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Motley Fool Answers' August Mailbag: Small Nest Egg Meets Small Inheritance, So How to Invest It?

By Motley Fool Staff – Sep 6, 2018 at 12:46PM

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She's a long way from retirement, but a long way from retirement-ready. Here are some good steps to help her start changing that.

Summer is just about over, but we expect most Motley Fool Answers listeners didn't "sell in May and go away" -- you've been keeping up with matters of finance and investing all along...right?

However, if you happened to take a break from thinking about your money during beach season, you might have missed a few of Alison Southwick and Robert Brokamp's monthly mailbag shows. In which case, you wouldn't have noticed that Ross Anderson -- certified financial planner from Motley Fool Wealth Management, a sister company of The Motley Fool, and a regular on the mailbag podcasts this spring -- took a break from his guest hosting duties as well, so that other Fools could get their time in the sun. Now, he's back to help the podcasting duo address another batch of listener queries.

In this segment, listener Mary Ann is 35, and her retirement savings so far are limited. But she just received a bequest that she can put toward beefing up her portfolio, and is in search of some solid advice. The Fools attempt to provide it.

A full transcript follows the video.

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This video was recorded on Aug. 28, 2018.

Alison Southwick: Our next question comes from [MaryAnn]. "I am a 35-year-old single woman who has worked in the non-profit sector for my entire career [read, low salary]. I have no debt and currently have about $9,000 in a 403(b) with no employer match; $1,000 in a Roth IRA, and $5,000 in a traditional savings account. My precious grandmother passed away earlier this year and I just learned that she has left me $10,000.

"I'm not convinced that I should be a homeowner in the next five years as I enjoy the lifestyle that renting affords. I'm very encouraged by Bro's stance that home ownership does not have to be part of a successful retirement plan, but I'm also starting to freak out about how little I have saved so far. I'm contemplating what kind of account I should invest this money in. How would you approach this situation? Also, I assume I will need to pay taxes on this income. How can I minimize that?" Aw, MaryAnn, you're 35 and worrying about your money. You're great!

Robert Brokamp: She is great!

Southwick: I feel like I want to tell her straight out, "Hey, the fact that you're worrying about this at 35 is a good sign."

Brokamp: Yes, I think so, too. First of all, the good news is that you likely won't pay any taxes on the inheritance. If your grandmother's estate owed taxes, it's paid by the estate and not by the beneficiary. There are some states [I think it's only six] that actually do have an inheritance tax that beneficiaries have to pay, but they're high-exemption amounts on that, so generally speaking you probably won't have to pay any taxes. You may want to check to see the laws of your state in the state in which your grandmother lived, but you're probably fine.

And it's great that you're thinking about your retirement at age 35. I mentioned earlier some of these studies that say that you need 10x to 12x your salary before you retire. For people who are 35, you should have accumulated about 1x or 2x your salary. That's a lot, though. It's asking a lot, so don't be overly freaked out about that. You still have at least 30 years until you retire, but I would definitely say the place for this money that you've inherited is for retirement. I would start by maxing out a Roth IRA this year. The maximum amount is $5,500 and then just put the rest in a cash account until January 1st and then put the rest in the Roth IRA.

You could max out the Roth this year and then put the rest in your 403(b). The problem is that the average 403(b) stinks. You might have a good one, so if you have a good one, you could put money in there, but I just know from experience that the average 403(b) is not very good. I think it's better just to have it on the side and then put the whole thing in a Roth.

The other good thing about that is if you ever need the money before retirement, you can take the contributions to a Roth IRA out tax and penalty-free. Not the earnings, but the contributions. In case you ever have an emergency, or you decide to buy a house, or you decide to get married and have to pay for the wedding, you have more flexibility than if you put the money in a 403(b).

Ross Anderson is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional. The Motley Fool has a disclosure policy.

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