Advice on investing inheritance

[DougK]

My grandmother passed away recently, and my mother inherited more money than she was expecting. I'm the only one in our family who invests, so she called me and asked for advice on investing.

Personally, I invest based on what I've read on Bogle and Ferri. Pretty much identical to Ferri, actually. But I'm not sure I should advise my mother to invest her inheritance the same way I would invest it myself. We have not discussed exact amounts at this point, but based on conversations, I'm assuming somewhere between 200K-400K. Unfortunately, she has already spoken with an investment person, but she has not committed to anything yet. She also, unfortunately in my opinion, put maybe as much as 100K in 6, 12, and 18 month CDs already.

My mother lives on a fixed retirement income, I'm guessing 40K a year, and she has never invested. She is in her late-60s and single. She owns her home, but I'm guessing she still has as much as 20-25 years on her mortgage, probably very small payments, and no other debt. Her health could be an issue, as she has smoked for the past 25-30 years.

My initial thinking was to advise her to put about 20K-30K in her savings account, and invest the rest in index funds through Vanguard. She is very wary of the stock market, so she would probably not consider anything more than a very, very simple portfolio. My thinking is maybe:

60% Total Bond Market Index
40% Total Stock Market Index
(Minus 6K annually into IRA with the same allocations.)

I would appreciate any advice on this. She has indicated she may want to invest in more than just CDs, but at the same time, she is worried about her own financial future with regard to future medical bills, etc.

[Aptenodytes]

The main thing to keep in mind is what she is comfortable with, and what her goals and worries are. Don't rush anything. Wait at least two full months to go by before you get into things in a serious way, unless she specifically tells you she wants to move faster.

Where you go with specific investments depends entirely on what she wants to achieve, what she's worried about, and what kinds of plans she would be comfortable with and what kinds would be confusing or distressing.

If there's an investment adviser she likes offer to go with her to a session -- don't jump straight to talking her out of the idea altogether.

Nobody likes being told they are making foolish decisions. None of us are so wise we can be sure we know what is best for someone else. Tread easy and keep her peace of mind foremost among your goals.

[dalerobk]

If she's wary of the stock market, simply encourage her to pay off the mortgage first. That will help her budget huge. I would then suggest a really conservative mix for the rest--maybe even as little as 30% in total market index. I think putting a signficant part of the remaining money in 5-year cd ladder isn't really that bad for someone like her. It's not what I would do, but if she's really risk-adverse and doing OK already, paying off the house and putting most of the money in cds isn't really that bad.

[archbish99]

Agreed about encouraging her to pay off the mortgage -- that will give her much lower monthly expenses and more peace of mind, plus it's a guaranteed return. Risk premium is all well and good, but returns with no risk are very nice too.

If she wants a simple portfolio, look at some of the Vanguard all-in-one funds. The "Target Retirement Income" fund, for example is simple for her -- one fund in one account, all is done. Internally, though, it's:
- 45% Total Bond Market
- 21% Total Stock Marke
- 20% TIPS
- 9% Total International Stock Market
- 5% Money Market

A very nicely balanced conservative portfolio.

[Watty]

Agreed about encouraging her to pay off the mortgage -- that will give her much lower monthly expenses and more peace of mind, plus it's a guaranteed return. Risk premium is all well and good, but returns with no risk are very nice too.

If she wants a simple portfolio, look at some of the Vanguard all-in-one funds. The "Target Retirement Income" fund, for example is simple for her -- one fund in one account, all is done. Internally, though, it's:
- 45% Total Bond Market
- 21% Total Stock Marke
- 20% TIPS
- 9% Total International Stock Market
- 5% Money Market

A very nicely balanced conservative portfolio.

+1

That was my thought too.

The wild card is her mortage. It could be that if she has had it for a while that it might not be at a good interest rate and paying it off would be an easy decision. unless there is a special situation it it hard to justify a 6% mortage while you have money in 1% CD's

If she is up to it you might get a copy of "The bogelheads guide to investing" and go though the relevent parts of it with her.

http://www.amazon.com/s/?search-alias=a ... Bogleheads

It is very readable.

[Avo]

FWIW, I agree with the Target Retirement Income suggestion. If she has several funds, and is not used to investing, then she's likely to be unhappy seeing one of her funds drop when stocks hit a bear market. That makes her a target for a financial salesperson, maybe someone who's a "friend" of one of her friends. One day you'll go see her, and find out that all her money is now in a variable annuity with a "guaranteed" payout. Which she'll think is much better than your plan, which was not "guaranteed".

[Duckie]

I agree with the others. She should pay off her mortgage and put the rest of the inheritance into the Vanguard Target Retirement Fund. And as for the annual $6K going into an IRA, unless she has a job she can't contribute to an IRA.

[dharrythomas]

She cannot put money in an IRA unless she has earned income. Pension income is not eligible.

It is probably not unfortunate that she invested some of the money in 6-12-18 month CDs. It won't earn much but it will keep her from doing anything rash. Look at it as buying time to think.

Good Luck

Harry

[Anon1234]

1) Start by setting a reasonable expectation of what the money can do, either paying off debt or creating an annual income stream (and how the former effects (affects?) the latter).
2) Agree on a goal, write it down (start an IPS).
3) Devise a portfolio that should support the goal, add it to the IPS. Talk about simplicity.
4) Explain what has happened to a portfolio of that allocation in the past; prepare her to "stay the course."
5) Decide who will manage the portfolio and explain what that means.

I agree the Target retirement income fund seems like a good first guess. Do offer her some reading materials. I like the vanguard "investing truths".

Analyze paying off the mortgage. Compare the tax-adjusted rate to what you expect from the portfolio. The mortgage could end up being a nice inflation hedge. Especially if it's small in comparison to the portfolio it's not much risk.

[Default User BR]

BTW, putting it in CDs isn't a bad idea at all. It's a good idea to do nothing particularly rash with a windfall. This gives her a chance to think about options.



Brian

[DougK]

Thanks for all the input, everyone. Very good advice here, as usual.

I hadn't given much consideration to paying off her mortgage, since it's probably no more than 40K, but that makes complete sense. I'll bet it is financed at 6% or around that. That will give her piece of mind. And I guess you're right about the CDs, too. It's probably better that she did that as opposed to handing the entire inheritance over to the financial guy, which might have happened if I hadn't randomly discussed investing with her once or twice during phone conversations over the past couple years.

I also agree with the target retirement fund. I'll take a look at the most conservative one Vanguard offers and see what she thinks about it.

Thanks again for the advice. Very helpful.