What To Do With A Windfall - Part Two
Great Aunt Mabel leaves you a lump sum when she dies and you see it as your chance to turn it into a retirement pot for the future. How would you go about it?Last week we looked at what to do with a windfall if one needed access to it in the short term. A high-interest savings account seemed the best option along with putting the maximum allowance of £3,000 per person into a cash ISA to avoid paying tax on the interest.But what if you want to use your windfall to provide for your retirement many years in the future? One Fool has recently found himself with £100,000 to invest and he intends to add to this potential retirement pot to the tune of £9,000 a year until he reaches 55 in 12 years time which is when he wants to stop work.Our Foolish friend would like to achieve an eventual retirement pot of between £400,000 and £500,000 and as he's investing for the long term the stock market is the obvious place to put the money for the time being. Over the last 50 years, shares have delivered a real (after inflation) return of 7.1% per year whereas cash has only beaten inflation by 2% a year.Nevertheless, it's a big ask and while I think he could achieve half a million quid if he worked till he was nearer 60, his pot is more likely to be in the region of £400,000 if he wants to retire at 55.His plan at the moment is to put a third into a 'safe' long-term fixed rate savings bond paying 6% a year, to put another third into a bog-standard index tracker (with as much of it going into a tax-efficient ISA as possible) and to use the remaining third for something slightly more risky, such as a managed fund that he might have read about in the papers.I can understand the desire to keep a third of the investment in a savings bond, although I'd probably keep just a quarter of it as cash and chase the best rates every now and then. I also approve wholeheartedly of the index tracker option - it's a favourite Motley Fool investment because they're an easy-peasy, drip-drip-drip, cheap-as-chips investment that you don't have to think too hard about. In a way they're as simple as a regular savings account, except the money's invested in the stock market over the long term (preferably in an ISA to save on tax).However, personally, I don't like too much risk and the trouble with managed funds is that you do have to research them and keep an eye on their performance -- and for most people that's just too much effort. Also a fair bit of your investment will be eaten away by charges -- and who's to say that you'll choose a winning fund or that the fund manager will get it right most of the time?Index trackers also tend to outperform the average actively managed fund, mainly because the charges aren't so high. A typical tracker fund will charge around 0.5% a year in management fees and the majority do not have an initial charge. Managed funds, on the other hand, tend to charge at least 1.5% a year plus and, in many cases, an initial charge of between 3-5% for the privilege of buying into one. Over the years the difference of even just one percentage point in annual charges can really eat into your investment.If our Fool seriously wants to learn about shares then he could invest his £9,000 a year in a Self-Invested Personal Pension (SIPP) which would be topped up in tax relief by the government, and choose his own portfolio of shares if he really wants to spend time studying the market. Some people like doing it but I've got better things to do with my time.So, on balance, I would keep around a quarter of my £100,000 in cash, invest my annual contribution of £9,000 in a SIPP and drip-feed the remaining £75,000 into an index tracker over a period of a year or two with as much as possible (currently £7,000) going into a shares ISA each financial year. While my aim at the moment would be for capital growth, I would review my position when I reached 50 because that would be the time to start thinking about using my pot to generate an income.What would you do with your windfall? Answers on the Feedback Board if you have a view.