Sudden Wealth Management

Question

My father passed away last week. I am not yet sure how much his life insurance is, it will be anywhere between 100k and 250k, which I know is a big range. Either way, I am having a bit of anxiety as to what the best way to go about investing this money would be. What is the best thing to do when running into an unexpected windfall like this?

Summary of our finances:

• 125k income + ~30k from wife
• Mortgage 155k house worth 175k
• Two cars, one paid for other brand new owe 40k on it
• No credit card debt
• Contributing 6% to 401k which is what my company matches. About 30k balance.
• About 20k in savings

Answer 1

First, put the money someplace that is safe - a saving account is fine - while you figure out what you want to do with it. You will obviously want to think about it what to do for a while.

A financial advisor could help out, but note that many of them make their money on commission and therefore don't act in your best interest. The ones where you pay them directly are more aligned with your interests.

As for how to invest, you have a lot of different options depending on your timeline and your risk tolerance.

Answer 2

The range is fine. It's ~ 1-2X your annual income.

First, and foremost - your comment on the 401(k), not knowing the fees, is a red flag to me. The difference between low cost options (say sub .25%) and the high fees (over .75%) has a huge impact to your long term savings, and on the advice I'd give regarding maximizing the deposits.

At 26, you and your wife have about 20% of your income as savings. This is on the low side, in my opinion, but others suggest a year's salary by age 35 which implies you're not too far behind.

Given your income, you are most likely in the 25% federal bracket. I'd like you to research your 401(k) expenses, and if they are reasonable, maximise the deposit. If your wife has no 401(k) at work, she can deposit to an IRA, pre-tax.

It's wise to keep 6 months of expenses as liquid cash (or short term CDs) as an emergency fund in case of such things as a job layoff. They say to expect a month of job hunting for each $10K you make, so having even a year to find a new job isn't unheard of.

One thing to consider is to simply kill the mortgage. Before suggesting this, I'd ask what your risk tolerance is? If you took $100K and put it right into the S&P, would you worry every time you heard the market was down today? Or would you happily leave it there for the next 40 years? If you prefer safety, or at least less risk, paying off the mortgage will free up the monthly payment, and let you dollar cost average into the new investments over time. You'll have the experience of seeing your money grow and learn to withstand the volatility.

The car loan is a low rate, if you prefer to keep the mortgage for now, paying the car loan is still a guaranteed 3%, vs the near 0% the bank will give you.

Answer 3

First off, I'm very sorry for your loss. Depending on when the money comes in I would park it and give it some time. After that, one of the best investments is paying off debt. Right now your net worth is less than 30K and that is really not even accessible until retirement. If the money is there to pay off the house I would do that. If there isn't enough to pay off the house then I would pay off the automobile and put all or a sizable portion of the remainder into the house. Now you have very little risk in your life and most likely much more monthly income to invest in 401K, IRAs, college funds or any other investment.

Life insurance is mostly to replace your income if there are people counting on that income (spouse, kids, etc). Normally this would be invested to hopefully replace that income with the growth of the money. In your case it doesn't sound like you were relying on your father's income, so this can go to clean up current debt.

Finally, depending on your relationship, what kind of person your father was and how he was with financials, what do you think he would want you to do with it?

Answer 4

I was in a similar situation and my method was this: since I already had a fidelity 401k account it was pretty easy to open a individual account through the website. From there you can just put the money into a general market mutual fund or exchange traded fund. I prefer low expense ratio funds like passive indexed funds since studies show that there isn't much benefit to actively traded funds. So I just put my money into the popular, low fee fund SPY which tracks to the S&P 500. I plan on leaving the money there for at least a year, if not several years, so I can pay the lower capital gains tax rate on any gains and avoid paying the commissions too many times.

In your situation you might want to consider using the extra cash to max out you and your wife's 401k this year, since you aren't already taking full advantage of that. Often people recommend saving 10% or 15% of gross income throughout their career for retirement, so you're on the low side and maybe have a small bit of catch up to do. Finally you could also start a 529 education saving plan to save for kid's future college cost.

Answer 5

Consider consulting a fee-only Certified Financial Planner. It will be worth the money to have your game-plan looked at by somebody who is trained and experienced in such matters, helping you avoid big mistakes and making the right decision for your personal situation. It should cost only a relatively small percentage of the overall inheritance.