$745K Coming in on Friday! What to Do?

[retiringby50]

Short personal summary: I'm 41, and DH is 43. There's more about us on the "Hi, I'm..." board, which I still have to answer, but this thread is more about how to invest the money.

The $745K will be wired into my Vanguard MM fund by this Friday afternoon. Separately, I already have about $145K with VG broken up into the following funds:

10% Long-Term Investment-Grade Fund Investor Shares
10% Short-Term Investment-Grade Fund Investor Shares
15% International Value Fund
25% Windsor II Fund Investor Shares
10% Total Bond Market Index Fund Investor Shares
25% Capital Value Fund
5% Money Market

My short-term expenses are as follows:

1. December 2007 - taxes - $56K - sold inherited home, and accountant wants me to pay before 12/31 to get deduction for this year, plus the IRS won't penalize me for a high amount of taxes owed.

2. March 2008 - new car - $40K. My current car is 21 years old, so I'm feeling sort of entitled right now.

3. Throughout 2008 - remodeling of current home - $50K.

My plan is to (1) put away $12,000 in a separate money market as my emergency fund, (2) keep the $56K in the VG MM to pay taxes when the accountant is done w/all the paperwork, (3) open a 3 month CD for the $40K for the car, and (4) do some ladder CD's for the $50K for home improvements (we don't actually know what we're going to do yet). That leaves me with $587K to invest.

Do I bother with dollar cost averaging or just do the lump sum arbitrarily? Pick a day and be done with it? I've read 1 thread on DCA here but should probably spend more time on it, although from what I read, it sounds like lump sum is the way to do it.

Should I just use the percentages shown above? Am I being too conservative? Too risky?

Breathe, breathe, this is a great problem to have, but I feel I have to be extra responsible since two people worked extremely hard all their lives to ensure I can have a better life. Thanks for your help!

 

[LOL!]

Maybe you should buy some books on investing and read them? How are you gonna know that any answers you get here are reasonable? Did you look at Bogleheads :: View Forum - Investing - Help, Personal Issues and Advice ?

 

[cute fuzzy bunny]

What are your objectives for the $587k? When will you want to start tapping the money, for what purposes, will you be retiring, when, etc?

 

[RetireeRobert]

Short personal summary: I'm 41, and DH is 43. There's more about us on the "Hi, I'm..." board, which I still have to answer, but this thread is more about how to invest the money.

The $745K will be wired into my Vanguard MM fund by this Friday afternoon. Separately, I already have about $145K with VG broken up into the following funds:

10% Long-Term Investment-Grade Fund Investor Shares
10% Short-Term Investment-Grade Fund Investor Shares
15% International Value Fund
25% Windsor II Fund Investor Shares
10% Total Bond Market Index Fund Investor Shares
25% Capital Value Fund
5% Money Market

My short-term expenses are as follows:

1. December 2007 - taxes - $56K - sold inherited home, and accountant wants me to pay before 12/31 to get deduction for this year, plus the IRS won't penalize me for a high amount of taxes owed.

2. March 2008 - new car - $40K. My current car is 21 years old, so I'm feeling sort of entitled right now.

3. Throughout 2008 - remodeling of current home - $50K.

My plan is to (1) put away $12,000 in a separate money market as my emergency fund, (2) keep the $56K in the VG MM to pay taxes when the accountant is done w/all the paperwork, (3) open a 3 month CD for the $40K for the car, and (4) do some ladder CD's for the $50K for home improvements (we don't actually know what we're going to do yet). That leaves me with $587K to invest.

Do I bother with dollar cost averaging or just do the lump sum arbitrarily? Pick a day and be done with it? I've read 1 thread on DCA here but should probably spend more time on it, although from what I read, it sounds like lump sum is the way to do it.

Should I just use the percentages shown above? Am I being too conservative? Too risky?

Breathe, breathe, this is a great problem to have, but I feel I have to be extra responsible since two people worked extremely hard all their lives to ensure I can have a better life. Thanks for your help!

Given your and DH's ages, the above allocation of your current funds looks entirely reasonable. Depending on your longer-term goals, your and DH's shared risk tolerance, and what other assets/income/pensions you have, you may eventually want to alter the asset allocation. For now, just in general, it does not look especially risky or especially conservative, but somewhere in the middle. And that's ok.

For the new investable funds coming in--the $587k, I would put it in the MM fund and/or 3 and 6 and maybe 9 month CD's. While this new money is sitting safe and relatively accessable in MM and short CD's, read, read, read, study, study, study, AND most importantly:

You and DH have longtalks about risk tolderance, goals, dreams.

Once you and DH have better ideas of what you would like this new money to accomplish, THEN you can start deciding how to invest it.

If, after this process, you decide to allocate the new funds in the same percentages as you have allocated your current funds, I don't think anyone could make a reasonable case that would be a big mistake. In fact, if that is what you do, such decision would seem very very reasonable for a fairly wide range of goals, objectives, and risk tolerances.

Good luck, and you are to be complimented on the seriousness with which you regard your coming investing project.

 

[retiringby50]

Maybe you should buy some books on investing and read them? How are you gonna know that any answers you get here are reasonable? Did you look at Bogleheads :: View Forum - Investing - Help, Personal Issues and Advice ?

I didn't know there's a moderated VG forum. Thanks! Regarding reasonableness, I was sort of counting on a majority rule type of thing... if 10 people say I'm on the right track, and 1 says not, then I'm probably going to assume, I'm doing okay.

 

[retiringby50]

What are your objectives for the $587k? When will you want to start tapping the money, for what purposes, will you be retiring, when, etc?

Good questions... I didn't initially talk about this because I didn't really know. My plan for the money is ultimately for retirement, hopefully in 9 years for both of us, but we also have 401(k)'s.

 

[LOL!]

.... Regarding reasonableness, I was sort of counting on a majority rule type of thing... if 10 people say I'm on the right track, and 1 says not, then I'm probably going to assume, I'm doing okay.

I see. Does that mean you are not open to reading some books?

I'll add this: we own some VG Windsor II, Short term bond, international value, tax-exempt MM ... but I would not select most of the funds you selected. Most of them are actively managed. All our new money goes into index ETFs, but you could use index funds from Vanguard.

If you want to mimic to total stock market, then you need
40% VTSMX (US total stock market)
22% VFWIX (FTSE world ex-US international total stock market)
8% GWX (small cap international missing from VFWIX, or choose PRIDX)
10% VFSTX (short-term bond, but NOT in a taxable account)
10% VIPSX (inflation protected securityes, but NOT in a taxable account)
10% VBIIX (intermediate term bond, but NOT in a taxable account)

If you want slice-and-dice see FundAdvice.com - Home for some portfolios. If you want to add some REIT (but NOT in a taxable account) use VGSIX.

Or use a no-cost broker and buy the equivalent ETFs (VTI, VEU, GWX, TIP, etc).

There is an asset allocation tutorial in this forum that you might wish to read for more info as well.

 

[audreyh1]

Wait until your funds have paid out their 2007 distributions before investing in them otherwise you'll just needlessly increase your 2007 taxes. You might have to wait until Jan 1 2008.

Audrey

 

[retiringby50]

I see. Does that mean you are not open to reading some books?
If you want slice-and-dice see FundAdvice.com - Home for some portfolios. If you want to add some REIT (but NOT in a taxable account) use VGSIX.

Or use a no-cost broker and buy the equivalent ETFs (VTI, VEU, GWX, TIP, etc).

There is an asset allocation tutorial in this forum that you might wish to read for more info as well.

Oops, I didn't answer that part. Totally open to reading books. I've read Investing for Dummies and have taken Eric Tyson's classes through an extension program; I've just finished Bob Clyatt's book, and I've done some reading online. It's just that understanding numbers and tax implications isn't one of my stronger points, so sometimes I just don't get it. For example, the article on fundadvice.com regarding whether to pay off the mortgage or not was really helpful because he outlined the calculations for me. I probably could have figured out most of it but would have left out something (like taxes on mixed bag of funds). Thanks for the info you gave me. I'll check it out more tomorrow when I'm less sleepy.

 

[Payin-the-Toll]

2 words---Las Vegas!!!!

 

[lucija]

Are these funds to be invested in a regular taxable account?

You have selected a set of reasonable funds (and allocation seems to be OK, a bit short on the small cap side for my taste), but none of them are particularly tax friendly.

Unless you plan to use yearly distributions for living expenses, you may want to consider a different set of funds (i.e., general index or tax managed funds as these tend to be very friendly at tax time). I would keep bonds in tax deferred accounts if possible.

Take a look at the dividends & cap gains distributions for your selected funds and see if you can live with the added tax liability... For example, if you invest the whole thing in Vang total stock market, a very tax efficient fund, it will "throw-off" about $10K/year in qualified dividends (no cap gains, probably). It's all down hill from there...

 

[cute fuzzy bunny]

Good questions... I didn't initially talk about this because I didn't really know. My plan for the money is ultimately for retirement, hopefully in 9 years for both of us, but we also have 401(k)'s.

Okay, well knowing what you want the money for and time horizons are fairly crucial to making a recommendation.

In the absence of other info, I'd suggest the target retirement 2015 or 2020 funds. Low cost, mix of equities and bonds. Good generic answer for a good generic question.

If those seem not racy enough, add 5 or 10 years to the TR fund maturity date. If you dont want a 'sliding' fund, go with lifestrategy conservative or lifestrategy moderate growth.

And yes, wait until next month to buy.

 

[jIMOh]

Good questions... I didn't initially talk about this because I didn't really know. My plan for the money is ultimately for retirement, hopefully in 9 years for both of us, but we also have 401(k)'s.

To properly invest the money, I would do an x-ray of the 401ks plus the Vanguard accounts.

Don't include the new money initially.
Then discuss how much risk is being taken. right now.
Then discuss retirement plan (do you have enough?)
add in the new money to analysis.
do you have enough now?
do you need to take on more risk to retire in 9 years?
come up with a new allocation to judge the new risk profile, do an xray prior to investing the money, but include new money in 2nd xray.

(xray is a morning star tool to help judge risks and holdings in a portfolio).

I could see this playing out one of 3 ways:

1) you have more than enough to retire. The 401ks and current Vanguard account had enough already. The 587k is a bonus. This money could be used to get more conservative or create a more reliable portfolio. What was a 70-30 stock-bond portfolio might now become a 40-60 portfolio with a more stable return.

2) You have "just enough" to retire. The 401ks and Vanguard accounts were slightly underfunded, but with the 587k included, you appear to have just enough. In this case I would invest the 587k in the same allocation as the 401k and Vanguard accounts.

3) You are behind in retirement savings. The 401ks and Vanguard accounts were underfunded for years. They had no where near enough to retire on-maybe because current holdings were too conservative. The 587k is a needed boost, but is still not enough. In this case I would invest the 587k aggressively as the money was unexpected, and allows you to take more risks.

I am guessing if you are on this board, you are in situation 1, maybe 2.

 

[RetireeRobert]

Oops, I didn't answer that part. Totally open to reading books. I've read Investing for Dummies and have taken Eric Tyson's classes through an extension program; I've just finished Bob Clyatt's book, and I've done some reading online. It's just that understanding numbers and tax implications isn't one of my stronger points, so sometimes I just don't get it. For example, the article on fundadvice.com regarding whether to pay off the mortgage or not was really helpful because he outlined the calculations for me. I probably could have figured out most of it but would have left out something (like taxes on mixed bag of funds). Thanks for the info you gave me. I'll check it out more tomorrow when I'm less sleepy.

Some have advised "wait till next month" to invest the new funds. I would again urge putting the new funds in MM or short-term CD's while you read, study, and absorb meterials on investing. And while you and DH meditate on longterm goals, desires, and dreams.

THEN start gradually investing the new funds--3 or 6 or 9 months from now.

You earlier indicated this money represented a lifetime of work by those you inherited from, and you didn't want to blow it. Listen to yourself, and take your time. There is no hurry.

 

[retiringby50]

2) You have "just enough" to retire. The 401ks and Vanguard accounts were slightly underfunded, but with the 587k included, you appear to have just enough. In this case I would invest the 587k in the same allocation as the 401k and Vanguard accounts.

I am guessing if you are on this board, you are in situation 1, maybe 2.

I think I'm #2. In general, this extra money is go towards retirement. OK, I decided today was a good day as any to allocate the money. Figure if I didn't do it now, I'll forget. I thought about allocating throughout the next few days but not sure if that will do anything except be one more thing I'll have to remember doing! Thanks everyone. I'll keep reading and learning.

 

[cardude]

Yeah, just get it over with...................

 

[lazygood4nothinbum]

what to do? perhaps i could interest you in a house?

 

[Animorph]

As volitile as the market is, even DCA'ing over a few days might make sense. Just to make sure you are not at some market peak. However, I normally just do it all in one day, and today is as good as any.

Dan

 

[Scrapr]

2 words---Las Vegas!!!!

Black or Red?

always bet on black

 

[retiringby50]

what to do? perhaps i could interest you in a house?

I forgot to mention that I was in South Beach two weeks ago and took two boat tours where the guides pointed out all the famous rich people who live on the islands on Biscayne Bay. Ummm, I'll pass - real estate just isn't my thing.

 

[W2R]

Would you mind telling us how you invested the money? If that is too personal, just ignore me!!! I don't intend to pry but I am SO curious.

Although I would not want to copy anyone else's plan, right now it is interesting to me to see how others deal with windfalls since I am coming into one as well. So far, just one small partial distribution has appeared but more is on the way, and I won't have the taxes/car/remodeling expenses that you are expecting. Creating a plan for investing a windfall is an interesting exercise. I am reading like crazy and working on my plan. I plan to ER in 22 months, so I am considering this to be an ER investment plan.

My asset allocation will be about 45:55 (equities:fixed).

In my still tentative plan, almost everything is in Vanguard.

20% Total Stock Market Index VTSAX - (taxable account)
10% FTSE All-World Ex-US Index VFWIX - (taxable account)
30% Vanguard's Wellesley VWIAX - (taxable account, unfortunately)
16% Prime Money Market VMMXX or perhaps eventually CD's (taxable account)
21% "G Fund" Government Securities Fund (my entire TSP)
2.5% either REIT VGSIX or Small Value Index VISVX (my entire tiny Roth)

As you can see, I am constrained by the fact that over 3/4ths of my portfolio will have to be in my taxable account. The Roth, especially, is still up in the air since I'm not sure that 2.5% is really enough to see any benefit from additional diversification and apparently putting either of these funds in taxable would be an exercise in self-flagellation. Maybe I will just abandon the idea of extra small value or extra REIT, and consider the Roth to be money to play with and invest in whatever seems cool to me at the time so that I am not tempted to vary from my overall plan. I think Uncle Mick said he does that with part of his funds, and that makes sense.

I will probably DCA into the (VTSMX)/VTSAX and VFWIX, and lump sum into the VWIAX and VMMXX. Or not. Still thinking.

 

[jIMOh]

Would you mind telling us how you invested the money? If that is too personal, just ignore me!!! I don't intend to pry but I am SO curious.

Although I would not want to copy anyone else's plan, right now it is interesting to me to see how others deal with windfalls since I am coming into one as well. So far, just one small partial distribution has appeared but more is on the way, and I won't have the taxes/car/remodeling expenses that you are expecting. Creating a plan for investing a windfall is an interesting exercise. I am reading like crazy and working on my plan. I plan to ER in 22 months, so I am considering this to be an ER investment plan.

My asset allocation will be about 45:55 (equities:fixed).

In my still tentative plan, almost everything is in Vanguard.

20% Total Stock Market Index VTSAX - (taxable account)
10% FTSE All-World Ex-US Index VFWIX - (taxable account)
30% Vanguard's Wellesley VWIAX - (taxable account, unfortunately)
16% Prime Money Market VMMXX or perhaps eventually CD's (taxable account)
21% "G Fund" Government Securities Fund (my entire TSP)
2.5% either REIT VGSIX or Small Value Index VISVX (my entire tiny Roth)

As you can see, I am constrained by the fact that over 3/4ths of my portfolio will have to be in my taxable account. The Roth, especially, is still up in the air since I'm not sure that 2.5% is really enough to see any benefit from additional diversification and apparently putting either of these funds in taxable would be an exercise in self-flagellation. Maybe I will just abandon the idea of extra small value or extra REIT, and consider the Roth to be money to play with and invest in whatever seems cool to me at the time so that I am not tempted to vary from my overall plan. I think Uncle Mick said he does that with part of his funds, and that makes sense.

I will probably DCA into the (VTSMX)/VTSAX and VFWIX, and lump sum into the VWIAX and VMMXX. Or not. Still thinking.

I might suggest bumping up equity allocation in Roth (VFINIX??) and let it ride (no withdraw requirements). As the Roth gets bigger, you will have the peace of mind that money will never get taxed.

Is VMMX a taxable fund? Have you considered a muni money market fund?
Wellesley is a 40-60 fund, correct?

Do you reinvest dividends and capital gains? I might suggest sending dividends, interest and capital gains into a money market, and use that fund to live off of and rebalance from.

Is the TSP tax deferred growth? Can it be converted to a Roth? Is the G fund subject to RMDs?

 

[W2R]

I might suggest bumping up equity allocation in Roth (VFINIX??) and let it ride (no withdraw requirements). As the Roth gets bigger, you will have the peace of mind that money will never get taxed.

Good idea! I could do that. I guess that is pretty highly correlated with VTSMX, but who cares since it is so small.

Is VMMX a taxable fund? Have you considered a muni money market fund?

Yes it is, and no, didn't think of that. I'll read more about them and look into them. Thanks!

Wellesley is a 40-60 fund, correct?

Correct, essentially. 39.9% equities, 60.1% bonds.

Do you reinvest dividends and capital gains? I might suggest sending dividends, interest and capital gains into a money market, and use that fund to live off of and rebalance from.

I was thinking of doing that with the Wellesley dividends and the TSP, since that will give me several times more than I have been living on lately. I was thinking of not touching the Roth, as you suggest. Also I thought maybe I'd just let VTSAX and VFWIX ride as my inflation protectors and not take any dividends, interest, or capital gains out.

Is the TSP tax deferred growth? Can it be converted to a Roth? Is the G fund subject to RMDs?

Yes, it is tax deferred growth.

It is expected that TSP can be converted to Roth in 2010. Right now withdrawal rules are pretty specific and rigid, and I had planned to take the equal monthly payment option (the amount of which can be changed once a year). Maybe I will be able to move my equal monthly sums into a Roth - - no way do I want to take the tax hit of moving it all at once into a Roth anyway. The G Fund is probably the safest fixed income investment on the face of the earth, which is why I am thinking of keeping it for these crucial first 10 years of ER. It is guaranteed to never lose principal. Last year's rate was 4.87%, and the year before 4.93%. I believe the lowest in history was 4.11% in 2003.

Yes, the G Fund is subject to RMD's at age 70 1/2, which is 11 years from now.

 

[Spanky]

Wellesley is a 40-60 fund, correct?

2/3 bond, 1/3 high dividend stocks

If tax is of concern, try Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX).

 

[jIMOh]

Good idea! I could do that. I guess that is pretty highly correlated with VTSMX, but who cares since it is so small.

I recomended S&P 500 because it is
a) more concentrated
b) more conservative
c) has higher yield

than the overall market. As you get into retirement, I would expect more large cap holdings and fewer small and mid cap holdings. The recomendation to S&P 500 was because that choice is a move in that direction.

But don't let my risk profile suggest what you should do.

Yes, it is tax deferred growth.

It is expected that TSP can be converted to Roth in 2010. Right now withdrawal rules are pretty specific and rigid, and I had planned to take the equal monthly payment option (the amount of which can be changed once a year). Maybe I will be able to move my equal monthly sums into a Roth - - no way do I want to take the tax hit of moving it all at once into a Roth anyway. The G Fund is probably the safest fixed income investment on the face of the earth, which is why I am thinking of keeping it for these crucial first 10 years of ER. It is guaranteed to never lose principal. Last year's rate was 4.87%, and the year before 4.93%. I believe the lowest in history was 4.11% in 2003.

Yes, the G Fund is subject to RMD's at age 70 1/2, which is 11 years from now.

Here is my suggestion- if you can convert TSP to a Roth, use the income tax cap to roll more money into a Roth.

For example, if you withdraw 40k from TSP (based on your need), the income tax cap for 25% bracket is 78,850 (link: Reference Room). This assumes filing single, the cap is different for married filing jointly.

You have 38850 to cap out 25% tax bracket, convert that amount from TSP to a Roth. Money is taxed at 25%, you will never pay taxes on that money again.

You could go with a more complex plan. If you need 40k and the taxable accounts generate 15k of this need, you could withdraw 25k from TSP. That 25k is taxable as ordinary income at 15% tax rate. The cap for that bracket is 32550. Convert 7550 to a Roth (paying 15% tax) and never pay tax on that money again.

I would start doing the TSP toRoth conversion well before age 70.5. The goal would be to gradually convert TSP to a Roth, paying as little tax on the TSP as possible (if you can convert whole TSP to Roth at 15% bracket over a 20 year period, it is probable you will have a higher income from Roth (tax free) than you do from the TSP (because decrease in taxes is more money in your pocket).