How should I invest a lump-sum inheritance to add value to my savings?
I am 35 years old and currently following all the great advice prescribed by financial planners such as putting $18K pre-tax into my employer's 401(k) plan and receiving a $7K match. I went ahead and started contributing the after-tax portion which brings the total annual savings to $52K per year. I used to be able to contribute $5,500 into a Roth IRA, but can no longer do that due to the IRS income limitations. I funded a Whole Life Insurance policy with 5 year premiums at $20K per year to secure my family in case something happens to me and so they can accumulate cash value along the way. I also went ahead and started investing approximately $500 to $1,000 per month in California Muni Bond Funds. I am expecting to receive a $100K inheritance and wanted to know what the best strategy is for investing this money? I am not looking for something active/risky like owning Real Estate or funding businesses, but prefer something passive with no headaches. What do you recommend?
Think of your financial net worth as an "overcoat" with many pockets. You may have stocks in one pocket, munis in another, etc., but when you decide how to allocate assets between stocks of various types and fixed income of various types, think about the whole coat. Reading between the lines, I can conclude that you have more than enough current income to live on. Assuming you are reasonably secure in your job, lean heavily toward equities.
I agree that munis are good diversification and a source of decent after-tax returns. But in general, bonds may suffer in a rising-rate environment so stay light in that sector.
When you get the $100,000, it just adds to one of the pockets. If you are planning to keep, say, a 75% - 25% equity/fixed strategy going forward, invest the inheritance accordingly. Don't consider it a separate entity.
You are doing a great job so far! One of the perks of doing a good job is that it is much easier to keep things simple and get where you want to go. This is especially great news for folks, like you, who have lower risk tolerances. Continuing to build a portfolio of tax free bonds, blue chip dividend paying stocks, and quality low expense index funds are all great options and will serve you well.
Before making those investment choices, be sure to have at least six months of expenses ready to go. These funds should be readily available so keep the money in short-term, easily liquidated vehicles. For example, a short ladder of certificates of deposit. You absolutely want to avoid having to liquidate long-term investments unexpectedly. Retirement accounts, muni bonds, insurance and the like are off limits!
Another consideration that will become increasingly important for you will be taxes. It shouldn't keep you up at night by any means, however, understanding how dividends, capital gains, and the like are a concern that you don't have with 401(k)s and IRAs. Start building a relationship with a tax professional if you aren't doing so already.
Finally, if you have children or, if you believe you will in the future, you might look into college savings options. Something like a 529 plan could make sense for you and provide you some flexibility in current and future tax liabilities.
I will first say, great job on the proactive approach to savings. Just an FYI, the after-tax money you are putting into your 401(k) is a Roth investment. If and when you rollover your 401(k) into IRA's at retirement, you will be able to roll out the 401(k) into their respective Roth and Traditional amounts. Do not worry, your plan administrator will be keeping track of those amounts internally. So, don't fret about losing out about that $5,500.00, you are essentially contributing $34,000.00 a year to a Roth. If you would like to still contribute to your outside Roth, I can walk you through a very popular strategy known as a backdoor Roth. Just send me a note.
You have given us a lot of broad on your accounts but not much detail associated with them. To answer this question with certainty, I would want to know a little more about you and your intended use of the funds. Will you be using the funds for short, intermediate, or long-term goals?
- If you plan to use the money within the next 2 years, I would suggest a combination of money market funds and low duration fixed income funds(under 5 yrs). You don't want to risk market volatility.
- If you are going to use the funds in the next 3 to 15 years, some combination of stocks and bonds. If the funds will be closer to three years, the portfolio should be around 20% stocks and 80% bonds. If the funds won't be accessed for 12-15 years flip that allocation around.
- If the funds will not be used for anything in the next 15 years, I would invest in an equity portfolio, with a focus on dividend payers.
At this point, you will want to develop a strategy for investing the funds. While it's hard to time the market, using a dollar cost averaging technique over 3 to 5 months can allow you to ease into the market. Invest between $20,000.00 and $33,000 each month. As for a passive investment, I would look at a Robo-Advisor. There are several options which will manage the money for free with very little to no work from your end. Also, the advisors tend to use ETF options, which are extremely tax efficient. You can use the more established brokerage houses like Schwab or Vanguard or find an independent. Here is an article from Business Insider outlining different options (http://www.businessinsider.com/best-robo-advisors-2017-1). I actually just opened one through Wisebanyan. I am looking to compare my active trading strategy vs.a passive strategy.
I would like to know more about your situation. I assume you live in California, hence, the muni bonds. Based on your age, why did you choose to go with muni bonds? Did a financial advisor tell you to buy whole life insurance?
The easiest way is to pick a Vanguard target retirement fund. Since you are 35, let's say you are going to retire in 2050, then use Vanguard Targe Retirement 2050. The symbol is VFIFX. One fund is enough and you don't need to do rebalance, they will do that for you behind the scene.
The first place I would start is by hiring a Certified Financial Planner to help you create a comprehensive financial plan and investment strategy to ensure this money is allocated properly for your financial goals. From there, it may make sense to invest your money into some sort of robo advisor portfolio as they offer regular rebalancing and most robo advisor portfolios have passive investments like Vanguard funds and ETF's. However, you definitely want to have professional help setting up your investment account and choosing the right allocation mix so that is why working with a CFP is important. This is exactly the work I do with my clients. Hope that helps and best of luck to you!