top of page
  • Writer's pictureDavid J. Perrotto

The Right Way to Handle an Inheritance

According to this HSBC survey of 16,000 people across the world, 69% of retirees plan to leave an inheritance to their offspring, at an average of $177,000. Retirees in India were most likely to do so -- with 86% expecting to leave money behind -- while American retirees were the least likely, with only 56% expecting to give inheritances to their children. If you are fortunate enough to be the benefactor to a sizable inheritance, one of the first things you should do, is go to a Financial Advisor. A new car, vacation or kitchen renovation may be in your future, but make sure you carefully assess your financial picture and retirement planning goals so you can maximize the inheritance for your long-term financial security.

One of the best things you can do, is not do anything for three months, access your overall financial situation, make a plan on how the cash can help any short falls in your long term and short term plan, and don’t base your decisions on emotion.

Even if you are skilled at managing your money, it’s still important to take a breather and develop a financial plan. In the meantime, you could place the money in a high-yield savings account or a conservative mutual fund for six months or so to sort out your priorities.

Here are the best ways to handle an inheritance.

Create a list of financial goals. Prioritize and address any bad financial habits that have tripped you up in the past. Also, do a cash-flow analysis to see how much money you need both in the short term and long term to help you determine where you should direct the money.

Fund an emergency account. One of the most important buffers in life is to have an emergency account. Three months is the minimum you should have access to. This is essential to staying out of debt. If any unforeseen expense comes up, and you don’t have an emergency fund, it usually goes on the credit cards, and you’re back paying off high interest rate debt.

Pay down debt. The next priority is outstanding debt, which can include student loans, credit card debt and if possible, mortgage debt. Start with the largest high interest rate, and work down from there. A credit card with a $5,000 balance and 18% APR that is paid down over 24 months will cost you almost $1,000 dollars in interest. For other debt, including mortgages, it is important to consider the interest rate, your tax bracket, and expected investment return. For example, look at the after-tax rate of interest you are paying on your mortgage. If you are in the 25 percent tax bracket, paying 4 percent on your mortgage, you receive a tax deduction for part of the mortgage, which means you are really only paying a 3 percent interest rate.

Retirement savings. Next in line is investing in your retirement savings accounts. If you haven't been contributing the maximum to a 401(k) or individual retirement account, do it now. Let’s say you earn $50,000 this year and had to spend it all on bills, lifestyle, and debt. But now you receive an inheritance of $148,000. Contribute to your Roth or workplace retirement from the $177,000, sheltering some of it from taxes and allowing it to earn tax-free returns. In almost all cases, it makes sense to maximize your retirement accounts if your cash flow allows you to do so.

Have a little fun. Finally, some advisors suggest spending 5 percent to 10 percent on discretionary purchases. But that’s it. It’s fine to treat yourself but don’t overdo it. don't use a one-time windfall as an excuse to change your lifestyle.

Deploying that inheritance wisely can help you climb onto firmer financial footing and lay the groundwork for a more secure future.

Featured Posts
Recent Posts
Search By Tags
No tags yet.
Follow Us
  • LinkedIn
  • Facebook Basic Square
  • Twitter Basic Square
bottom of page