Receiving an inheritance can be viewed as a financial windfall. But it can also end up as a lost opportunity or frittered away. Seventy percent of wealthy families in this country lose their wealth by their second generation and 90% lose it by their third generation.
Have a plan
The way heirs deal with their inheritances depends on their size, the beneficiaries’ financial situation and the heirs’ experience managing investments. But it is important for heirs and beneficiaries to review their financial situation now and develop a plan.
Pay off all of your debt, especially college and high-interest loans and credit card bills, after receiving an inheritance. Next, establish an emergency fund to cover three to six months of expenses.
Saving for retirement can be done in many ways. You cannot directly investment money into a 401(k), 403(b) or other employer-sponsored retirement plan. But you can you use your inheritance to pay living expenses while increasing the money you contribute from your paychecks into your retirement accounts.
IRAs and 401(k)s are prudent methods for saving for retirement. But there is a 10% penalty plus tax liability if you withdraw money from these and other retirement accounts before you are 59½.
Opening a brokerage account and investing the money on your own is recommended if you have an intermediate or short-term goal for your money. Open an account and then purchase stocks, bonds, mutual funds and exchange-traded funds.
Investing in index funds is an option if you are just beginning to invest. These are investment vehicles that are inexpensive, relatively hassle-free and track the S&P 500, Dow Jones Industrial Average or other market indexes.
Using all or part of your inheritance to purchase real estate may be a sound investment. Home values have risen over the last few years and real estate may be seen as a way to fight inflation. Median home sale prices have grown by almost 1,400%, not adjusted for inflation, over the last 50 years according to the Federal Reserve Bank of St. Louis.
Current homeowners, however, should consider using their inheritance to pay off their existing mortgage. This converts that money into home equity and that money does not have to be paid to the bank or mortgage lender when the house is sold. Also, eliminating mortgage payments frees up substantial money each month for other investments.
Attorneys can help individuals draft wills and create trusts that also affect inheritances. Lawyers can also assist with estate administration.