What would you do with Inheritance?

TNChick · June 2015

I have never posted here before (I used to be fairly active on the bump before it became a ghost town), but I thought it might be a good place to ask. My husband's grandmother passed away earlier this year. We were told by her estate manager that we are receiving close to $400,000 after taxes. We have no idea what to do with this money. We are torn between paying off our home (we owe around $310,000), doing some home improvements, and investing the rest or investing all of it in a mutual fund. We have no other debt (student and car loans were paid off prior to our children's birth). Our 401k, IRAs, and our children's 529's are a little weak and could use a huge boost. Would you see a financial manager? How would you proceed?

brij2006 · June 2015

I would pay off your house, then toss the remaining amount toward a fully funded emergency fund (if you don't have one already), and then the investments and 529.

Then I would start saving up to do remodels and things like that in cash.

TNChick · June 2015

But could I earn more in a mutual fund than I would save in mortgage interest (4%)?

TNChick · June 2015

We do have a fully funded e-stash. But our 401Ks are lower than I would like since we are nearing 30.

brij2006 · June 2015

The thing is, once your mortgage is paid off, then you have that much more in your monthly budget to be able to put toward a 401k and the 529 consistently.

TNChick · June 2015

That is true. Thanks. We were leaning toward option 1, and then using our monthly income to ramp up investments.

hoffse · June 2015

First, find out if the taxes are going to be your responsibility or if they are coming out of the estate before it gets distributed.

If you are truly clearing around $400K, I would definitely boost the IRAs and get caught up on your retirement first. You could simply invest some portion of it in a regular investment account and mentally earmark for retirement, with the intention of just not touching it before then.

I would then boost the 529's.

Not going to lie, I think I would also set something aside for at least one really memorable family vacation when kids are older and can remember/appreciate the experience. Of course this isn't as important as the other things you've mentioned, but $5-$10K could go a really long way toward something like that in the future, and it's a pretty small percentage of the total inheritance amount. I personally value that kind of thing a lot though - you might not make it as high of a priority.

I would probably use whatever is left (if anything) toward wealth building. I might pay down some bit of the mortgage, but I'm not particularly anti-mortgage-debt, as long as it's low interest. That's just me, though.

If you want to put something toward the house, you might think about paying down whatever you need to pay down in order to refinance into a 15-year mortgage at a lower interest rate (with a comfortable monthly payment). That might be the sweet spot for me if you are in a 30-year right now. If you're already in a 15-year mortgage, I would probably just wealth build.

Just my $0.02. None of this is legal advice.

hoffse · June 2015

One other thought - if you decide to do home improvements, don't lose sight of what improvements make sense for the overall value of your house/neighborhood just because you suddenly have money you can burn on it.

Also think about whether this is your forever house. If it is, then you might want to spend a little more. If not, I would definitely still be considering what you might get back out on resale and be a little strategic with it.

als1982 · June 2015

I would pay off your home and max out ROTHs for each of you. From there, I'd put some in a 529. (Do these have annual limits? I don't have kids so don't know much about them...) Anything left I'd put in a mutual fund. After that, increase your 401k contributions to include whatever you were paying on your mortgage before OR if you're unhappy in your current jobs, use it as an opportunity to transition into something more fulfilling.

TNChick · June 2015

Those are good thoughts. I thought that if we paid off the mortgage, it would free up $2,000 a month for wealth building. But if something were to happen to my husband's job (he is the breadwinner), then we wouldn't have to panic. It seemed like a good safety net, and would still give us the opportunity to build our retirement nest.

And, I am a huge vacation person, so I love the idea of planning a big fun one. My kids are 2 and 4, so it might be a few years before they are old enough for a huge one (we did Disney in the spring).

TNChick · June 2015

We both love our jobs, but I would love to get a doctorate (I have a master's). So, we also considered using some of the money for that. But the pay increase is hardly worth the investment. It would be for personal fulfillment only.

hoffse · June 2015

TNChick said:

Those are good thoughts. I thought that if we paid off the mortgage, it would free up $2,000 a month for wealth building. But if something were to happen to my husband's job (he is the breadwinner), then we wouldn't have to panic. It seemed like a good safety net, and would still give us the opportunity to build our retirement nest.

And, I am a huge vacation person, so I love the idea of planning a big fun one. My kids are 2 and 4, so it might be a few years before they are old enough for a huge one (we did Disney in the spring).

Yeah I hear you. $400K is a lot of money all at once - enough to make some very big changes. But it's also not so much that you can necessarily do ALL of the things you mentioned, so you guys need to prioritize.

Not sure how much you've lurked on this board, but most of us tend to be either very anti-debt (all forms) or less debt-adverse and willing to drag things out a bit. So we give advice based on those viewpoints. I personally fall in the latter camp. That's a very personal decision and it's one you and your H need to make together.

I forgot about the e-fund, but that's a good point. With $400K, I would make sure to get that knocked out if you haven't already. 6-8 months expenses is a pretty good safety net for most people.

brij2006 · June 2015

TNChick said:

Those are good thoughts. I thought that if we paid off the mortgage, it would free up $2,000 a month for wealth building. But if something were to happen to my husband's job (he is the breadwinner), then we wouldn't have to panic. It seemed like a good safety net, and would still give us the opportunity to build our retirement nest.

And, I am a huge vacation person, so I love the idea of planning a big fun one. My kids are 2 and 4, so it might be a few years before they are old enough for a huge one (we did Disney in the spring).

That's the beauty of having zero payments whatsoever. You can build wealth, give to things you're passionate about, and save to do things like vacations, remodeling, newer vehicles, etc.

If you really want to beef things up for the next 5-10 years until you build more wealth, you can always take out a term life insurance plan for 10-12x his income to have just in case.

TNChick · June 2015

hoffse said:

TNChick said:

Those are good thoughts. I thought that if we paid off the mortgage, it would free up $2,000 a month for wealth building. But if something were to happen to my husband's job (he is the breadwinner), then we wouldn't have to panic. It seemed like a good safety net, and would still give us the opportunity to build our retirement nest.

And, I am a huge vacation person, so I love the idea of planning a big fun one. My kids are 2 and 4, so it might be a few years before they are old enough for a huge one (we did Disney in the spring).

Yeah I hear you. $400K is a lot of money all at once - enough to make some very big changes. But it's also not so much that you can necessarily do ALL of the things you mentioned, so you guys need to prioritize.

Not sure how much you've lurked on this board, but most of us tend to be either very anti-debt (all forms) or less debt-adverse and willing to drag things out a bit. So we give advice based on those viewpoints. I personally fall in the latter camp. That's a very personal decision and it's one you and your H need to make together.

I forgot about the e-fund, but that's a good point. With $400K, I would make sure to get that knocked out if you haven't already. 6-8 months expenses is a pretty good safety net for most people.

Exactly! It is so much and not enough all at the same time. We have some serious thinking to do.

hoffse · June 2015

Also, not necessarily legal advice, but this is life advice I've heard our estate planners give to people who have just inherited a lot of money:

Before you do anything, let that money sit in your bank account for 30 days and get used to seeing it there. Force yourself to adjust to having that much money, and you aren't as likely to make a rash decision about how you spend it.

No joke, one partner I work for talks all the time about a client of his who won a multi-million dollar jackpot at one of those linked casinos in MS. He was in his 60's when he won. He managed to spend all of it and filed for bankruptcy before he died.

Obviously you guys aren't going to do that (!) but it's a good story to think about when you are contemplating a windfall this big.

brij2006 · June 2015

TNChick said:

hoffse said:

TNChick said:

Those are good thoughts. I thought that if we paid off the mortgage, it would free up $2,000 a month for wealth building. But if something were to happen to my husband's job (he is the breadwinner), then we wouldn't have to panic. It seemed like a good safety net, and would still give us the opportunity to build our retirement nest.

And, I am a huge vacation person, so I love the idea of planning a big fun one. My kids are 2 and 4, so it might be a few years before they are old enough for a huge one (we did Disney in the spring).

Yeah I hear you. $400K is a lot of money all at once - enough to make some very big changes. But it's also not so much that you can necessarily do ALL of the things you mentioned, so you guys need to prioritize.

Not sure how much you've lurked on this board, but most of us tend to be either very anti-debt (all forms) or less debt-adverse and willing to drag things out a bit. So we give advice based on those viewpoints. I personally fall in the latter camp. That's a very personal decision and it's one you and your H need to make together.

I forgot about the e-fund, but that's a good point. With $400K, I would make sure to get that knocked out if you haven't already. 6-8 months expenses is a pretty good safety net for most people.

Exactly! It is so much and not enough all at the same time. We have some serious thinking to do.

It's definitely a difficult thing to wrap your head around. Unfortunately I am in the same situation as you right now, but will be receiving $345,000. It's an ungodly amount of money for us, but in the same sense there are so many things we have on our list that we want to buy.
We live by the teachings of Dave Ramsey, and that is to get 100% debt free then Live, Give, and Save. He has a book called "The Legacy Journey" that has helped us to figure out what we need to do to keep this legacy going from our deceased, and how to leave a legacy of our own.

Another thing my H and I have done is we gave ourselves 2 weeks to each list out things we want to buy, what we want to save for, and where we want to give. This way we had time to think about it. Then we sat down and read our lists to each other. Anything that matched up, we put on our "priority" list (like fully funding 2 roth IRA's for 2015, and starting our DD's 529).

It gave us things to really think about and figure out where to spend, give, and save some of this money.

smerka · June 2015

I would seriously consider putting all of the money somewhere you can't touch it for like 6 montha. A CD maybe? Then I would think about what you want your life to look like? Retire early, bigger house, less work, travelling, volunterring, etc. then I would sit down with some professionals and work out a plan for when the six months is over. If setting aside money for retirement is important, you can only put $5,500 per person per year into a IRA. And 401ks top out at $17,500 (? Check on that one) per year per person. You could invest a certain portion into mutual funds and move it as needed each year.

TNChick · June 2015

Thank you for mentioning giving. We need to write in an amount for that as well.

brij2006 · June 2015

hoffse said:

Also, not necessarily legal advice, but this is life advice I've heard our estate planners give to people who have just inherited a lot of money:

Before you do anything, let that money sit in your bank account for 30 days and get used to seeing it there. Force yourself to adjust to having that much money, and you aren't as likely to make a rash decision about how you spend it.

No joke, one partner I work for talks all the time about a client of his who won a multi-million dollar jackpot at one of those linked casinos in MS. He was in his 60's when he won. He managed to spend all of it and filed for bankruptcy before he died.

Obviously you guys aren't going to do that (!) but it's a good story to think about when you are contemplating a windfall this big.

Yes! Yes! Yes! I actually called into the Dave Ramsey radio show and asked him what to do with the money. He said to pay off all debts, but take the remaining amount and put it into a savings account (even though it doesn't make jack squat) for 6 months. Let it sit there for a while, and log in to see that bank account number at least once a week. He stated that it helps you be more intentional about what you will be spending it on, because you will watch that number go down as you spend it.

His other reasoning for that was this way you aren't spending emotionally. The emotional me would like to pay everything off, give a bunch away, then travel with my family for a month and see things we wouldn't normally see and enjoy our time together (the family member we lost was a very tragic situation). But I know that's the fastest way to blow through the money and have nothing to show for it.

KAdams767 · June 2015

TNChick said:

Those are good thoughts. I thought that if we paid off the mortgage, it would free up $2,000 a month for wealth building. But if something were to happen to my husband's job (he is the breadwinner), then we wouldn't have to panic. It seemed like a good safety net, and would still give us the opportunity to build our retirement nest.

And, I am a huge vacation person, so I love the idea of planning a big fun one. My kids are 2 and 4, so it might be a few years before they are old enough for a huge one (we did Disney in the spring).

Yes, but if you invest a huge chunk of that $400k, if something happened to your husband's job, you could always use it to pay the mortgage then. Really, as long as you don't spend the whole thing on hookers and blow, you're going to be in a position going forward where you'll likely never have to panic. Paying off the mortgage gives you a guaranteed return of 4% on that amount, but the other way to think about that is that 4% is the absolute max return you'll get. Personally, I'd fully fund your IRAs, 529 and e-fund first, allocate a portion to something fun like a family vacation or a home-improvement want, and invest the rest. With your e-fund and General savings mostly set for awhile, you can then work on reallocating your actual income - more to $401(k), paying extra on the mortgage if you want, etc., since you won't be using income to add to those accounts right now.

hoffse · June 2015

OP, I've linked an article below that is a quick break-down of how contributions to 529's work for gift taxes.

We don't talk about gift taxes much around here because it's rare for people in our generation to be able to superfund a 529, but if I were you.... I would absolutely be looking to superfund after taking care of retirement, etc. By superfunding I mean contributing over the annual gift tax exclusion limit so that you are front-loading contributions. You can do up to 5 years' worth in one lump sum.

That can be enormously valuable since your kids are so little. If you can't max out both children's accounts, then I would put more in the oldest child's 529 because you can transfer whatever is left in his/her account to the younger child later. Plus, the younger child's account has more time to grow, and the older child would need a bigger up-front contribution to offset that 2-year difference.

The gift tax exemption limits do change once in awhile, so make sure you talk to somebody at whatever bank you are using before you do it. You don't want to inadvertently owe gift taxes.

http://www.savingforcollege.com/intro_to_529s/are-there-gift-and-estate-tax-benefits-for-529-plans.php

And here's a college savings calculator that's pretty good, if you're curious to know how superfunding could make a big difference:

http://www.savingforcollege.com/college-savings-calculator/

**Not legal/tax advice - just re-stating some things that are in the article I linked

AprilZ81 · June 2015

First, I'm sorry for your loss.

Second, as long as you don't blow through the money (and it sounds like you are smart enough to avoid that) there is no "wrong" answer, only what works best for your family.

I agree with @hoffse and @smerka about leaving the bulk of the money sit for awhile to get used to having it there. If you can find a short term investment or an online savings account to let it grow even better.

If you don't want to pay of the house and you want to invest the bulk of your inheritance you will likely end up with more money in the long run. Money invested in the market averages 7-8% return so it will make you more money than paying off a 3% mortgage will.

The biggest thing is to know yourself and your families financial behavior. Once the mortgage is paid off will you guys be able to stay focused on making contributions to retirement and wealth building accounts? If you think you will be temped to start spending more (remodeling, new cars, traveling, or whatever) then I would invest the money now to build that safety net.

Just for fun, I used a time value of money calculator to see what you could have in 35 years if you invested $350,000 (assuming $50,000 for "fun money"). If you get a 7% return you could end up with $3.74 million. If you invest all $400,000 it would be $4.2 million. Obviously there are no guarantees, but a good financial advisor and a well balanced portfolio could set you up to be very comfortable in retirement, especially with what you currently have in retirement accounts and even a small amount of annual contributions going forward.

Sisugal · June 2015

I would add to your emergency fund so that you have at least 6 month's expenses.
Pay in full your IRAs and fund work retirement plans to max
Put the remaining amount on the mortgage.

vlagrl29 · June 2015

I would pay off the mortgage first in full - that's what i did when my first husband passed away suddenly. Then I would fully fund an emergency fund and put the rest in investments. The money you spend now on mortgage payments could go in a separate fund for home improvements or your retirements.

MommyLiberty5013 · June 2015

1. e-fund - fully funded.

2. I see both sides of the pay off house versus invest in market discussion. However, I personally like the idea of owning my home free and clear. If this is a home you plan to stay in forever, or at least until you downsize as an older person when you are an empty nester, then I would consider putting a chunk of change into paying it off. I liked the PP's idea about refinancing into a 15 year loan term too.

3. I agree that you should NOT do anything with the money for a few months, though. To think and plan.

vlagrl29 · June 2015

Even if it's not your forever home still pay it off. We aren't in our forever home but when it comes time to move then we will just take all the money we get form this house as cash and put it towards the next house.

Erikan73 · June 2015

I would talk to an investment advisor or CPA to find out what is the best route for you tax wise. Things to consider, if you itemize your taxes currently, your maybe using the interest you pay on your mortgage as a tax deduction, so in turn you aren't paying interest. Also from a tax perspective, would you end up with more money down the road if you put it all into different investment options like an IRA or your kids 529 or into something else instead of paying off your house now (if you are deducting your mortgage interest).

Like other PP said, if you pay off your house now, you'll be able to contribute more of your regular funds into your retirement plans each month. But I would take to someone who can advise which way you would be better in the long run.

brij2006 · June 2015

vlagrl29 said:

Even if it's not your forever home still pay it off. We aren't in our forever home but when it comes time to move then we will just take all the money we get form this house as cash and put it towards the next house.

Same here. This isn't our forever home, but we can make a lot of progress with investing and giving, with the extra month to month cash from a paid for home. Yes, putting that lump sum into an investment may yield more when it comes to math, but we like the idea of knowing that without a mortgage payment, our life decisions can change and we won't have to worry as much about money. If we have baby #2 and I suddenly decide I want to go part time, then we can. We also like the idea that if something drastic were to happen, we don't have to worry about not being able to pay the mortgage and losing our house. But hey, we have hundreds of thousands in our investments, yet we're getting foreclosed on. Not something that's worth even chancing it, to us.

TNChick · June 2015

^ I am fairly risk averse, so I feel the same way.

brij2006 · June 2015

TNChick said:

^ I am fairly risk averse, so I feel the same way.

Then it sounds like you know what you should do with the money. ;-)

abrewer5 · June 2015

I won't lie the non MM and animal lover side of me would either start a dog rescue with the money or donate a good portion to a no-kill rescue to help more animals after paying off my mortgage.

BUT that's just what I would do. In your case I'd probably fully fund an e-fund (6-8 months), fully fund your retirement for at least the year, and then pay off your mortgage or come close to it with the money left over depending on how much those items take to accomplish. Once that's complete, I would start contributing more to the 529s using the money that would usually go to your mortgage.

What would you do with Inheritance?

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