Author Topic: Investing a Windfall  (Read 2259 times)

Rollin

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Investing a Windfall
« on: November 02, 2023, 04:00:36 PM »
My siblings and I are receiving money from an estate and for my portion I'm going with my ongoing investment strategy/plan (generally 60% stock/40% bonds) - that is, buying index funds through Vanguard and withdraw at the 4% Safe Withdrawal Rate. I've successfully done this since I FIRE'd about 8 years ago. Its one source of income among many.

My older sister (65 yo) hasn't got much to her "name", as she didn't put much away for retirement. So while I'm perfectly comfortable with the above investment strategy and the associated risks I was wondering if anyone had a more conservative/safe approach to suggest (in order to get 4% from the investment). I was thinking of a CD ladder for her because rates are now above 5%, but I do worry about what to do if and when the current higher rates fall and if she'll be able to handle the reinvesting involved a a ladder. I guess she could reinvest at that time in a plan like mine. Anyway, looking for suggestions. Can one even set up a CD ladder to take 4% income/year and still maintain the initial investment? (my investment plan seems so much more simple :)

Second sister is younger (55 yo) and I'll suggest she go my route, and maybe even 70%/30%.

JAYSLOL

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Re: Investing a Windfall
« Reply #1 on: November 02, 2023, 07:40:37 PM »
Unless older sister wants to learn how to manage a portfolio, I wouldn’t suggest her to do CD ladders or self directed account management and rebalancing etc, I would think as low a fee as possible one fund with a 60/40 or 50/50 split that she won’t have to manage would work better.  CD rates are fine now, but when they aren’t paying 5% then she’s got to figure out something else and in the mean time the market could have a big run up. 

maizefolk

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Re: Investing a Windfall
« Reply #2 on: November 02, 2023, 07:51:57 PM »
Keep in mind that the 4% rule is usually tested with the assumption that it needs cover expenses that grow along with inflation.

Inflation is currently running around 3.7%, so a 5% return on a CD ladder is only 1.3% real return. If your sister needs to spend 4% of the initial amount each year, and that 4% grows with inflation each year, she'll be eating away at her (inflation adjusted) principal year by year.

Unless she has significant health issues that would preclude the chance of living into her 80s or 90s, I think a 60/40 stock/bond portfolio would be a better choice for her as well.

Chris Pascale

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Re: Investing a Windfall
« Reply #3 on: November 03, 2023, 06:52:37 PM »
Having read a little bit of your history before responding, I don't think you need my help, but if my response helps you think through the problem, I'm happy to help.

Some questions:
Do your sisters have income? If so, do they live off of it, or do they bridge the gap with debt?
Is the windfall enough to live off of if invested at 5%? If so, get them to agree for it to be locked up and the interest is the money.

There are more questions centered on this scenario, but you've probably worked through them.

Perhaps the last one is: Would they listen to you if you were right? If not, then you gotta just love them, be happy for them, and be a good friend in their lives.

Rollin

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Re: Investing a Windfall
« Reply #4 on: November 03, 2023, 08:13:27 PM »
Unless older sister wants to learn how to manage a portfolio, I wouldn’t suggest her to do CD ladders or self directed account management and rebalancing etc, I would think as low a fee as possible one fund with a 60/40 or 50/50 split that she won’t have to manage would work better.  CD rates are fine now, but when they aren’t paying 5% then she’s got to figure out something else and in the mean time the market could have a big run up.

Two good points there that have been in the back of my mind, and those are the complexity for her (I'd likely be involved more than I want to be), and the other point is what to do if the CDs aren't at 5%. I think you are correct and just get her set up with a managed account with a good split. Hey, it's worked for me why not for her right ?!

Thank you.
« Last Edit: November 03, 2023, 08:31:20 PM by Rollin »

Rollin

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Re: Investing a Windfall
« Reply #5 on: November 03, 2023, 08:15:28 PM »
Keep in mind that the 4% rule is usually tested with the assumption that it needs cover expenses that grow along with inflation.

Inflation is currently running around 3.7%, so a 5% return on a CD ladder is only 1.3% real return. If your sister needs to spend 4% of the initial amount each year, and that 4% grows with inflation each year, she'll be eating away at her (inflation adjusted) principal year by year.

Unless she has significant health issues that would preclude the chance of living into her 80s or 90s, I think a 60/40 stock/bond portfolio would be a better choice for her as well.

Agreed. Again, I just started thinking, that if that plan has worked for me (and of course so many others), why not for her.

Thank you.

Rollin

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Re: Investing a Windfall
« Reply #6 on: November 03, 2023, 08:29:08 PM »
Having read a little bit of your history before responding, I don't think you need my help, but if my response helps you think through the problem, I'm happy to help.

Some questions:
Do your sisters have income? If so, do they live off of it, or do they bridge the gap with debt?
Is the windfall enough to live off of if invested at 5%? If so, get them to agree for it to be locked up and the interest is the money.

There are more questions centered on this scenario, but you've probably worked through them.

Perhaps the last one is: Would they listen to you if you were right? If not, then you gotta just love them, be happy for them, and be a good friend in their lives.

Yes, your response, as well as the others, has helped a lot. They help me gt past a few of the doubts I have and get back to what I know and have worked so hard to understand all these years. I've been away from the forum and this kind of thinking for a long time (outside having a blast), so I'm a tad bit rusty.

Both sisters have income with the younger very little debt and soon to be none. She is determined to be debt free. I'd like to see her end up building a nice retirement sum and hopefully know she can become FIRE'd. She will not be taking any income from this windfall.

The older sister has debt, but seems to be fairly steady in not adding to that. That makes me think to ask her what she has (debt) to determine if some of that needs to be paid before she invests (that is, to see if her hair is on fire). She would like to take income from the windfall, but 4% would work for her.

Would they listen to me - yes. It'll be a challenge to get the older one to the brokerage and funnel the money into it (the first part will be coming from muni bonds that we will convert later this month). The younger one will sail her own ship once I suggest a course.  What will be imperative is to explain to them the potential for loss and the volatility (to not study their portfolios daily or just "too often"). It will help if they remember I'm doing the same thing they are (except mine will be self managed).

Very good questions and thank you for those.
« Last Edit: November 03, 2023, 08:35:50 PM by Rollin »

 

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