How can I stretch out a significant inheritance over my lifetime?
I'm 28 years old. I recently inherited $1,000,000, but after taxes, I'm guessing I will recieve around $500K. How can I make that money last without having to kill myself by working a 9-5 until I'm over 60 years old?
First of all, I would like to know more about why you think it will only be $500k after taxes. If the deceased didn't have over 5.49 million, then there is no estate tax. So the 1 million may not be taxable at all. If some of the assets are in a retirement plan, then you must follow certain rules about minimum required distributions (MRDs) as a beneficiary, which could either be over 5 years or over your life expectancy depending on the circumstances. Those distributions would be taxable as income to you at yoru tax rate including adding in the distribution. Also, there is usually no tax on life insurance proceeds. So it really depends on how the assets were titled and what type of assets they were, but you may have a lot less or even no tax to pay. If the deceased had well over the 5.49 million, then estate taxes are very high and if your portion is, in fact, the net of the million, then you would receive a much lesser amount. So you need to get with an advisor who understands estate taxes well to help guide you through this process & help you plan.
Having said all of that, how to invest the proceeds is another, separate question. Many advisors will give you a "pie chart" based upon your age, risk tolerance, and "station" in life and simply hold for all environments. I am an active advisor who doesn't subscribe to that philosophy 100%. You age and needs are important, but it is also very important to determine how much risk is in the markets or specific sectors, and those risks changes over time. For instance, with the specter of rising interest rates, bonds are riskier than they were just a couple of years ago. Stocks are also at least fully valued. Therefore, I believe you should invest but we have a sell discipline especially at these levels of valuation and interest rates. If you were investing after a major correction or bear market, my answer would be different and a buy-and-hold pie chart would carry a lot less risk than now.
Either way, you need education and research (not products) so you can decide for yourself. Whatever you do decide, you need to understand the strategy & philosophy, and it needs to make sense to you.
I hope this helps and wish you the best of luck, Dan Stewart CFA®
Generally inherited money has no taxes involved by the recipient, so I would be curious to know why you would be receiving only around 500 thousand. If you invest this money prudently then you can build it up through time and have a worthwhile nest egg by the time you are older. You also didn't say whether you are inheriting retirement accounts or some other kinds of assets. If you are inheriting a traditional IRA or some other non-Roth retirement account then you should not withdraw it all at once and pay taxes; that would be very poor tax planning (and might explain why you said there were high taxes involved). You should only take the required minimum distribution each year which is determined by your age of 28 and would only be about 1% of the total amount.
Be sure not to go overboard and become too fully invested in overpriced securities since that is a temptation by those who suddenly have a large amount of new money.
I don't think working 9-5 until you're 60 will kill you. I have been working more than that since I was a teenager and I'm 57--and I think I'll probably survive another three years or more. If your plan is to suddenly change your lifestyle and quit your job because you inherited money, then you'll end up broke before you reach 40 and you'll be worse off than you are now.
Congratulations. Although the circumstances under which you are receiving this lump-sum may carry some grief.
1. Sit with a trusted advisor to map out a plan for the money that meets your financial and life goals;
2. Stick with that plan, no matter what. That is not to say you cannot have changes in life or lifestyle, but don't lose the discipline of continuing to invest, save and spend wisely.
3. Remember that someone worked hard, and died for you to receive that. You've been entrusted with a "gift", honor their memory by doing right by them.
One additional point: You may want to hire a CPA for a tax consultation. Depending on how you received the money, you shouldn't have to pay that large a tax bill. I have limited details, so I cannot say that definitively.
If you need any guidance or assistance, feel free to reach out.
I hope that helps!
You are in a fortunate position. Remember one basic rule; spend income, but never touch your principal. You can arrange to invest in dividend paying stocks that will begin a small stream of income that will last a lifetime. If you select stocks with dividend yields between two and four percent you have a good chance of growth of principal in addition to the income you take out. Best of luck!
You should not have any taxed, but that question is best suited for a CPA. As far as making it last, long term, consistitant growth is best achieved with a diversified portfolio spread over all market sectors. When there are swings in the market, money does not disapeer it moved from one sector to another. Having exposure to all areas of the market, with active rebalancing, is your best bet.