Cash windfall just before retirement

[disneysteve]

I'm teetering on the brink of retirement. I'll be 57 or 58.

I'm in the process of receiving an inheritance. About 600K will be in cash.
Do I invest it all?

Do I keep a larger than normal cash position and use that to fund our expenses for a few years to minimize our AGI for ACA purposes?

Do I invest it in a growth index fund to limit investment income?

We already have a substantial taxable portfolio. I was planning to tap that in the early years to keep AGI low but I'm wondering if sitting on more cash would be even more advantageous.

Thoughts?

 

[RetiredHappy]

I'm teetering on the brink of retirement. I'll be 57 or 58.

I'm in the process of receiving an inheritance. About 600K will be in cash.
Do I invest it all?

Do I keep a larger than normal cash position and use that to fund our expenses for a few years to minimize our AGI for ACA purposes?

Do I invest it in a growth index fund to limit investment income?

We already have a substantial taxable portfolio. I was planning to tap that in the early years to keep AGI low but I'm wondering if sitting on more cash would be even more advantageous.

Thoughts?

We retired years ago, and kept about $1M in cash/CDs to fund us until the established income stream would fully fund our expenses. We also have substantial taxable and tax deferred portfolio, but we kept the cash/CDs as a separate bucket. I keep a spreadsheet with cash flow for the next 30 years, broken down by months for the upcoming few years. Retiring at 53, it meant expensive health insurance premiums until I get on Medicare. Other sources would be SS, annuities and RMD. We were only able to utilize ACA subsidies for the one year after we retired. Thereafter, capital gains etc resulted us in making too much.

If you haven't already set up your financials in a spreadsheet or some other tool for the purpose of itemizing and tracking income and expenses for your retirement, you may want to do so. It would drive where you want to park the $600K.

 

[RunningBum]

You might want to see this current thread, which asks almost the same question:

https://www.early-retirement.org/forums/f28/windfall-and-withdrawals-109874.html

I think keeping it as cash or investing in growth index fund are both legitimate options. Not a windfall, but a few years I sold out of a couple of higher income producing funds and went with cash to use for my final few years on an ACA plan. I missed out on some gains that way, but did lock up money in CDs at a better rate than today. The issue with investing in a growth fund is that if you need the money for living expenses, you would incur a taxable event (capital gain or loss) selling the fund.

 

[audreyh1]

You know, this is the time to review your personal goals, short term and long term. That will be what determines how you should any extra funds.

No one else can answer that question. There is not a single universal answer.

 

[OldShooter]

... Thoughts?

This is an asset. A nice one and possibly unanticipated but an asset nevertheless. You have an asset allocation plan. After receiving the windfall, park it in a MM or somewhere, then sit down and figure out your resulting AA. It will probably be different that your former AA plan, which may be different that the AA plan you want to have going forward. Decide on the AA going forward and adjust your current holdings to suit.

The windfall is completely fungible money. We all do mental accounting; sometimes it is beneficial and sometimes we do it accidentally and it confuses us. IMO you may be in the latter category. Try: https://en.wikipedia.org/wiki/Mental_accounting or, better, use the first few bucks of that windfall to buy yourself a copy of Richard Thaler's "Misbehaving." Your financial management skills will benefit.

 

[disneysteve]

This is an asset. A nice one and possibly unanticipated but an asset nevertheless.

I just realized in writing and revising my post a few times, I ended up leaving out an important detail.


I knew this money was coming. It is already part of our anticipated retirement portfolio. In that sense, it isn't a windfall but rather expected funds.


So the question is really how to structure our portfolio entering retirement, how much to keep in cash, and devising the best withdrawal plan for the early years to keep income under the important caps (ACA and CG) while also making wise decisions as far as taxes are concerned.

 

[audreyh1]

Well, in that case, you already had a goal for it.

There are a lot of discussions here on the mechanics of managing retirement funds. Several recent threads on how much to keep in cash (including one started by you), how to manage withdrawals and cash flow. Lots of discussions of tax implications (including ACA, conversions, IRMAA) on just about everything to do with retirement income and investing.

https://www.early-retirement.org/fo...-401-k-roth-ira-first-109886.html#post2628411

https://www.early-retirement.org/fo...r-on-cash-at-start-of-withdrawals-109760.html

https://www.early-retirement.org/fo...-needed-in-cash-and-how-to-get-it-109273.html

https://www.early-retirement.org/forums/f28/how-much-in-cash-at-the-time-of-retirement-108169.html

https://www.early-retirement.org/forums/f28/another-withdrawal-thread-108865.html

 

[RetiredHappy]

I just realized in writing and revising my post a few times, I ended up leaving out an important detail.


I knew this money was coming. It is already part of our anticipated retirement portfolio. In that sense, it isn't a windfall but rather expected funds.


So the question is really how to structure our portfolio entering retirement, how much to keep in cash, and devising the best withdrawal plan for the early years to keep income under the important caps (ACA and CG) while also making wise decisions as far as taxes are concerned.

There are 2 options to figure out how to structure your cash flow, i.e. income/money to fund expenses in your retirement. First option is to DIY on a spreadsheet. Second option is to find a fee only CFP to help you with it. I take the DIY route because I know exactly how I want to fund our retirement. But if you are unsure or need validation, go to a fee only CFP. The CFP charges a small amount - a couple of thousand dollars, and will help you work through the analysis.

 

[EastWest Gal]

Remember in 2021 and 2022 there is no ACA cliff, but it is scheduled to return in 2023. but there are CG tiers. However, it might not be worth keeping in the 0% LTCG bracket now, and it's easy to stay within the 15% LTCG bracket. CG taxes will likely go up at some point.

And if you are inheriting an investment portfolio, you will be inheriting those at a stepped-up basis. It's almost like inheriting cash, for tax purposes. Smaller capital gains when you sell. When I executed my dad's estate, I divided the equities between me and my sister. Once I received my share, I immediately invested it to match my asset allocation.

 

[disneysteve]

And if you are inheriting an investment portfolio, you will be inheriting those at a stepped-up basis. It's almost like inheriting cash, for tax purposes.

Yep. I am inheriting 2 individual stocks that I plan to sell, so that's about 150K of the 600K in question.

 

[BubbaChris]

So the question is really how to structure our portfolio entering retirement, how much to keep in cash, and devising the best withdrawal plan for the early years to keep income under the important caps (ACA and CG) while also making wise decisions as far as taxes are concerned.

I'm ahead of you in a couple of ways, started ACA last year, this year received an inheritance, and will retire at the end of the month.

In our case, the inheritance helped (mentally) fund us from today to our planned retirement 5 years from now. My decision was to leave roughly 3 years of expenses in cash and invest the rest. That way the invested monies will be LTCG eligible by the time I need them.

On taxes - For the next couple of years I'll do some ROTH conversions within my ACA limits.

Best regards,
Chris

 

[swakyaby]

I did pretty much what BubbaChris did by increasing my cash position and investing the rest in equities. In 2018, I received > $1M in mutual funds spread among 5 different companies, as IRAs and after-tax funds. Those fund companies that disappointed me with their customer service (DWS/Scudder and Janus), I closed the accounts after they corrected the cost basis and transferred the funds as cash to online bank accounts. I consolidated the inherited IRAs to one at Fidelity where I already had various types of accounts. And the remaining stock funds I kept untouched at T.RowePrice and American Century, since I wanted to minimize any further commingling of inherited assets with marital assets.

And although OP didn’t specifically ask this, I did elect to hold about 3 years living expenses in cash at the beginning of retirement. Thanks to the stock market, the dividends, capital gains, and the RMDs from the inherited IRAs made this cash position much longer-lasting than 3 years. I probably would have been just fine with a 2 year cash holding, in retrospect.

 

[Bamaman]

If you start withdrawals from a defined pension, you might want to keep enough cash to refrain from that. The life expectancy table can be brutal to future monthly withdrawals.

I've been fortunate not to draw from my IRA Rollover until RMD's are required at age 72. It's continued to grow substantially the last 10 years.

Not drawing social security until age 70 also pays a healthy return.

But do take some of the funds and do something out of the ordinary. I bought a new car, a fifth wheel trailer and a new boat one year, as they all wore out at the same time. We've also often traveled internationally since our cash windfall.

 

[SecondCor521]

Yep. I am inheriting 2 individual stocks that I plan to sell, so that's about 150K of the 600K in question.

One nugget I like to share about this situation is that inherited assets get long term treatment even if your holding period is less than a year. You can find this fact buried somewhere in the IRS instructions for Schedule D or Form 8949.

 

[disneysteve]

My decision was to leave roughly 3 years of expenses in cash and invest the rest. That way the invested monies will be LTCG eligible by the time I need them.

Since we already have a large taxable portfolio, I can do the same thing. I can invest the new money but draw from the old accounts as needed for LTCG from those. I won't have to touch the new money for years that way.