Next year I will be getting an inheritance of $50,000. I do not want to just spend it, I want to invest it. So, what is the best way to invest this money.
Oh…and I’m going to be turning 21. So, thats why I am asking because I think I’m too young to receive this amount of money.
Inheritance Investment Questions?
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Historically, stocks have the best return in any 20 year period. If you buy when there’s a lot of negative news about the economy that is the time to buy, such as now. The best way for a beginner is just invest in a Exchange Traded Fund (ETF)of an Index. That way you can make money on the way up, and then short it on the way down and you make twice the amount of money with lower fees than a Mutual fund.
If you have a job, and dont already have an IRA, the first thing to do is to start one. The second is to pay off any debts you have, excluding a mortgage probably because it has tax incentives. The next thing depends on your risk profile. If you need to keep the money handy you should put it in CD’s. If you can afford to do without if for at least ten years then put it in stock and bond mutual funds.. The rule of thumb is to have the same percentage as your age in bond funds and fixed income investments, and the rest in stock funds. This also depends on your other income and tax considerations. The amount of the inheritance shouldnt make a sizable difference in taxes. You may want to consider a paying fee-only financial planner for a few hours of advice if your situation is more complicated.
make sure your accountant knows that you are not required to pay estate tax on that b/c the amount is far lower than the exclusion amount, which was just raised to like $1.6 million.
anyway, open a Roth IRA, put the money in a low-fee S&P 500 index fund. that’s if you intend to let the investment sit for atleast 10-15 years. otherwise, maybe invest in a ‘balanced’ fund, which is a touch less risky, but will get you lower returns, b/c they invest in stock AND bonds.
or invest in TIPS, inflation-indexed t bills. very safe investment, returns are ok…in the 5% range, which invested over a very long time actually provides some nice geometric returns. so they’re nothing to sneeze at if you start early and are discplined enough to keeep the funds invested.
to be a touch more aggressive, but at the same time, more diversified, you can invest say 75% in an S&P index fund (check w/ T Rowe Price for low fee index fund), 10% in international/global equity fund, 10% in a real estate investment trust (REIT) or some other form of real estate invesetment, and the rest in money market accounts or tbills.
Dear Cera,
You are really a very intelligent almost 21 year old. There are many things that you could invest in and since the $50,000 will be coming to you tax free. (Inheritance is Federal Tax free, but some states have an inheritance tax, you can check online if yours has the tax.)
Some things that you must decide before you consider investments is:
When will you want to use this money? If you want to buy a house in 5 years, you would invest very differently than if you want to save it all to have a very wealthy retirement. Remember that if you have a short (less than 5 year ) time frame in mind then you probably don’t want to be invested in the stock market or stock mutual funds. But if your time frame is 12 years or more then stock mutual funds are great. For a long time horizon non-traded REITs (Real Estate Investment Trusts) are also great but you have to plan to leave that money in the REIT for at least 10 years.
What makes you comfortable? What ever the investment is, if you don’t understand what it is or what it does then don’t invest in it. Don’t get sucked into an annuity contract or into whole life insurance, those don’t make you big money but they give a big comission to the salesperson who sells it to you.
If it were me, I would open a Roth IRA with $5,000 of it (if you have a job and therefore have earned income of at least $5,000 per year). If you receive the inheritance before April 15, 2009, you can deposit $10,000 of it since you can deposit for 2008 and 2009. If you choose you can move $5K from this money over to your Roth every year, as long as you have earned income over $5,000, until you have moved all of it into your Roth. That would take about 12 years or so total considering that the other $40K would be earning interest of it’s own during the 12 years or so that it would take you to move it. If you continued making the maximum contributions to your Roth IRA every year until you are 65 then you would have $2.8 million at retirement if your investments averaged 9%
Basically I would say that you should interview 3-5 fee-only Certified Financial Planners and have them draw up a sample investment portfolio for you. Pick the plan and planner that you like and understand. If they talk down to you or get huffy when you ask them to explain something, then just walk out. This is YOUR money and you have every right to have your questions answered without a patronizing attitude.