Advice for managing a one-time windfall
August 28, 2018 5:27 AM   Subscribe

My late husband’s estate has finally been settled and I’ll be getting a lump sum payout that’s more money than I’ll ever see again in one sitting. Looking for some general suggestions for making the most of this opportunity.

Some particulars:

- I’m a substitute teacher and make a good daily rate when I work. But it can be irregular at times. I’m on the path toward a permanent contract but that’s a multi-year process.

- We rent, and are in a good building for which we pay a high—but lower than market average—amount. I’m comfortable staying there until said permanent job materializes. I’m open to purchasing a modest condo down the road but I’m not in a particular hurry.

- All of my child’s medical is funded, including prescriptions. I have to pay for my own dental and prescriptions. I currently take one prescription which is inexpensive.

- I have unused contribution room in my retirement account. I’d like to use it but from a tax standpoint I understand it is not advantageous to plunk 40k in there all at once, so I’d like to do that in stages. I also have an education account for my toddler son and I would like to contribute the maximum amount to that so I can take advantage of government matching.

My husband’s father is my accountant. He has advised to not lock down anything since my career stuff is still in transition, and to manage my ‘investments’ myself without trusting the bank to handle it. I don’t really know what all that entails. Any suggestions for where to start with all this?
posted by ficbot to Work & Money (14 answers total) 7 users marked this as a favorite
Can you give an idea of how much this lump sum is? You mention 40K, is that right? Or more than that?
posted by Bebo at 5:32 AM on August 28, 2018

I would recommend you find a financial adviser who's not emotionally tied up with the money.
posted by zadcat at 5:40 AM on August 28, 2018 [19 favorites]

Bebo- still not sure what the exact total will be. Somewhere is the neighbourhood of 100k.
posted by ficbot at 5:46 AM on August 28, 2018

Some of this depends on what you might want to do down the road (invest, purchase real estate) but some of this is immediate stuff. So it sounds like you may need to wait to see if you get a steady contract. Til then you can put the money in a high interest savings account (who has top interest now) and just park it. This is especially useful before you've determined what sort of taxes you may owe on it. My main advice is if there is any matching aspect to your retirement contribution, that you beef up your contribution for the maximum match as you have noted. You can do that now.

If you're just talking about a five figure sum that you might want to keep liquid, it may not make much sense to invest it. Also you don't mention debt but you can often make a higher "return" just by paying down debt (esp if it's credit car debt) as opposed to putting something in to an uncertain market.
posted by jessamyn at 5:46 AM on August 28, 2018 [9 favorites]

The bogleheads have a blueprint for Managing a Windfall.
posted by Short Attention Sp at 6:38 AM on August 28, 2018 [13 favorites]

First up, I'd recommend reading past AskMe responses to folks with windfalls. You'll find lots of good advice there. (Here's my response to a previous windfall question.)

The Bogleheads guide to managing a windfall (mentioned by Short Attention Sp above) is also good. That said, here's my standard advice modified for your situation. (Note that I've been reading and writing about money for over 12 years now, thanks in part to folks from the Mefi community.)
  • $100,000 seems like a lot of money -- and it is -- but it's not that much money. You shouldn't do anything crazy with it like buy a condo. It sounds like you're planning to be slow and cautious. I want to affirm that this is the correct course of action.
  • Your husband's father is correct: You can handle this yourself. It's totally non-difficult. That said, managing this money will require some proactive behavior on your part. You'll need to do research, which probably means reading a book or three. But trust me: This isn't rocket surgery.
  • Your first step when you get the payout is to determine whether or not you'll owe taxes on the money. (Ask your husband's father. As an accountant, he'll know.) If you will, then set aside that amount for when the bill comes due.
  • Next, I always recommend "fixing the things that are broken" in your life. If you have debt, repay the debt. If your car needs a repair, get the repair. If you've been putting off a medical procedure, get it done. Fund your retirement accounts for the year. Establish an emergency fund that can see you through three months of expenses. And so on. A windfall is good for getting you back to Ground Zero.
  • A lot of people want to spend a windfall on fun stuff. I get it. I like to do that too when I get an unexpected lump sum. But it's generally a bad idea to spend everything. (Again, it doesn't sound like you intend to do this, which is awesome.) That said, I do think it's fine to take roughly 5% of the windfall (or $5000 in your case) to spend on something fun, whether that's a vacation, a new television, a kayak -- whatever. It's okay to use a small portion of the money to treat yourself.
  • All of the above can (and will) happen quickly. This next step is a slow one. Open a new account at a new bank and deposit the bulk of the money there. Savings accounts don't pay much right now, but you might consider putting the cash into certificates of deposit. (There are a couple of ways to do this.) Then sit on the money for a while. Months, maybe years. Get accustomed to having it.
That's it. After you've had the money for a while, after you've had time for the euphoria of the windfall to dissipate, then you can think about how to use the cash to help you achieve your long-term goals. Decide you want to buy a condo or a house? This money can help you with the down payment. Decide you want to go back to school? This money can help bridge that period while you're not working.

Again, this is something you can (and should) handle yourself.
posted by jdroth at 8:08 AM on August 28, 2018 [24 favorites]

Set financial goals. Retirement, college for kids, maybe an advanced degree for yourself, emergency fund. I worked for a university and my retirement funds went in to TIAA CREF, which has a socially responsible investing option that has performed well and the socially responsible part is a priority for me.

Look into a Roth account after the IRA is maxed out.

Take some part of it and do something wonderful for yourself, a couple thousand for a vacation to a national park or some other bucket list item. Financial security is really important, but also, life is short.
posted by theora55 at 9:28 AM on August 28, 2018

Great advice from jdroth, above.

A thought: When your toddler is close to college, having a bunch of cash in the bank will attract the attention of the financial aid office (who will probably want like 30% of it). Having it in a retirement account of some kind that is appropriate to your situation might help shelter it. When you speak to a financial planner of some sort, who has an obligation to know his information, ask that question.

It may well be true that you don't investigate this until your career settles down a bit, which is fine: as jdroth says, park that money somewhere for now. (Laddered CDs, which mature out of sync with each other, used to be a recommended way of getting some growth out of money you might need to get at. Again, ask a pro for help.)
posted by wenestvedt at 10:02 AM on August 28, 2018 [2 favorites]

Good advice from jdroth.

With respect to "letting the bank handle it," bank "advisors" are actually salesmen and are under no legal obligation to put your interests first. Even if you had more money, I wouldn't recommend it, as their focus will be on extracting the highest commissions possible for themselves, not your best interests. But $100K (and I imagine it'll be a good bit less once you're done "resetting" as he advises) isn't usually even enough to attract the scammers from respectable banks for more than a one-shot transaction.

Fortunately, you can easily handle this. You don't want to wait too long on investing that money somewhere, as inflation will erode the value of money in even "high-interest" savings accounts (these, e.g., Barclays, pay as much as shorter-term CDs right now, but remain liquid, so I'm not sure there's a real advantage to using CDs instead of them right now), but you can certainly take a few years to sort it out, especially if you have a clear path to some kind of formal career determination that will settle where you're going to live.
posted by praemunire at 10:53 AM on August 28, 2018 [3 favorites]

You didn't mention this but just in case you didn't know: if you're in the US your child is entitled to Social Security survivors benefits regardless of your, or the child's, assets until age 18 or graduation from high school.
posted by mareli at 11:52 AM on August 28, 2018 [1 favorite]

...especially if you have a clear path to some kind of formal career determination that will settle where you're going to live.

...and which may also provide a different kind of retirement benefit (e.g., pension plan), which can strongly influence your own investment strategy.

(Though opening a Roth IRA is usually a pretty safe plan.)
posted by wenestvedt at 12:32 PM on August 28, 2018

I recently got an inherited windfall. Most of it was in cash so I put some of it in a bank in a Money Market fund, which gets 2.7% interest, I think. I took some of it and, through a financial broker where I have my 401K, I bought part of a treasury bill. Yes, you can buy part of a bill. It has a maturation date (you pay a smaller amount up front and later collect that back plus the interest). The brokerage house also waives fees for T bills, which was a nice surprise. Both of these can be accessed quickly should I need the money. I didn't want to do anything too risky but I didn't want 1% interest in a savings account, either.

This was after I paid back a home equity loan (new tax bill does not allow interest on home equity to be deducted) and paid all our outstanding bills.

It is a blessing to have the financial comfort of an emergency fund, and I have the self-satisfaction of feeling like a financially responsible adult.
posted by citygirl at 2:04 PM on August 28, 2018

a Money Market fund, which gets 2.7% interest

Just FYI, a money market fund will not have a guaranteed interest rate (unless there's a promo or something, I guess). It's not necessarily a bad idea to be in one, mind you; just be aware that you are not guaranteed any particular return.
posted by praemunire at 2:09 PM on August 28, 2018

Oh my goodness, JD Roth! THE JD Roth! I followed your blog for years and it helped me when I was paying off my student loans. I feel like a celebrity just replied to my ask :-)

I’m fortunate to be debt-free right now but I did have to dip into my savings to cover my son’s first year of daycare. He was sick a lot and I had to miss some work. I don’t have a car. Other than rent and daycare, I have a pretty low overhead.
posted by ficbot at 5:19 AM on August 29, 2018 [4 favorites]

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