I've been a freelance writer focusing on movies, hiking, stamps, volleyball, and politics.
What to Do With a $250,000 Inheritance
The old adage, "What would you do if you won the lottery?" gets used a lot and makes people really wonder what they would do if they suddenly found themselves with a lump sum of money.
Well, in this case, that's precisely what happened. It wasn't lottery winnings, but through various trusts and inheritances, I suddenly found myself with access to just over a quarter of a million dollars.
You think when you get into that scenario, you'll have it all figured out. And maybe you do, depending on where you are in your lifespan.
I found myself nearing the end of a fairly long career and beginning preparations for retirement planning. What receiving such a lump sum meant for me was the paring down of the timeline I had been considering from four to five years closer to one to reach my goal of moving on from my career to enjoying the remainder of life free from the burdens of the nine-to-five. The goal was to bring in enough income to travel and be out in nature with people that share my interests.
Was $250,000 really enough to accomplish my goal? As I realized what kind of resources would be coming my way, I sat down and made a plan. In all honesty, I made multiple plans depending on return rates and if I continued investing in the same manner I had been through work.
Aside from this giant lump sum, I had done a decent job of putting money into a 401k through my job and had built up an account to just over $190,000 with steady contributions and a few years of maximum investing to hurry the process of getting to compound interest (adding interest back onto a principal sum to increase the amount of interest gained every year).
I thought I could find some funds that had a return rate of around 10% for the $250,000, and while out on walks in the neighborhood, I did the calculations in my head on how long that would take to create a return amount that equaled my current take-home pay.
The Initial Plan: Long-Term Growth Funds
What I decided to do initially was to open an account at Vanguard and begin putting monies into various growth funds that were getting the return rates I was hoping for. I used just over $50,000 to buy into six different funds that had experienced over 10% returns in the past few years.
Multiple forecasts, however, noted that having been in such a bull (growth) market for the past few years, the United States was due for a market correction. I was hesitant for a while about shipping more money into the market, hoping to wait for the correction and then get in on the low end.
During this pause in investing, I started to see more articles pertaining to something I had not considered—dividend investing.
The Solution I Had Been Looking For: Dividend Investing
Once I started to look at dividend investing, I liked what I was seeing. Many people out there were investing in companies that paid them quarterly cash payments from the excess money that those companies took in from profits. I definitely liked that idea.
While growth sounded really good to me, I was also looking for something more liquid for an asset that could give me a decent return. The immediate return of cash back through the holding of stock sounded like the perfect setup for where I was hoping to go. I learned that this dividend payout to individuals who owned a company's stock is referred to as passive income.
Passive income is the process of making money by doing nothing but letting your money work for you. Some people get discouraged because this can take tens of years if you're just starting out. With the inheritance and trusts I was getting, I was getting in at a point much further along the process than many others. I joked about being the definition of white privilege.
Dividend Growth Versus High-Yield Dividend Investing
In researching dividend investing, I noted two very different approaches. The first was dividend growth investing, and the other was high-yield dividend investing.
Dividend growth is where I found the majority of investors. They would select a portfolio based on established companies with yearly stock price improvements and a history of consistently paying out dividends—usually between two and four percent dividend yield.
I had to step back and understand what that meant—yield. Dividend yield is how much a company pays in dividends per share each year. It is relative to the stock's price. So, if a company pays two percent for their yield, and the price is $10 a share, they will pay twenty cents per year per share (or five cents per quarter per share). If you invested $1000 and had 100 shares, you would be making twenty dollars per year or five dollars every quarter.
Dividend Growth Companies
Companies that dividend growth investors were investing in included AT&T, Johnson & Johnson, McDonald's, and Disney. These are household name stocks that have shown consistent growth.
In looking at some of the investors, they would brag about getting back a $9,000 return on $200,000 cash in the market. I immediately started to think dividend investing was not the path for me. No way I was currently living on $9,000 a year. But then I found a different path.
In high-yield investing, there are some stocks and funds out there paying out returns between ten and twenty percent. They are more volatile than growth stocks, as their stock prices fluctuate more often.
One of the things I liked about some of these stocks was that there was a group in there that paid their dividends monthly instead of quarterly. What this means is that there could be extra growth by reinvesting those dividends in more frequent intervals, as well as having an option to withdraw those earned dividends on a monthly schedule if the investor so chooses.
High return and liquidity was the option I was looking for if I was going to be moving on from a career sooner rather than later. Also, there was no intent to be selling these stocks anytime soon, so price fluctuation was less important than maintaining a high yield and having access to cash.
Discovering the Right Platform
In looking at dividend investors, I noticed many were opting for a platform called M1Finance. Their site allows people to set up their investing preferences and auto-invest dividends into those preferences. It also gives very clear views about gains and losses. Best of all, there are no transaction fees.
I started with a modest investment of five hundred dollars and set up my investment preferences in the five stocks and funds I read would give me the returns I was looking for.
After a week of satisfaction, I sent the company a file of my Vanguard funds and asked them to bring those into their platform. In doing so, M1Finance cashed out my long-term growth fund options and reinvested that original $50,000 I had put into Vanguard into my now higher-yielding options. I also moved another $38,000 into the platform for about a third of the total funds I had decided to allocate to high-yield dividend investing.
Based on the declared dividend payouts in the funds I had chosen, my initial investment of just over $90,000 would be netting me just over $900 a month in dividends, as three of the five options I had chosen pay out monthly.
When I finish converting the inheritance and trusts to liquid assets and get them into the funds I have selected, I am anticipating returns of around $2,700 per month. That sum is equivalent to my current take-home pay (with a $48,000/year salary).
With a year of reinvesting those dividends while I continue to work prior to announcing my retirement, I will be able to withdraw $3,000 per month for living expenses while still leaving some money to be reinvested so that my funds continue to grow.
The best part of all of this is that dividends are tax-free up to $40,000 per year. So much of what I will need to live on will not be taxable. Only the money that gets reinvested will be taxed. And even when those do get taxed, it won't be any more than what the current tax rate would be for a salary.
The other great part about using just my trusts and inheritance for passive income is that the 401k I had built up over nearly 30 years of work will be able to continually grow until I reach retirement age. It can be there in an extreme emergency or be waiting to supplement the loss of income expected for not working the last ten years and contributing to social security during prime earning years.
In hindsight, I wish I had known about dividend investing years ago. I had benefitted from a previous trust to the tune of $75,000 but used that money for real estate and long-term growth investments in my 401k. I did the math and figured out what that 75k would be in today's dollars and realized that I missed an opportunity.
Not this time, though—getting passive income without much of a loss in the principal will be the ticket to financial freedom I have been looking for. I realize how fortunate I am and will be setting up trusts of my own for my eventual passing. But in the meantime, if anyone needs me, I will be off hiking or traveling!
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2021 JOC