Author Topic: investing inheritance 3-5 year horizon  (Read 1987 times)

slowsynapse

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investing inheritance 3-5 year horizon
« on: June 24, 2016, 05:13:43 PM »
Posting for a friend but want MMM'ers typically awesome investment advice.

Friends daughter age 19 not currently in college inherited $25,000 with the specific instruction that it was to be used for college (in a joint account and she will not really have access).  She will not be attending college for at least 2 years from now and dad would be helping her for the first year or two from college savings plans.  So I think she has a 3-5 year time horizon before accessing the money. 

The question: With this time horizon, do you park it in a money market, invest it in a low fee index fund, or a combination of the two?  My gut says that time horizon is long enough to take on some market risk.

zombiehunter

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Re: investing inheritance 3-5 year horizon
« Reply #1 on: June 24, 2016, 06:19:02 PM »
What's her tax rate, 0%? 

REITs are taxed at ordinary income tax rates for the distributions, and capital gains for the appreciation.  Something like the Vanguard REIT ETF holds a diversified portfolio that has a very solid return.  If she is basically paying zero income tax, it would be a special opportunity to get a nice return without tax.  Of course, for all other investments she could be in the 0% capital gains bracket if she's in the 15% income tax bracket or lower.  So she could have favorable taxes all around.

I would do something like a mix of 1/3 BND (vanguard bond ETF, ~2% yield) 1/3 VNQ (vanguard REIT etf ~3.5% yield) and 1/3 VYM (vanguard dividend etf ~3.2% dividend yield).  These are all fairly low fee ETFs as its vanguard, but they aren't like the 0.05% fee VTI fund.  Over a 3-5 year period, the difference from .05 to .25 fees isn't going to make a big difference, like it would on a 25-30 period.

slowsynapse

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Re: investing inheritance 3-5 year horizon
« Reply #2 on: June 24, 2016, 06:49:35 PM »
Her tax rate would be very low, most likely 0% in any when she would pull the money. 

MDM

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Re: investing inheritance 3-5 year horizon
« Reply #3 on: June 24, 2016, 09:19:14 PM »
The question: With this time horizon, do you park it in a money market, invest it in a low fee index fund, or a combination of the two?
No clear answers.  See Investing with a medium-term timeline - Bogleheads and links therein for a good summary of various perspectives - and good luck!

slowsynapse

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Re: investing inheritance 3-5 year horizon
« Reply #4 on: June 24, 2016, 11:53:49 PM »
Thanks zombiehunter and MDM, really good advice from both of you.  I never even considered the REIT option with the yield as a portion of investment which is why I posted the question.  I have also read a lot of the Bogleheads but not that specific page.  I think they are comfortable with some risk on the original capital so a mix of REIT, VTSAX (or VTI) and cash seems really reasonable for their tolerance. 

My immediate suggestion was to take $15K of the $25K and put it on either black or red and never tell the daughter, but my friend was not comfortable with that :).  On a day like today with the Brexit, it seems less far fetched though.

money_bunny

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Re: investing inheritance 3-5 year horizon
« Reply #5 on: June 25, 2016, 05:24:47 AM »
Things to consider:

If the family is asking your opinion ask them to zoom out a bit and think some more long term concepts.

How much is in the other plans and are they thinking about a career that needs graduate work?
25K is 1/2 a year at NYU undergraduate for example, or most of a doctorate at University of Missouri.

One of the main reasons I am where I am today was that I graduated with no student loan debt, so the 200-400 a month my friends are or did pay could go to the stash and reduced by back end ratios so I could buy my first apartment.

My opinion is diversified bonds for most of it. The time horizon is too short.