Retirement Planning: How to Invest Money from an Inheritance

Over their lifetimes, baby boomers are estimated to receive inheritances totaling $8.4 trillion — undoubtedly leaving this generation with the question: What should I do with my inheritance money?

Use inheritance wisely.
Use inheritance wisely.

Receiving an inheritance can be both an emotional and financial experience. While it’s important to honor the memory of your loved one, it’s equally essential to make wise decisions with the assets you’ve been entrusted with.

Let’s take a look at two steps you should take BEFORE you decide what you should do with the money, then we’ll explore options for how to invest money from an inheritance and finally we’ll explore some resources for making the best decision for you

Pause and Reflect

Before making any decisions, take some time to process your emotions. The loss of a loved one can be overwhelming, and it’s important not to rush into financial decisions. Allow yourself some time to grieve and understand the magnitude of what you’ve received.

Think About Your Long-Term Goals

An inheritance is a chance to think about your long-term financial goals. Do you want to start a business, save for your children’s education, or buy a home? Create a plan that aligns your inheritance with your aspirations.

Understand the Tax Implications

Inheritance can come with significant tax consequences. Depending on where you live, you may owe state or federal taxes on the inheritance. Working with a tax professional can help you minimize your tax burden and ensure compliance with the law.

Update Your Own Estate Plan

Receiving an inheritance is a good reminder to update your own estate plan. Make sure your will, beneficiaries, and other documents reflect your current wishes and any changes in your financial situation.

Decide How to Invest Money from an Inheritance

Give Back

If you’re financially secure, consider donating a portion of your inheritance to a cause that was important to your loved one. This can be a meaningful way to honor their memory and contribute to something larger than yourself. Explore charitable gifting strategies that will help minimize your tax burden.

Invest in your retirement

While $8.4 trillion might already be on the way, another $3.2 trillion is expected to add to that, when taking into account inheritances that are passed on while older generations are still alive, a study by MetLife and Boston College suggests.

But if research holds true, Americans will only hold onto half of their inheritances, according to The Ohio State University’s Center for Human Resource Research. This makes investing in your future even more important.

“People need to plan for inheriting wealth to avoid the pitfalls that result in so many heirs making emotional or ill-informed decisions they later regret,” writes Michael Abbott, a veteran financial consultant and chief financial officer of The Abbott Bennett Group, in a statement.

The Ohio State University study suggests that adults who receive an inheritance save only about half of what they receive, while spending, donating or otherwise losing the rest.

But saving your inheritance can provide a big financial boost in retirement.

“Savings provides a financial safety net. … People who do not have a financial safety net often end up in bankruptcy or foreclosure when unexpected problems arise,” Jay Zagorsky, author of the OSU study, tells Bankrate, a consumer financial services company.

“If people cannot build up savings by spending less than they earn, then it is important for people to save some of the money they receive as inheritances and gifts,” says Zagorsky,  research scientist at The Ohio State University’s Center for Human Resource Research.

Consider investing a portion of the inheritance in retirement accounts, stocks, bonds, or real estate. Diversifying your investments can help secure your financial future and grow your wealth over time.

Pay Off High-Interest Debt

If you have high-interest debt, such as credit card balances, it might be wise to use a portion of your inheritance to pay it off. This can free up more of your income for savings and investments in the future.

Build or Bolster Your Emergency Fund

An inheritance can provide a unique opportunity to establish or enhance your emergency fund. Aim to have at least three to six months’ worth of living expenses saved in a liquid, easily accessible account.

Want to control how quickly you spend the money, an annuity might help

An annuity is an insurance product that pays out income. There are real pros and cons to these financial products. You make an investment in the annuity and then it makes payments to you, giving you a dependable income stream during retirement.

Investing in an annuity could help prevent you from spending all of your inheritance, says Alan Moore, certified financial planner with Serenity Financial Consulting LLC in Milwaukee, Wis.

“The most common way I’ve used [annuities] with clients is to protect heirs from overspending,” he says. “It’s the difference between giving someone $1 million and giving them income for life so they can’t spend it all in one year.”

Moore says he has taken this approach with a client who inherited a significant amount of money and couldn’t stop spending it.

“Especially when you’re going through a grieving period, it can be easy to go through money [more quickly],” he says.

How to Decide What to Do with an Inheritance

Run “What If” Scenarios to Better Understand the Impact of the Money

Use the Boldin Retirement Planner to run “what if” scenarios to see the impact of the money being used in different ways. Compare investing in an index fund to paying off college debt or any other possible opportunity with the money.

The tool makes it easy to see the lifetime financial impact. And, spending time inputting your different options enables you to better assess what feels right to you.

Consult with a Financial Advisor

Depending on how much money you have received, you may want to consult with a financial advisor, especially around the tax implications of your windfall. A professional can help you understand the full scope of the inheritance.

Collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from Boldin Advisors to identify and achieve your goals. Book a free discovery session.

Boldin Planner

Do it yourself retirement planning: easy, comprehensive, reliable

Boldin Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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