How should I invest a lump-sum inheritance to add value to my savings?
I am 35 years old and currently following all the great advice prescribed by financial planners such as putting $18K pre-tax into my employer's 401(k) plan and receiving a $7K match. I went ahead and started contributing the after-tax portion which brings the total annual savings to $52K per year. I used to be able to contribute $5,500 into a Roth IRA, but can no longer do that due to the IRS income limitations. I funded a Whole Life Insurance policy with 5 year premiums at $20K per year to secure my family in case something happens to me and so they can accumulate cash value along the way. I also went ahead and started investing approximately $500 to $1,000 per month in California Muni Bond Funds. I am expecting to receive a $100K inheritance and wanted to know what the best strategy is for investing this money? I am not looking for something active/risky like owning Real Estate or funding businesses, but prefer something passive with no headaches. What do you recommend?
Think of your financial net worth as an "overcoat" with many pockets. You may have stocks in one pocket, munis in another, etc., but when you decide how to allocate assets between stocks of various types and fixed income of various types, think about the whole coat. Reading between the lines, I can conclude that you have more than enough current income to live on. Assuming you are reasonably secure in your job, lean heavily toward equities.
I agree that munis are good diversification and a source of decent after-tax returns. But in general, bonds may suffer in a rising-rate environment so stay light in that sector.
When you get the $100,000, it just adds to one of the pockets. If you are planning to keep, say, a 75% - 25% equity/fixed strategy going forward, invest the inheritance accordingly. Don't consider it a separate entity.
You are doing a great job so far! One of the perks of doing a good job is that it is much easier to keep things simple and get where you want to go. This is especially great news for folks, like you, who have lower risk tolerances. Continuing to build a portfolio of tax free bonds, blue chip dividend paying stocks, and quality low expense index funds are all great options and will serve you well.
Before making those investment choices, be sure to have at least six months of expenses ready to go. These funds should be readily available so keep the money in short-term, easily liquidated vehicles. For example, a short ladder of certificates of deposit. You absolutely want to avoid having to liquidate long-term investments unexpectedly. Retirement accounts, muni bonds, insurance and the like are off limits!
Another consideration that will become increasingly important for you will be taxes. It shouldn't keep you up at night by any means, however, understanding how dividends, capital gains, and the like are a concern that you don't have with 401(k)s and IRAs. Start building a relationship with a tax professional if you aren't doing so already.
Finally, if you have children or, if you believe you will in the future, you might look into college savings options. Something like a 529 plan could make sense for you and provide you some flexibility in current and future tax liabilities.
The easiest way is to pick a Vanguard target retirement fund. Since you are 35, let's say you are going to retire in 2050, then use Vanguard Targe Retirement 2050. The symbol is VFIFX. One fund is enough and you don't need to do rebalance, they will do that for you behind the scene.
The first place I would start is by hiring a Certified Financial Planner to help you create a comprehensive financial plan and investment strategy to ensure this money is allocated properly for your financial goals. From there, it may make sense to invest your money into some sort of robo advisor portfolio as they offer regular rebalancing and most robo advisor portfolios have passive investments like Vanguard funds and ETF's. However, you definitely want to have professional help setting up your investment account and choosing the right allocation mix so that is why working with a CFP is important. This is exactly the work I do with my clients. Hope that helps and best of luck to you!
Congratulations on planning for your future at a very young age. You are taking some good steps by contributing to a 401(k) pre-and post-tax, securing your family's future by purchasing insurance etc.
While making investments decisions, you have to take cash flows and possibility of an emergency into consideration. I recommend having 6-12 months of your expenses in highly liquid cash equivalents. This is especially important since all the vehicles you have mentioned, in some ways lock you up (Although there is the possibility of taking a loan from both the 401(k) and Insurance policy).
Assuming you have taken care of all that- the best strategy is to build a portfolio of stocks and bonds. Since you are relatively younger and seems like you have good job, you can take on more risk if this portfolio is for the long term. (Your ability to take risk is relatively high). On the other hand, by your own admission, it seems like your willingness to take risk is low. So, you will have to build a portfolio at a risk level that balances the two (Your risk profile).
In terms of asset classes, consider Large Cap versus Smaller Cap, US versus non-US, Developed versus non developed. For bonds, you should consider interest rate sensitive versus other less interest rate sensitive. US versus non-US.
Portfolio construction really depends on your beliefs, ability and how much time you want to or are able to spend (In addition to your risk profile). You could have a broad allocation to the above asset classes and simply rebalance (I recommend yearly and if there has been a 5% or more deviation in allocations) or you may want to supplement the broad allocation with 'tactical tilts' depending on your views. In your case, it seems the former is better. The exact allocation to stocks versus bonds really depends on your risk profile.
Then there is the question of whether you want to use active managers or passive managers. If you have a strong view against active, you may want to stick to passive vehicles like ETFs. Although, the press has more or less dismissed the ability of active managers to add value- it is not that simple. Again, since you want to keep it passive you may want to use ETFs.