How to Spend, Save and Invest an Inheritance

Inheriting money is a mixed blessing. It likely means that you lost a loved one while also experiencing the gift of a financial legacy.

But when you’re about to receive an inheritance, you may be unsure as to what to do with it.

According to the Journal of Financial of Family and Economic Issues, research shows that people save about half their inheritance. They spend, donate or lose the rest through poor investments. Often, a person’s first thoughts are buying a new car, fixing the roof, getting a new entertainment system, paying down student loans, paying off the credit card, or sharing the wealth and giving some to charity or the kids. Another option is to save and invest for retirement — especially if your retirement date is near.

Before you make a choice, though, you may want to take time to grieve, heal and hold off from making big decisions. Failing to take this important time is how heirs often end up losing money via poor investments, overspending or giving away too much inheritance. This can leave them no better off than before the inheritance and sometimes worse — especially as their own retirement looms.

Once you have had time to grieve and heal, you should take a thorough approach and consider the options available to you. Here are some ways to save and invest that can help you get the most out of your inheritance:

Pay down debt. This is a form of savings as it reduces the demand on your cash flow in retirement. Many pre-retirees make the mistake of carrying too much debt into retirement. At the same time, their retirement income is often less than their working years, and they leave themselves short because their fixed expenses eat into too much of their available cash flow and savings.

Create/add to your emergency fund. Make sure you have enough emergency savings — you never know when another unforeseen event, such as the pandemic could put your investments at risk. Additionally, you don’t want to be “forced” to sell assets at low valuations or prices to replace the savings in your emergency fund.

Max out your retirement savings. If you have inherited after-tax money (not an IRA or retirement plan), you may want to max out your company 401(k) plan and fund a Roth IRA for you and, if married, your spouse. This way, you reduce your taxable income by increasing your company retirement plan contributions, and you create future tax-free income with your Roth IRAs.

Invest in your financial future. Hire a CERTIFIED FINANCIAL PLANNER™ professional to get help. A personal financial plan takes time to build and implement— the same kind of precious time it takes to grieve, heal and make good decisions — to ensure you are a good steward of your sudden monetary inheritance.

Creating a personal financial plan with your CERTIFIED FINANCIAL PLANNER™ professional can help you determine how much of your inheritance to save, allot to emergency funds, pay down debt and invest.

If you are serious about using your inheritance wisely and getting ready for retirement, hire a CFP® professional to help you. You can find one near you using the Find a CFP® professional search tool on LetsMakeAPlan.org.