Early this month, my wife and I received an inheritance from an Aunt. Without going into specifics, it was not a life-changing amount, but not insubstantial. She was invested in many (20+) different mutual funds, Exchange traded funds, and a few individual stocks. Because of this, we received smaller bits of a lot of different things. Since we already had a brokerage account the investments were added to that account. The existing account consisted of funds primarily from another inheritance from my parents and the sale of a house several years ago. For the most part, we have just let the magic of compounding work on this account and resisted the temptation to spend from it, but as retirees, we have started to make withdrawals on occasion, most notably for a home purchase and some improvements to that property.
I had planned to research each newly inherited investment, reflect on how it might fit into our portfolio and form a course of action. But I ultimately decided that each individual position really didn’t move the needle on our portfolio. So, I quickly sold each position in full, save one that we also happened to already own. For now, the rest sits in cash, mixed in with our other investments, awaiting redeployment and also a memorial charitable gift and a couple of home projects. We did put a chunk on our mortgage, but that was planned anyway, regardless of the inheritance. Due to timing, we’re sitting on a capital loss (not a large one) but that is not really a major issue.
I was curious how other people handle inheritances of this nature.
As I see it there are several possibilities:
Let it ride
Reinvest
Spend it
Reduce or eliminate debt
Charitable and other gifts
A combination of the above.
In general, our aim is to use the windfall wisely, and hopefully on something that would have made my Aunt happy, but we can never know that with certainty. As time goes on, since it is all intermingled, it will not really be practical to distinguish where funds we withdraw will have come from. And, it is quite likely, that at some point what remains of this account will also be distributed as inheritance to our heirs.
You need a financial plan. Just because your aunt owned certain funds, it doesn’t mean they are magic for you. If it were me, I’d sell everything…there should be little or no tax due to the stepped up basis at her death…and invest according to a carefully thought out financial plan.
Maybe gift some today to the future heirs? Reduce their stress?
Treat yourself, wife, and family to a “special” trip? “Make some memories”?
Upgrade some doodads to “more convenient than current”… Make your life easier now, today.
Hire a weekly or monthly maid service?
Reduce “maintenance, routine stressors”?
For us, the only debt we have is the mortgage. We’re reasonably frugal and have adequate means for our retirement. Running up debt is not in our nature.
We moved/downsized a couple of years ago, but bought before we able to sell the old place. It would have been very tight to do the purchase without borrowing, but could have been done. We chose to go with the mortgage. Shortly thereafter, we sold the old place and rolled the proceeds into our brokerage account, and invested it, rather than immediately paying off the mortgage.
We could pay off the mortgage, but it would involve selling some CDs early or selling some equities. The inheritance would not, by itself, be enough to pay off the mortgage. Instead, we’ve been throwing some extra cash at the mortgage annually to reduce both our mortgage interest and interest income, which nets out better on our taxes. The CDs and other fixed income generally yielding around 4.5% and the mortgage is around 5%. On the other hand, having the mortgage gives us flexibility and our equities should do better than 5%.
First, are you retired or working? What is your retirement date? What are your sources of income? Are your retirement expenses covered?
Generally you need to be in equities to keep up with inflation. A balanced portfolio is probably best. An S&P 500 index fund or etf is a good beginning. Depending on size you can include an international fund and selected stocks.
For stability you probably need some bonds or CDs. TMF usually suggests a laddered maturity bond portfolio covering 5 years of expenses if you will retire on investments. Some would use the ladder only for expenses covered by investment income after deducting other sources of income.
Much depends on you circumstances, your risk tolerance etc. Some need much larger bond positions. We hear lots about a 60/40 equity/bond split on TV. But many in TMF have much smaller bond positions.
Great to hear you are thinking about. Best wishes finding a plan that fits your needs.
As to inherited stocks, some possible situations are–
Stock of a previous employer
Stock of a leading employer in her area
Stock that has done well for her.
Some examples might include GE, Boeing, 3M, Texas Instruments, HP.
I don’t put much value on nostalgia. As you suggest, I would review each one case by case. Industry leader? Good prospects for future?
Ones that did well for her in the past (favorite stocks) are the least likely to keep. You inherited them on a stepped up basis. Easy to sell and no income tax. Keep only if they have good prospects.
A well diversified portfolio can be fine. Too many mutual funds can be a problem. Performance is often mediocre but more costly than index funds.
Wow. Lots of questions. Kind of beyond the scope of the original post. I titled it “Musings”, as I wasn’t really seeking advice, but I suppose I can provide a little more color. Hope I don’t come off as snarky, as I’m sure your questions and advice were in good faith. It’s just that I’m pretty confident in our financial situation.
Both my wife and I are retired 4+ years. Together we have Traditional and Roth IRAs quite sufficient to fund retirement. The accounts are diversified, but more equity than bonds. We’re taking <4% distributions. In addition, we have a taxable brokerage account that is worth around 2x our primary residence value. It’s roughly 30% cash/CD ladder and 70% equities (mostly efts, but a couple of individual stocks), but that is skewing more towards equities over time due to growth from the equities and maturing bonds that we will draw on from time to time.
If you lump all or our financial assets together, we are about 75% equities, 17% bonds and 8% cash. One IRA account is kind of a core account split between RSP, MDY & a Fidelity Bond Fund. That account is primary covering our living expenses.
I start Social Security next month (at age 62) which allows us to reduce our IRA distributions a little bit. My wife (same age) will wait until at least full retirement age or maybe even to age 70. Her SS benefit will be larger than mine, because she also worked longer and made more money than I did.
The inheritance was on the order of 1% of our net worth. I described it as not life changing. It was a nice chunk of change, but truthfully, our portfolio value changes more than that amount on many days.
A few years back, I inherited an IRA from my mother and some life insurance proceeds. Same as you: not life changing but not insignificant. I have zero debt and still working, so I mainly reallocated the holdings that aligned with my goals. The beneficiary IRA has done quite well as have been writing puts for income.
My current issue is taxes: the first 3 years I did not take a withdrawal as tax brackets would have killed me. Last year was first year I withdrew funds and planned to pull enough so that it would not put me into next higher tax bracket. This year I will do the same come November. But the returns may still cause a huge tax hit in years 9 and 10; as with new IRS laws enacted few years back, money has to be depleted.
With the withdrawal from the beneficiary IRA last year, I setup a new brokerage account so I can track it separately from my regular brokerage account. I guess if I had a need for cash, I would take from this account first; but personally would like to pass these funds to my nieces and nephews to honor their grandma.
