Afford Anything - Q&A: Don’t Waste Your Inheritance! Here’s How

Episode Date: July 19, 2024

#524: Mark and his partner will soon inherit an IRA worth over a quarter million dollars. With today’s elevated interest rates, would throwing it all at a primary residence be the smartest play?  An anonymous caller and his girlfriend are musicians who dream of building a home with a monetizable recording studio. How do they untangle personal wants from business needs? Will feels stumped about the options in his defined benefit pension plan. When should he choose a guaranteed annuity over a lump sum payment?  Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode524 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, have you ever come into any sudden money, sudden big money? When I sold my business, yes. Ooh, you were 40 at the time, right? I was. Does the public know how much it was? I don't think I know. They do not know how much it is. Ooh, dun-d-d-dun-d-dun-d-dun-tun-tun-it.

It was a lot. It was a mid-six-figure number. Let's put it that way. How about that? Mr. Moneybag. Yeah, I know. Look at you, right? Well, speaking of a six-figure number,

we're going to take a call today from someone who has received a a $300,000 inheritance. What should he do with this inheritance? It's a great question because a huge wealth transfer is about to take place from first the silent generation to the baby boomers and then the baby boomers to millennials. So for people who either are getting an inheritance or a bonus or a commission, people who are getting sudden money, people who are selling their businesses like you did, it's a good question to grapple with.

It is. It buys a lot of Kit Katz. That's your candy of choice, Kit Kat. Oh, yeah. That's not yours? I've been in a starburst kick lately. Oh. Yeah.

Those wore my jawed after a while, though. Hmm. You know, you can only do one or two of those and then you're done, which probably is better because I could eat like a bushel of Kit Kat. Well, and with that, welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. So every bag of Kit Katz that you buy. is a bag of Starburst that you are not buying.

But it doesn't just apply to your money. It also applies to your time, your focus, your energy. Everything carries a trade-off. So, what matters most? What trade-offs are you willing to make? Those are the questions this podcast is here to answer. My name is Paula Pant. I trained in economic reporting at Columbia,

and I help you focus on what matters. Every other episode we answer your questions, and I do so along with former financial advisor, Joe Saul Seahyai, who sold his financial advisory business for his mid-six-figure number. I did. Bam. How are you, Paula? I'm great. How are you doing? I'm fantastic. There's no better time than the present to answer a bunch of phenomenal money questions. Absolutely. I can't wait to answer this question about inheritance, but before we get to

it, we are first going to answer a question from a gentleman who he and his girlfriend dream of building a home with a monetizable recording studio. They're musicians. And they want to build a recording studio in their home. Let's hear from them. Hey, Paula and Joe, anonymous first-time long-timer here. I've got a bit of a complex question I'd like your input on. My girlfriend and I are 27 years old.

We're both part-time musicians. And we're looking to eventually build a home together sometime in the next two to five years. As Joe says, we're looking to start with the end in mind. And the end in this case is us being married. with a five-bedroom home with a basement, two car garage, solar panels with batteries, geothermal assisted HV charging station, deck, fenced in backyard for two dogs, recording studio at two turtle doves, and possibly a partridge and a pear tree. Now, obviously, this is a lot, and we're not looking to do everything at once.

We'd like to kind of start with a small home and maybe add extensions and expansions as we move along. We're pretty dead set on that new build, though. We both live in New England, and we're kind of just tired of dealing with the quirks of old buildings, Central air and basements are pretty nice, and knowing that the home is up to today's building code would bring a peace of mind that would noticeably improve our quality of life. We expect the cost of the house to be anywhere from 250 on the bare bones end to as much as 670-ish, maybe north of that, to the do-it-all-at-once end. I recently made the pivot from full-time musician back into IT.

I'm starting at 67 a year, and my girlfriend is currently making 59 a year, but we're both expected to significantly increase our salary income to a combined $250,000 a year after about three to five years' time. Together, the side music business also brings in an additional $20,000 to $50,000 a year, depending on some factors. Debt-wise, we're in a pretty good spot. I only have about $4K and some residual credit card debt. My girlfriend has roughly $14K in student loan debt, and she has $22K in a savings account that doubles as an emergency fund. We both own our cars outright with no plans to buy new ones. At current income levels and after expenses, we expect to be able to save 6K a month plus whatever additional income the music business generates. Now, here's the meat and potatoes of the

question. When should we build the recording studio? We expect the cost to be in the ballpark of $100,000 to $300,000, and this could be pretty much the only part of the house that would actually produce income. We have some ideas as maybe it doubles as a small venue. We can offer it to shoot music videos in, rent it out for studio time, the big one being offering it as a practice base for local bands. And that kind of stuff can kind of be quantitatively calculated, but there's also qualitative reasons for this part of the build. Our various bands and musical acts usually have struggles finding places to practice. And not only that, but the current home studios in our shared apartment, so we can't record anything that's too loud.

And quiet hours kind of restricts personal practice time. I'm torn because obviously building it sooner might mean we could use it as a business asset for longer, and it could increase our income even more, but it also means we might have to wait a little bit to build the rest of the house. As always, I appreciate your input. I'm friends with a couple financial planners, so I have resources to be able to figure out particulars. I'm most interested in what your thoughts are on our decision-making process that we could follow while our pricing calculations fluctuate. Thank you very much. I love this question. Before we answer it, however, this caller needs a name. I know half the audience is going, wait, he doesn't have a name. What are we going to do?

For those of you who are new to the show and you're wondering what's going on, this is an anonymous caller. And we have a tradition of giving every anonymous caller a nickname. We should definitely give him a musician name. Because if he's a musician, he's not going to tell us who he is. That means he's probably famous. Listening to his question, this guy's never used a microphone before. Oh, my God. I mean, okay, a musician name.

So Elton. Oh. Billy? You know, as in the Joel variety. Isn't it wild that you can say first names and we know exactly who you're talking? Of course, Elton. Elvis. Yeah, right.

Let's go with Elton Bilvis. J.Z. JZ is great. Garth. How about Garth? Garth is a good one. Yes. Fantastic.

I have a musician who I like a lot that I just saw in. concert at a really small venue in Austin named Josh Rouse. I really like the smooth sounds, very mellow music of Josh Rouse. We could call him Josh. I was thinking Wolfgang or Johan. Johan. Let's go with Johan. Yohan. Okay. Perfect. Yes. All right. Well, Johann, thank you for the question. This is a classic classical question by Johan. I'm going to laugh every time. we talk about Mr. Baroque. Baroque.

If it's not Baroque, don't fix it. What do you think, Paula? How do they think about the studio? How does Johan think about the studio? So, Johan, what I would do is you clearly want this for a blend of personal reasons as well as business reasons,

right? There is the monetizable element, which is great, and you can model that out by looking at demand, by looking at competition. You can model out on a spreadsheet, how much will this cost, how much will it bring in, what's the payoff period, what's the ROI on building this? But that's only a portion of your motivation, because there's also the personal element

of wanting to practice and record yourselves, wanting to support local musicians. So what I would do is assign awaiting to what percentage of this is personal and what percentage of this is business. And this is where precision should not be conflated with accuracy because there's no way to state definitively 70.6.243 repeating percent. It isn't quite so on the nose. But you have a general sense of, is your motivation 50-50? is it 80-20? Is it 70-30? And if so, 70-30 in which direction? Is it primarily a business interest or primarily a personal interest? What I would do is figure out what that split is, assign each of those their particular weightings. And so then when you run a business plan for this, when you model it out,

whatever numbers you come up with, multiply that by the percent to which that factors in. And so it becomes a weighted average. So what I'm imagining right now is a spreadsheet where column A is that you want a place to record for yourself. Column B is that you want to support local musicians. Column C is some alternate motivation, et cetera, et cetera. So every column is a personal motivation. and for each one you assign a weight, one through 10, of how strongly that factors into the decision, and then you give that a weighted average.

And then you create a weighted average between personal and business. And that's how you kind of try to quantify something that feels at this moment so amorphous. I want to jump in right there. I want to hear the rest of your thinking, Paul, because I love this. when I have worked with entrepreneurs, I think we have to talk about your bias, because the bias of most entrepreneurs are twofold. Number one, this is a great idea. And number two, it's going to bring in lots of income. And the biggest problem that places like the SBA will tell you is the average entrepreneur doesn't give themselves enough runway. The money comes well after

their funding has dried up. And the reason that companies go out of business often in the first two years is because they didn't give themselves enough because they were too optimistic about their results. So I would take whatever those numbers are that Wolfgang comes up with. Johan. Did I make the bad mistake? No, actually, I like this. Let's give him a different musician name every time. I call Bach Mozart. Next, it's going to be. Ludwig, but I would take whatever number that he comes up with and maybe work with that number in half. And from a financial planning standpoint, I just like that better anyway, Paula, because if extra

money comes in, we can always figure out what to do with it. But with that money doesn't materialize, then we find ourselves in a world of hurt. So always planning for less and then having greater gains is a much better plan than betting on bigger gains and big numbers that are going to somehow make this a reality. So, Joe, to your point, entrepreneurs tend to be optimistic. And your point is to push them towards pessimism. I was actually, it's funny you say this because I was thinking about this last night. I think to survive in business, you need to have a combination of optimism and paranoia.

Absolutely 100% paranoia. Absolutely. I think you need optimism about what could be and paranoia about preserving what is, which is another way of saying aggressive offense and aggressive defense, right? Because if you've got optimism, you're going to play offense aggressively. If you've got paranoia about protecting what already exists, you're going to play defense aggressively. So optimism and paranoia is the way that I would approach this, which means Wolfgang, to your question, The paranoia portion of it is in preservation of your current assets, right?

To what extent could building out this recording studio destroy any of the wealth or net worth that you have already amassed? You talked in your message about how it might affect future plans, future puzzle pieces, but what I want to know is to what extent could it disrupt what you've already built. built. I would be a bit more paranoid on that preservation element, but then when it comes to, all right, how could this grow? How could this improve our music careers? How could this become a source of revenue? That is the place to be optimistic, but to do so under the purview of a spreadsheet where you're modeling that out, you're modeling a best, worst and midcase scenario, you're basing it off of actual demand that you see in the location that you're in. And you're waiting. You're leading that average with a weighted average of the amount that your personal considerations are also playing a role in this.

Because the inescapable part of this is that he's not talking about opening up a frozen yogurt store. He's not talking about something that a person might do purely for the sake of an investment. He's talking about something that is a personal want that could be monetizable. So that decision needs to wait for that, wait in the W-E-I-G-H-T sense of the word. I thought about this also a couple of different ways. You know, when he asked the question about when to build it, when do I build the studio? Meaning, I think, does he build a studio when the house is built or does he wait until later? I think that's incredibly difficult because of that.

that wide, wide, wide standard deviation in cost structures between 200,000 something and 600,000 something. The monthly payment on those different mortgage structures is so vastly different from one to the next that I don't know, Paula, that we can answer it until he narrows that number down significantly because if you're thinking about the studio's entrepreneurial space and certainly thinking about this being an income stream for the house, I think what he's leaning toward is build it sooner because it'll build a revenue stream that will help him afford the bigger mortgage.

Like I get to even say that, but if I'm reading the tea leaves, I think that's where we're at, is that, hey, if I build this sooner, then more money could come in. Maybe. But at $600,000, do I want to make that bet when I'm already stretched very, very thin? At $200,000, I could probably easily make that bet based on just his current income structure, which, you know, another reason that I came to Ludwig's decision-making process also was when he also chose to tell us in the question about his future. income going up. I think the only reason you tell us that your future income is going up is you're also thinking, hey, I've got this future income that's coming in that can help me afford that. Whenever I think about betting future income against current debt, I am creating a recipe that could

quickly go south. So I prefer not to do that. I know a lot of people who do that and they win and you can definitely win big, but you can also lose big when you start betting your future income against current debt. So I kind of like the idea of facing reality the way it is, not the way I expect it to become. It's though don't count your chickens before they hatch. Yes. As Paula and my mom say. I was just Googling classical composers, composures. Composures. I was thinking, as Leonard Bernstein is thinking. A little bit more contemporary. Frederique.

Wagner. But that's his last name. Strauss. I mean, first names, right? Who's recognizable on a first name basis? Because there's Antonio, Giuseppe, Frederic, Richard. I mean, I think you'd have to know the space pretty well

to know the last names of who I'm talking about. Because you said Antonio, I'm like, I didn't know Bandaris was a composer. That one's very. The Valdi. Ah, the four seasons. Not to be confused with the hotel, the fancy hotel. Mm-hmm.

You know, I think the element of this question, Joe, that you touched on in your last point is cash flow management. You know, Frederique, my question to you is if you were to build the basic version of this house, how big of a bite would that take out of your mortgage every month? How does that compare to your current income? And then when you get that raise, if you were to build the recording studio, assuming that you couldn't monetize it at all, how big of a bite would that take out of your current budget? And is that something you could live with? It may not be ideal, but is it withstandable? Is it tolerable as painful as it may be? If the answer is yes, because you're at that point optimizing for downside protection, right? If the answer is I would hate it, but I could tolerate it. even if it brought in zero, that would suck, but I could survive it. If your answer is that it's survivable, great, then go ahead and do it so long as even if that brought in zero, it would still be survivable. Which is, if you think about playing defense, a much stronger position to be in.

Right. That's the being paranoid about defense portion of it. And then once you know that you you've been paranoid about defense and you've mitigated for what they call in poker your risk of ruin. Once you've mitigated that risk of ruin, then you can chase unlimited upside. Poker's a great analogy, Paula, because even on the best hand, things can go against you. I was always frustrated when I would meet with somebody and they're like, you do all the inputs correctly. Look at the number of people in 2007, 2008 with the housing crisis and the real estate meltdown, who really, you look at what they did, they did things very, very well and still got swept up in it. Loss of a job, loss of credit, did all the things that they thought that they could do.

And then they learned the wrong takeaway, which is don't trust the system or don't trust investing or don't invest anymore. Don't trust the markets. Those are the wrong takeaways because they had wood in poker you'd just call a bad beat. Right. Exactly. Variance. In poker, it's known as variance. frustrating, but very real. So in poker, what you want to mitigate is that risk of getting knocked out of the game entirely.

That's the risk of ruin. So long as you can stay in the game, then you live to play another hand. And so, Elton, your version of that is making sure that even if this recording studio doesn't bring in any money, you could still bear the weight of the payments. It would be painful. It would suck. You would hate it. But you could do it. As long as that is in place.

Then go forth. So, Luciano, thank you for the question. Call us back and let us know when you build that recording studio. Maybe we could use it from time to time, Paula. Yeah, we should record an episode from there. We'll be your first customers. No, seriously, I will commit to that right now.

build that studio, Joe and I, well, I can't speak for Joe, I will come and record an episode there. Actually, I don't know where you live. That's what I was thinking. You've no idea what you're committing to. Oh, guess where I live? That's how I rolled, Joe. It's the adventure that awaits. Isn't it part of the fun committing to it and then being like, huh, wonder where I'm going? And then you find out that he lives in North Korea. You know, like, how am I going to get that passport stamp. Well, anytime you get a chance to visit Billy. Exactly. Thank you for the question. We're going to hear from the sponsors who allow us to bring you this show at no cost to you. And when we come back, we're going to tackle a question all about the money that you take out in retirement

and how to deal with the risk that you might outlive your money. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens, maybe you need servware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has can't miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway in the bathroom, very space-saving. I have a daybed from them that's multi-purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers

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From November 25th to December 2nd, your donation will be doubled. That means every dollar goes twice as far to help build a future where no one's seeking help is left behind. Donate today at camh.ca slash giving Tuesday. Welcome back. Our next question comes from Will. Hey, Paul and Joe. This is Will in Seattle. Long time, first time.

I'm just calling in a question about how to optimally use a defined, benefit pension plan that my employer provides. I sort of view it as two options. Option one would be to take the guaranteed annuity at age 65 until I kick the bucket, which sounds really easy, but it sounds like it's less return than option two, which is whenever I end my employment, take the lump sum and roll it into a traditional IRA and self-manage with broad-based. ETFs. Obviously, the annuity helps with longevity risk, but what am I missing? What are the unknown unknowns, as it were? I guess some context about myself is that I'm 28. I have an investment portfolio about $121,000 with no debt. To much of Joe Segrin, I would be called Coast Fai.

but I also run a small knife sharpening business in my spare time that grosses about 40K annually. And I don't really have a plan on retiring from traditional work anytime soon, as I need the W2 to start doing some value add house hacks in the future. This sort of piece of my investment portfolio is a little elusive. And so I think more money in the future sounds better than less money in the future, but I don't know if there's something that I'm missing. Looking forward to your feedback and really love the show. Thank you so much.

Will, this is a fun, fun question. And by fun, I mean lots of people pulling their hair out over this one. Because if they have a pension, if they're lucky enough to have one, you get all these pension options. You're like, which one do I choose? Do I choose to take a monthly payout for the rest of my life, which is his guaranteed pension option? Or they'll give me a lump sum and then I take it and I invest it. Which one will give me the most money? What's cool about the answer to this will is it is actually a simple, which is very nice. It's a much more simple answer than you would think, which is it's a math problem. which is this, how long from the time that I received the lump sum? Because the key is this, if I can get the lump sum, then I will avoid all the downstream problems that only getting a monthly payment would create.

Like let's say as an example, Paula, you choose to take monthly payments, but then you pass away six months after you decide to take monthly payments. The way that Will is talking about taking these payments, there are some beneficiary designations you can choose and you'll get a smaller number. But let's say he chooses just to get the most money each month. You're done. You worked all these years for this company and now you receive four, five, six payments, and you're never getting another payment again.

This whole benefit doesn't help intergenerational wealth. It doesn't help with your wealth transfer. It doesn't help anything. any of your charitable incommations, whatever it might be, it's bye-bye. That money is all gone. So to avoid that, people will often take the lump sum instead and they'll invest it. There is one number that we need to figure out, and that is what rate of return do we need on that amount of money to equal in payments the amount that I'm getting from the annuity company

from the people giving me the pension. When I start working through this, even if those numbers, if I can squeak out a payment that's the same as what I would get monthly payment-wise, and the amount of return that I need is, let's say, 7%, 6%, some pretty high numbers

when I'm trying to also take income from it every month. I need that number to actually be. fairly low. Right. It is like the four percent withdrawal. Yeah, it's got to be a fairly low number. Or if I'm not going to spend the money right away and I could let it grow for five, six, seven, eight, nine, ten, oh my goodness, if I could take it today and I'm not going to start spending it for 10 years, well, then maybe I'm more likely to then let the money grow in equities, in stocks, like a good low-cost index fund for 10 years and then back it down when I begin getting ready to take payments.

But it is a math problem. How long do I think I'm going to live and what return do I need on this money to equal the payments that this company is giving me? Once I know those numbers, then I think to myself, okay, let's say that I can't replicate the payments at a 4% withdrawal rate. like you're talking about, or having it grow at a 4% rate, let's say I can't replicate the payments, but I can come close. Well, just the fact that I have all the money in my pocket, and I don't have to spend a lot of worry, agonizing about when I'm going, if I'm going to die six months from now

or die a year from now, all the money is in my hand. I might still go for the lump sum, But if there's a huge discrepancy and I could take the excess money from those monthly payments and reinvest it, then the question becomes, how long would it take me to reinvest that excess money to equal what I would have taken is the lump sum anyway. So I think you can see there's three or four different math problems I can play with. But it all very simply is it is math. And it's not difficult if you just start off with what rate of return to. I need to create that monthly payment stream? And when you start working with that number, then you begin tweaking. When I imagine what the spreadsheet for this looks like, I'm picturing finding that crossover point. Yeah. Because there's going to be one scenario in which the annuity

makes more sense and an alternate scenario in which the lump sum makes more sense. when you put those two on a graph, there's going to be an intersection. And the question is, at what point in time does that intersection take place? Yeah. The longer you live, the more that monthly payment makes sense. Right. So as we model this on a spreadsheet with different assumptions, we see how that crossover point moves.

And I think that's where the decision comes in. my bias to answer Will's question directly is always toward taking money now. Always is toward taking money now. So let me ask you about that, Joe, because I understand mathematically why that bias would be there, particularly given a desire to make sure that some of that money goes to your heirs or beneficiaries or to any charities that you designate. But isn't there also a real? risk of behavioral malfeasance. Oh, totally. Great point. And Will, of course, we're not

implying that you would do this, but in general, the average person behaviorally is apt to blow a lump sum. In fact, we're going to be talking about this more in our next question when we talk about how to handle an inheritance or any giant lump sum. When you've got money burning a hole in your proverbial pocket, it's easy to load up on champagne and caviar. I love the way that we attack this question, though, because my bias is toward take the lump sum. And then my first question, which was the question you asked Paula, was, okay, what could go wrong? The first thing it could go wrong is me.

And then how am I going to mitigate against me? how am I going to build fencing between me and my ability to mess up this entire plan? And then I think one of the first things I have to do then is seriously not just look in the mirror, look in the rear view mirror and see what I've done with sums of money up until now. Because if I think I'm going to manage this money perfectly, and I've never done that in the past, what am I going to change that's going to make this different than anything I've done before? This is one of those episodes where past performance could be indicative of future performance.

Very well, could. When it comes to your own behavior. If I've been able to leave my hand out of the cookie jar and not day trade my index funds, and by day trade, I don't mean day trade because everyone's laughing, I'm sure, listening to their advice going, what's Joe talking about day trade? I'm talking about you make one move every other year because you're certain the market's about to go down. and then you decide you know better than the market does. And you know what?

The average person who just laughed at, oh, day trade, I would never do that. I think a lot more people would go, oh, yeah, there's been that time. Yeah, yeah, that once every two years that I think a recession is coming. Yeah. Water cooler chat. You know, the other piece that I would add to it is, sure, there's look in the rearview mirror, how have you handled money in the past. There's also the question of, did something recently happen that was so impactful in your life that it is likely to change your future behavior? So what I'm thinking of right now is how many people's behavior changed during the pandemic?

Because it was such a radical shift in their life that all of their past habits, patterns, et cetera, got thrown out the window. And you saw people, particularly when it came to how people handled money, you saw people, and myself, included do things with our money that we had never done before, largely because we were just living in this alternate, unimagined reality. The rise of Robin Hood. We could no longer bet on sports, so we started betting on stocks. Exactly. Wall Street bets, GameStop, AMC theaters. All of this went hand in hand with the rise of crypto right at that same time. And the pandemic. I'm bored. And I have an app in my hand. Let's go. And there was with the pandemic, the loneliness, the isolation.

Those things had a huge effect on people. So that's the other element of my question is, of course, we're not in lockdown anymore, but is there something in your personal individual life that has recently happened that might impact the way that you handle your time, your money, your focus? Where is your focus and energy going right now? And is that the same as where it used to? go or is it different? Has it changed? And it doesn't mean it's better or worse. Just is it different? Because even that can be indicative of, you know, where your cognition is. That's often where your behavior is.

So I think, Will, hopefully that that answers it. You know what looks very convoluted comes down to some math. I don't think the math is going to solve the problem, Paula. Right. But I think it will definitely give you a better idea of what our options truly are. Because I I'll tell you, sometimes I've done this math with some companies. And the math doesn't end up making sense one way or the other. You know what I mean? Math ain't math. Yeah, it becomes very clear that I need to take the monthly because it's so much better than

a lump sum. Or I need to take the lump sum because it is so easy to replicate the number. And I don't think I can get in my own way enough that it makes it not work out. It's a math problem. And here's how you run the numbers, but then also don't forget about the behavioral component. Absolutely. If you take the lump sum. Well, then at the end, yeah. My bias is toward the lump sum. What are all the things, though, that would make the lump sum not work in my favor, mostly being me. Right. And as I see it on a spreadsheet, find the crossover, which basically, Joe, just echoes

exactly what you've said in spreadsheet graphical format. Right. Right. Right. It is fun, though, Will. I'm not joking. Paula, I do think it's fun because I feel a little bit like Sherlock Holmes because you will come to a very comfortable decision. 99% of the time when I was a planner, my client, I would come to a very comfortable decision because you'll find that the math is going to lean in one way or the other and you can then sleep very calmly at night knowing that the probability is you made the right decision. Perfect. Well, Will, thank you for the question and best of luck as you math it out. All right.

Joe, are you ready for the big final headliner? I have goosebumps. We're about to tackle the $300,000 question, which is how do you deal with the legacy of everything that your parents have built in their life? They're passing this to you. How do you handle it? We're going to answer that right after this final break to hear from the sponsors who allow us to bring you this show at no cost to you.

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Like leftovers at midnight, our Black Friday all. offers won't last. Shop now at IKEA.ca.ca slash Black Friday. IKEA, bring home to life. Welcome back. Our final question today comes from Mark. Hi, Paul and Joe. Thank you so much for the invaluable resource your podcast is. I enjoy hearing your insights into the various questions that come through and have learned a lot

over the years that I've listened to afford anything. I'm about to receive a large inheritance of around $300,000, and I'm seeking your advice on the best way to handle this money. Our main goal is to use this inheritance towards purchasing a primary residence within the next year. We live in a moderate to high cost of living city where houses we'd like to buy would be in the $7,000 to $800,000 range. For additional context, we currently rent a single-family home for $3,000 a month and bring home a salary of about $175,000 a year. At the moment, we have around $80,000 of our own funds that we can contribute to a house purchase. We have a fully funded emergency fund, max out our Roth IRAs each year, and I contribute to my works 401K to my company match.

I want to make sure we're making the most prudent decision with these funds and realize what a blessing it is to have such a situation. Could you please provide some guidance on the best strategies for saving and possibly growing this windfall while ensuring that it remains relatively safe and accessible when we're ready to buy home? My gut tells me to keep the funds lump together with our other savings and a T-bill each. or in our high-yield savings account, so that they can grow modestly and stay safe over the next year. I believe the funds are coming from a Roth IRA, but I'm not sure. Are there any tax considerations that we should watch out for, since this is an inheritance? Considering the current high interest rates, would it be the best idea to put the majority of the funds down as a down payment to keep the mortgage as small as possible? Having a $700,000 house with a less than $400,000 mortgage,

Sounds really nice and a great way to keep our cash flow strong and our budget more flexible. Thank you so much for your insight and advice. Mark, thank you for the question. And congratulations on having such a great financial structure and so much clarity around your current financial position, your goals, and your awareness of potential risks. It's clear that you've spent a lot of time organizing your financial life. So congratulations on having come so far in your financial literacy that you've clearly got a very solid handle on this. A couple of things to talk about right off the bat. This is an inherited IRA.

You asked about what some of the tax ramifications are. Generally speaking, the money from an inherited IRA is taxed at your ordinary income tax rate. Now, with an inherited IRA, there is no 10% early withdrawal. penalty for the money that you're withdrawing, even though you're likely younger than 59 and a half. So you don't have to worry about any of that. There are no restrictions in that way. And you can expect to pay ordinary income taxes on the money that you take out. Now, there is, if you wanted to leave the money in the IRA, that would get more complicated because inherited IRAs are also subject to RMD, required minimum distribution. But given the fact that you don't want to do

that anyway, that is a moot point in your particular scenario. I would definitely, though, Paula, to your point, work with a great tax advisor on how to withdraw the money if it is in a pre-tax IRA. To your question around how to best manage this money, there are two things that come to mind right away. One is, and I'm going to put this out here, Mark, not just for you, but for everyone listening, broadly and generally speaking, and of course your mileage may vary, but generally speaking, it is typically a good idea that in the first year after a loved one has passed, you make no major financial decisions because grief could cloud your decision making. And this money has emotional heft to it.

greater emotional heft than any other random $300,000 that might come your way from some alternate source and for some alternate reason, right? This is $300,000 that's imbued with emotional significance. And so as a very generalized rule of thumb, it's often advised to keep that money in cash or cash equivalents for the first year. while you simply process the grief. So Mark, from listening to your particular question, that doesn't necessarily strike me as something that you personally need to do because it's clear that you've thought through this really well.

It's clear that the main idea that you're considering, which is using this money for the purchase of a home, would not be an expenditure of the money in the conventional sense of the word, you wouldn't be using it to buy depreciating assets, cars, vacations, you would be essentially transferring the money from the form of cash or equities

into the form of real estate equity, but it would still be 300,000 on your balance sheet one way or the other. So you're essentially maintaining 300,000 on your balance sheet, but transferring it functionally transferring it from an IRA to primary residence equity. And so for that reason, because of the fact that it's the thing that you're considering

does not diminish the $300,000 from your net worth statement, I don't necessarily think that you specifically need to wait if what you want to do is use this to buy a primary residence. But if you were considering it for anything else, then waiting might be a good idea. I think the caution is important, though, Paula, because whenever you're putting money into real estate, you're turning liquid cash into illiquid. Into a solid, yeah. Into a solid, yeah. And I do worry about grief.

And I think it is good to bias toward a slower decision-making process during this time because of the potential that that might factor into your. decision making. And again, I'm with you. I don't, I don't especially feel that just from the tone and the tenor of the conversation of the question, but it certainly is something that you should watch out for. When I was a financial planner, it was the most frustrating time to work with a client because financial planning is all about predictability. And frankly, I could not predict you during a time of grief. Some people would bury themselves in work and would make tons of money. Other people would completely change directions in their life. And so it made it

very difficult for me to do my job to ensure that my client had enough money in a liquid spot that regardless of what came along, they had money in the right place at the right time to do the thing. Because it wasn't uncommon for a client to call me and go, I've decided I'm buying a boat. Right. Like, where did that come from? You can't swim. I know. But I'm going to take swimming lessons and then I'm going to buy a boat and jet skis. But you know what I mean?

So I do like the warning. And I also like, and part of the reason why I think this is a well-reasoned question, I was like where he's talking about putting the money for the home purchase. The high-yield savings account is an excellent choice. I think you will eke out a little more yield using the Treasury Exchange traded fund or some other option that's similar to that. Personally, I don't care. Yeah.

Between the two of those. Just keep it simple. I don't like lumping it together, though, with the emergency fund. This, frankly, is why I personally use the ally account. And I don't want this to be a commercial. I've no affiliation with ally. But I like their buckets that you have inside the account. Right.

Just so I can have it differentiated and leave it in one account. Yeah. But I do think that keeping this separate from your emergency fund is important. Yeah, I agree. That was actually the part of his question that I liked the least. I liked Mark when you talked about keeping this $300,000 lumped together as one cohesive, discrete unit, one block of money that's used for one purchase, which in this particular case would be the purchase of a primary residence.

What I like about that is that, is that because, this is such emotionally charged money, this is a very specific, discreet, tangible use of this money. So that 20 years down the road, when you think back on what was the legacy that this person left me, you can point to one extremely specific thing and go, the legacy was this house. Or the legacy was the initial funds that got us into this house and that paid for. or nearly 50% of it, not quite 50%, but close. Yeah. I think that's the reason why, going back to math again, like we did with Will,

I think the math to do here first, it sounds like Mark is doing a great job of saving into his long range other goals. But I don't know, Paula, if he started doing that six months ago or if he's been doing that for a long period of time, so often you and I. I ask the same question that I'm going to ask Mark, I don't know if you're doing enough toward these other goals. Is it enough to actually reach the goal? If Mark's 45 and he's telling me he's maxing out these different programs, but he's

been doing it for six months, Paula, he might be way behind. And this inheritance money could help him catch up on something that is a competing life goal to the house. So I want to know how I sit with the other goals that I have in my life that might be competing before I make a decision to use all the money toward just one thing. Interesting. Okay, Joe, I think you and I disagree here. Well, clearly I'm right. Here's how I see it. When it comes to money that was passed through an inheritance, there is that emotional need to feel as though the person who passed is still in your life in some way and to want to honor their legacy in a way that is discreet and concrete.

Mark, let's say you buy a $700,000 home with a $300,000 down payment and you have a $400,000 mortgage. So I'm running this through a mortgage calculator and a $400,000 mortgage on a 30-year fixed at a 7.4% interest rate, that is a monthly payment of $2,782. Now, that does not include property taxes, homeowners insurance, and HOA fees. But we're now talking about a monthly payment, at least a principal and interest portion of a monthly payment that is fairly comparable to what you're paying right now. So your day-to-day budget won't change drastically.

It will change a little bit. And I should asterisk here, this is highly going to depend on how high or low the property taxes are in the area in which you're buying. And also insurance. I mean, if you live in Florida, this is going to be a different conversation.

But assuming that you don't live in a very high insurance or very high property tax area, your monthly housing payment remains fairly consistent and you get to associate the legacy of the person who passed with this home that you're now in. I don't. I'm not down with that at all, Paula.

Wow. And here's the reason. What is a bigger legacy that somebody can leave you than ensuring and helping you lock down financial independence? If on one side, this will help me purchase a house, but I'm nowhere near financial independence, and I'm going to be in this beautiful house doing something I don't want to do, living a lifestyle that I may not be able to sustain. But in this beautiful place, I don't know that I like that nearly as much as the flexibility

and the ability to do whatever the heck I want to. I understand that the mission was get in the house. And I also understand that what you're presupposing then is this is the A number one goal. And I truly don't know that to be the case because when we would do this in financial planning meetings, we would look at the other goals. And we'd actually sit in a room and we'd look at how does this house compare with financial independence? And we chatted about it for a longer period of time. it turned out that while the house is the right now goal, the true long-term goal is, I want to feel good about where I am.

I want to feel the sense of security that I have. I want to know, am I ahead or behind in the other places before I make that decision? Because if I'm ahead, then certainly how great is it that I can live in this beautiful place and I can say this place is the legacy and this inheritance helped me get this beautiful thing? That's great. But if I'm doing that at the detriment of an overall legacy that I'm trying to create for myself and my future, then I'm not going to go there. I won't fight it because I think that Joe has a very valid point. I just also see it differently.

But now, I mean, Joe, like everything you said, and I'm not just trying to be agreeable, they're all very valid points. But there's also the slippery slope of having, I don't know, too many goals and the money gets split into too many different pies. And then eventually you look back and you don't really know what any of it went to because there was a goal of saving to pay for your next car in cash. And there was a goal of taking a vacation and there was a goal. And then it just gets split between all these different things. And you end up scratching your head wondering, where did all that money? go. You're going to have more power levying it toward one spot, I think is where you're going. It's almost like our attention. If I try to do four things and multitask, I'm not going to do those four things,

which should equal 100%. If I did one thing, never do. Right. This loss of attention that I have because I'm not paying attention to any of them ends up worse than if I just focused on one thing. So I totally, I totally get that. And I don't think that we're going to really, agree on that part, which is why I'm going to, if you don't mind, Paula, pivot to another thing that Mark said. Ooh. Well, because what Mark did was talked about a bias, I think, that he has, which is toward protecting free cash flow, which is super important.

It is super important. But we're doing that at the expense of the asset, which we are burying. So in this case, by taking an asset and moving it into a primary residence, we are taking the velocity of that asset and we are making it next to nothing. The value of your primary residence will not go up as fast over a 10, 15, 20 year period as the total stock market. So we often think one way or another, some people bias toward the asset only. and they don't think about free cash flow and their asset, asset, asset.

These are the questions that we've answered in the past that are, there are people that have, you know, 95% of their portfolio is real estate. They have asset, asset, asset, and they can't figure out how to come up with 20 bucks to buy their next meal. Right. Because they're so asset based. But the opposite is also a problem. We're so worried about cash flow that we don't think about the asset.

$300,000. The velocity of it. of that money over a 20-year period of time in the financial markets is huge versus what it's going to do in a primary residence. And so while I agree with, yes, I do want to protect my cash flow, I also don't want to just go, oh, I'm going to take $300,000. I'm going to pop it in here and my cash flow is going to be fine. But once again, we can mess up our cash flow in a hurry, right? I mean, I remember meeting with people that had $100 a month Starbucks budget. And I haven't been a financial planner in 15 years.

So imagine what that Starbucks budget would be now. I'm not doing the I roll latte thing. I'm just saying that we can mess up free cash flow and spend that on stuff that doesn't make a lot of sense. Where to your point, if I take the asset, the $300,000 asset, that gives me the ability as a chunk to make a ton of money. So I would caution against one bias versus the other. What about the behavioral component of that? Again, like we talked about with Will's question, there's the money that that could make, that $300,000 lump sum could make over the span of 20 years if you don't go in and touch it.

But then there's the temptation. Oh, but come on, Paula, the free cash flow? Yeah, that's true. I think it's easy to eff up free cash flow. It's so easy. past me did that a lot very well. I had some mad skills at messing up cash flow. So I think we can play that game either way.

But to your point, again, we look at those biases. And then we also go, what's the chance in the past that I have messed up cash flow? How have I messed up the asset? And I think that some people are better at, you know, when it comes to assets, I'm pretty good at leaving my money alone, not touching it. So for me, having the $300,000, in the market, I know me, I'm not going to touch that money. I just don't touch that money.

Cash flow, I still don't trust myself, which is why I always make sure I don't have money in my hand. I had to create systems to make sure that I guard it against my inability to have $10 in my wallet and not blow it. So then for Mark, this is where the question would come in. How often with your existing investment accounts do you go in and mess up your own strategy? because again, that past performance is indicative of future behavior. I do get the feeling, though, just based on his question, that Mark is much better at cash flow than I was because of the fact that he said that they're maxing out, you know, they're doing the right things by automating these savings goals that he has in place.

So I do think he's doing a good job. So, Mark, I'm not barking at you. Joe's talking to his younger self. He's talking to himself 20 years ago. I find this podcast to be therapy. Welcome to afford anything, Joe's therapy session. There's one other piece of this that I also want to talk about. This is the piece that nobody likes hearing about.

Oh. As always, here's the disclaimer. Mark, this is not directed at you, but it needs to be said. There are many other people listening who are in similar situations or will be in similar situations, so it needs to be said for the sake of everyone. one regret that people who receive an inheritance often face is years down the road, they go through a divorce, and their ex-spouse ends up getting a portion of the money that was left to them by a deceased loved one, a deceased parent or grandparent. and emotionally that hits hard because you know that your parent or grandparent or whoever left you that money worked their entire life and planned and saved and sacrificed for their entire life

so that you, their child or their grandchild, could have this money. And then your ex-spouse walks away with a huge chunk of it. And that is an incredibly painful. experience for anyone who has gone through it. And so one thing to be on top of is, what does your pre-nup say, and I hope you have one, what does it say when it comes to the division of inheritances, and if you don't have one, or if the pre-up that you have doesn't cover this, put a post-nup in place. Because you don't want this to fall to the discretion of some judge. You don't want some judge to be the person who decides how your

parents' lifetime of earnings ends up getting split. That should be a decision between you and your spouse. A negotiation between you and your spouse, it should not be the decision of a judge. And if there's no pre-nup or post-nup, then it becomes the judge's decision. Which I think, regardless of where you would end up will not be the same thing that you wanted. And that's the thing I want to emphasize. Do you want you and your spouse to be the ones who make that choice or do you want a judge to make that choice? Because somebody's going to choose. You know, if that situation ever comes up, someone's going to be the decider.

So who should hold that decision? This is the same case I often make when it comes to estate planning and people that put estate planning off, Paula. The state has already has an estate plan for. you. Yeah. And it's not the one you would have chosen. Exactly. Do you want your government mandated asset division or do you want to be the one who chooses it? Because probate's got a good reputation. Said no one ever. I think you're spot on. It's something people don't want to talk about. And if you phrase it the way that you did so eloquently, Paula. Oh, I thank you. Well, I do think it was eloquent because it is about us making the decision.

decision. Let's make the decision and let's formalize it because if we don't, it's going to be. Then his majesty gets to make the decision. Yeah. I guess they call him your honor. And what doesn't affect us today may greatly affect us tomorrow if we don't put this in writing. Right. Exactly. Wow. I hate to end the question on that note. But I do like the gravitas of the question because it is a time for gravita. It is a time for contemplation, Paula. It is a time for planning. And I think a few hours spent planning how to do this well now saves you so much time and so much energy in the future. Absolutely. So thank you, Mark, for the question. Call back and let us know,

which one of us do you think is right? Me or Joe? Oh, definitely me. Come on, Mark. All right, Joe. have done it again. We answered three amazing questions. If people haven't gotten enough and they want to hear you provide more answers, where can they find you? I am so excited. Darius Faroo is a gentleman who's writing I've loved for a while and it is always fun, Paula, when you get to interview people who you've loved their work from afar. And you and I are very lucky. We've talked about this before that we get to do this, right? Yeah. Where all the sudden I'm face to face with this person. who I've been fan-boeing over their work. But I think a lot of the afford-anything community knows Ryan Holiday. They know about stoicism. Darius Faroo takes what Ryan Holiday does so well with

stoicism, but applies it directly to money and personal finance. So taking a stoic approach to your wealth, he's a phenomenal blogger. He's a great writer. I'm so excited that he's on our show this week. So come listen to me, interview Darius Farrow about being more stoic. with your money on stacking Benjamin's. So the stacking Benjamin's podcast, which you can find wherever the finest podcasts are found. Only the finest. Speaking of places where you can find fine podcasts, please make sure that you're following the Afford Anything podcast in your favorite podcast playing app, whether that is Spotify or Apple Podcasts or on YouTube. In fact, hit us up on all three.

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Guess how this is going to end, Joe. How's that you are all going to end? What do you think? Got any guesses? Afford anything. com slash. Slash. newsletter. Oh, crazy. I know. How do you come up with that? We brainstormed for hours. It was,

we hired an outside consulting firm. And McKenzie said. Yes, exactly. Did you hear, by the way, that New York City paid McKinsey $4 million to commission a study on whether trash bags should be put inside of trash cans? I saw that. Yeah, yeah. Versus on the street. Versus on the street. New York City, which, by the way, is grappling with these pervasive rat problems. $4 million to McKinsey. McKinsey's conclusion is, yes, trash bags should, in fact, go inside trash cans. No, no, no. Yes, it's true.

It's true. We've revolutionized trash pickup. We could have come up with that for $3 million. I know. Well, 3.7. That's not too deeply discount our work here. Well, thank you so much for tuning. In my name is Paula Pant.

I'm Joe Salci-hi. And we will catch you in the next episode.