Impending Inheritance - What to do!

[Jon Snow]

Greetings! I'm new to this forum, and looking to better understand how to handle an impending inheritance.

I’m 30 and married with 2 kids. My portion of the inheritance is approximately as follows:

$250,000 – Cash savings/life insurance
$55,000 – IRA’s
$30,000 – Estimated amount after sale of house

My current financial info:
$35,000 IRA
$70,000 home equity

I’ve been thinking about my goals in life, and how this might significantly affect my ability to achieve them much earlier. Retiring early would allow me to pursue my goals of travel, non-profit work, and music aspirations. My goal is to retire around 12 years from now. I’d like to retire with my investments yielding about $70,000 in today’s dollars. I know that in 12 years, adjusted for 3% inflation this amount will be $99,803, and that using the 5% formula I’d need a cool $2 million. I’m leaning towards the 5% formula, because I think some of my endeavors in retirement will yield income, which will reduce my dependency on my nest egg. I guess one reason I’m hear is because I’d like your input on my plans and whether or not you think they will allow me to achieve my goals. From what I've read, there appear to be a lot of experienced investors with good ideas.

My plan is as follows:

1. First, open a money market account and deposit all cash.

2. Max out a Roth IRA, annually.

3. Use the 72t exception to make substantial, equal, annual withdrawals from the inherited IRA using the average lifetime approach. As I understand it cannot simply be rolled over because Uncle Sam wants his share.

4. Use my existing home as a rental property, and buy an additional property for primary residence, using 20% of the inheritance as down payment. Depending upon how I tolerate being a landlord, I am considering future real estate, such as purchasing foreclosures either before or at auction, which could be held as rentals or reconditioned and sold, if purchased significantly below market value.

5. Pay down my 2nd mortgage by $30,000, using the equity as emergency cash fund.

6. Invest the rest in an aggressive stock portfolio. I’m not sure about the timetable. All at once vs. ½ now, ½ in 1 year vs. monthly for 2 years.

- Jon

[crazy connie]

I suggest reading up on inherited IRA's at ED SLOTTS IRA Forum. If you were named as the beneficiary then you can take lifetime stretch starting no later than the year following the death of the original owner. Uncle Sam is content to take his share a little bit at the time.

You could do conversions to ROTH on your current IRA over a few years time.

Why become a landlord? Why not pay off home and stay or trade up to what you want?

Also, a most important point is "Sole & Separate". Put a great deal of thought into this before deciding.

[Nords]

Welcome to the board, Jon.

Originally Posted by Jon Snow

3. Use the 72t exception to make substantial, equal, annual withdrawals from the inherited IRA using the average lifetime approach. As I understand it cannot simply be rolled over because Uncle Sam wants his share.

I can hear Ed Slott now: "NNNNNNNNOOOOOOoooooooo!"

The executor and the IRA custodian need to properly split up the IRA and correctly retitle your share in yours and the decedent's names. Doing it incorrectly forces a complete distribution within five years, but doing it right lets you draw on it for the rest of your life-- which is pretty significant considering the compounding potential. Read Ed's "Retirement Savings Time Bomb" book or ask the advice of the CPAs at his discussion forum.

As for the rest of the estate and your ER plans, have you forecast your expenses and various withdrawal schemes on FIRECalc?

[Cattusbabe]

DH and I inherited a large sum last year. Enough not to have to work ever again so I FIRED last May . DH was already retired. If I may make a suggestion. Hold off on making a decision on what to do with the money, park it somewhere safe. You made a good move coming here to learn and to get good advice. There are books out there concerning how to handle sudden wealth and what to do after you inherit a large sum of money. We read some of these and they helped. There is a lot of emotional stuff that goes on when you inherit money and you will need to deal with that. Your young so you have time to get your plan together. Some people wait a year, some more. Take the time you need.

DH and I have not made any changes with the money we inherited because we are still learning what our holdings are and why things are invested the way they are. Change for change sake is not wise and quite franky we are in agreement with the investment strategy as it stand now. We will make some adjustments in the future but not until we fully understand what we are doing.

[Oldbabe]

"Retiring early would allow me to pursue my goals of travel, non-profit work, and music aspirations. My goal is to retire around 12 years from now. "

Hi Jon,
Hope you won't mind a little advise giving from this "Oldbabe" I would suggest trying to work in a little of those aspirations right now and continue to do so during those 12 years until you ER. You don't want to be surprised 12 years down the road that you really don't want to do those things after all! You would be surprised how a person changes in 10-15 years. Work on those aspirations now with your current energy and desire, even if only a few hours a week!

All the best with your goals.