The Inheritance

After inspecting the Hokusai exhibit at the Nelson-Atkins Museum (excellent btw), my good friend and I retired to a nearby dive bar called Chez Charlie. For anonymity’s sake, let’s just call him “Chuck.”

It was there over a can of Hamm beer, Chuck and I discussed the finer points of Japanese asceticism (where do you keep all your stuff?), the Chiefs’ prospects for a three-peat (good, but hopeful that the playoff bye week will be very restorative) and that Chuck was unsure what to do with a recent inheritance.

He had mentioned to his fellow heirs the idea of them all setting aside ten percent of their cut to put toward some sort of charitable endeavor. It was right then that I realized that while Chuck was a prince among men and a charitable soul, I was thankful that he wasn’t the executor of my recent inheritance.

Much like my recent analysis of a friend’s windfall, I didn’t ask further questions about his “risk tolerance, current financial situation, and future financial needs.” As “too much information generally leads to confusion and, even worse, to more questions. Most recipients of financial advice are reluctant to take it, and asking more questions usually won’t make them more receptive.” Also, I knew Chuck is a philosopher, he didn’t want the correct answer, he was more concerned with the correct question.

I did know something else about him: he was drawing social security, had three adult children, and seemed well enough off that he and his charming wife spent 40+ hours a week working for free at a charitable endeavor.

I seem to remember he asked for advice on what to do, though we became sidetracked by more pressing issues (I did already mention the Chiefs, and since we do live in Kansas City . . .). So before I get back to him officially, I thought I’d run it all by you Humble Dollarites . . .

Dear Chuck,

First things first: Every real man needs to have a real emergency fund to cover a new roof, a new foundation, etc. Maybe three months of expenses, maybe twelve. It all depends on how much risk you can tolerate and how much you can reduce your monthly expenses if required (see this Hoppin’ John recipe my wife made for the new year).

I did confirm with you that your inheritance is invested in an FDIC savings account earning ~4% interest. Though you might want to review the FDIC insurance limits, you never know.

Then you need to review your financial plan. Don’t really have one? Don’t worry, I’ve never met someone who did, as most have an evolutionary portfolio built on 40 years of tips, websites, and Kiplinger articles.

Well either way you need to determine your current allocation of stocks vs. bonds. Your newfound windfall should be the impetus to ask this most important question.

How should your portfolio be allocated? Let us start you with a 50/50 split, with you increasing the stock allocation based on your risk tolerance. From here there are three ways forward:

1. You have more yesterdays than tomorrows so maybe a conservative 50/50 approach makes sense. If the world goes to hell in a handbasket, then having more cash than less could be very useful in getting you to the end of (your) days. You can’t put a price tag on enabling you and the Missus sleeping soundly every night for the rest of your nights.
2. Maybe you have thirty or more years ahead of you and therefore upping the stock allocation could be useful.
3. If you are actually investing for your grandchildren then maybe a longer investing horizon is in order, one that requires an even larger stock allocation.

The central idea of my advice is that you invest your inheritance based on moving your current allocation in the right direction. Keeping in mind that social security and pensions may be a substitute for a portion of the bond allocation.

No matter what the horizon or risk tolerance, your stock allocation needs to be allocated to a low cost broad based index fund. I like the Schwab Total Stock Market Index Fund (SWTSX), but there are others to choose from. I invest my bond portion in laddered CDs, but there are other options.

Also, a friend keeps mentioning that a little international diversification couldn’t hurt.

Whatever you do, you are too old (and wise) to get involved with dividend stocks, active mutual funds, commodities, I bonds, or options.

An even better alternative for your newfound wealth might be for you to take a good friend (and his charming wife) on a trip to the Galapagos Islands, I hear it’s a magical experience.

I’ve given out financial advice before and the receiver never seems to tell me how it worked out, so if you don’t go the Galapagos route, I’d appreciate an update when it’s all said and done.

BTW: His fellow heirs put the kibosh on the “10% solution.”