Big Lump Sum and AA

[timbervest]

A friend of mine with shortly inherit a large amount which will dwarf his current NW (increase by 4-5X). His current AA is 70-30% in index funds which he is comfortable with. He has no large debts or other problem issues to deal with financially. He is within 5 years of retirement.

Question he posed to me is when this cash comes to him should be just plunk it all down with the same AA and invest 70% of it in the market or take another strategy.

My answer is if he was comfortable with his AA before it shouldn't make any difference with this new amount and to invest accordingly.

Thoughts?

 

[OldShooter]

Sorry, I disagree. Going in, putting the windfall into the current AA is probably fine, but the "right" AA depends on your friend's objectives, which could easily change with the large increase.

The example I use is two 75YO widows with long-lived parents. The one with $100,.000 will have a different AA than the one with $10M. In your friend's case, the 30% may be far more than he likely needs to cover his remaining lifetime. If so, maybe the equity tranche should be increased to fund a larger estate for children and charities. Alternatively, if that is not of interest, maybe the equity percentage is reduced and he goes into BTD mode with the fixed income tranche.

Lewis Carroll, "Alice's Adventures in Wonderland: Alice: "Would you tell me, please, which way I ought to go from here?" "That depends a good deal on where you want to get to," said the Cat.

 

[thefist]

Another way to look at AA is using Years of Expenses. So for instance, make sure that 5yrs of expenses is in cash and short term or investment grade bonds. 5 is just a suggestion. Choose the duration that makes you comfortable. Maybe you keep more in cash for the first few years and try for ACA subsidies while the equities stay invested.

If your friend is within 5yrs of retirement, the windfall could be used for major house repairs or upgrades, car replacement, savings for anticipated expensive vacations. Figure that out, then the balance is available to invest.

 

[target2019]

A friend of mine with shortly inherit a large amount which will dwarf his current NW (increase by 4-5X). His current AA is 70-30% in index funds which he is comfortable with. He has no large debts or other problem issues to deal with financially. He is within 5 years of retirement.

Question he posed to me is when this cash comes to him should be just plunk it all down with the same AA and invest 70% of it in the market or take another strategy.

My answer is if he was comfortable with his AA before it shouldn't make any difference with this new amount and to invest accordingly.

Thoughts?

With 5 years to go, and a doubling of invested assets, he needs to evaluate more. No one here knows all of his needs, and especially not 5 years from now.

If the inheritance is all cash, then...put it into a hi-yield account while determining a complete investment plan for, say, 10 years.

If the inheritance is a mix of funds and cash, then...put the cash into a hi-yield fund and craft a 10-year plan for all assets including the funds.

Good luck to your friend.

 

[DrRoy]

If it were me, I would probably go 50-50 on the AA.

 

[chassis]

A friend of mine with shortly inherit a large amount which will dwarf his current NW (increase by 4-5X). His current AA is 70-30% in index funds which he is comfortable with. He has no large debts or other problem issues to deal with financially. He is within 5 years of retirement.

Question he posed to me is when this cash comes to him should be just plunk it all down with the same AA and invest 70% of it in the market or take another strategy.

My answer is if he was comfortable with his AA before it shouldn't make any difference with this new amount and to invest accordingly.

Thoughts?

This is a perfectly reasonable thing to do. If he changes his mind later, that’s ok too.

 

[Bamaman]

Such an inheritance would commonly generate a RESET in life.

It'll be time to reevaluate the future for themselves and their loved ones. It would also be a great time to begin gifting children/grandchildren for example.

And a 400-500% increase in net worth would likely generate future tax issues. Professional help might be needed to meet one's financial goals and minimize taxation. If there are large 401K's, RMD's alone would be painful. I can see where trust funds, etc. plus new wills to be setup.