Receiving a substantial inheritance can bring both advantages and challenges. On one hand, it offers financial security and opportunities for the future. On the other hand, it comes with the responsibility of managing it wisely. Here’s a detailed guide for individuals who have recently inherited or are expecting a significant sum of money.
Anticipating a substantial inheritance can be uncertain, as various factors may affect its realization. Medical expenses, charitable decisions, or unforeseen circumstances could alter the expected amount or destination of the inheritance. Studies suggest that the average inheritance in the United States ranges from $12,353 to $46,200, with disparities based on income levels and family backgrounds. Despite predictions of a significant inheritance transfer from the baby boomer generation, data indicates that only a minority of households received inheritances between 1989 and 2007, suggesting that relying solely on future windfalls may not be prudent.
Given the unpredictability of inheritances, younger generations are advised to focus on their financial independence, invest wisely for the future, manage debt responsibly, and not rely solely on potential windfalls that may never materialize. This proactive approach ensures financial stability and reduces dependency on uncertain inheritances.
Receiving a significant inheritance can be overwhelming, especially when dealing with grief. It’s essential not to rush into decisions but rather take time to process emotions and consider financial options carefully. The first step after inheriting will vary depending on the form of the inheritance. If it’s cash, it’s advisable to secure it in a federally insured bank or credit union account temporarily. Such accounts provide insurance coverage of up to $250,000 per depositor per financial institution, and setting up multiple accounts can increase coverage.
Alternatively, if the inheritance exceeds the insured limit, distributing funds among different institutions can mitigate risks. For other assets like securities, retirement accounts, real estate, or business interests, collaboration with the estate’s executor is necessary to ensure proper transfer of ownership.
Consider seeking professional financial guidance depending on the size of your inheritance and your confidence in making financial decisions. A fee-only financial planner can assist in short-term money management and develop a comprehensive long-term financial strategy considering your assets and obligations without conflicts of interest. They can also advise on handling non-cash assets like securities, helping you determine their suitability in your portfolio and whether selling them for alternative investments is advisable.
An advisable option for inherited funds is to prioritize debt repayment, especially for high-interest debts like credit cards or student loans. Deciding on lower-interest debts, such as a home mortgage, depends on personal preferences and financial goals. Using the inheritance to pay off the mortgage can provide a sense of security, while investing the money for potentially higher returns compared to the mortgage interest rate is also a viable but riskier option.
Once debts are settled, the remaining funds in your bank or credit union accounts can be carefully considered for future use, but haste is to be avoided. Seeking guidance from a financial planner or managing the decision independently, you may opt to invest the inherited money.
Following standard investment principles, inherited funds should be integrated into your overall portfolio for optimal diversification across various risk levels. Instead of a lump-sum investment, spreading it over time using strategies like dollar-cost averaging or value averaging can mitigate the risk of buying at inflated prices. Additionally, the inheritance can supplement contributions to retirement or 529 college savings plans, indirectly supporting these accounts by freeing up earned income for investment.
Relevant articles:
– My children and I inherited nearly $750,000 from my aunt. I spent some of it wisely, but I made one mistake I can’t take back., Business Insider, Mar 26, 2024
– ‘Please don’t judge me’: I’m 54, and married with 5 kids. I have $20,000 in debt and $20,000 in mutual funds. I just inherited $10,000. How do I invest it?, Yahoo Finance, Apr 4, 2024
– Megan Mills on LinkedIn: My children and I inherited nearly $750,000 from my aunt. I spent some of…, LinkedIn · Megan Mills
– What to Do With a Large Inheritance, investopedia.com