What to do with large inheritance based on our situation?

Hi all, my wife and I learned that we're fortunate to be be receiving a large inheritance from her recently deceased grandmother, likely in the realm of $50,000-$60,000. We're now seeking opinions on what to do with it. Apologies for the long post -hopefully it provides just enough insight into our situation to give context. Thanks in advance for reading and sharing any thoughts!

My wife and I learned that we're fortunate to be be receiving a large inheritance from her recently deceased grandmother, likely in the realm of $50,000-$60,000. This inheritance should make it possible to afford having a second child, which would be life-changing. Now, we're puzzling over how best to save/invest it. There's some complexity to it so here's more background:

We are both in our mid-30s with a 19-month-old, and hoping to have a second child. Our combined household income is about $135,000. Apart from our mortgage we are debt-free. With daycare/childcare costs and our current investing (see below), we have a very tight budget with little left over, and have even had to pick up some freelancing to make ends meet. We estimate there might be three years of overlap where we'd be paying double the cost before the first child gets to kindergarten. At an average of $25,000 a year, we estimate we'd need an extra $75,000 for those three years.

Our current monthly investing:

  • Roughly 15% of our income into retirement (per Dave Ramsey):
    • 10% of my income into 401k (plus a small employer match)
    • 10% of her income goes into her teacher pension plan (no choice there)
    • Roth IRAs ($570/mo) -- on top of the 401k and pension, this gets us up to approximately 15% of our income invested for retirement
  • HSA deducted from paycheck (roughly $560/mo)
  • ESA for our child ($200/mo)
  • Betterment "Income Protection" account ($200/mo) - this is a stand-in for Long-Term Disability Insurance, which would have been prohibitively expensive due to an underlying health condition

We're trying to find the best approach with this inheritance that maximizes its time in the stock market while leaving us with enough liquid savings to afford daycare over the next several years. Here are a couple options we're floating around, along with their reasons, and I'd love to hear what people think.

Option #1 - Put inheritance into our high-yield online savings (currently only .4% but had been 2%), and put all of it into our daycare budget category so we can draw it down over the next several years. We'd lose on some potential stock market gains, but it would ensure we have enough for daycare no matter what, while being able to continue investing as normal each month. And as soon as we're at $75k extra saved in our daycare fund, we could then put extra into investments.

Option #2 - Daycare is about $2,000/month, per child. We're investing about $1,500/month. If we were to pause monthly investing (except for 401k and teacher's pension), that would shore up $1,500/month, so we'd only need $500/month more for three years for daycare, which equals $18k. In this option, we'd put $18k of inheritance into high-yield savings, pause our monthly investing (beyond 401k and pension), then invest the rest. For investing, we'd max our our Roths and HSA for 2021 immediately and add a bunch to the ESA and Betterment accounts. Maybe hold on to $19k so at the start of 2022 we can immediately max out our Roths ($12k) and HSA ($7k) again, depending on how much inheritance ends up being. The main perk of option #2 is that we're getting a lot more money into the stock market sooner, as opposed to it trickling in normally over the next several years. With compound interest over the next many years, that could make a big difference.

What do you think? Would you consider a different approach than what we're doing? Or some combination?

Thanks so much for any thoughts!!

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  • The working-single-parent in me is breathing that deep exhale that you have childcare expenses covered like this. What an amazing gift and a way for your wife's grandmother to keep being present to nurture your child even after she passes. That is just a huge pile of stress off your plate.

    I got a big sum of like 15k last summer from some work I did, and I was so glad because it gave me some flexibility to make childcare choices that allowed me more time with my son. That sounds kind of confusing to spend more on childcare in order to have more time with your child but it's how things played out for me. For instance, nannies are more $$ but they eliminate the transition time so you have more family time. In my case I was able to purchase the more expensive childcare option that was closer to home, even though I only needed childcare 4-days a week but I had to pay for a full week. Getting my childcare budget addressed allowed me to create more breathing room in my life, not just in my budget.

    With 1 and soon to be 2 young kids and 2 working parents I would be thinking about actually increasing your childcare budget if there are ways that doing so could create more breathing room in your life. Or, for instance, creating a budget for someone to clean the house. Just anything that creates more ease and breathing room in a day-to-day way. Maybe extending parental leave by a month. Have you thought about using any of this money to create more time?

    in terms of investing all at once versus holding the cash and spending it down, I guess I'd choose your second option - getting all the money into investments sooner not later. However, I'd be holding back more than the bare minimum. 

    I assume you have an emergency fund fully funded. 

    Another thing to think about is a 529 for each of them. There is lots of controversy over this but where I personally came down was to put 2K in my son's 529 account and then leave it. Over the years this should develop into a small pot of money so that I at least have *something* to offer him for college or vocational training. When my retirement is in an even stronger place than it is now, I can contribute more. But in the meantime that 2k will compound. 

    So you might think about sending some small amount to a 529 for each child, a little nest egg. You totally have compounding on your side and if used for education expenses, alllllll of that growth is tax free to withdraw. I understand not going wild with 529s and prioritizing one's own retirement, still at the same time, a large gift like that is maybe a wonderful opportunity to launch some momentum for your kids when they are 18.

    Finally, for me personally, no big windfall like that can be budgeted out without some meaningful allocation towards the common good, whether that is environmental/climate so that our children inherit a livable world, food banks to help the people around me feed themselves, the local teen homeless shelter, scientific research and development, or whatever cause is meaningful to you. This is intergenerational wealth so I think, as we experience gratitude towards our own ancestors, that we are mindful to create ourselves into ancestors for our entire community, not only our direct biofamily. That is just my own perspective.

    Just some ideas. I'm sorry for your family's loss. What a gift and generosity from her grandmother. Very, very precious inheritance at this time in your family's life.

    Like 3
    • Ivory Storm Thanks so much for your incredibly thoughtful reply. So much great insight and it's helpful to hear the parallels between our situations. It's funny you mentioned the cleaning - that's exactly what we're looking into and we actually a potential cleaning person visiting tomorrow to give us a quote! 馃檪

      The idea of using the money create more time is wonderful and has got our gears turning. Also the idea of holding back a little more than the minimum sounds very prudent. One thing we could be better about is giving. We have a small "giving" category in our budget that we periodically use to make small donations, but it could certainly be more, and we love the idea of setting aside a chunk of the inheritance for a larger amount of giving.

      Thanks again! 

      Like 2
    • nolesrule
    • Stealing From the Future fix is an improvement but is incomplete....
    • nolesrule
    • 5 mths ago
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    At the very least use some of the money to max out two Roth IRAs. Roth contributions can be withdrawn at any time, so this should be a priority.

    I would not cut back on the retirement savings and if possible I would look for ways to increase it and use the money from the inheritance to cover some of the "lost" income.

    Like 4
    • nolesrule Great ideas, thank you! I hadn't actually realized that Roth contributions could be withdrawn - that helps us feel much more at peace with dumping as much into them as possible. And a good reminder to maintain focus on investing as much as possible. A next step for us might also be to optimize our investment allocations a bit more. Currently using a lot of target date funds, which we appreciate the simplicity of, but they may be a bit bond-heavy at this stage, and the fees are also a bit higher. Just need to get myself feeling more comfortable actively choosing funds and allocations.

      Like 2
      • Ivory Storm
      • Ivory_Storm.3
      • 5 mths ago
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      Silver Guitar you might enjoy reading The Simple Path to Wealth. It was very eye opening . . and motivating. When he says simple, he means simple. Very, very appealing route the author offers and quite logically reasoned. I went way outside the parameters of the target funds and I feel 'on top' of investments for the first time ever.

      Like 2
    • Ivory Storm This book looks great! Just placed a hold on it from our library 馃檪 I read through "The Only Investment Guide You'll Ever Need" a few years back and it was a lot to get through, but TSPTW looks a bit more accessible (and I may also be more prepared now).

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  • I'm so sorry for your family's loss, and I've been in this situation in the last couple of years.  When my mom died in 2019 I mostly inherited IRAs and some stock which stayed in the market, but I got a $200k refund from her care facility.  I took half into my budget and the other half diversified into the market with everything else.

    My biggest concern was the payments for my kids' private school at the time.  She had been helping with that in the past, and now it was on me.  I used the inflow to boost a lot of true expenses and top off my income replacement fund.  I put enough into the school tuition category to cover payments for the rest of the school year, and then started to work on building it up again before it was spent down (I used target date spending goals for that).

    I *thought* I'd end up spending down all the cash, but our regular income increased and I was able to "slow the bleed" and then reverse it into a net gain, with YNAB's help of course.  So I'd say you guys are still moving into your prime earning years, so don't discount that your budget might have some more wiggle room in the near future.  Since you have known expenditures I'd keep that cash in your budget and keep it safe until you feel your income will support you without it.  I am slowly saving that $100k I put in (well some did go right back out to charitable giving) with a goal to eventually transfer it out to investments, but it's not life or death, just a 5 year goal I'm shooting for and I'm over 30% there.  If I need the money, it's there.

    As far as where to physically park it, I have it both in high yield savings and a very conservative income-based intelligent portfolio at Schwab.  It's on budget, but I only record the income and have a buffer for major balance fluctuations (hello March 2020!).  So keep investing the way you are, it sounds like you're doing all the right things.  I posted about this a couple years ago, you could search for my post that was something like "What do I do with all this cash?" where everyone gave me some great ideas.

    Like 1
    • Annieland Thanks for your response. Sorry to hear about your mom's passing - what a wonderful gift she was able to pass on to you! I also appreciate you referencing the older post you made a couple years back. I need to read through that thread again as it presented a lot of new information I hadn't considered, and am sure I'll learn a lot from it. Also always helpful to hear someone else's story and find all the parallels. You make a great point that we're getting into our prime earning years, and a lot of our calculations don't take into account any raises or unexpected windfalls. We'll probably land somewhere in the middle of options 1 & 2. Maybe dumping some extra into our investments, but also holding onto more than the bare minimum we calculated so we're sure to have daycare covered.

      A lot of the investing makes me nervous - just how more and more zeroes get added on, and knowing how various tweaks could equate to tens of thousands of dollars down the road - but I'm definitely getting more comfortable. And as the investment situation grows and gets more complicated, I'm so thankful to have YNAB to help keep track of things, between keeping all these different investment vehicles in tracking accounts and just the rest of the budget system in general.

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 5 mths ago
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      Silver Guitar It sounds like a task for you by the end of the year is to get a little more knowledgeable about and comfortable with investing.  Thankfully, there is tons of solid and free advice out there.  nolesrule is a Boglehead and he can probably point you to some simple investing ideas. I opened a new Roth IRA last year and had some fun looking through and choosing one of these portfolios https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/. There's lots of tools out there to track your investments on at least a daily basis. You can shoot for a quarterly review to compare performance to the market as a whole, and check to make sure your current portfolio is continuing to represent your goals and risk tolerance. Risk tolerance is also something to evaluate and embrace in making your plan. But excessive paranoia only leads to paralysis which leads to lost opportunities.

      You're young, and nothing with investments is set in stone.  You can always make changes!  I never had good results from those target date funds back when we started out, so I dropped them.  I only use them for our 529's because they've performed VERY well, thankfully.  Almost too well 馃槵.    

      On a personal note, I remember back when my 2nd child was a toddler, and I was super overwhelmed with my rambunctious preschooler and caring for my mom who was starting to decline in health.  I was having one of those fantasizing moments of "What would I do if I won the lottery?"  And the first thing that popped into my head was "I'd have another kid." And I was like, Woah! Are money worries what is stopping me from having a 3rd baby (while I still can)??  I immediately found that notion unacceptable, because we had years to work on finances, but not an unlimited amount of time to build a family.  It was that year that I found YNAB (2009) with the goal of making our finances work, and that is exactly what happened and I'm so grateful.  Good luck to you both!!

      Like 3
      • Ivory Storm
      • Ivory_Storm.3
      • 5 mths ago
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      Annieland I can totally relate to that. Money is absolutely what has kept me from having a 2nd child. It's not money exactly . . it's time. All of the time that money can bring. 

      If we had a more developed support system for families -- more parental leave, better support for quality childcare, more vacation in general, just a better culture and infrastructure around work/life balance, I'm sure I'd have another baby. YNAB is amazing but it won't pull water from rocks. What YNAB is bringing me personally is the ability to provide things for my son that I'd written off . . like saving for college . . or really making sure my retirement is in a much more sound place . . and vacations. We are going to be taking our first vacation ever thanks to YNAB.

      So I just came to the conclusion that I value our quality of life and don't want to rock this beautiful little boat we've created. I comfort myself that 1 is better for climate change issues anyways. But I'm sure I'll always have some whispering in my heart around what could have been.

      It's exciting that @Silver Guitar gets to live that dream!!

      Like 2
    • Annieland I read through most of the 150 portfolios page you linked and also found it enjoyable, plus reassuring, realizing how many different possible viable paths there are. In my work's 401k, until recently I had it 100% in an S&P 500 index fund, and it had tremendous gains, especially over the past year. Then a little paranoia set in about it being 100% in that fund, so I diversified a bit with a couple others in the mix. But as that 150 portfolios page points out, an S&P 500 index fund already has plenty of diversity built in...

      That's a great point about there being a limited timeframe for family building vs. a much longer horizon for finances. And I realized I misspoke - our "ESA" is actually a 529. Glad to hear yours has worked well - best not mess with success! I'll also stalk some of the posts from nolesrule 馃檪

      Like 1
    • Ivory Storm I absolutely hear you on needing better support systems for families. The daycare options we found ranged from around $17k (generally with lots of red flags when we visited) up to $40-$50k!! We feel lucky to have found one for $25k that checked a lot of boxes, but we're barely making it work. Our state is working on a bill to limit daycare costs to something like 9% of a family's take-home pay, which would be a huge difference for us and so many other families, but I'm not going to hold my breath. I've nearly jumped into the freelance world many times in order to boost my income and vacation flexibility, but it could end up introducing a lot more stress and lack of work/life balance in other ways, like not having consistent hours, or not have dependable work without having to hustle and hunt down new clients after every project.

      I love how you said "YNAB is amazing but it won't pull water from rocks." One can optimize a budget really really well with YNAB, to make sure each dollar goes as far as possible -- but it doesn't bring in more dollars. And thank you so much for opening up with your story about what must have been a very difficult process around finances and number of children. It's a wonderful lesson to heed about cherishing all the great things we already have in our lives. If we don't have another child, we're so happy and grateful that we have one at all, who's bringing so much joy and playfulness into our lives every day. Wishing the best for you and your family.

      Like
  • Hi all, digging back into this thread with a follow-up question.

    I鈥檓 currently contributing enough to my 401k to get the maximum employer match, which totals around $7,500/yr including the match. When we receive the inheritance from my wife's recently deceased grandmother, we鈥檙e planning on boosting our tax-advantaged retirement savings for at least a year or two, starting by maxing both of our Roth contributions. My wife is a teacher so already has about 10% of her income going toward the state pension system. We鈥檇 have to look closer but I don鈥檛 think her employer offers great additional options for retirement accounts (seem to remember much higher fees than my 401k), so we're not considering that at the moment.

    My question is, if there鈥檚 extra inheritance money beyond the 401k employer match, maxing our Roths, and setting aside for short-term savings priorities like daycare costs for a possible second child, should I add even more to my 401k (above and beyond the employer match) or is it better to invest elsewhere due to poor options/high fees in our 401k? The lowest expense ratio fund in my 401k is VADAX (Invesco Equally-Wtd S&P 500 A) with an expense ratio of .53%, which is the only fund I鈥檓 invested in. My sense was that we don't have to pay VADAX's associated front-loads due to it being within a company 401k plan. Our Roths are 100% VTSAX, and we may soon add some VBTLX.

    Obviously VTSAX would be a far superior option to the VADAX in my 401k, with better performance and a much lower expense ratio of .04% - less than 1/10th of VADAX expenses!

    Basically wondering which option is better overall after I've maxed the employer 401k match:

    1. Invest extra in the tax-advantaged 401k VADAX with high expense ratio of .53%, or
    2. Invest extra in a non-tax-advantaged VTSAX with much low expense ratio of .04%.
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    • Silver Guitar This may be helpful: 

      Prioritizing investments (via Bogleheads)

      I can't give specific advice, but what I can say is that generally speaking, the tax savings from using the 401(k) are very large, and therefore it doesn't pay off to skip tax-advantaged investing in favor of taxable investing, even when the expenses in the taxable account are lower. But it really depends on the specifics of the situation!

      Like 1
      • Annieland
      • I was told there would be no math.
      • Annieland
      • 4 mths ago
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      Matthew Silver Guitar  Yeah, my first thought was, unless your tax burden is less than .53% of your income, probably best to eat the higher expense of VADAX.  It still isn't THAT high.  And in the meanwhile, lobby the employer for better options!

      Like 1
    • Annieland Well, they're going to have to pay some of the tax later, but probably not all of it!

      Like 2
    • Matthew Annieland Thank you!

      Like 1
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