 06:01:02 PM »
Thanks guys. This is helpful as I know Iím not completely on top of my game currently. Those 529s were the only thing I was sure about. Gahhh. It seems to make sense given that it can grow tax free? Also Iím not a generous person by nature and believe Iíll struggle to help out more later once I see it dropping my balance. Also just thinking 60-75k each between 6 kids. But youíre right, slowing down wonít hurt.

Rags2Riches

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Re: Suddenly FI -Help with 2 million dollars
« Reply #8 on: April 09, 2019, 06:16:12 PM »
@MDM
ďVTSAX dividend yield is often ~2%, or ~$20K on $1 million.  You aren't required to "turn over" (aka sell) any of that in a given year, but you always may do so if desired.Ē

Thanks those are good resources. So, when I said ďturn over ď I mean the turn over ratio for the fund, when stocks fall off the index. What does that look like tax wise?

Villanelle

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Re: Suddenly FI -Help with 2 million dollars
« Reply #9 on: April 09, 2019, 06:28:07 PM »
Thanks guys. This is helpful as I know Iím not completely on top of my game currently. Those 529s were the only thing I was sure about. Gahhh. It seems to make sense given that it can grow tax free? Also Iím not a generous person by nature and believe Iíll struggle to help out more later once I see it dropping my balance. Also just thinking 60-75k each between 6 kids. But youíre right, slowing down wonít hurt.

Once you allocate that money, you can't easily get it back.

Perhaps you could set up a separate taxable investment account with some allocation.  (Maybe $50k each?)  That money would still be in your name, but perhaps having it separated would help with your anticipated difficulty with giving up that money later, but if gives you far more flexibility.  What if you need that money?  What if one kid gets a full scholarship, and another needs more?  Or if one kid gets a partial scholarship to a state school and another want to pursue grad school or attend a fancy private school (for a degree with lots of value).  You buy a lot of flexibility if you don't label those dollars as "education money for nephew #2" right now.

At a minimum, I'd wait at least a year before doing anything major.

I'm sorry for your loss and that you are having to ask and answer these questions. 

MDM

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Re: Suddenly FI -Help with 2 million dollars
« Reply #10 on: April 09, 2019, 06:29:39 PM »
...when I said ďturn over ď I mean the turn over ratio for the fund, when stocks fall off the index. What does that look like tax wise?
It has no effect on VTSAX.

See 2017 Relative Tax Efficiency - Bogleheads.org (don't know if a 2018 version was published but it's still relevant) and why is VTI more tax efficient than VTSAX - Bogleheads.org for background.

frugaldrummer

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Re: Suddenly FI -Help with 2 million dollars
« Reply #11 on: April 09, 2019, 06:43:06 PM »
I am so very sorry for your loss.

I personally would probably pay off the mortgage on the rental - just for the peace of mind of having it.
You mentioned you already had $260 k in retirement funds so I don't think $400 k for all the nieces and nephews for college is too much - but kind of agree that there may be a better way to do that than a 529. Whatever you do, DON'T put it in a 529 owned by the kid or the parent. The least impact on their student aid is if it comes from someone outside the nuclear family and they don't use it until later in their academic career.  An outright gift from you would have the least impact on their financial aid since no one could guarantee that you would give them the same gift every year. But bless you for thinking of their educations.

I agree with not making too many sudden moves. But I would encourage you to loosen up on your spending a little bit. You've learned an important lesson about the uncertainty of life, and you have enough money now to support you well even if you quit tomorrow (don't though - I think your rationale for continuing working is great). I would however use a little of the income from your investments to do things you've always wanted to do -travel, take music lessons, go to concerts, have experiences - LIVE. This doesn't mean being a spendthrift - but if you spent an extra $1,000 a month on these things it wouldn't make much of a dent in your savings which will be continuing to grow as you're not taking out anywhere near 4%.

Rags2Riches

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Re: Suddenly FI -Help with 2 million dollars
« Reply #12 on: April 09, 2019, 07:35:26 PM »
Lastly, your questions about taxes sound a bit like the tail wagging the dog. Both VTSAX and VTIAX are highly tax efficient funds so trying to optimize something that is already pretty optimal isn't worth the brain space in my opinion.
You are totally right. I Will take that worry of my list.

Rags2Riches

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Re: Suddenly FI -Help with 2 million dollars
« Reply #13 on: April 09, 2019, 07:41:43 PM »
But I would encourage you to loosen up on your spending a little bit. You've learned an important lesson about the uncertainty of life, and you have enough money now to support you well even if you quit tomorrow (don't though - I think your rationale for continuing working is great). I would however use a little of the income from your investments to do things you've always wanted to do -travel, take music lessons, go to concerts, have experiences - LIVE. This doesn't mean being a spendthrift - but if you spent an extra $1,000 a month on these things it wouldn't make much of a dent in your savings which will be continuing to grow as you're not taking out anywhere near 4%.
Luckily my husband and I traveled a lot. Right now itís more a lack of desire than frugality thatís holding me back but I agree, when Iím ready money shouldnít be much of an issue.

Cassie

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Re: Suddenly FI -Help with 2 million dollars
« Reply #14 on: April 09, 2019, 07:51:23 PM »
I am so sorry you lost your husband so young. Never do any changes for at least a year after such a loss.  I think keeping your job is a great idea for now.

Rags2Riches

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Re: Suddenly FI -Help with 2 million dollars
« Reply #15 on: April 09, 2019, 08:14:12 PM »

Perhaps you could set up a separate taxable investment account with some allocation.  (Maybe $50k each?)  That money would still be in your name, but perhaps having it separated would help with your anticipated difficulty with giving up that money later, but if gives you far more flexibility.

That could be a good solution.

SwordGuy

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Re: Suddenly FI -Help with 2 million dollars
« Reply #16 on: April 09, 2019, 10:04:24 PM »
I'm sorry for your loss.   After years of hard work we reached $1M net worth and a month later my mom passed, so we were suddenly at $2M.

It took some months to get most everything transferred over -- three years later I'm a month or two away from settling the final $100k.

We decided to move funds into the market in large chunks over 6 months.   I'm well aware that the odds are 2 to 1 that investing earlier is better. 
It's what we did anyway.   I don't lose sleep over potential market losses by getting in the market more slowly.   We were also doing real estate investing so we set aside some for that purpose.

We didn't make any big changes in our life or spending patterns.  I think that helped.   

If you end up moving, re-file your change of address forms on the 1st of the next December.  That way, if there was an investment you've forgotten about and the paperwork was mislaid, the annual statement will find its way to you.   We found $30k that way.

If possible, it's best to get anything that requires letters testamentary done within a year of issuing.   They may not accept them afterwards unless you have new letters issued with a stamp on them with a current date saying they are still in full effect.  I learned that the hard way and it's the reason I'm just now able to settle the last two accounts.

Best of luck in the future.





GizmoTX

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Re: Suddenly FI -Help with 2 million dollars
« Reply #17 on: April 10, 2019, 04:38:56 PM »
I am so sorry for your loss. I wouldn't invest in the 529s because too much can happen in the interim.

25 years ago, we funded Educational trusts for 2 nephews with $5000 each with me as the trustee. The trust vehicle allowed us to retain control after age 18, which UGMA does not. They are taxable, but I chose tax friendly index funds so the gain is mostly appreciation which doesn't have to be paid until sold. I file a simple Form 1041 each year. Nephew1's trust paid for $20,000 of his university tuition, tax free to him. Nephew2's trust paid about $3,000 of community college tuition, but he quit school and the trust keeps accumulating until he reaches age 30 in 3 years -- currently it is valued at $30,000. When Niece1 came along later, we somehow missed adding her to her brother's trust or setting up one of her own, so we paid her university $2,500 per semester for her tuition for 4 years, $20,000 the same as her brother, only we added a GPA requirement after our experience with Nephew2. In retrospect, I favor the pay as you go approach -- I don't like the idea of Nephew2 getting a windfall after doing nothing -- he still lives at home & has yet to get a job. This same nephew received over $100,000 in UGMA stocks from his grandparents, which he now has full control of. In some cases, the gifts are counterproductive.

secondcor521

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Re: Suddenly FI -Help with 2 million dollars
« Reply #18 on: April 11, 2019, 10:20:50 AM »
Sorry for your loss.  Take all the time you need to heal.  Ignore anyone who says grieving should take X months or Y years or whatever.  You may heal slower, you may heal faster - nobody knows, and there is no right answer.  Also, the five stages of grief are not in any order; you may find yourself in multiple phases at once, revisiting phases, and skipping around, etc.  Be kind to yourself.

I agree with the others that you should taking things very slowly and methodically.  I also agree that you should rethink putting so much of your $2M into 529's.

That being said, a couple of comments on 529's:

1.  There is often a maximum that you can contribute per year per child.  You may be able to contribute up to 5X the annual amount, but if you do so then you wouldn't be able to add more for five years.

2.  As a previous poster mentioned, it would be better for you to be the custodian of the account if there is any possibility of financial aid for the kid.  Plan to use it for the last two years; again, this helps for financial aid reasons.

3.  There is often a state income tax deduction if you use the plan in your home state.

4.  It is typically very easy to move money back and forth between the kids in any amount, as long as they are cousins or siblings.  This may help if the kids' educational trajectories differ.

5.  If the kids get scholarships, you can withdraw an equivalent amount from the 529 without paying any penalties and only paying ordinary income tax on the earnings amount.

There is also the option of paying the school directly when the time comes.  Any money paid directly to a school does not count against your annual gift tax exclusion amount (~$15K/year/person).

I think your AA is fine.  I'm not sure how the international taxes work except that I know there is a foreign tax credit that you can take if you hold the international fund in your taxable account.  I am 99.9% certain that the dividends listed on Vanguard's website are not adjusted and do not take this tax credit into account.
« Last Edit: April 11, 2019, 10:22:36 AM by secondcor521 »

MrThatsDifferent

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Re: Suddenly FI -Help with 2 million dollars
« Reply #19 on: April 11, 2019, 01:08:54 PM »
Unfortunately I have nothing of value to offer regarding finances, others are much smarter than I am. My heart goes out to and what youíre going through right now. I may have missed it, you mentioned being sad and depressed, which of course is natural and understandable.  Are you seeking counseling? If not, I highly recommend finding a professional to spend time with working through this and helping you with the depression. All the very best to you.