My friend is married in his late 40s with 2 children, one in high school and one working. He has no mortgage, no Ira and came into an inheritance of 500K after taxes. He and his wife work.
I told him to open up both a regular and Roth Ira for him and his wife and put in the maximum each year. I also suggested that he take the 500K and split it 3 ways: 100k fixed income as an emergency fund, 200 to 250K in bond funds and 150 to 200K in stock funds.
Do you like this breakdown and do you have any fund suggestions?
Thank you,
Matt
Comments
One quick question. Do they have access to a 401k, 403b or 457 plan via their employers?
This could be a very good first place in addition to IRA's, as it will also reduce their taxable income and they may also have an employer match.
I'm sure you'll receive ample considerations from the MFO group.
More later.
Regards,
Catch
No 401k etc. available. Never had extra money to open Ira til now
Otherwise,
You know, I actually think it's probably not a terrible idea to look at rental housing with a little bit of that, either. Some kind of property that can generate income. Overall, while I think a good portion of the money should be invested, I think there are things outside the market (real estate that can generate income and other things - gems, art, whatever) that should be considered.
Some money should just be kept as cash - don't risk all that.
Real estate is indeed an option, but unless he has some previous experience in rental properties or is able to manage the property himself, this could be problematic.
My suggestion is to start out slowly. I don't want to be self-serving, but he really ought to look into working with a fee-only advisor, since it sounds like he has no experience with any kind of investing. And there may now be some planning issues, too. For example, do he and his spouse have current wills, powers of attorney, living wills, etc.? Some cash flow projections, using his current assets and the new dollars, might be extremely helpful. These, combined with SS and any pension plans, could reveal how much risk he actually NEEDS to take on with the new dollars. Maybe none at all.
He is a fortunate guy. Tell him to go slowly and thoughtfully.
Past the investment side thoughts for a bit. Bob C's comments regarding legal manners are high on the list. All of these areas should be put in place.
Additionally, a few early morning and not enough coffee thoughts; not in a priority arrangement of "to-do", as their family status is not known:
--- Is there a consideration in place for either parent or the children to continue or pursue more education, either at a technical or formal degree program. Education, in my opinion is one of the best investments for forward personal and monetary growth.
Safe monies (CD's) could be set aside for this area.
--- Are health and/or dental plans provided for the parents, and the one child at home, via their employment ? This is also a critical area that can really chew into one's money for services, let alone not receiving or having proper access to quality medical treatment. Lack of this may also be an impediment to all things related to the quality of life.
--- In addition to Bob C's comments about the legal side; one might also consider term life insurance policies as another buffer against loss and tied into an overall plan. The rates are quite low for a nominally healthy person in the parents age group.
--- If they are satisfied with their current housing location and quality and are renting, I personally would stay with this until other monetary areas are established. Past this, if they are renting in an area they consider to be unsafe or undesireable, I would also considering renting into another area of their community; with the consideration of not causing problems with a school district change for the one child still in school. Part of this, too; is the consideration of travel time to work for the parents; as well as whether the other child who is working also lives at home. You noted no mortgage. Does this mean they own their current home or are renting?
--- If they rely on their own vehicles for travel to work and otherwise; are the vehicles reliable? Newer, but not new, vehicles may be part of their plan, too. No sense in continuing to plow money into some older vehicles.
Just a few things to chew upon and may raise more questions for them and some new answers that perhaps could be noted here for a better understanding of their positon; as well as their wants versus their needs. A "to-do" list of sorts.
Not knowing their attitudes towards money and spending habits makes all of the suggestions here a bit rough around the edges.
I personally know too large of a percentage of folks who would do silly and dangerous things with such a windfall of monies. Hopefully, your friends are level headed about going forward with the best uses for the money. I expect this is the case, or you would not have posted the question here. Hats off to them and you for this consideration.
One last item that I have pursued with numerous people I have known over the years.
Start (if not in place) a most simple list of the 10 largest family budget needs using a composition book. On a daily basis, note how much was spent in particular areas and total the costs each month end to really watch where the monies are going. They don't have to list every single candy bar or other that is purchased; but the recurring items which take the most from their budget that every household encounters............food, gas, utilities, home and/or auto insurance.....etc.
More later, as other thoughts along this line fall out of my brain.
Regards,
Catch
I am almost in the same boat, early 40 years old, all mortgage and car loans/school loans are paid for. wifey and I do work and no kids.
It also depends on what your goals are - if you are someone that don't want to loose $ vs short or long term trader. I also look at the market perspectives and think what I want to get out of it long term.
For me - I put my investments into three baskets: first basket - for my 401K which is very aggressive 80% stocks/ 20% bonds and I plan to leave these 'indexing' longer term. The second basket which is my own investment money - very conservatives - about 50/50 since I don't want to loose any money. The 50% stock basket has good quality long term holding funds like permanent portfolio, vanguard star, vanguard prime cap funds. I also buy a bunch of muni bonds/corporate since I think that we maybe heading toward a slow or no growth in stocks for the next 3-7 years.
The last basket [about 20% of your total $$] you may consider buying real estates for rent w/ your private money or previous coin collections, buildings for rent, art collections, since these could be true values of what you can hold longer term,...
You probably need at 7-12 months of cash [which can be parked in money market accounts or short term CDs/short term funds < 12 months that can be easily sold]
http://online.barrons.com/article/SB50001424052748703438504577042394189481000.html#printMode
http://seekingalpha.com/article/309386-time-to-throw-away-the-4-withdrawal-rule-for-retirement
http://seekingalpha.com/article/309115-retirement-scenarios-the-good-the-bad-and-the-ugly
http://www.forbes.com/sites/rickferri/2011/11/21/withdrawal-rates-drop-as-fees-rise/
http://www.burnsidenews.com/Opinion/Columns/2011-11-14/article-2804370/The-new-retirement-and-effects-of-market-risk/1
http://www.prnewswire.com/news-releases/americans-in-the-dark-about-the-real-cost-of-retirement-131508253.html
http://seekingalpha.com/article/298138-rewriting-the-4-rule
also rono's previous retirement commentary, a must read imho
rono - retirements
Think of your retirement like a stool with legs. We all know that if your stool only has one leg, it won’t be very sturdy. Even if it has two legs, it will likely tip over. Once we get to three legs, it’ll stand on its own. With four legs, it becomes even sturdier. In addition, you want your legs to be strong.
With your retirement, the objective is to have as many legs under your own retirement stool as you can. More is better. You always want more legs. In this way, even if one leg falters or is cut off, you have other legs to support your stool. Five is better than four, six is better than five.
Examples of legs are numerous, but we can start with Social Security. Add in your Pension. How about a saving account? The equity in your house is a good one. You want to include deferred compensation and an IRA. Another leg could be an outside business – you could be an EBAY dealer, or a landlord, or have a corner store. What about having children that have gotten a good education (largely with you help, I should add). You might have a collection of widgets that have value. These ALL can become legs under your retirement stool. Which do you have and how strong are they?
SOCIAL SECURITY. Regardless of how secure you may, or may not, think the system is, in all likelihood it will be around to a greater or lesser degree. Sure, the age at which you can start drawing may increase and even benefits may be reduced. However, it remains such a key component of our society, that to some degree it will be one of your legs.
PENSION. Whether you’re going to receive a Defined Benefits (traditional) pension, or a Defined Contributions (401K) type pension, this is also another key leg under your stool. A traditional pension is nice because supposedly it’s a guaranteed income for the remainder or your life [note: this is no longer such a guarantee as in the past]. Sometimes you even have the choice of a “cash out” option where you can roll the monies into a Rollover IRA and thereafter have control over it. With a Defined Contribution (401K) pension, you also have some benefit in that it’s portable. If you decide to change jobs, you can ‘take it with you’. Normally, this is also through the process of moving it into a Rollover IRA.
SAVINGS. Hopefully, we all have some savings if nothing other than an Emergency Fund. An Emergency Fund is where you start and is normally six months worth of expenses (bills). Once this fund is established, additional savings can be invested or simply left in the bank. Either way, this money also represents another leg.
DEFERRED COMPENSATION. Many employers offer some sort of deferred compensation in addition to the 401(k), in which you have an option of also investing. Depending upon the particular plan, the limits may or may not be similar to those of a 401. You might have similar or different investment options and you also might have different withdrawal rules. However, it can become another Leg under your retirement stool.
IRA (TRADITIONAL OR ROTH). The Roth IRA is one of the nicest gifts ever made to us by the federal government. With limits, you can contribute up to a certain amount each with after-tax dollars and later withdraw everything TAX EXEMPT. There are some minor restrictions on withdrawal of the gains (not the principal), but these are minor and end at 59 ½ . After that you can take it out however you wish without worries about the taxes. This is very neat.
With the traditional IRA, if you have a lower income, you can contribute with after tax monies (the credit comes when you file your taxes). This money grows tax deferred but your withdrawals are subject to tax as income. There are even situations where it may be wise to contribute to a traditional IRA when you don’t qualify for the tax break. This is because you’ve contributed After tax money and therefore only the gain is taxable at a later date – not the principal. You would want to weigh the tax implications both now and in the future to go this route, but it should be considered in some situations.
A further note about these tax exempt or deferred IRS type of retirements savings plans (401, 403, 457, traditional IRA and Roth IRA) is that they often have drastically different withdrawal rules and tax implications. This means they provide a great deal of flexibility in how your use them for retirement . . . and flexibility is good.
HOME EQUITY. Buy a home. Period. It beats renting as you’re paying into your OWN equity, rather than the landlord’s. Over time this equity will increase and become available, should you need it, in retirement. There is even now such a thing as a reverse mortgage. This is where, in retirement, you sell your home to the bank, and continue to live in it until you die, but they pay YOU a monthly mortgage payment. However, this only works if you’ve either paid it off, or most of it, because in effect, you’re borrowing on your equity. Home equity is a great and crucial leg under your retirement stool.
OUTSIDE INCOME. Start another business on the side. Sell stuff on EBay. Become a landlord and rent out houses. With any of these, you’re establishing a second stream of income and another leg under you stool.
CHILDREN. You’ve heard the expression, “my son (daughter) - the doctor”. Well, don’t sneeze. Having kids and helping them through school so they can get good paying jobs is a form of security in your old age that can be very important. How many know of someone who had a parent or other relative move in with them? Whether you need or want to use it, it can be another leg.
In summary, you want to take an inventory of the number of legs you have under your retirement stool and how strong each of them is. Can you add another leg or two between now and when you retire? Can you strengthen any of the weaker legs you presently have?
The bottom line is that your retirement is only as secure and sturdy as you make it and having a variety of strong legs under your retirement stool, provide a diversity that can insure you against any one or more legs, getting chopped off or eliminated. Or think of it as diversifying your retirement. If diversification is good for your portfolio . . . why is it not good for your retirement?
It's good to have some cash in an emergency fund, but I wouldn't have more than 6 months of living expenses if both are working. Other cash can be strategic reserve/planning/future needs/house/car/education.
Matt