Inheritance coming - best options?

[JWJones]

Hi folks, I haven't been on the forum in a while, but now I have something that will significantly change my financial future: we are going to inherit a large sum of money from an irrevocable trust come July (about $500K).

Our first order of business will be to pay off ALL remaining debt. It will be great to get that monkey off our backs.

Next will be investing, with the goal of FI within 5 years.

We are also considering buying rural property (we currently rent in the city).

I currently work in the commercial printing industry, and my wife runs our small business making/selling bar soap. I would rather not work at the day job, but will continue to do so for the foreseeable future, to add to the pot. But having "F-You Money" will be nice.

Given all this, what are my best options to reach FI within 5 years?

[C40]

We can give you more specific advice if you have more information

What are:
- Taxes you'd pay on the inheritance
- Amount of your debt
- Cost of property you're thinking about buying
- Current net worth
- Current income
- Current spending
- Projected spending (if you move to that rural property)

Aside from that stuff, I'd say:
- Don't do much of anything with the money for a while. Don't buy a particularly expensive property.
- Invest it fairly conservatively

[Gilberto de Piento]

I agree with C40, especially about not doing anything fast.

Also, don't tell anyone that doesn't need to know about it. Money that appears to be "free" sometimes makes people have weird expectations.

[JWJones]

What are:
- Taxes you'd pay on the inheritance
- Amount of your debt
- Cost of property you're thinking about buying
- Current net worth
- Current income
- Current spending
- Projected spending (if you move to that rural property)

Aside from that stuff, I'd say:
- Don't do much of anything with the money for a while. Don't buy a particularly expensive property.
- Invest it fairly conservatively

- Not sure yet what taxes we'll being paying on it
- About $15K
- No plans yet, hoping to buy land (2-10 acres) for less than $200K
- Not much
- About $5K/month
- About $4K/month
- No change at this time

The asides:
- Yes, we're going to sit on it until we have a solid plan
- I'm planning on putting at least a third, possibly more, into Vanguard (VTSAX). Basically following JL Collins' advice ("The Simple Path to Wealth")

Also, re: what Gilberto said, absolutely. The only people that know are under this roof, and our lips are sealed.

[C40]

Oh, if I understand correctly after about 1 minute of googling, you don't have to pay any tax on that inheritance, because the exemption is really large. Though I don't know if that exemption amount is for each person getting inheritance or the total from the estate.

If you get it all, that's $485k.

** If you buy the land, say at $150k so you've got $335k left. Let's say you can keep your spending flat (if the land includes a house??).. then you'd be FI in like 20 years

** If you want to be FI in 5 years, starting from the $485k net worth and getting a mortgage for the land, you'd need to reduce your spending to about $30k per year.

** If you want to be FI in 5 years, starting from the $335k net worth after buying the land, you'd need to reduce your spending to about $25k per year.

Your spending amount is very important in these calculations, because it is assumed that you stay at that spending level for the rest of your life. If you keep your spending as it is now and want to fund it all with investment income, you'll probably need a lot more capital - over $1 million and perhaps as much as 1.5 million.


There are many FI calculators on the internet you can play around with to make projections like this, I used this one: https://networthify.com/calculator/earlyretirement

[JWJones]

Thanks, C40.

So, further details have come to light: we get 14.2857% of $4,858,630. So about $694K. There's a distribution fee of $2K off the top of that, so $692K. Yes, you are correct about the taxes, it seems, although there is mention of possible capital gains or loss taxes. Not sure I understand how that works. Either it's taxed or it isn't?

Thanks for the calculator, I'll do some running of the numbers.

[flying_pan]

@JWJones, when you are saying that you want to buy land, do you mean with the house on it or just land? Building is very expensive.

I second the advice to be conservative with this money, no need to rush. With $677k and house for about $150k, you'll get $522k left; if markets continue to get 4% after inflation, you'll get $20k per year, you'll need to save more until your investments produce enough income to supplement all of your spending, or you just need to lower your spending (this is more efficient).

Before you put any money into VSTAX or something like that, I highly recommend to take couple of months off (or just quit your job, you have very high financial security) and study about investing. You have a pretty big sum of money, so it will pay off to educate yourself.

> possible capital gains or loss taxes

That sounds weird, to be honest. How can you get losses from getting an inheritance? If you inherit not cash, then it might be trickier. If it is complicated, don't hesitate to hire somebody, like CPA to figure out it (again, it will pay it off to do it right).

[Adamski]

@JWJ I had an inheritance earlier this year. Sounds like I have done something similar to your initial plan. I have put one third in a couple of index trackers, and two thirds in the best interest paying bank/building society/bond accounts, to preserve capital and against inflation.

My future plan is different. In the UK tax advantages to private pensions (UK specific) so plan to build up pensions for myself and wife over a number of years and drip feed the cash savings into pensions.

[JWJones]

@JWJones, when you are saying that you want to buy land, do you mean with the house on it or just land? Building is very expensive.

I second the advice to be conservative with this money, no need to rush. With $677k and house for about $150k, you'll get $522k left; if markets continue to get 4% after inflation, you'll get $20k per year, you'll need to save more until your investments produce enough income to supplement all of your spending, or you just need to lower your spending (this is more efficient).

Before you put any money into VSTAX or something like that, I highly recommend to take couple of months off (or just quit your job, you have very high financial security) and study about investing. You have a pretty big sum of money, so it will pay off to educate yourself.

That sounds weird, to be honest. How can you get losses from getting an inheritance? If you inherit not cash, then it might be trickier. If it is complicated, don't hesitate to hire somebody, like CPA to figure out it (again, it will pay it off to do it right).

Buying land without house is one idea, and putting something like this on it:

https://www.ideabox.us

We are not really firm on anything yet. Maybe just a small house in a smaller town, with a big backyard (we like to garden and grow some of our own food). We currently rent a large house (way too much house!) from some friends of ours at about half the market value, as they are caring for their elderly parents in another state. Previously we were homeowners, but a combination of poor choices and the housing debacle of 2008 left us in foreclosure.

I understand and agree with being conservative and not rushing into anything, other than paying off debt. But we would really like this money to work for us, too, rather than us working for money. Given that, is just parking it in a low-interest bank savings account until we figure out something better a good idea? I suppose it doesn't hurt.

Regarding the taxes/capital gains or loss: I believe that is if we keep it with the current account holder, rather than take a cash disbursement.

Haha, don't tempt me with quitting my job! I'd love to do that, which would have the added benefit of me being able to focus more on our side business. I don't want to be rash, but I am damn tired of working for others. And I am in the process of educating myself; that's how I'm spending most of my free time since this came to light, and why I have returned to this forum after 3 years.

[2Birds1Stone]

I read your original posts here from a few years back and immediately see red flags. This thread reminds me of the cautious tales of professional athletes going broke shortly after they pass their primes, ditto with lottery winners squandering it in short order.

You're mid 50's, with an established career, a wife who runs a side business, and you describe your net worth as "not much". You were interested enough in early retirement and changing your course in 2017, to register and post here, but what have you done to move in the right direction?

I would completely forget about buying anything with the money for at least 6-12 months. This is an opportunity of a lifetime, and with $700k essentially tax free, you can buy your family security and peace of mind for the rest of your lives. You're only 12-15 years away from SS, figure out what that benefit will be at FRA for you and your wife combined. Keep the funds in several high interest accounts to get at least 1.5% for now while maintaining FDIC insurance limits ($250k per account). Then figure out how to conservatively invest this, such that you can take 3-4% out with minimal impact to the principal. That's $21-28k/yr in tax free spending.....you can do almost any PT job and live your current spendy lifestyle. Or figure out how to cut expenses a bit, focus a little bit more on the side business, and never work a FT job again. Speaking of the side business, it's been quite a few years now. Is it an expensive hobby? Or is there a real income there? My sister in law has an Etsy store and after expenses and the time she puts in, we've figured out she earns between $1-2/hr over the past 4-5 years.......

Just playing devils advocate. Read waaaay too many stories of people in your exact situation broke as fuck after a few years over on Bogleheads.

[JWJones]

I read your original posts here from a few years back and immediately see red flags. This thread reminds me of the cautious tales of professional athletes going broke shortly after they pass their primes, ditto with lottery winners squandering it in short order.

And that's exactly why I'm here, I don't want to screw this up.

You're mid 50's, with an established career, a wife who runs a side business, and you describe your net worth as "not much". You were interested enough in early retirement and changing your course in 2017, to register and post here, but what have you done to move in the right direction?

Other than slowly paying down some of our debt, not much. We try to control our spending and save, but it seems like something always comes up to knock us back again. I do have an IRA through work that I contribute 7% per pay period to and we have a little in a savings account at our bank, but that's all. We only own one car (outright, no payments), so that's a good thing.

I would completely forget about buying anything with the money for at least 6-12 months. This is an opportunity of a lifetime, and with $700k essentially tax free, you can buy your family security and peace of mind for the rest of your lives. You're only 12-15 years away from SS, figure out what that benefit will be at FRA for you and your wife combined. Keep the funds in several high interest accounts to get at least 1.5% for now while maintaining FDIC insurance limits ($250k per account). Then figure out how to conservatively invest this, such that you can take 3-4% out with minimal impact to the principal. That's $21-28k/yr in tax free spending.....you can do almost any PT job and live your current spendy lifestyle. Or figure out how to cut expenses a bit, focus a little bit more on the side business, and never work a FT job again. Speaking of the side business, it's been quite a few years now. Is it an expensive hobby? Or is there a real income there? My sister in law has an Etsy store and after expenses and the time she puts in, we've figured out she earns between $1-2/hr over the past 4-5 years.......

Okay, this gets to the meat of what I'm looking for, but there's a lot I just don't understand about this stuff. I'm an intelligent guy, but not very smart when it comes to money matters (that's probably fairly obvious).

When you say keep the funds in several high interest accounts, what kind of accounts are you talking about? Standard bank savings accounts, or...?

Conservatively invest how? Where? Take 3-4% out how? Is this living off of dividends?

What is "FRA?"

Concerning the side business, this is where I feel like quitting my job to focus on that would be beneficial. My wife doesn't track financials well, so I just don't know whether it's an expensive hobby or whether there's real income there. I do know it's growing, we actually have several retail accounts, but I just don't know the numbers. I keep encouraging her to get some small business education and get the financials straight, but these things just don't come naturally to her. She is the "creative" type and can't seem to be bothered by these details. I know I could do it, if I didn't work already; I simply don't have the time/energy after working a full-time job.

Just playing devils advocate. Read waaaay too many stories of people in your exact situation broke as fuck after a few years over on Bogleheads.

I appreciate your honesty. I don't want to be one of those people. That's why I'm back here. I want to do the right things and make this money work for us. I would also rather not continue to work for others, at least not full-time, and especially not doing what I'm doing now. I'm not opposed to some part-time work doing something I actually enjoy, or focusing on the home business.

[Sclass]

Yes, you are correct about the taxes, it seems, although there is mention of possible capital gains or loss taxes. Not sure I understand how that works. Either it's taxed or it isn't?

Not sure what the money consists of land, paper or cash. There’s probably no mention because there are no taxes for those amounts.

If it is stocks you can arrange with your broker to have the cost basis “stepped up” to current value at time of death. For example if your parent dies, leaves you a few shares of XYZ shares, your acquisition cost is the price at the time of death. So if you chose to sell then, you’d owe no long term cap gains. You’d get the value in cash. This all gets arranged during the transfer of shares. You’ll owe taxes on any appreciation that occurs after the TOD.

Welcome and good luck.

I’m not a big fan of running out and buying the land out of the gate. I’ve seen a lot of people do just that with windfalls and end up with weak returns down the line. Unless you are sitting on a sweetheart real estate deal I’d learn a bit about investing beforehand.

I’ve had many friends get big windfalls in tech options. The first thing they did is they bought a little too much home and in a couple of cases, cow farm and grape farm. They regretted it a few years later. Owning the property was a huge opportunity cost on a large portion of their capital. I guess they just had to do it. When the smoke cleared in a couple of cases they weren’t all that rich anymore. Think it through first.

Paying down debt sounds smart. It depends on the interest rates of course.

[2Birds1Stone]

The good news, OP, is that you have the opportunity to "get it right" this time. Just don't do anything that you may regret down the line until you've REALLY thought things through and understand all of your options.

FRA = full retirement age. It should be 65 or 66 for you? Is your wife around the same age? Figuring out how much you will get from SS will be very helpful in understanding how long you have to make this money last, and what percentage of your spending SS will cover. Since you're 53/54 SS is only 12-15 years away depending on when you decide to take it. Assuming you get the "average" US benefit at age 65 it should be ~$27,000/yr combined with your wife. Could be more or less depending on lifetime income and how early you take/long you delay. That could cover a significant chunk of your expenses once you claim it.

Conservatively could mean a two fund portfolio of 50% total stock market/50% total bond market. Withdrawing 3-4% could be a combination of not-reinvesting dividends (have them deposit into a cash account), or reinvest dividends and just pull 3-4% of the portfolio value once a year (and use that to keep the portfolio balanced 50/50, meaning if stocks outperform one year and it skews for example 53/47, pull from stocks, if they under-perform, pull from bonds, etc.

I wouldn't quit your job just yet. But you could definitely do so within the next year once you figure all of this out.

Reducing your expenses to say, $45-50k/yr combined with a plan for the money that allows you to bridge the gap between now and SS, and you're set for life.

[JWJones]

I’m not a big fan of running out and buying the land out of the gate. I’ve seen a lot of people do just that with windfalls and end up with weak returns down the line. Unless you are sitting on a sweetheart real estate deal I’d learn a bit about investing beforehand.

I’ve had many friends get big windfalls in tech options. The first thing they did is they bought a little too much home and in a couple of cases, cow farm and grape farm. They regretted it a few years later. Owning the property was a huge opportunity cost on a large portion of their capital. I guess they just had to do it. When the smoke cleared in a couple of cases they weren’t all that rich anymore. Think it through first.

After some discussion last night, we both agreed that what we really want (and not right away) is a small house in a smaller town. As I mentioned earlier, we currently rent a large home from friends, that still has most of their "stuff" in it. It's really made us realize just how much we don't want a big house and a bunch of stuff. We have downsized our possessions considerably since we lost our home several years ago.

Conservatively could mean a two fund portfolio of 50% total stock market/50% total bond market. Withdrawing 3-4% could be a combination of not-reinvesting dividends (have them deposit into a cash account), or reinvest dividends and just pull 3-4% of the portfolio value once a year (and use that to keep the portfolio balanced 50/50, meaning if stocks outperform one year and it skews for example 53/47, pull from stocks, if they under-perform, pull from bonds, etc.

I wouldn't quit your job just yet. But you could definitely do so within the next year once you figure all of this out.

Reducing your expenses to say, $45-50k/yr combined with a plan for the money that allows you to bridge the gap between now and SS, and you're set for life.

That's actually exactly in keeping with my thoughts on investing it: 50% total stock market/50% total bond market.

Back to what you said about "Keep(ing) the funds in several high interest accounts to get at least 1.5% for now while maintaining FDIC insurance limits ($250k per account)." What do you mean by that? Are you talking about conventional bank savings accounts, or...? I would appreciate examples or links to such accounts.

Re: quitting the job—you and my wife are in agreement, haha. As much as I'd like to ditch it now, it seems prudent to stick it out for at least another year.

Reducing the expenses is the big one for me. I'm very frugal, personally, and my wife is MUCH better than she used to be, but we can still do better. We are about 2+ years from being "empty-nesters," so that will be a big factor when it happens.

[jacob]

Yes, it's a conventional bank or credit union account. The bank just offers more interest in order to attract customers. See e.g. https://www.investopedia.com/best-high- ... ts-4770633 and read the descriptions (I just googled "high yield savings accounts").

This would be one example https://www.capitalone.com/bank/savings ... s-account/ which gives 1.5%.

FDIC insurance is free. It means you get your money (up to the $250k limit) back if the bank collapses. It will say in the small print if the insurance holds. https://en.wikipedia.org/wiki/Federal_D ... orporation

Note that some banks will give money (like $100 per $10000 deposited) for first time customers. Some play the game of moving money around that way to collect bonuses.

[2Birds1Stone]

Note that some banks will give money (like $100 per $10000 deposited) for first time customers. Some play the game of moving money around that way to collect bonuses.

Ditto to what jacob said before this sentence. I personally like Ally, which recently reduced their interest rate to 1.25%, and many others are following suit due to the Fed lowering their rates. You could do a 1 year CD or a penalty free CD to lock in a good rate.

RE: bonuses, I played that game quite addamently a few years ago and earned ~$3k in a years time by moving around approx $75k in funds. Many of those accounts that offered a high sign on bonus has crappy base interest rates and locked your money up for 90-180 days, so the juice may not be worth the squeeze. Many of those offers have dried up due to the current economic situation, but some still exist. I used https://www.doctorofcredit.com/best-ban ... t-bonuses/ and would check monthly to see what was out there worth the effort. At the end of the day, dividing the money into 3 separate accounts (for that FDIC insurance) that yield as close to 1.5% as possible over the next 6-12 months is likely your best bet.

edited to add: looks like the 1.5% APY Capital One account currently does have a sweet bonus! $500 for $50k deposited https://www.doctorofcredit.com/capital- ... 0-deposit/

[JWJones]

Excellent, thanks guys. I'll have to see what kind of deals are available for savings accounts come July.

[white belt]

I agree with @2Birds1Stone.

You are asking for tactical advice for a large pile of money, while many on this forum are rightly pointing out their concerns that if you don't change your money strategy, you will end up exactly where you were financially pre-inheritance. Lottery winners go broke, professional athletes go broke; being wealthy is not just a function of how much money is in the bank.

Now I applaud you for putting yourself out there and recognizing you need help. However, I'm very concerned that we may be speaking past each other since our ERE Wheaton Levels of understanding are so far apart. Remember that most folks on these forums could live on a ~$700k pile of money for an eternity since at a 3% SWR we're talking about ~$20k in annual spending. Heck, I think that was around the spending level of MMM's family of 3 at one point.

But since you want actionable advice, I'll echo what others are saying. You need to put the money in some kind of savings account and not touch it for at least a year. The investment return on such a sizeable chunk of money for one year is unimportant in your current situation. Why should you not touch it for at least 12 months? Well that's to give you and your wife time to really examine your relationship with money.

Have you read any books on personal finance? You have consumer debt so I'd recommend starting with Dave Ramsey. If that seems too basic to you then you can move on to more advanced books that are referenced in the ERE Wheaton Levels linked above. It's critical that your family really examines what money means to you. You need to be on the same page. There are numerous books about money and relationships, but perhaps if you can provide us an idea of your MBTI personality type along with your wife's, then folks on this forum will better able to assist you with the process. And I want to emphasize that this will be a process. It will not be an overnight thing.

[JWJones]

Well, your post turned into the catalyst for what amounted to an ongoing, day-long discussion between my wife and I.

My first reaction to the post, when I read it to myself yesterday morning, was defensive, since you said we have consumer debt. We don't actually have consumer debt, per se. We have income tax debt, some medical debt, and debt from an apartment rental a few years ago, but not the usual things associated with consumer debt (no credit cards, etc.).

But what really got me thinking (and then discussing with my wife), was the thinking around money, and the Wheaton level. We discussed where we are, and where we want to be on that level, our past money habits, etc., throughout the day (and various tangential topics related to all this).

I have read, and own, personal finance books. Currently reading "The Simple Path to Wealth" by JL Collins, with "ERE" and "YMOYL" waiting in the wings (our daughter is reading YMOYL). I would say intellectually I'm beyond Dave Ramsey, but practically not.

I will have to look into the personality type stuff; I know of it's existence, but have never endeavored to test myself.

[Gilberto de Piento]

I found Dave Ramsey podcasts useful for keeping my enthusiasm up for paying off debts even though I don't like Dave, don't agree with his barely hidden politics, and was past the intellectual level of his show on the first listen. Sometimes it is helpful to focus on the basics and have a feeling of being part of something, though I completely understand if Dave Ramsey is not for you.

It does feel good to pay off debt. The effect is more subtle but it also feels good to not get back into debt.