agonyaunt | (no subject)

Dear Amy: My girlfriend and I are in our late-20’s. Recently my grandfather died, and I inherited $500,000!

This came as a complete surprise and of course in addition to missing my grandfather and feeling grateful for his generosity, we are thrilled at this unexpected gift. My girlfriend is eager to retire early. She sees this as life-changing and we are talking about the best way to spend it.

We agreed to bring this dilemma to you.

– Blessed

Dear Blessed: I appreciate your trust in me; you should trust a qualified financial adviser even more.

My reaction is: This is not your girlfriend’s money to dream about. It is yours. One way this windfall might be “life-changing” would be for you to take a good look at your girlfriend’s reaction to it. You should not be thinking about how to spend this money, but how to invest or save it.

This is a huge amount of money, and yet it is not even close to the amount someone your age would need to retire. (However, if you choose to, it could get you comfortably into your first home, which might be a good investment for you.)

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Amy didn't crunch the numbers for LW, but she would've done them a favor if she had, so here it is:

If you have an income of $50,000 a year - a reasonable income but by no means extravagant - then $500,000 represents exactly ten years of earnings, pre-tax. Unless LW is planning to die before the age of 40 this is not enough money and once they start spending it it'll go a lot faster than they expect.

The only thing this money should be spent on is paying off pre-existing loans or urgent medical bills. Otherwise, shove it into some reasonably safe investments and pretend it doesn't exist, LW.

I looked it up because to me that looked about what a house cost not retirement money. "The average home price in the United States was $495,100 in the second quarter of 2023, according to the Census Bureau and Department of Housing and Urban Development. By comparison, the median U.S. home price in June 2023 was $426,056, according to Redfin."

Take one nice trip and invest the rest, LW.

That is not retire-early money and, unless LW keeps working to pay taxes and upkeep, it isn't buy-a-house-for-cash money either. LW should contact a reputable firm like Vanguard or Fidelity, talk to a planner and advisor, and invest.

I would leave girlfriend out of the usage considerations; she's not LW's spouse and even if they marry, in most states legally this isn't her money.

I think the letters is lacking in details.
If they're in their late twenties, I doubt the girlfriend wants to retire right now, it seems to me that she might be talking about investing it so that it builds to a nice sum over time.
The LW talks about spending it, which might mean they want to buy a house, or travel around the world.
I also agree that it is not the girlfriend's money, but that brings us back to the lack of details.

Definitely suggesting talking to a financial advisor right off the bat (tax considerations if nothing else), but also taking some time to sit both alone and together with one's own ideas about money, life goals, current pain points -- investment vehicles are tools, money is resources, and many of us have a lot of non-financial baggage about what money is or what it means.

It's a nice solid nest egg, but it may take work to ensure the table you share can take that weight.

Picking a decent financial advisor isn't necessarily easy either.

Nooooooooo, definitely not, especially if you and your family aren't typically in the social class that can afford one.

The usual rule of thumb is that you can spend something like 3% of your well-invested capital a year if you want it to last a lifetime. (Four percent if you're a more ordinary retirement age.) I don't think they want to live on $15K.

...I want to know more about the relationship with the gf. Because this is his money, presumably grandfather left it to him, not them, until they're married or have some kind of a legal contract/agreemnt. (Sorry, but that's what marriage is legally, not just the love-sex-babies-familyunit matter.)

Life-changing? Yes. But more in the sense of "it will give you a solid base off which to work" rather than "retire and live off the largesse".

Agreed. If they've been living together for a few years, sure, they may be a committed couple and planning to stay together, but legally, the money's his. And even in community property states, money one spouse inherits may legally be theirs alone.

I mean, $500,000 is life-changing, but on the smaller end of the scale, like "pay off student loans" and/or "buy a house." It's by no means early retirement money for one person, let alone two. (Did I say "Oh you sweet summer children" when I read that part of the letter? Maybe.)

I'm at least 25 years older than LW. If I suddenly inherited $500K, I wouldn't see it as enough to fund early retirement. (And that's assuming it's that much after taxes; I don't know how inheritance tax is handled.)

This money could still be life-changing. If LW has college debt, getting rid of that would be a huge help; if they'd wanted to go to college but couldn't afford it at the time, now they can. It's savings that would cover a lot of emergencies -- no worries about how to pay for car repairs or dental work. It's a hefty down payment on a house, and in some parts of the United States it'd be more than enough for a house, period.

But it's not retire-now income. At best it's the seed of retire-somewhat-earlier income.

Edited (tag) 2024-04-16 01:34 (UTC)

Assuming LW is in the US, most states don't have inheritance tax, and there are various thresholds and exemptions (in at least one grandchildren are exempt). It's the grandfather's state of residence that matters, and I think usually it's the estate that does the paperwork even though it's the beneficiary's legal responsibility. There's no federal inheritance tax.