I just inherited $200K and I want to retire early. What should I do with the money?

A Reddit user inherited $200,000 recently and is trying to figure out how to best use the funds to enable early retirement. The poster has already paid off his student loans. He’s 33 and his wife is 40, and they have a two-year-old child. He’s hoping to use the $200K to help set himself up to be financially independent at a young age.

So, what should the original poster (OP) do with his windfall to get on the right path to make his dreams of becoming a young retiree come true?

Taking a look at current finances is a good place to start

The Redditor explained all of the details about his current financial situation, and it’s helpful to look at that information in determining what he should do with his inheritance.

Specifically, he and his wife earn $300K per year combined. They have a high-yield savings account, individual savings accounts, a Roth IRA with $24K that they are contributing the maximum to, and some money in a traditional 401(k) and a traditional IRA.

Some of their money is in index funds, some in individual stocks, and some is in a target date fund. They are now considering putting the  $200K inheritance money into a target date fund, but choosing a later withdrawal rate than the time when they plan to use the money. That way, the funds are invested more aggressively. The OP also plans to add $1,000 per month in contributions to the target date fund.

The OP thinks this plan is safe and hassle-free, but he wants to know whether others believe that it’s the right move for his inherited funds. 

Target date funds may not be the way to go

Unfortunately, many other Reddit users were not on board with the OP’s plan, and for good reason. Most commentators suggested that he look at alternatives to target date funds.

Target date funds have some clear benefits in that they reallocate your assets for you over time as you draw closer to retirement. The point of these funds is that they get you invested in the right asset mix. Unfortunately, they often charge high fees, which eat into your returns. The asset mix they select is also a generic one, just based solely on the date you pick for your retirement — it’s not personalized to you based on your goals or the other money you have invested elsewhere.

Many posters also commented that target date funds are just a lazy solution when it’s not that hard to put together a solid portfolio of ETFs that have lower fees and that you can select personally to better match your goals. The general consensus among most posters was that the OP has been given a good opportunity with his inherited funds, and he can take a little time to find a good, low-fee ETF to put the money into if he really wants to retire early.

This is good advice because there really is very little reason for the OP to incur the added costs a target date fund offers, given he’s already investing a lot of his money in index funds and in ETFs that track the performance of the broader market. That’s especially the case since the OP has made clear he wants to invest the money more aggressively than a target date fund would (which is why he wanted to choose a fund with a lower retirement date).

Rather than wasting money on high investment fees for a product that isn’t really a great fit, the OP should strongly consider talking with a financial advisor about creating a comprehensive plan for the $200K inheritance that takes into account his other assets, his retirement timeline, the tax implications of his investing, and other relevant issues. Getting this help from an advisor could give the OP the best chance of using his inheritance as a springboard to enable the early retirement he is dreaming of. 

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