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pig slut lisa
Mar 5, 2012

irl is good


I am 28, employed, debt free, able to save a good portion of my income, and very grateful to chance, circumstance, and privilege to be in such a good place. In approximately a month, I anticipate receiving a windfall of $200K.

My brother is 19, still in school, not much income but also not a big spender. He should graduate debt free and in fact already doesn't really have to worry about expenses over the next 3-5 years thanks to scholarships and parental savings. He will also be receiving $200K.

As I try to plan for a larger sum of money than either of us has ever dealt with, I wanted to seek BFC's advice. Below you'll find what I've hashed out for both my brother and myself. I welcome any thoughts, recommendations, questions, etc. Thanks!

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My situation

I am in pretty good shape. My wife and I are good savers, and she is about to start a new job that will pay her 3x what she was making as a grad student. Even without this windfall, we are on a great financial path so far. I mainly want to use this money to accelerate some savings goals. Here is what I'm thinking of doing with this money for the rest of 2016:
  • $3,000 to top off the emergency fund at $5,000
  • $9,000 to top off both IRAs
  • $28,000 to two 529 plans
  • $35,000 to house down payment savings account (This would bring the account to $40,000. We will be looking at houses in the $160K-$220K range in mid-2017)
  • $19,500 in an Ally savings account that will disburse $1,500 to us every two weeks from July 1-Dec 31. In the meantime, we will both set our 457(b)/TSP contributions to 100% of salary to max out.
  • $105,000 in an Ally savings account to sit and wait for lump sum savings goals in 2017

Then in 2017:
  • $12,000 to two IRAs (I'm an optimist and think the contribution limit will increase for 2017)
  • $28,000 to two 529 plans
  • $19,500 in an Ally savings account that will disburse $1,500 to us every two weeks from Jan 1-Jun 30. In the meantime, we will both set our 457(b)/TSP contributions to 100% of salary to max out.

This will leave the main Ally account at $40,000 or so. More, actually, since once we max out our retirement contributions our entire paychecks will start funneling into that account. It should be enough to do at least one more year of 100% paycheck contributions in 2018.

My big hangup with this is that I'm leaving a ton of money in cash for a year or two. But I think that's the right thing to do, given that I have a lot of that money "programmed" for 2017. What do you all think? What potential potholes am I not seeing?

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My brother's situation

My brother is 19 years old and just finished his sophomore year in college. He is a bright kid and a hard worker. Thanks to a combination of parents' savings and scholarship funds, his expenses are covered through graduation. Additionally, there will be a decent amount of money left in his college fund to cover some or all of grad school, should he go that route. Even without this windfall, his costs are most likely covered for the next 3-5 years (i.e. either he's in grad school drawing down the college fund, or working a job and supporting himself not needing to rely on this $200K). I should also add that I do not see him turning into a wild spender all of a sudden.

Unlike me, he is not working a full time job, so he has no 401(k) and perhaps not even enough annual income to max out an IRA. I have already suggested he start an IRA and contribute the couple thousand he'll earn from his summer job. But beyond that, I'm at a bit of a loss of what to do. I think it makes sense to essentially preserve this money over the next few years until he has a job and can use it to start maxing his retirement accounts. What's the best way to do that, though? Some combination of a 1% savings account + a taxable brokerage account with a heavy bond allocation? Leave $10K-20K in cash and put the rest in TIPS?

Also, what questions should I be asking him? It's his money, after all. I'm trying to set him up to make informed choices (e.g. I've suggested he read If You Can and we're going to talk about financial planning in the next week or two) but ultimately he's the only one who can make the decisions. How would you advise a kid in this situation?

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Thanks y'all :cheers:

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TwoSheds
Sep 12, 2007

Bringer of sugary treats!
Why would you recommend such a high bond allocation? The kid's 19, he has time to absorb some risk.

Personally, if it were me, I'd spend half of it on a condo, but that's me, because my top priority is having a stable residence; his priorities might be different. I would then dump the other half (minus an emergency fund, of course) into a stock index fund.

EDIT: Actually, that's wrong. I would divide the remaining half into a 70/20/10 split between stock index fund, bond index fund and REIT, respectively.

pig slut lisa
Mar 5, 2012

irl is good


TwoSheds posted:

Why would you recommend such a high bond allocation? The kid's 19, he has time to absorb some risk.

Good question. I certainly agree with you that young people should generally be allocated heavily in stocks (up to the level of risk they can stomach, of course). For our part, my wife and I keep our retirement savings allocated about 90% in stocks.

However, I don't view his situation as equivalent to mine because he's not yet saving for retirement. He's not even in the job market yet. When it comes to his $200K, I'm viewing it through a much more short-term mindset. I want that $200K to be preserved until he gets that first job in a few years. At that point he'll have a much clearer idea of what he wants to do in life and what that $200K should be put towards.

Maybe it's wrong to be viewing this money with that short-term mindset, though.

VendaGoat
Nov 1, 2005
:v: I would suggest you both go all in on a mound of cocaine. :v:

TwoSheds
Sep 12, 2007

Bringer of sugary treats!

pig slut lisa posted:

Good question. I certainly agree with you that young people should generally be allocated heavily in stocks (up to the level of risk they can stomach, of course). For our part, my wife and I keep our retirement savings allocated about 90% in stocks.

However, I don't view his situation as equivalent to mine because he's not yet saving for retirement. He's not even in the job market yet. When it comes to his $200K, I'm viewing it through a much more short-term mindset. I want that $200K to be preserved until he gets that first job in a few years. At that point he'll have a much clearer idea of what he wants to do in life and what that $200K should be put towards.

Maybe it's wrong to be viewing this money with that short-term mindset, though.

How he spends or invests the money will depend largely on his long-term or short-term goals, and how he can use this money to achieve them. I think the goal of any conversation you have with him about this money should be to find out what his priorities are. $200k isn't exactly a fortune anymore, but it's still enough to make significant progress toward achieving nearly any goal you can imagine. Want to retire early? Work on saving up another 500k (less, if you factor in the interest that will be compounding on a 200k principal) and you can probably make it happen in a decade. Want to buy a house? You're there already. Want to have a small passive income to supplement what you anticipate making after grad school? Perfectly workable.

Of course, it bears repeating; the kid's 19. He may not know the answers to these questions, but it's still worth having the talk, if only to get him to think seriously about it.

Triglav
Jun 2, 2007

IT IS HARAAM TO SEND SMILEY FACES THROUGH THE INTERNET
Even though the kid's not a big spender, he might appreciate some spending money over investment gains while in school and jobless.

$200,000 in municipal bonds could be ~3% annual gain plus a federally and potentially state tax-free coupon of about $500 monthly (~3% annual). In a defensive market sector like consumer staples, it could be ~8% annual gain plus a taxable dividend of about $1200 quarterly (~$2.5% annual).

Alternatively, a few thousand in cash, that same amount in a one-year CD, and the rest invested in a broad-market index like VTI.

pig slut lisa
Mar 5, 2012

irl is good


TwoSheds posted:

How he spends or invests the money will depend largely on his long-term or short-term goals, and how he can use this money to achieve them. I think the goal of any conversation you have with him about this money should be to find out what his priorities are. $200k isn't exactly a fortune anymore, but it's still enough to make significant progress toward achieving nearly any goal you can imagine. Want to retire early? Work on saving up another 500k (less, if you factor in the interest that will be compounding on a 200k principal) and you can probably make it happen in a decade. Want to buy a house? You're there already. Want to have a small passive income to supplement what you anticipate making after grad school? Perfectly workable.

Of course, it bears repeating; the kid's 19. He may not know the answers to these questions, but it's still worth having the talk, if only to get him to think seriously about it.

Yeah, all good points. I like the idea of laying out what the different paths could be. And to your last point, I agree 100%. That's why I think I'll advise preserving the bulk of the cash for the next few years, so it's still there when he does have a better idea of how to answer those questions.


Triglav posted:

Even though the kid's not a big spender, he might appreciate some spending money over investment gains while in school and jobless.

$200,000 in municipal bonds could be ~3% annual gain plus a federally and potentially state tax-free coupon of about $500 monthly (~3% annual). In a defensive market sector like consumer staples, it could be ~8% annual gain plus a taxable dividend of about $1200 quarterly (~$2.5% annual).

Alternatively, a few thousand in cash, that same amount in a one-year CD, and the rest invested in a broad-market index like VTI.

Thanks for the strategic ideas. Your first point makes me think it would be worth asking him if there's anything he feels he would really want that isn't already covered by whatever he gets from our parents monthly.

I'm thinking I should also stress that he should not be telling his college buddies about this at all.

BEHOLD: MY CAPE
Jan 11, 2004
Why do you need to put so much money in a savings account? Invest it all in taxable brokerage in the same/equivalent funds as your tax-advantaged plans, then just dribble out whatever you need to accomplish your savings goals in tax year 2017. For tax filing simplicity you could just put it in whatever Vanguard target date fund most closely matches your desired risk allocation.

onemillionzombies
Apr 27, 2014

You wouldn't want to use a target date fund with taxable investments, better to just buy the funds separately.

Also with taxable you probably wouldn't want to automatically invest your dividends, better for those to go into a money market account for tax simplicity and re-balancing without having to sell anything.

BEHOLD: MY CAPE
Jan 11, 2004

onemillionzombies posted:

You wouldn't want to use a target date fund with taxable investments, better to just buy the funds separately.

Also with taxable you probably wouldn't want to automatically invest your dividends, better for those to go into a money market account for tax simplicity and re-balancing without having to sell anything.

We're talking like one year, I think transaction minimization and tax filing simplicity might be a reasonable consideration over extreme tax efficiency optimization

pig slut lisa
Mar 5, 2012

irl is good


BEHOLD: MY CAPE posted:

Why do you need to put so much money in a savings account? Invest it all in taxable brokerage in the same/equivalent funds as your tax-advantaged plans, then just dribble out whatever you need to accomplish your savings goals in tax year 2017. For tax filing simplicity you could just put it in whatever Vanguard target date fund most closely matches your desired risk allocation.

Let me make sure I understand your suggestion. My proposed plan calls for the following in 2016:
  • $3,000 to top off the emergency fund at $5,000
  • $9,000 to top off both IRAs
  • $28,000 to two 529 plans
  • $35,000 to house down payment savings account (This would bring the account to $40,000. We will be looking at houses in the $160K-$220K range in mid-2017)
  • $19,500 in an Ally savings account that will disburse $1,500 to us every two weeks from July 1-Dec 31. In the meantime, we will both set our 457(b)/TSP contributions to 100% of salary to max out.
  • $105,000 in an Ally savings account to sit and wait for lump sum savings goals in 2017

$75K definitely won't go into a taxable brokerage account ($3K E Fund, $9K IRAs, $28K 529s, and $35K house down payment). Are you suggesting I put the remaining $125K in a brokerage account, or just the $105K that I'm saving for my 2017 goals?

Either way, my hesitation comes from the fact that I have a lot of that money programmed for a period of 6-12 months from now ($40K for IRAs and 529s on 1/1/17, another $19.5K over the first 6 months of 2017). However, now that I type that out, I'm thinking more about the $40K that would be left over for 2018 and beyond. I could definitely see myself getting more aggressive with that.

paperchaseguy
Feb 21, 2002

THEY'RE GONNA SAY NO
not a single hooker or blow? I bet you're the most fun guy in your knitting class

pig slut lisa
Mar 5, 2012

irl is good


paperchaseguy posted:

not a single hooker or blow? I bet you're the most fun guy in your knitting class

Haha, I hear you. There will be a little bit of splurging, but honestly there's not a ton of stuff I want to do or buy that I currently can't. For instance, one of my dreams has been to fly first class internationally, and I'm doing that next year (on ANA and Korean, plus business class on Cathay Pacific). But I'm not paying cash for it; that's all airline miles.

sellouts
Apr 23, 2003

Yeah use miles it sure as hell isnt worth is for cash if you're buying.

Weatherman
Jul 30, 2003

WARBLEKLONK

pig slut lisa posted:

Haha, I hear you. There will be a little bit of splurging, but honestly there's not a ton of stuff I want to do or buy that I currently can't. For instance, one of my dreams has been to fly first class internationally, and I'm doing that next year (on ANA and Korean, plus business class on Cathay Pacific). But I'm not paying cash for it; that's all airline miles.

Have you flown business class internationally before? If you haven't, I'd suggest going business class on ANA first rather than first class. My wife and I got surprise-upgraded on a flight to Europe several years back after never having flown anything but economy, and we're still talking about it now. ANA's business class rocks and personally I don't see what the point of first class is if no one's fellating you or writing songs about you while you're there.

Benefit of doing so would be that you'd have enough points to take business class on the way back, too! coming back on economy suuuuuuuuuuuuuuuuuucked

Actie
Jun 7, 2005
Not to derail this too much, but FWIW I've flown both business class and first class on ANA, and I actually do think it's worth experiencing their first class product if the delta in mileage redemption between that and business isn't too great. (For instance, if it takes 1.5x as many miles to fly first class over business, I would think that's totally worth it, for the novelty of the experience.)

pig slut lisa
Mar 5, 2012

irl is good


Yeah, we'll have a ton of miles to spare even after flying F on 3/4 of the legs of the trip, and it's the last international trip we'll be taking together before we start trying to have kids, so I don't feel bad about splurging on F.

ninjahedgehog
Feb 17, 2011

It's time to kick the tires and light the fires, Big Bird.


pig slut lisa posted:

I'm thinking I should also stress that he should not be telling his college buddies about this at all.

Yes do this. Be careful about who you tell too.

That said, let him know that it's ok to take a small percentage and blow it on something stupid if he wants to. Buy a dirt bike or a sweet gaming rig or floor-level seats at a basketball game, have fun.

GoGoGadgetChris
Mar 18, 2010

i powder a
granite monument
in a soundless flash

showering the grass
with molten drops of
its gold inlay

sending smoking
chips of stone
skipping into the fog
PSL, people get very defensive when talking finances, doubly defensive talking kids, and probably, I don't know... sixteenbly defensive when talking their kids' finances, but I personally don't see the value in dropping so much money into 529 plans before kids even exist.

Here's an interesting read:
http://jlcollinsnh.com/2016/04/12/stocks-part-xxix-how-to-save-money-for-college-or-not/

And when you say "$28,000 to two plans" is that $14k per or $28k per?

pig slut lisa
Mar 5, 2012

irl is good


GoGoGadgetChris posted:

PSL, people get very defensive when talking finances, doubly defensive talking kids, and probably, I don't know... sixteenbly defensive when talking their kids' finances, but I personally don't see the value in dropping so much money into 529 plans before kids even exist.

Here's an interesting read:
http://jlcollinsnh.com/2016/04/12/stocks-part-xxix-how-to-save-money-for-college-or-not/

And when you say "$28,000 to two plans" is that $14k per or $28k per?

Yeah, you're definitely right. Assuming we have our first kid in 2018, the tax difference in 2036 between having started a 529 in 2016 vs. 2018 is probably not worth the lack of flexibility and risk of penalty. So we will hold off on that until if/when we have a kid.

The new plan is as follows:
  • $3,000 to top off the emergency fund at $5,000
  • $9,000 to Vanguard top off both 2016 IRAs
  • $40,000 to house down payment savings account (This would bring the account to $44,000. We will be looking at houses in the $160K-$220K range in mid-2017)
  • $39,000 in an Ally savings account that will disburse $1,500 to us every two weeks from 7/1/16 to 6/30/16. In the meantime, we will both set our 457(b)/TSP contributions to 100% of salary to max out.
  • $12,000 in an Ally savings account that will go to max out our IRAs on 1/1/17
  • Remainder to taxable brokerage account

Oh also we decided to splurge on one thing:



:cheerdoge:

slap me silly
Nov 1, 2009
Grimey Drawer
Sigh. Blew your cash on Irish bog water when you coulda had a proper Scotch.

Baddog
May 12, 2001
My accountant told me I could put five years of 529 donations in at once. So I dumped in 140k and got a nice refund from the state that year.

(you dont have to spend it on kids, and if you spend it on something other than education you just pay tax on it when you take it out, so its a push)

Nail Rat
Dec 29, 2000

You maniacs! You blew it up! God damn you! God damn you all to hell!!
Or you can let it keep growing and give it to your grandkids or something. Your descendants could be old money!

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Baddog
May 12, 2001

Nail Rat posted:

Or you can let it keep growing and give it to your grandkids or something. Your descendants could be old money!

Yah that's my plan actually.

This is dependent on your state btw. Colorado had good choices for 529 investments. And the deposit was tax deductible.

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