What to do with all that money?
January 14, 2008 3:41 PM   Subscribe

I will soon receive an inheritance of about $100,000-$150,000 (numbers are vague right now). I'm looking for tips and advice for managing that money.

I have talked with a financial advisor from one of the major firms about this and they would be happy to help me with my money at the rate of 4.5% per year. Frankly, I view that as extortionary. I even remember once hearing advice that said to not pay more than 1% in fees. This sounds reasonable to me. My current IRAs and other means of saving that do charge, charge less than 1%. I doubt it's 1/5th of a percent. I'm pretty sharp and generally good with money. I think that with the right research, and proper dedication, I can manage this money myself and save scads of fees.

Ideas so far:
1. I have a small amount of debt that I want to pay off immediately. Less than 10K.
2. I have a 13-year-old daughter for whom I want to sock aside somewhere between 20-30K for college. This is very important to me.
3. My mortgage is split 80/15 (the 15 being about $23K). I am toying with the idea of paying off the 15%. The interest on that portion is 8.25%.

For what it's worth, I am a late-thirties male with decent (not great) income and a proven ability to live frugally when I set my mind to it. I have no car payment. Only regular payments are child support, house, utilities, subscriptions etc. Currently, I am paying towards that small amount of debt on a monthly basis.

I need help on figuring out how to manage the rest of the money and my future money since I will ideally be out of debt aside from the mortgage. So, pointers, advice, tips, reading material, ideas, what have you?

email can be sent to AnonyMeFimomoney (at) sbcglobal.net
posted by anonymous to Work & Money (16 answers total) 9 users marked this as a favorite
This sort of thing has been asked many times before (Here's the most recent one that I remember)

In general:

1) Pay off any high interest loans

2) Invest it in a mutual fund. Find one who's balance of risk/stability is right for you. (Vanguard and others offer target date funds which do all the reallocation into safer funds for you as you age)

3) Save a little to buy yourself something nice
posted by chrisamiller at 3:52 PM on January 14, 2008

Arrgh - messed up the link. Here's the most recent one.
posted by chrisamiller at 3:53 PM on January 14, 2008

1 - Definitely pay off the debt.

2 - Use a STATE SPONSORED 529 plan (they will have the lowest fees). They will limit the amount you can deposit per year, but put in the maximum and get the tax break. Put the rest away somewhere safe and just keep funding the 529 for the next 4-5 years till college.

3 - Eh, I'm kind of iffy on the mortgage thing. Maybe pay it off. Mortgage debt isn't exactly the same as consumer debt. The rate is kind of high though, so maybe go ahead and pay it off.

What type of retirement plan do you have? Make sure you max it out. If you don't have one, setup an IRA and max it out. That will give you a tax break as well.

Use a discount brokerage. TD Ameritrade, Scott Trade, etc. Definitely not an advisor that charges 4.25%. That's disgusting.

Manage the money yourself. Put it in low-cost ETFs and index funds and don't think about it. Don't try to pick stocks unless you really want to dedicate yourself to doing it several hours per week, because otherwise you will never beat the general market (in the long run).

Read this blog post about mutual funds: http://www.iwillteachyoutoberich.com/blog/all-about-mutual-funds

Resist the urge to go out and buy expensive things or blow the money. $100-$150 can set you up real well for retirement.

Assuming you're 40, if you socked away $100,000 for retirement and let it grow for 20 years till age 60, this would give you $672k in 20 years, based on an average 10% return.
posted by andrewdunn at 3:59 PM on January 14, 2008

Vanguard Index fund, tied to S&P 500
posted by jcruelty at 4:01 PM on January 14, 2008

Find Dave Ramsey's show on your local radio station or download the podcast. Buy his book or check it out at the library. You're 50% in to the "baby steps" already, but he's good. He'll cover every question you've asked.

I'd link to his website, but it winds up looking like some shady deal with all the endorsements/clutter, etc. Listen to the podcast/radio show/book first!
posted by cdmwebs at 4:01 PM on January 14, 2008

I would look towards a tax lawyer or a financial adviser who can help you transition your goals with minimum tax burden. As you said, the fees on your relatively small amount can add up quickly and chip away at any goals. You want to look at the ways to achieve things like college and paying off a mortgage while setting up funds for recurring expenses in the least expensive way possible. I don't know if you can avoid this, as tax laws are rather complicated and given to paticular circumstances. I am of the school of thought that a good attorney is worth his price in gold if he can direct your assets to where they will be at least risk and with the least tax burden relative to your goals.

After that set up, you're right, prudent investing is probably going to return you as much as your average financial adviser for the amount of money you're suggesting. In fact that's pretty much the target which financial adviser's salivate over because you don't have enough money to attract big players, and honestly, probably don't know what to expect in fees.

I'd look toward Swensen's Yale Model and some of Mandelbrot's broad generalizations to build a framework on how you should manage your portfolio. The methodologies are rather broad, but promote a slightly more coherent version of what it means to diversify against risk than your average mutual fund brochure will present.

To be honest, after getting your basic trusts set up for your daughter and any ways to make your mortgage debt cheaper, I would blow a little money on a luxury. A new kitchen or entertainment center? A vacation to Europe with your daughter perhaps? I've seen too many families blow opportunities like that due to the capital always being tied up in some sort of fund or trust and really miss out on doing things that really define life. Don't let optimum portfolio management or financial advisers tell you what you should be doing. There's a difference between spending cash like this on a Porsche 911T and setting aside a portion for an amazing adventure.
posted by geoff. at 4:10 PM on January 14, 2008

I won't advise you on what to invest in, but I will say that you are correct in not going with that adviser. The same thing happened to me when I inherited money: the money manager my dad had used tried to steer me into investments that would net him quite a lot of money. It wouldn't have done so well for me, and I am glad I took the time to learn about investing myself. It sounds like your 3 steps are very sound ones to me. Make sure you find out what the taxes are. The can be shockingly high in some inheritance situations.
posted by procrastination at 4:28 PM on January 14, 2008 [1 favorite]

Definitely go for a 529 plan for your daughter. Check your state plans, especially if they offer a state tax deduction. If you are in a state without an income tax, you can get a low cost generic 529 plan at Vanguard and put the entire $30,000 in at once. The contribution compounds tax free and the distributions are tax free when used for qualifying education expenses.

First off, make sure you have at least a 6-month cash emergency fund.

I would pay off the 8.25% loan. Paying off the loan is the equivalent of a guaranteed 8.25% riskless investment which is much better than any other riskless investment.

Max out your Roth contribution and max out your 401k contributions. This is assuming you have a reasonable 401k with good, low cost investment funds.

Take the remainder and put it into low cost Vanguard index funds. If you aren't able to max out your 401k each year, you can withdraw some of these funds each year to do so.

You really don't really need a financial adviser to do this.
posted by JackFlash at 4:37 PM on January 14, 2008

Make sure you CYA re: she-to-whom-you-pay-child-support, i.e., that she doesn't try to make a windfall claim on the money.
posted by Rumple at 4:54 PM on January 14, 2008

Pay off the debt certainly, and don't add more on.

Put money into a 529 plan. These act as wrappers for other investments, often specified by the plan. It works very similarly to a 401(k) plan if you have one of those where you put money into the plan, and then choose between a bunch of different mutual fund options. I'd probably split it between a S&P index fund, and a bond fund, with most the weight towards the S&P fund.

Open and max out a Roth IRA. You can go to Scottrade, and they'll charge you zero in maintenance fees. They've been very good to me. Since you are buying in all at once, I'd recommend ETFs over Mutual Funds, as the ETF's fees will be lower. If you want really simple, there are target date ETFs out there (I think), which will automatically rebalance based on the date you want to retire. (you can also get those based as mutual funds).

Take a vacation, have fun, do whatever with a small chunk of the money (5-10k?).

With whatever is left, open a "taxable" (ie. regular account). Put it into safer investments, like a Money Market account, or a Government Bond Fund. Then, make a withdrawal every year to put into the 529 and IRA accounts. Heck, this chunk could just go sit in a high-interest rate bank account (see EmigrantDirect or similar), acting as both an emergency fund, and also a "waiting to be invested" fund.

If you need more help walking through this, look into a fee-based financial planner. They will charge by the hour as a one time thing, rather than a recurring percentage.

As for the mortgage, it's up to you. Either way has arguments for and against it, the 8.5% rate is right on the borderline of an easy decision either way.

A 4.5% fee is outrageous, never ever pay that much. They are taking advantage of you. The 1% number you've heard is on mutual funds. I suggest ETFs since that number is even lower, and they act like mutual funds. A broad based S&P ETF can be had for as low as 0.08%.
posted by cschneid at 5:52 PM on January 14, 2008

There are financial advisors who operate on a flat-fee basis (e.g. an hourly rate). Having at least one or two meetings with one of those would probably be useful in tailoring a plan to your specific situation.
posted by winston at 5:53 PM on January 14, 2008

the bottom appears to be falling out of the housing market. by late 2008/2009, there may be good opportunities to pick up the pieces of somebody else's shattered dreams.
posted by bruce at 5:56 PM on January 14, 2008

There's some good advice in this thread, but not all of it may fit your situation. You say you're 'good with money' but I sense from the language you're using that you're not fully versed in market-speak.

I agree that the no-brainers are to pay off your current debt and your second mortgage, max out your 401(k) and Roth each year, and start a 529 for your daughter. Beyond that is a combination of weighing your risk tolerance against what your investment goals and what your other alternatives are. It's not rocket science, but I don't think it's something to which that the hive mind can give you a definitive answer.

If you want someone to look at your "complete picture" and provide one-on-one advice, I suggest you look into a fee-only financial planner. This is someone you pay by the hour who won't have a financial incentive to steer you towards investments that pay higher commissions. You want to talk to this advisor about basic financial planning more than individual stock or fund picking (although "asset allocation" should be part of that conversation).

As far as the actual expenses go, it sounds like you have confused the expense ratio associated with mutual funds (which are probably a good deal at around 1%) with the "discretionary fee" that a big brokerage would charge you to manage all of your assets. These fees are not comparable. Frankly an account of $150k is probably barely large enough to be on the radar of competent manager, and it doesn't sound like there's any real reason you need this level of "advice".

I agree you can do a lot of this without an advisor. But in order to do that, you need to be able to understand the language and basic concepts that a financial advisor would be using.
posted by QuantumMeruit at 6:03 PM on January 14, 2008 [1 favorite]

Priority One:
Find out what your inheritance tax liability is.
Been there, lost half that.
posted by artdrectr at 6:50 PM on January 14, 2008

You need to look at the college aid situation very carefully. When I was going to college, parents expected contribution was increased heavily by savings and not at all by home value! So back then it would have made sense to pay off the mortgage so as to boost aid eligibility. You have to think about this kind of thing.
posted by Jahaza at 8:13 PM on January 14, 2008

Pay the bills, then toss the rest into an index fund and forget about it.
posted by tkolar at 11:29 PM on January 14, 2008

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