What should I do with a four million dollar inheritance?
I'm going to inherit approximately $4.1 million dollars. After all taxes are paid, what's the best way to invest or spend that money? I'm a 24-year-old single woman living in the tri-state area with limited financial knowledge, $10,000 in debt, and an interest in traveling the world. While I absolutely want to ensure that this money lasts for a long time, I'd also like to spend some of it now.
I would be wary of putting these specific facts - high dollar amount & the fact that you are so young and therefore likely inexperienced - up front on this forum before you can do some due diligence & vet the "advisor" giving you advice. That said, the first thing I would do is retire the $10k debt especially if it has a high interest rate. Then you need to formulate a solid strategy for how to invest the money, and with that kind of money, you also need an estate plan just in case of your unfortunate demise. If you do not have a will or living will (also called a living trust) and you were to pass, then you assets would simply follow the intestate rules of your state. So it may not go to the person(s) you really want the assets to go to. So these things should be your primary focus.
As to investing, I have some strong views not shared by many advisors. I believe in strategy, not products. This is why I said to be careful putting the fact that you just inherited a large sum of money on this forum. You will get annuity and insurance agents coming out of the woodwork to sell you these high commission, long surrender penalty products that are very clumsy. But you will hear annuity salesman tell you that with an "indexed annuity" you can get "most of the upside but with none of the downside." While it is true you will not have downside, you will not get much upside either for a plethora of reasons.
I would suggest interviewing a few different fee based only advisor who are active managers. Ask them about their experience, background, and track record. I would not go with someone who is also a broker meaning they have their Series 6 or Series 7. This means there are conflicts of interest that you need to be aware of. Doesn't mean they can't do a good job, just that you really need to be on your toes for conflicts that may arise. In my opinion, life it too short. So you want an "Advisor" who is fee based and only represent YOU who doesn't get paid from ANY outside sources period. Then when negative outcomes occasionally occur, and they will, you don't have that lurking notion in the back of your mind whether the investment was an honest attempt at making money or whether there was incentive. Make it all about strategy not products.
And with that amount of money you would be able to do individual stocks and exchange traded funds (ETFs) versus mutual funds. This way you can better control your taxes on gains. Then you could take distributions as needed within limits without cannibalizing the principal. If you just make a net 5% after fees & taxes, you could take out $200k per year without touching the principal. So again, I believe you need a solid strategy, not products. One that has a defined sell discipline to protect and limit principal drawdown during bad markets. Money will not be made evenly no matter what you do, so you need to understand that. Some years, if done correctly, you will do much better than 5% or even single digit. Then you can re-evaluate and modify your strategy as you go.
But you also need to learn about money and investing because no one cares more about your money than you do. You don't necessarily need to know everything, but enough to make sure the strategy makes sense and that the money manager is following that strategy. Thus I believe you need a solid strategy & education. Believe me, I understand this can be overwhelming and it won't be easy. There is no easy button that you can put on auto-pilot. If you get an advisor who tells you that, run.
I was very candid here and wanted to give you some ideas to make you think and give you the right questions to ask. BTW, we have a short, daily market update and a weekly radio podcast to educate investors. It is free and you can simply go to our website and sign up and it will be delivered directly to your inbox. I promise we will not spam you, sell your email address, or even reach out to you in any way. It is up to the individual to reach out to us if they are interested in our management services. Personally, I think you will enjoy our podcast more as they are more much more entertaining and not quite as in depth as the daily market videos.
Hope this helps and best of luck, Dan Stewart CFA®
Thank you for submitting your question. First things first, I would suggest that once you receive the inheritance, deposit the funds in the money market of a brokerage account and just leave it there for a little while. There has been a lot of research conducted on the topic of "Sudden Wealth Syndrome." Yes, this may sound funny, but it is a real state of mind that many people who suddenly receive a significant amount of money become susceptible to. What Sudden Wealth Syndrome means is that when someone is not ready to receive a large sum of money, they usually spend it, give money away to family or friends, make impulsive purchases, etc....they tend to do everything except what you are doing -which I commend you for- which is to seek professional advice from a trusted financial advisor.
After you deposit the funds in a money market account and have spent some time interviewing financial advisors to make a final determination about who you would like to hire you, then you should sit down with your new financial advisor to develop a written financial plan. Some financial advisors will charge you for preparing a financial plan for you, while other financial advisors offer FREE Financial Planning. Having a financial plan prepared will help you to add future context to whatever your financial values, needs are goals are. The "Plan" will address taxes, budgeting, retirement, estate planning, investments, goal planning, etc. In my field, I am not alone in believing that starting with a written financial plan is one of the most important things that you can do in order to protect yourself financially! I HIGHLY recommend it!!!
Lord willing, the world will be there for you to travel after you come up for air from doing some good financial planning. Actually, your financial advisor is going to do most of the financial planning work. He or she will ask you a boat load of questions, or simply have you complete a paper questionnaire. However, since you are 24 years old, I can't imagine that you will have a lot of information to add to a financial planning questionnaire. Therefore, the Plan will probably focus more so on tax mitigation, goal planning, investing and structuring an income for yourself that you cannot outlive.
If you have any further questions, please don't hesitate to reach out to any of the financial professionals on Investopedia who I am sure will be more than happy to receive a phone call, or an email from you!
First of all, this is one of those questions where you'll get many answers from qualified investment advisors. This question is the dream question for many, lots of assets to manage and charge fees on it. There's nothing wrong with it, but I'd like you to be aware of it.
First, noone will give you a detailed answer in a forum like this. You'll get info that will interest you in one advisor vs. another. It's a 'beauty' contest here too. Then you'll read the answers and maybe decide to follow up on one or two of them or none at all.
The issue I see here is that you have limited financial information and that opens you up to confusion. My recommendation is to do nothing but educate yourself on some financial principles and ideas of wealth management. While I'm an advisor myself, my focus is Financial LIteracy, and I'd be happy to help you, the best thing right now is to increase your Financial Knowledge. You want to know as much as possible starting with the type of advisors out there 1) Fiduciary or 2) Broker/Suitability then you want to know about typical fees and then some ideas from other wealthy entrepreneurs, best asset management solutions etc.
For you as a 24-year-old this is a blessing but also a very stressful situation. If friends/relatives know about this even more. I would suggest a period of 6 months where you increase your knowledge and financial literacy and don't commit to anyone or anything.
You may want to hire a lawyer first to understand how to structure this large asset, as sometimes keeping it on your own name may not be as good as establishing a company and managing it that way. Even on that one please take your time.
My background is Financial Literacy and I deal primarily with your age group (with not much money), but the ideas I'm bringing up here deal more with the emotional aspect of money, patience and thoughtful planning rather than the actual money management and how to save/spend portion of it.
First, you have to get your emotions and mind in line with this large fortune, then think about and patiently educate yourself about basics of financial planning, so that when time comes to either select an advisor or do something with your money you won't chose solely by the looks of the advisor or the way they sound. And sadly, that's how many people chose their advisors.
I am always cautious in answering these types of questions with any specific advice. However, an easy piece of advice I can safely give is to pay off the $10,000 in debt. Beyond that, take your time.
You're going to have lots of people knocking on your door to help you invest and manage that money. Be careful! Find a financial advisor committed (legally, not with words) to acting in your best interest. Lots of people will tell you to work only with a CFP or a member of NAPFA, which is a group representing "fee-only" financial advisors. Those are both fine organizations and a good place to start. There are also plenty of good advisors who aren't part of either of those groups.
When you get a short list of names, research them and their records at the SEC's advisor search site here - https://www.adviserinfo.sec.gov/. You should also run them through FINRA's broker check to see if there are any complaints against them. Here's a link to that site - https://brokercheck.finra.org/. At each of these sites, you can enter the individual's name and find out about their records. Once you've chosen your short list, interview each advisor. You want to make sure he/she is a good fit with your personality. Make sure they listen and don't just talk about all the reasons why you should work with them.
A good advisor will help you put together a plan to both protect and help this money grow. You will easily be able to enjoy travel and spend some money to do the things you've dreamed of doing. I believe you will enjoy it much more if you take the time to develop a long-term plan for the funds., Then, when you travel, you can do it with ease knowing there is a foundation in place that allows you to do this comfortably. I hope this helps.
You're going to get lots of answers to your question and lots of offers to help. Whatever you do, be careful. You said you have limited knowledge. You don't want to end up working with someone that will take advantage of you. If you have a friend or loved one, who is knowledgeable about finance, I would recommend you include him or her in the process when you look for someone to work with.
First and foremost, I recommend that you restrict your search to fiduciary advisors. Even better, look for someone that will sign a fiduciary oath showing they will work in your best interest. One of the best examples of a fiduciary oath can be found here. Alternatively, Jason Zweig who writes on personal finance issues regularly for the Wall Street Journal recommends you ask 19 questions when meeting with a financial advisor.
It can be worthwhile to work with more than one advisor, but even if you do, it makes sense for one to know what your total assets are. That way, you make sure everything is taken into account when your assets are allocated to different investments.
As for your inheritance itself, the first thing to do is pay off your debt. Based on the amount, I'm assuming you're paying a relatively high rate of interest on it. There is no reason for you to do that.
If managed wisely, you have enough money to live comfortably for the rest of your life. There's no reason you can't take some time off to travel and see the world. It's what you want to do. You have been given a golden opportunity to do so. But, budget how much you want to spend, and stick to it. The last thing you want to have happen is that you find you have a lot less left than you planned, and the life-changing inheritance means a lot less than you think.
You may also want to honor your loved one. If they had a favorite cause, you could do something to support it. If they died of a terrible disease, you could do something to help fight that disease and, hopefully, keep others from suffering the same fate.
You also have been granted the freedom to do what you truly want with your life. If that means getting more education, then go ahead and get it. If it means taking a job that provides a little less income, but allows you to do what you enjoy, that's okay, too.
You can also allocate funds to purchase a home you want to live in. Whether you purchase it for cash or take a mortgage is something you will have to decide when looking at the overall opportunity set. If you are not ready for home ownership, there is nothing wrong with renting. As a young, single woman, you might not want all of the responsibilities that come with home ownership. Renting can be a fine option until you are ready to own your home.
How much you can spend on travel, honoring your loved one or on your home should be part of your financial plan. A fiduciary advisor will help you put together such a plan that has the potential to let you lead the type of lifestyle you want, and if managed properly in a well-balanced portfolio that delivers the type of returns that have been achieved historically, it can last your lifetime. It could even leave you in a position to leave an inheritance to someone in your situation many years in the future.
As with those who suddenly have a big windfall after winning the lottery, be careful, too. Many people may come to you asking for assistance, for a share of your money. Be careful and make sure that you are not taken advantage of.
I hope you find this helpful.