Author Topic: Advice Needed: What to do with inheritance  (Read 4430 times)

LiseE

  • Stubble
  • **
  • Posts: 181
Advice Needed: What to do with inheritance
« on: October 04, 2017, 11:29:22 AM »
My hubby and I, I believe are done with the accumulation phase of our nest egg.  We are 50 and 51 years old and we have 1M in our combined 401K's.  (been working for the man for a looong time).  We don't plan on drawing from these accounts for another 5-10 years so we'll start a Roth Conversion ladder once I quit my job (in the coming months) to have access to those dollars.

In addition .. I've recently inherited 200K from my parents estate.  I know I shouldn't be timing the market but I am waiting for the "correction" that EVERYBODY keeps talking about before putting that money into play.  The question is .. we still own 250K on our mortgage but it's at 3.5 percent interest.  If I can make that 200K earn more than 4%, wouldn't that be the better choice?  To invest rather than pay off mortgage?  I know this is not a new question .. it's one that is mulled over from time to time on these message boards.

Just curious what you would do ...


birdman2003

  • Bristles
  • ***
  • Posts: 314
  • Location: Iowa
Re: Advice Needed: What to do with inheritance
« Reply #1 on: October 04, 2017, 11:32:53 AM »
I would put 100k towards the mortgage today and 100k into VTSAX today

Gin1984

  • Magnum Stache
  • ******
  • Posts: 4834
Re: Advice Needed: What to do with inheritance
« Reply #2 on: October 04, 2017, 11:45:36 AM »
I'd put it in a taxable account.

ysette9

  • Walrus Stache
  • *******
  • Posts: 6679
  • Location: Bay Area, CA
    • The Best Is Yet To Come
Re: Advice Needed: What to do with inheritance
« Reply #3 on: October 04, 2017, 11:53:19 AM »
If I had a dollar for every time someone posted “I know i shouldn’t time the market, but do you think I should try to time the market?” I would be FIRE already. :)

If you think the US market is over priced you could always put money into international, if your AA says to have part of your investments diversified that way. What does your personal investment policy statement tell you to do? If you don’t have one, I recommend looking it up on the Bogleheads wiki and do some thinking over a glass of wine. Their article on what to do with a windfall may be helpful as well.

Congrats on a great problem to have.

Bicycle_B

  • Handlebar Stache
  • *****
  • Posts: 1818
  • Mustachian-ish in Live Music Capital of the World
Re: Advice Needed: What to do with inheritance
« Reply #4 on: October 04, 2017, 12:13:18 PM »
1. Whichever makes me feel better.
2. Taxable account.

Tyson

  • Magnum Stache
  • ******
  • Posts: 2512
  • Age: 48
  • Location: Denver, Colorado
Re: Advice Needed: What to do with inheritance
« Reply #5 on: October 04, 2017, 01:12:17 PM »
IMO, paying towards a mortgage makes no sense until/unless you are paying it off in full.  That's because paying off only part of the mortgage makes you way less liquid.  Your money's tied up in your house and you can't get to it easily if SHTF. 

Once you are in a position to pay it off in full, you reduce a monthly bill.  It's not the optimal choice from a returns standpoint, but for some people getting rid of what is usually their largest monthly expense is a huge weight off their shoulders. 

For me, there's 3 main choices, from most optimum to least optimum:

1. Dump it into VTSAX and let it ride.  If you are afraid of a market crash, put 18 months of expenses into bonds.  Crashes rarely last longer than 18 months, so you can spend down the bonds if you lose your job/income at the same time as a market crash.   In the absence of job loss, crashes don't matter especially during accumulation phase.
2. Pay off the mortgage in full - it's not optimal from a $$ standpoint, but it does get rid of a large monthly expense.
3. Pay of part of the mortgage in part - the worst option.  Your money gets tied up in an un-liquid asset and you don't even reduce your monthly expenses.

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 3191
  • Age: 82
  • Location: The laboratory
  • Ghouls Just Wanna Have Funds!
Re: Advice Needed: What to do with inheritance
« Reply #6 on: October 04, 2017, 01:56:11 PM »
My hubby and I, I believe are done with the accumulation phase of our nest egg.  We are 50 and 51 years old and we have 1M in our combined 401K's.  (been working for the man for a looong time).  We don't plan on drawing from these accounts for another 5-10 years so we'll start a Roth Conversion ladder once I quit my job (in the coming months) to have access to those dollars.



In addition .. I've recently inherited 200K from my parents estate.  I know I shouldn't be timing the market but I am waiting for the "correction" that EVERYBODY keeps talking about before putting that money into play.  The question is .. we still own 250K on our mortgage but it's at 3.5 percent interest.  If I can make that 200K earn more than 4%, wouldn't that be the better choice?  To invest rather than pay off mortgage?  I know this is not a new question .. it's one that is mulled over from time to time on these message boards.

Just curious what you would do ...


First off, I'm so sorry for your loss.

Second, I'm going to pull the bolded part above as the reason to maybe think about a third option to the Invest or Pay On Mortgage ones...

If you're planning on doing a Roth Pipeline, the most optimal way to do so is to make sure you've got low, low, low income to allow that conversion the most room to fill up the tax bucket. You'll be able to roll that much more out of the accounts and into your Roths with lower taxes if you don't have actual income to deal with. So lower or maybe even no taxes per year that you rollover to the Roth, and may even be able to roll over the amounts in less time than you'd figured.

You're currently sitting on $200K in cash (in a savings account right now?). If you plan on retiring this year or next, then this is a great opportunity to explore using some of that $200k to pay your yearly living expenses. That cash won't be counted in your income since you already have it and it's not seen as earned/simple income in any case. It may earn a few hundred in interest (so definitely counts as income that is reported for tax purposes), but if all you have to report on the tax forms is a thousand or so of interest, a bit of dividends/cap gains if you have a taxable account (do you?).

I would run some numbers and see how that shakes out (especially if you have to take into account health insurance and live in a state without expanded medicare so may need to show some sort of income to avoid being too low to qualify for the ACA, but not eligible for medicare), but sitting on a large pile of cash isn't necessarily an invest or pay the mortgage either/or situation in your case. I'm not saying that this is necessarily a great use of the cash - to leave it sitting so you can use it to pay expenses for several years - but it IS an option to consider anyway.
« Last Edit: October 04, 2017, 03:18:05 PM by Frankies Girl »

LiseE

  • Stubble
  • **
  • Posts: 181
Re: Advice Needed: What to do with inheritance
« Reply #7 on: October 05, 2017, 08:23:45 AM »
Thanks everybody .. and thank you for your condolences Frankies Girl.  :) 
Quote
make sure you've got low, low, low income
... yes that's why I was going to wait to start the ladder until after I retire so our tax bracket will be lower.  I'm also just now reading up on ACA and realize that we have to have some income to qualify but I don't think that will be an issue if hubby and I do some part time work.  It's a lot to take in .. very excited to almost be FI but it's daunting when you are really staring it in the face ... and you've been researching, reading and learning for years ... and you still wonder if you're doing the right thing ... almost hard to believe when the numbers all line up and the light is green!

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2180
  • Age: 26
Re: Advice Needed: What to do with inheritance
« Reply #8 on: October 05, 2017, 09:51:12 AM »
Quote
If I had a dollar for every time someone posted “I know i shouldn’t time the market, but do you think I should try to time the market?” I would be FIRE already. :)

Quoted again for truth.

LiseE

  • Stubble
  • **
  • Posts: 181
Re: Advice Needed: What to do with inheritance
« Reply #9 on: October 05, 2017, 11:04:02 AM »
Quote
Quoted again for truth.

... so if you had a big pile of cash today you'd have to make a decision .... jump in now (at the all time high) or wait it out.  There's no rush ... but jumping in now (paying top dollar) would be a costly mistake in my view .. yeah .. this is called timing the market .. it's also called being thoughtful and smart with decisions

sorry to ask the redundant stupid question .. just wanted some feedback .... yeesh ...

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2180
  • Age: 26
Re: Advice Needed: What to do with inheritance
« Reply #10 on: October 05, 2017, 11:43:28 AM »
Quote
Quoted again for truth.

... so if you had a big pile of cash today you'd have to make a decision .... jump in now (at the all time high) or wait it out.  There's no rush ... but jumping in now (paying top dollar) would be a costly mistake in my view .. yeah .. this is called timing the market .. it's also called being thoughtful and smart with decisions

sorry to ask the redundant stupid question .. just wanted some feedback .... yeesh ...

I absolutely would.  If you had put all that cash right before the '07-08 recession you would've doubled your money by now.

My opinion remains the same: only market time if you have a crystal ball.  And do us all a favor and share a glimpse into it, too, if you don't mind.

It's a redundant question, but certainly not a stupid one.  It's a question that remains controversial (though I don't really understand why), along with the question of paying off a mortgage early vs. investing. 

No such thing as stupid questions around the MMM forums.

Tyson

  • Magnum Stache
  • ******
  • Posts: 2512
  • Age: 48
  • Location: Denver, Colorado
Re: Advice Needed: What to do with inheritance
« Reply #11 on: October 05, 2017, 11:54:04 AM »
Quote
Quoted again for truth.

... so if you had a big pile of cash today you'd have to make a decision .... jump in now (at the all time high) or wait it out.  There's no rush ... but jumping in now (paying top dollar) would be a costly mistake in my view .. yeah .. this is called timing the market .. it's also called being thoughtful and smart with decisions

sorry to ask the redundant stupid question .. just wanted some feedback .... yeesh ...

I used to think the same way.  Then someone pointed out to me that the market is almost always at an all time high.  Because it always goes up.  That's why we invest in it.  Even if there's a correction, its usually short lived and quickly recovered from. 

Scortius

  • Bristles
  • ***
  • Posts: 475
Re: Advice Needed: What to do with inheritance
« Reply #12 on: October 05, 2017, 12:05:50 PM »
Also, people seem to have this rosey ideal of clear bull and bear markets.  It makes sense because that's what we've grown to recognize from the recent boom/bust cycles of 2002 and 2008. It sounds so simple, just wait for 'the dip' and then buy. What people fail to realize is 1) that by the time you do get to the dip, it may not drop below where we are right now, and 2) instead of a dip, there may just be a long period of stagnation with no remarkable dip at all, and 3) even if there is a dip, it's equally difficult to 'call the bottom' as it is to 'call the top', and in most cases people miss on both ends, not just on one. Thus, this idea that even after nearly 10 years of solid growth that you'll be able to know for sure that there will be a significant >5% drop, that the drop will end up lower than the market today, and that you'll be able to buy at that bottom instead of waiting too long and missing it is a highly optimistic view of your ability to accurately predict a stock market that is pretty much impossible to predict in the short term.

frugalnacho

  • Magnum Stache
  • ******
  • Posts: 4006
  • Age: 37
  • Location: Madison Heights, Michigan
Re: Advice Needed: What to do with inheritance
« Reply #13 on: October 05, 2017, 12:41:26 PM »
Quote
Quoted again for truth.

... so if you had a big pile of cash today you'd have to make a decision .... jump in now (at the all time high) or wait it out.  There's no rush ... but jumping in now (paying top dollar) would be a costly mistake in my view .. yeah .. this is called timing the market .. it's also called being thoughtful and smart with decisions

sorry to ask the redundant stupid question .. just wanted some feedback .... yeesh ...

By that same logic shouldn't you convert all your current investments to cash?

I will be getting a huge paycheck from selling a house soon.  It will be invested according to my IPS asap.

ysette9

  • Walrus Stache
  • *******
  • Posts: 6679
  • Location: Bay Area, CA
    • The Best Is Yet To Come
Re: Advice Needed: What to do with inheritance
« Reply #14 on: October 05, 2017, 03:18:38 PM »
In my mind the answer is simply a matter of playing to the best odds. Yes, you could lump sum invest at a relative peak and be worse off than dollar cost averaging in, but the chances are better that lump sum investing will be the best bet in the long term. Emotions aside (recognizing that they are important in personal investing), the statistics say to lump sum invest now.

https://investor.vanguard.com/investing/online-trading/invest-lump-sum

https://personal.vanguard.com/pdf/s315.pdf

Quote
> vanguard.com Executive summary. If a foundation receives a $20 million cash gift,  what are the tradeoffs to consider between investing those funds immediately versus dollar-cost averaging the investment over time?  How might an individual who receives a $1 million windfall approach  the same decision?In this paper, we compare the historical performance of dollar-cost averaging (DCA) with lump-sum investing (LSI) across three markets:  the United States, the United Kingdom, and Australia. On average, we  fnd that an LSI approach has outperformed a DCA approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This fnding  is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets



Mighty-Dollar

  • Bristles
  • ***
  • Posts: 411
Re: Advice Needed: What to do with inheritance
« Reply #15 on: October 09, 2017, 02:53:54 AM »
I know I shouldn't be timing the market but I am waiting for the "correction" that EVERYBODY keeps talking about before putting that money into play.  The question is .. we still own 250K on our mortgage but it's at 3.5 percent interest.  If I can make that 200K earn more than 4%, wouldn't that be the better choice? 
Who is "everybody"? Ken Moraif? The gold salesmen? Annuity salesmen? Millennials who still have 2008 in their minds? Permabears like Gerald Celente or Harry Dent?
For every doom and gloomer there is an optimist. Larry Kudlow had a guest on his radio show on Saturday who made a great case why the bull market is just getting started.
The bottom line is that if you're worried about a stock market crash then you're over allocated into stocks. Ever heard of bonds???? When you're diversified then you won't worry about a stock market crash. The lowest risk allocation from 1970 to 2010 was 28/72. Hasn't been a 1 year drop of more than 1% in 22 years. http://investingadvicewatchdog.com/images/28-72-year.jpg
Having said that, at 50 you would take more risk than 28/72. For most 50 year olds you'd go about 70% stocks / 30% bonds.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 13009
  • Age: 62
  • Location: NorCal
Re: Advice Needed: What to do with inheritance
« Reply #16 on: October 09, 2017, 07:43:39 AM »
Another aspect to consider is that a large bucket of cash on hand at retirement will protect you if the market dumps early on. Instead of liquidating investments during a down period, you can live on the cash until your investments rebound. This is not wise during the accumulation period, because every green soldier needs a job, but once critical mass is achieved, keeping large numbers of soldiers in cash reserves is a good defensive strategy. Typically, two to three years cash on hand is recommended.

And don't throw a wad of cash at the mortgage. It just makes you illiquid and the same damn payment is due every month until the sucker's paid off. If the goal is to pay off the mortgage early (just saying "if", not actually endorsing this tactic), invest it and let it grow until you can pay it all off at once. Yes, you could recast the current mortgage, but at 3.5%, it's smarter to let it ride.

If I may add my condolences to Frankies'... I'm sorry for your loss. I'm the co-executor of my parent's estate and just trying to get things wrapped up. It's no fun. I keep telling myself that I need to make my parents proud by investing their hard-earned money wisely. Good on you for taking a similar spproach.

theolympians

  • Stubble
  • **
  • Posts: 149
Re: Advice Needed: What to do with inheritance
« Reply #17 on: October 09, 2017, 11:21:48 AM »
Another thought about timing the market: I know it has been alluded to here, remember if a "crash" happens, you won't know when to put your money in. "What if it goes down even more and doesn't go back up????" If you wait, you will have the same problem as you are having now, though with more stress---you will be afraid of a further decline in prices.

Whether in part or all, get it in now.

Mighty-Dollar

  • Bristles
  • ***
  • Posts: 411
Re: Advice Needed: What to do with inheritance
« Reply #18 on: October 09, 2017, 02:58:34 PM »
There's ALWAYS a reason to avoid becoming an investor http://www.ci.com/orderform/pdf/general_marketing/idontwant_poster_e.pdf

Exflyboy

  • Walrus Stache
  • *******
  • Posts: 6807
  • Age: 58
  • Location: Corvallis, Oregon
  • Expat Brit living in the New World..:)
Re: Advice Needed: What to do with inheritance
« Reply #19 on: October 09, 2017, 10:44:06 PM »
So doing a conversion pipeline adds to your MAGI right? You don't pay federal taxes in the 15% tax bracket but all the conversion stuff is a distribution and adds to your AGI (line 37).. Ergo it adds to your MAGI.

As your ACA subsidy is based on your MAGI you will want to be somewhere above 138% and below 400% Federal poverty level.

This is why we have not done a Roth conversion in order to maximise the ACA subsidy.. Also did a bronze plan (high deductible) and did an HSA to further reduce MAGI.

Am I off base here?