What to do with inheritance

GhostOfTomJoad

GhostOfTomJoad

500+ Posts
My soon-to-be fiancee found out she's inheriting a little over 20K from a distant relative's estate next year. Our preliminary thoughts are that we'll use 25 - 50% of the money to purchase & furnish a new home & then invest the rest. Any thoughts on where we should put the dough? Her desire is to establish a nest egg for herself (we both married & divorced young & are in the rebuilding phase of our lives) as well as protect the cash from the IRS. We're not looking for specific "buy company XYZ" advice, but just basic guidance from someone more familiar with this type of investing. My guess is that she'll probably put the money in a mutual fund, but we want to make sure we're not doing something that's gonna nail us in taxes/penalties. We're both in our very early 30s with no kids & none planned.

Appreciate any thoughts.

Ghost
 
In Austin? Nowhere. Now in Oklahoma we would be living in style!

No, the $5 - 10K is what what we've dogeared to be added to our current savings to go towards closing costs, furnishings, incidental. We don't want to blow the whole kitty there, but we do want to set aside any remaining money someplace that will make good sense.

Ghost
 
Ghost.
Step 1 - Earmark EVERY SINGLE DOLLAR for a specific purpose (retirement, home purchase, college education, new car...whatever)
Step 2 - For each 'purpose' establish a timeline for the money (like if she wants to retire at 55 and she's 25, she's got 30 years). For retirement, it's best to invest it with the idea that reality will force you to retire later than you thought.
Step 3 - Once you've figured that out, figure out your risk tolerance. This can be divided (simplified) into two categories. Your head and your gut. Your head will tell you how agressive you can 'afford' to be. In other words, given your time frame, how much can you 'afford' to lose on the short term in order to have plenty of time to recover those losses. The idea is that the longer you have, the more aggressive you can afford to be. Even mutual funds (growth or any equity/income based and even some High Yield bond funds) are considered 'risky' for anything less than a 3-5 year time frame. Alot of funds are down anywhere from 30-60 percent (and more) over the past couple years. Just remember that if you lose 10% of your principle, you'll typically need to see double that on the upside just to 'break even'. On the other hand, your 'gut' will tell you the real risk tolerance (bearing in mind the above). Some people can't STAND to see their money drop in value. Ever. Even if they have 30 years before they need to touch it.These are not meant for growth investments. Try using the 'sleep at night' rule. If you can sleep well on a night when the market takes a massive dip and not worry about your money, you're probably in a 'suitable' investment. It's all about suitability.
Step 4 - Based on the above, diversify appropriately. Alot of people subscribe to a 'formula' based on how old you are...meaning 10% in international, 5 percent in 'cash' (emergency funds) 50% in Index-type funds (fully diversified)..etc. I don't think this applies to everyone, but you may. I'm 28. I'm VERY agressive (primarily biotech, tech and international funds, though recently i've been DCA'ing into a bluechip fund (full of companies like GE, ATT...you know the stalwarts of our economy) because i ate it hard during this last downturn.

Decide if you want to dump it all in at once (which carries more risk, but allows for greater growth over time) OR Dollar Cost average, meaning you lump in a set amount (100.00d or whatever) on a monthly (or quarterly) basis. This is advantageous because, over time, the idea is that you are buying more shares when the market is down and fewer shares when the market is up, giving you a much better 'average cost'.

As far as sheltering it, unfortunately, the best way to shelter the most income is through qualified plans like a 401K or a pension plan. This money ain't eligible for that (since it's supposed to be pretax money), but you MAY be eligible for IRA's. The Roth is good for people that can let the money sit for AT LEAST 5 years because, though you cannot deduct the money you invest through a Roth, a qualified distribution from a Roth is TAX -FREE, as the law stands now. Plus, they're jacking up the maximum amount you can put into a Roth. The Traditional IRA, on the other hand, MAY allow you to deduct your contributions (lessening your current income tax burden), but it grows 'tax-deferred'. The idea is that you're in a lower income bracket when you retire. Either one can work for you and most insitutions facilitate some sort of IRA, (Schwab, alot of banks, Fidelity) where you can invest in a whole array of things.

Sorry. This was long and wordy, but let me know if you have more questions. I'd be happy to get more specific. (not to be construed as advice, of course)
 
hey, i am XYZ, send me the money
wink.gif
 
If P/C decides or tries to charge you, i'd be happy to help you at no cost. I cannot make specific recommendations as to which companies or funds to buy (which seems like what you're after, but i'm fully educated and licensed to do otherwise).
 
seriously, you dont need any advice... If you are going to buy a home, you are going to need well over half of your money for the down payment and if you are going to furnish said home, that is going to take the rest of it. Real estate is a great investement and you have just answered your own question. To be honest, If you are going to furnish and fix-up the house at all, $20,000 following the down payment, is not going to cover it. If you end up with enough leftover money to get a Big Mack with fries if you are lucky.
 
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