Help with inheritance...

[ScrimpAndSave]

My friend inherited about $200,000 and she needs some help. I told her to go to a financial advisor...but she seems to want to figure things out on her own and asked for my advice.

This is her situation. She is a teacher like me and has a pension. She is 27 years old. She rents and does not own - but does not plan on buying a home in the near future.

This is what she thinks she should do:

Pay off car/credit cards
$10,000 for 2009 ROTH and 2010 ROTH (And max it out every single year)
$10,000 Emergency Fund (Local Bank)
$5,000 New Car Fund - ($250 a pay goes to a different bank account in the local bank. By spring 2011 she wants to be able to pay cash for a new car.)
All excess $ goes to new Mutual Fund

Any other advice I can give her? I do not know a lot about investing. Our work has a 403b but not a 401k...not sure if she should try to max out that as well...

Thank you!

[jasonnoguchi]

Why won't she buy a home? I really don't understand. First of all, it transforms the monthly rental EXPENSE into a single ASSET unless local property taxes, maintenance and utilities makes it more expensive to own. Secondly, even if you don't live in it, you could always rent it out for extra income. Want a new car? let the rental income on the house pay for it! Why put good equity into a bad expense item?

[disneysteve]

jason - home ownership is not right for everyone and not at every stage of life. I can think of lots of reasons why a person may not want to buy a home. When I was 27 and single, I had zero interest in buying a home. I didn't become a homeowner until I had been married for 2 years and was sure I was settled in this location.

SAS, if she isn't contributing to the 403b, I'd certainly look at that. The tax advantage is the same as with a 401k even if there is no employer match.

Besides retirement and a new car, does she have any other significant financial goals? Are there any charities she'd like to support with some of this money? Beyond that, I'd put together a balanced portfolio in a taxable account. That could be as simple as 2 funds: total stock market index and total bond market index. Maybe 80/20 or 70/30 depending on her other investments and risk tolerance.

[ScrimpAndSave]

Thank you Disneysteve,

I will talk to her about 403b's.

[EEinNJ]

That's a lot of money for someone her age. Not enough to be "rich" or financially independent, but certainly financially secure in the long term IF she's careful. The plan you have listed shows that she is, not someone who will blow it on cars, trips, gifts, clothes, toys, etc.

Coming into money (not as much, not as young) myself, I realized it was both an opportunity and a responsibility, so I educated myself that much more on investing and personal finance. So I would tell her to study up.

I think the most important thing, besides the basics of paying off debts and having emergency money, is to consider goals. As a young person, a house can certainly wait, but it would be great to set aside a big downpayment. How about marriage, a wedding, kids, college-these are all important, expensive milestones. With that amount of money, she's all set even if it's invested very conservatively. That would be my recommendation- invest it slowly, conservatively, and consider time frames of 5, 10, and 20 years for allocating it.

[ScrimpAndSave]

I guess if she maxed out her ROTH IRA and maxed our her 403b (which would ne like $16,500 this year) every year until retirement (age 65), she would be doing great - right?

[disneysteve]

I guess if she maxed out her ROTH IRA and maxed our her 403b (which would ne like $16,500 this year) every year until retirement (age 65), she would be doing great - right?

Sure. That would be $21,500 for 2010. How much does she earn? That would be 20% of $107,500. For her, it would probably be more like 40+%. She'd be able to retire at a very young age.

[ScrimpAndSave]

She makes a little over $50,000 and plus she has the same teacher's pension as me. She is going to have a lot wrapped up into a mutual fund...and she is not really sure how diversify it. I don't know a lot about investing (which is why I told her to see an actual financial advisor). But I just mentioned that many she could put a chunk into that mutual fund and just make sure that every single year she maxes out both her Roth IRA and her 403b.
I'm assuming that although she has a while until retirement, she should look into more conservative funds. This money is from her father and he passed away last June. As of right now, $125,000 is in an IRA that she has inherited from her father (she has to take out all of this within 5 years) and then she is getting a little over $100,000 from the estate (which is tax free).
I figured that after having $5,000-$10,000 emergency fund in the bank, she could keep a chunk in the mutual fund (for wedding/kids/Europe trip)...and she can take that money out as she wants. She doesn't love the idea of tying some up in retirement funds - but I think it would be invaluable if she is able to max out her Roth IRA and 403b for a long time...not sure when and if she will exceed the income limitations of the Roth IRA.

Thanks all!

Kara

[disneysteve]

Even if she doesn't want to retire early, I would still do this. Contributions to a Roth (not earnings, just contributions) can be withdrawn at any time for any reason without penalty so she can take advantage of tax-free growth and use that money down the line for something like buying a house or new car or whatever.

[ScrimpAndSave]

Thanks Steve.

I am looking to 403b information provided by my school. It gives us 4 options:

Standard Interest Annuity (Stable)
Equity Index Annuity (Stable to Low Moderate)
Variable Annuity (Moderate to Aggressive)
Mutual Funds (Moderate to Aggressive)

Is there a certain choice that you would suggest?

[disneysteve]

Thanks Steve.

I am looking to 403b information provided by my school. It gives us 4 options:

Standard Interest Annuity (Stable)
Equity Index Annuity (Stable to Low Moderate)
Variable Annuity (Moderate to Aggressive)
Mutual Funds (Moderate to Aggressive)

Is there a certain choice that you would suggest?

DO NOT do anything with ANNUITY in the name. It is a disgrace that they give these choices at all. All non-profits do it: schools, hospitals, etc. An annuity has absolutely no place in a tax-sheltered retirement plan. I would look into the mutual fund options. If you can get more info and post it (in a new thread would be best) I'm sure folks will comment.

[jIM_Ohio]

The initial advice to pay down debt was good and create a 6 month emergency fund was good.

I would question doing anything else with the money for at least 6-12 months. Have your friend put the money in a CD where she cannot access it for 6 months, and research making decisions.

In general the best way to handle large sums of money is to not spend them too fast or commit to anything in short term.

No new house
No new car
Not even creating a car fund IMO
keep all the money in one account, do not touch the money, then in 6-12 months make a well informed decision.

For example, if the spending habits did not change, she might find herself in 20k of cc debt
For example she might decide earlier retirement is a better avenue.

[snafu]

What a good friend you are to genuinely seek help for your friend/colleague. Since her teaching contract is secure, I recommend only a couple of months income in a Money Mkt a/c. With 5 yr. draw-down time frame for $125.K, Estate IRA, is there any tax benefit to Dollar Cost Averaging[DCA]? How is the sum currently invested?

I know from experience that Dollar Cost Averaging into a Vanguard type, low MER Index Equity Fund, Index Bond Fund and International Fund has the potential to promote her into the Millionaire Next Door if the income generated is re-invested into the program.

Should she wish to withdraw sums...they are not 'locked-down.' As she becomes more knowledgeable about investing, sums can move through categories she likes in percentages she feels comfortable. When I started with merely savings, I wrote out a plan which designated 10% to International, age minus 100 to Equity, the balance to a 5 star Bond Fund. This has been successful beyond my wildest imagining. I've messed with it, tweaked it, took 'flyers' from time to time and even made a couple of bad decisions which I learned from.

[jasonnoguchi]

Buying a property isn't always for "settling down" somewhere. I have properties in over 3 major cities in the world and settling down isn't part of my plan. I have been "collecting" real estates since I was only 22 years old. Now, these real estates produce more income in rental than I need in monthly expenses (not to mention that most of them appreciated about 50% since I bought them). Properties are great income generation and appreciation vehicles especially after a major recession (and yes, I only buy properties WHOLE. No mortgages. OP's friend can absolutely do the same with the money she got now).

[disneysteve]

jason, that's true, but again, it isn't everybody's desire to be a landlord. Not everyone is cut out for dealing with that. Plus, lots of real estate investors lost their shirts in the market downturn so buying real estate is no guarantee that you'll make money, at least not in the short term.

It sounds like playing the game has worked out very well for you and that's great, but lots of people aren't interested in playing that game. I have no desire to be a landlord personally. I do invest in real estate through REITs just not directly where I'm the one actually responsible for managing the property.