Help deciding how to invest parent's estate proceeds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Jay4546
Posts: 10
Joined: Thu Oct 08, 2020 12:13 pm

Help deciding how to invest parent's estate proceeds

Post by Jay4546 »

Hi all...

I am receiving about $150,000 as my part of the proceeds from the sale of my parent's home. Thought I would come here to see how people would suggest I invest or allocate the money. I may be boring or conservative, but my mind thinks to just duplicate the 'ole 3 fund lazy portfolio I already have with some inherited IRAs. Some data first:

My wife and I are both 54 years old and will probably retire mid 60s.
We have about $200,000 in inherited IRA in 10 year rule starting this year. In Fidelity 3-fund lazy portfolio
Savings of about $20,000 in an emergency fun in a lowish interest savings account
Pension balances are about $100,000 and payouts currently listed at about $70,000 per year at retirement
Two cars fully paid off

Debt:
$175,000 on home (3%...$1600ish per month). Current value is $360,000
$39,000 in kids parents plus student loans (7.3% but on COVID interest/payment freeze till at least 9/30/2021)

I guess I have to decide two things. What to do with the house sale cash influx and what to do with the inherited IRA yearly withdrawals. I assume it's best to take out 10% of that per year to not increase your income too much? My initial instinct is to pay off the student loans, but I guess that can wait until the late Fall since they aren't requiring payment now or charging interest. As i said earlier, my 2nd thought is to be boring and open up a Vanguard account and put the house sale money + yearly IRA 10-year rule withdrawals into that. Probably the same 3-fund US Market Index (42%), Intl Stock (18%) and US bond (40%) as my accounts with Fidelity, but maybe Vanguard to be different and see which I like better. Yes, I am aware they are all mirroring the markets, so the results would likely be very similar. That all sounds reasonable, but I keep thinking it's not very original. We wife is not currently taking advantage of 401K, so maybe open one and max out as well.

I think that covers it. Any thoughts or ideas?
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Help deciding how to invest parent's estate proceeds

Post by retired@50 »

I'd certainly suggest paying off the student debt before any interest starts accruing again.
From what I've heard, interest starts accruing again on Oct. 1, so I'd be sending in the money in September if I were you.

Opening and maxing out the wife's 401k sounds like a good idea too.

See this link for more on investment priority
https://www.bogleheads.org/wiki/Priorit ... nvestments

Also, see this link for tax-efficient fund placement
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Help deciding how to invest parent's estate proceeds

Post by delamer »

Can you clarify as to what the”pension balances” are? How are they related to the $70,000 payouts?

What are your total liquid assets?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
HomeStretch
Posts: 11418
Joined: Thu Dec 27, 2018 2:06 pm

Re: Help deciding how to invest parent's estate proceeds

Post by HomeStretch »

Rather than mirroring the same asset allocation in each account, consider tax-efficient fund placement across your portfolio. Hold your fixed income allocation in your Inherited IRA to slow its growth and, in turn, minimize the RMDs. Hold equities in your Taxable account for tax efficiency. . This BH wiki page be helpful:
https://www.bogleheads.org/wiki/Tax-eff ... _placement
Topic Author
Jay4546
Posts: 10
Joined: Thu Oct 08, 2020 12:13 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Jay4546 »

Ok forget the pension balance. I probably shouldn't have included that and just focus on what is at hand right now. We don't really have any liquid assets except for the $20-25,000 in the savings account for emergencies.
Rudedog
Posts: 629
Joined: Wed Aug 01, 2018 3:15 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Rudedog »

Double your emergency fund and max out wife 401K, if employer offers a match so much the better. Pay off debt with any $ left.
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Help deciding how to invest parent's estate proceeds

Post by delamer »

Jay4546 wrote: Wed Jun 30, 2021 3:36 pm Ok forget the pension balance. I probably shouldn't have included that and just focus on what is at hand right now. We don't really have any liquid assets except for the $20-25,000 in the savings account for emergencies.
Originality in investing is overrated. :)

Payoff the student loan. Invest in your wife’s 401(k) if there’s a match particularly.

Decide what overall allocation you want for your retirement funds. As Homestretch suggested, put as much as you can of your stock allocation into the taxable. Put as much as possible of your bond allocation into the IRA. Those are for tax efficiency reasons. If you can’t fit all your stocks in taxable or all your bonds in the IRA, that’s OK.

Remember that the IRA very likely will have some growth over the 10 years. Meaning that taking 10% of the initial balance for 10 years probably won’t deplete it as required.

It might make sense to take 1/10th of the balance in Year 1, 1/9th in Year 2, 1/8th in Year 3, etc.

If you could predict future marginal tax rates (and account balances) it would make this simpler. If in Year 9, for example, your rate will be 12% vs. 22% today, then maybe you’d want to reduce withdrawals today.

Keep an eye on the balance and your rates, and adjust as needed as the years go by.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Dantes
Posts: 430
Joined: Wed Feb 25, 2015 5:38 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Dantes »

Paying off the student loans is obvious. And since you have no tax deferred assets other than the inherited IRA(s) (?) then using assets to fully fund a 403B seems like a good idea.

Since you are mid-fifties and planning to retire mid-sixties Is it possible one or both of you would retire before the 10 years for the IRA(s) is reached? If so you might have a low income year when it might be advantageous to defer withdrawal the bulk of the IRA.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Watty »

Jay4546 wrote: Wed Jun 30, 2021 2:51 pm Any thoughts or ideas?
Here is what I would do;

1) As others have said paying off the student loan is an easy choice. Any interest earned by holding the money in something like a savings account for a few months until the loan freeze ends this fall will be trivial so I would just pay it off now.

2) Have your wife set up her payroll withholding so she will max out her 401k each year. Make an identical withdrawal from the inherited IRA each year. These should usually offset each other and net out to zero on your taxes. In round numbers for example she could have $1,500 from her paycheck put into the 401k each month and you could also withdraw $1,500 a month from the inherited IRA for your living expenses.

3) After paying off the student loans you will have about $135K left from the sale of the house. I would call your lender and ask of they will "recast your mortgage(Google this) if you make a large prepayment. They are not required to do this but they usually will for a couple of hundred dollar processing fee of even for free. The way this works is that if you pay your loan down by 75%(or whatever makes sense) and do a recast then the required monthly payment will be reduced by the same percentage. This can be important if something happens like you are laid off or interest rates go up a lot. You could then keep making the same mortgage payment as before and have the house paid off in a few years. There are all sorts of opinions about paying off a mortgage early or not but that is what I would do if I was in my mid 50s.

4) It is just my pet peeve but I hate it when people post about having a lot of money but they don't drive relatively safe cars. Car safety has improved a lot especially since 2012 and a lot of new advanced safety features have become standard equipment in the last few years. I am not saying that you should buy an expensive high end car with all the latest safety bells and whistles but you should consider if your current cars are relatively safe and consider replacing them if you could buy a lot safer car for a reasonable price.
Topic Author
Jay4546
Posts: 10
Joined: Thu Oct 08, 2020 12:13 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Jay4546 »

Wow...lots of good info already. I will read up and probably have a few follow up questions. THANKS!
Topic Author
Jay4546
Posts: 10
Joined: Thu Oct 08, 2020 12:13 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Jay4546 »

Thanks I read through all the posts. Looks like I will do this in order:

1) Pay off all student loans

2) Open a retirement fund for my wife. She is a teacher, so it looks like it wouldn't be a 401K but a 403B. She doesn't go back to work until September, so it seems she can start it then since it's through payroll deductions and not lump sum deposit if I'm reading that right. I don't know if be able to max out the 2021 max amount with only 4 months of deductions, but at least we'll start it up.

3) Figure out to do with what is left from the house sale money. We only have a savings account and an inherited IRA account right now. It seems like we'd choose between setting up another traditional IRA vs Roth IRA vs brokerage account or a combination of those. Have to see what the max you can contribute to those are or how many we can have per person or married couple.

Thanks for all your advise ! I'll continue to read on.
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Help deciding how to invest parent's estate proceeds

Post by retired@50 »

Jay4546 wrote: Mon Jul 05, 2021 11:32 am 2) Open a retirement fund for my wife. She is a teacher, so it looks like it wouldn't be a 401K but a 403B. She doesn't go back to work until September, so it seems she can start it then since it's through payroll deductions and not lump sum deposit if I'm reading that right. I don't know if be able to max out the 2021 max amount with only 4 months of deductions, but at least we'll start it up.
It could be possible to max out the 403b in 4 months.

This typically depends on what percentage she chooses to have deducted from each paycheck, and what the maximum percentage she is allowed to deduct from each paycheck.

When setting up the account, presumably you'll be using a website from the 403b custodian. When you're making the initial decisions, you can simply try to type in a large percentage number (like 50%) in the box. If the web interface allows it, then you should be fine. With the tiny paychecks that result, you can make up any difference by spending some of the extra money from the house.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
Jay4546
Posts: 10
Joined: Thu Oct 08, 2020 12:13 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Jay4546 »

UPDATE AND PATH FORWARD (of course more questions)

I utilized a lot of the information learned here and already made a few decisions and will list those and also what couldn't be done and why.

* We paid off all student loan debt first
* My wife opened a 403B at her job (school). She can not start deducting and funding that until September, so we have only 8 bi-weekly checks to try to get close to funding the allowed $26,000 (since she is over 50). I offset the lack of salary during this time and to be able to pay our bills we will hold on to a lot more current cash in the emergency fund. Or I could also take bi-weekly deductions from our inherited IRA to offset since that will need to be emptied in 10-years.
* My wife and I both opened ROTH IRAs and we both funded the $7,000 maximum (haven't done asset allocations yet...questions to follow).
* Opened a brokerage account but haven't funded it...obviously no asset allocations yet.
* Since my wife's job allows it, we can also open a 457 account in addition to her 403b.

So after all of this we will have about $60,000 in cash right away, have about $1,000 extra every month since we don't have to pay off any of the loans we paid off, and also have the RMD from the $200,000 to take out and probably reinvest over the 10 years. So the question now becomes "where do we put the money in all these new accounts and what allocation?"

The only place I have things in a retirement account now is the inherited IRA with a allocation of 42% us stock market index 18% international market index and 40% bonds. My boring mind thought I would do the EXACT same in all accounts. The more I read the more it seems people say you can end up with those same percentages over all accounts when you add them together, but to place them differently in different accounts to be more tax efficient? For example Us market index funds more in the tax advantaged accounts since they have more growth potential if I have that right? I guess the opposite is bond funds since they don't grow all that much, do they go in the taxable accounts then? I have the option of using 403b, ROTH IRAs, brokerage account, and possibly 457 account and just trying to figure out which funds would go where and still end up with that same 42/18/40 allocation when I add them all together. Not sure if I'm explaining that right.

Answering a few other comments:

* Re couldn't re-cast our mortgage since it is a VA loan
* We did recently buy a new car last year and I totally agree the newer safety features in car's today are TOTALLY worth that investment.

THANKS EVERYONE !
HomeStretch
Posts: 11418
Joined: Thu Dec 27, 2018 2:06 pm

Re: Help deciding how to invest parent's estate proceeds

Post by HomeStretch »

Jay4546 wrote: Fri Jul 23, 2021 10:54 am * My wife and I both opened ROTH IRAs and we both funded the $7,000 maximum (haven't done asset allocations yet...questions to follow).
Consider holding 100% equity in the Roth IRAs for highest expected growth, tax free. You can hold more fixed income in another account in order to maintain your overall asset allocation. The Inherited IRA is a good place to hold more fixed income to slow the growth and, in turn, reduce the RMDs you are currently taking.

This BH wiki page on tax-efficient fund placement across different types of accounts may be helpful:
https://www.bogleheads.org/wiki/Tax-eff ... _placement
So after all of this we will have about $60,000 in cash right away,
Consider I-Bonds (if you don’t currently purchase them) in a TreasuryDirect account. Newly-purchase I-bonds have a rate of 3.54% for the first 6 months. The bonds have inflation protection and are Federal tax deferred and state tax exempt.
https://www.bogleheads.org/wiki/I_savings_bonds

Additional principal payments on your 3% mortgage is another option to consider.
Last edited by HomeStretch on Fri Jul 23, 2021 11:07 am, edited 1 time in total.
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Help deciding how to invest parent's estate proceeds

Post by retired@50 »

Jay4546 wrote: Fri Jul 23, 2021 10:54 am So the question now becomes "where do we put the money in all these new accounts and what allocation?"

The only place I have things in a retirement account now is the inherited IRA with a allocation of 42% us stock market index 18% international market index and 40% bonds. My boring mind thought I would do the EXACT same in all accounts. The more I read the more it seems people say you can end up with those same percentages over all accounts when you add them together, but to place them differently in different accounts to be more tax efficient? For example Us market index funds more in the tax advantaged accounts since they have more growth potential if I have that right? I guess the opposite is bond funds since they don't grow all that much, do they go in the taxable accounts then? I have the option of using 403b, ROTH IRAs, brokerage account, and possibly 457 account and just trying to figure out which funds would go where and still end up with that same 42/18/40 allocation when I add them all together. Not sure if I'm explaining that right.

THANKS EVERYONE !
You can mirror all your accounts at 60/40 in each one, but that typically isn't the most tax efficient solution.

Your thinking about where to put stock funds and bond funds is backwards, due to the lower tax rates on stock dividends and capital gains and the higher tax rates on bond interest. Bonds belong in tax-deferred accounts like 401k/IRA/Inherited IRA and stock index funds can go anywhere, but should especially used in taxable accounts and Roth accounts.

See wiki link on tax efficient fund placement for details. https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Jablean
Posts: 872
Joined: Sat Jun 02, 2018 2:38 pm

Re: Help deciding how to invest parent's estate proceeds

Post by Jablean »

At your age, inexperience with investing, and fairly low number in your retirement accounts then I would go with the "make each account mirror the others with the same allocation splits".

Unless you are willing to get into the weeds with allocations and more or less religiously predict your taxes each year I think you will tie yourself in knots trying to allocate according to each accounts tax advantage and refiguring your allocation again every year. If you spend the next five years starting to love spreadsheets then I'd change my recommendation. But for now, go with what you know and what's easy as I don't think for your situation doing the more complicated will be that beneficial.
Post Reply