If your average annual income is right around 10k and you inherit 50k, how do you handle the inheritance? Assume the goal is to supplement your yearly income and create retirement potential – the legal age for retiring being less than 15 years away.
Do you invest it, bank it, stuff it in a mattress, splurge (because the idea of retirement is still a joke)?
How much might the gov’t confiscate in taxes?
How do you find trustworthy advisers IRL?
Where do you live?
Do you have any debt? (the return on paying off debt is almost certainly better than any investment)
Is there anyone in your life that you trust who is likely to deal with a financial adviser already?
If you own your own home and expect to continue living there permanently energy conservation is a very good investment.
Are you in the U.S? The estate has already been taxed (and the vast majority of estates are not taxed - not via estate tax anyway), and any money you get is free and clear. However, if you are just learning now about the windfall, and the estate is significant enough to get taxed, then your share might be smaller after taxes.
$50k isn’t much money. I know it sounds like a lot, but it really isn’t. At 4% you’ll get $2k a year. Put about into a mix of stocks and bonds - index funds - and sit on it. There are a lot of places where you can get good recommendations and advice on the internet - I’d go over the the Bogelheads forum. If you want advice try and find someone who will work hourly - most people find them via referrals. You are looking for a CFP.
#1. Pay off all debts.
#2. If you don’t need things like a new car, don’t buy one.
#3. Consider using the money to go back to school to learn a new trade or career. $50K could pay for a lot of school bills and even taking time off work. Just make sure to check the local help wanted adverts to see what jobs are hot, or not, in your area. Even if you are 15 years away from retirement, getting into a new lucrative job in, say, 3 years would give you 12 years to more than make up the $50K invested in the education.
Just to be clear - the OP is hypothetical at this point. The benefactor, who was recently diagnosed as terminal, told me only yesterday of their intent to will me a percentage of their estate.
Since I have never dealt with such a sum-in-total, ever, I decided it would be prudent to educate myself.
I’m currently renting in TX. The idea of homeownership, much like retirement, is a laughable thing. Credit debt is appx 4k - of course it will be paid off. I will check out BogelHeads.
I’m looking to understand why keeping this gift as cash in a personal firesafe is not a good thing. Personal experience in the world of finance has so far indicated that this is the only way to go - if I want the money to remain mine.
I could be wrong but at 10K per year average income I would assume that you may be in public housing and receive food stamps. Would this infusion of cash have a detrimental affect on those? With 15 years towards retirement I am not certain that going to school is really an investment that is going to pay out what you put in since it may be difficult for an older person to get a starter job. YMMV.
I’d think paying off your debts ($4K) and buying something special for your self (nice TV, dependable car, or trip) would not be out of line; maybe budget $6K for that. Then put about $10K in checking and savings so that you can improve your credit rating and have some liquid cash available for an emergency. Then perhaps put the remainder in a long term investment like a Roth IRA for retirement income.
What kind of experience have you had? Keeping it in cash is first dangerous, and second guarantees that you will lose value to inflation. If you want to be super conservative you can put it in a money market fund with check writing privileges. These don’t pay much these days, but it is better than nothing - and actually safer than cash. Go with a well known legitimate company and you will be fine. I’ve had an investment account for about 30 years. It has gone up and down, but I’ve never lost a dime to malfeasance.
If you want to make money I agree with the suggestion on index funds. In the long run you will be okay - just don’t sell if they fall.
However, if you are really making only $10K a year, I think it might pay you to use some money for food or perhaps education. That could be a better investment in the long run than stocks.
Inflation will inevitably march steadily on. You’ll notice that $20 in the 70’s bought you a lot more than it does today. Putting it in a safe is like putting that money in a time capsule. If you put it into treasury bonds, or the bank, it will at least earn enough interest so that you don’t lose any money relative to inflation.
Treasury bonds are guaranteed to pay out and FDIC deposit insurance pays up to $250k so you’re guaranteed your money if you put it in a bank.
This. If we average 3% inflation per year, then in 15 years, $50K will only buy about two-thirds of what it buys now.
15 years is a pretty good period of time, enough to recover from short-term market fluctuations. If you invest it in an index fund, you could expect to average 7% annually, ending up with $138K at the end. The annual average could be higher or lower than that, but it’s almost certainly going to beat inflation (3%).
If you have debt with an interest rate that is higher than the return you expect from your investment (whatever investment you choose), then it makes sense to pay off that debt right now.
What about education? If you assume that investing would leave you with $138K after fifteen years, can you beat that by dumping $50K into learning a new career for three years, and then spending 12 years earning a higher salary? You’d have to look into it, and see whether your annual income would increase by more than $10K per year (after taxes). If so, then education might be a sound investment, if you are sufficiently motivated to see it through.
How so? Earning interest, such as it is today, is better than earning nothing, which is what putting it under a mattress will do. What do you mean by “if I want the money to remain mine?”
As others have said, $50K is really not a lot of money; you certainly can’t retire on it exclusively. I’d pay off every last red cent of debt, and put the rest into an interest bearing, tax deferred retirement account and treat it as though it doesn’t exist. You should earn a few thousand dollars on it in 15 years. When you retire, you can draw down on it as needed as a supplement to SS and any other income you may have.
I completely agree with the other posters. Get rid of the credit card debt first and foremost, because at 18%+, I don’t know of any investments making a return that will beat that.
I’d put $6,000 into an interest bearing savings account or even a “risk-free certificate of deposit (CD)”. This works just like a savings account, but pays a higher rate of interest and you can pull some or all of the money out at any time. Generally, the only catch may be that you can’t use the ATM to get it out (have to go inside) and you can’t add money to it (which I always thought was a strange rule) unless you want to restart the CD.
I’d invest the other $40,000 in index funds. That’s a reasonably safe way to make money and you can still access it if you need it. Plus, out of sight is out of mind. If you keep $40,000 sitting around in the bank, you will be tempted to spend it, or worse, some “friend”/loser relative will convince you they really need it and because it is readily accessible, they will convince you that you should give it to them. I do not recommend advertising to anyone that you are coming into this windfall as you’d be surprised what happens when you don’t immediately want to share it with your “friends”, if you do.
Are you comfortable putting a large amount of money into the stock market when it is currently at all time highs?
I can get a idea of your temperament and financial know-how based on your answer.
The only financial advice I can give you right now, knowing almost nothing about you, is to keep the windfall a secret and don’t go around bragging to friends or strangers. Keep it in a bank account and give yourself time to decide what you want to do. No need to rush into anything.
You say that as if the stock market hasn’t consistently trended upward for the past 80 years. It hits record highs routinely.
Pay off bills, max out your 401k. If you don’t have a 401k put 2K each year in a IRA. Not a Roth IRA.
Or, after paying off bills, contact your insurance agent. Buy a Annuity.
No. You can’t put inherited money in a 401(k), nor would you want to put it in a traditional IRA. A Roth would be the retirement vehicle to use in this scenario.
Yes, you certainly can. It’s simply a matter of maxing out your 401 k contributions, then spending the inheritance equal to your reduction in pay.
And Roth IRAs are a horrible, horrible idea for retirement. Every single middle class person I know who has put funds into a Roth have cashed it out before retirement. It’s too tempting. Fine if you want to save towards a down on a house, or if you’re rich.
Not to mention that the all time highs are barely above the highs from 6 years ago. I forget - are they even highs when you count inflation?
I mentioned education. I think you also need to factor in the fairly high probability that someone without it will not even be making $10K in the near future, since unemployment rates go up dramatically as the level of education falls.
Sorry, you don’t know what you’re talking about. If she maxed out her 401(k), that would effectively wipe out her entire year’s salary. It provides no benefits beyond the employer contribution, which is probably no more than 4% at best.
And you don’t put after-tax dollars in a traditional IRA. That is the height of stupidity. Nobody ever does that. You put the money in a Roth, which grows tax free. The money isn’t any more accessible there than it is in any other brokerage account.
And if you are rich, you don’t qualify for a Roth.