7/26/2012 2:27 PM ET|
What to do with a big inheritance
A sizable inheritance could help you achieve your long-term financial goals if you have a strategy. Here are 4 steps to take to manage a windfall.
Receiving an inheritance, especially an unexpected one, might leave you feeling a little overwhelmed by the options. Ideally, the money should bring you closer to financial independence, but many heirs don't know how to handle a windfall and end up no better off than they were before.
The first priority is to develop a strategy. "Most people run through an inheritance in two years or less," says Jason Flurry, the president of Legacy Partners Financial Group in Woodstock, Ga. In his experience, the first mistake people make is they "blow the money on stuff for themselves." The second mistake: choosing bad investments because they consider the inheritance "found money" and, consequently, take on too much risk.
A dollar is still a dollar, whether you or your benefactor earned it. So before rushing out to buy a big-screen television or invest in the latest hot stock, develop a game plan.
Flurry suggests starting with an inventory of your financial life. Take a close look to determine if you have adequate insurance, are on track for retirement and have an emergency fund that will cover you for at least six months or a year. Also identify the amount of high-interest debt you are carrying. "Make sure your foundation issues are in place," he says.
Everyone's financial game plan will look different depending on age, level of debt, whether they are supporting children or parents, and how they want to live in retirement. The point is to gain financial stability in the pressing areas and put the remainder toward reaching your goals. Some of the possibilities include:
- Paying off high-interest debt, such as credit cards. Whether you pay off a lower-interest mortgage that has some tax deductibility will depend on your personal feelings about carrying a mortgage into retirement and your net worth outside of the value of your home. If you still need to beef up your retirement fund, put the money there first; ditto for an emergency fund.
- Contributing to a college fund. Those who want to contribute to their children's education can add money to the college fund, but be sure to research how it may impact potential financial aid resources, either from the federal government or from the educational institution.
- Funding your retirement. If you're close to retirement, focus on income, Flurry says. "Put the money into areas that are reasonably stable as sort of an all-weather approach." Just don't play it so safe that your investments can't keep up with inflation.
There's nothing wrong with buying a luxury item for yourself with some of the money, Flurry says, but the reward will be sweeter if you've figured out your long-range financial plan first.
Don't act rashly
When someone inherits, Flurry says, "The temptation is to feel like you have to do something, but you really don't. Sit down and dream a little, then back into the numbers and ask, 'How can we do this with the least amount of risk?'" Acting too hastily can lead to trouble. Paying off your mortgage without thinking about future income in your old age, for example, could leave you living debt-free but in poverty. "If your house is paid for but you run through everything else, you can't use shingles to pay for groceries," Flurry says. "Then what do you do? You don't want to be in that situation."
- Calculator: When will your debt be paid off?
If you've inherited a traditional IRA, research the options available before making changes. If you're not a spouse, you can't roll the inherited IRA into your own. Non-spouses are required to take taxable minimum distributions every year based on life expectancy. Instead of treating the distribution as an annual windfall to be spent, make a plan to integrate it into your long-term strategy.
Dial down risk
Constructing a portfolio that generates passive income is the slow-and-steady approach that will lead to financial independence, but it's a step most people miss, according to Flurry.
He says creating a portfolio that throws off a steady stream of income is not as sexy as finding the next big investment, but it's a safer long-term strategy. To achieve stability and income growth, you'll need to mix stocks and fixed-income investments, but don't speculate by sinking it all into volatile equities. "It's kind of a 'get rich slow' plan, but it works," Flurry says. "So many people take unnecessary risks."
On the other hand, depending on your age when you inherit, you might not want to keep the inherited investment portfolio as-is if it is too conservative to provide the necessary growth to get you to your financial goals in 20 years. The point is to make the money work for you without unnecessary risk.
Hire an expert
Consulting a financial planner, investment professional or tax accountant will help you maximize your current plan or help you develop a plan if you don't have one. If you know you'll inherit, you can begin planning ahead of time, but if the inheritance comes as a surprise, a professional can provide a better idea of your options.
"People will come out of the woodwork," Flurry says. Banks and insurance companies, in particular, may try to sell you a variety of products. "There's nothing wrong with that," he adds, but don't rely on sales representatives. Get an objective opinion that is based on your entire financial picture and a thorough understanding of your goals.
Complicated assets, such as a family business or an asset you've inherited with others such as a home, will probably require a professional to help sort out the options.
Though a master plan will help you keep and grow the assets you've inherited, it doesn't have to be perfect or static. It can and should change over time. "The average plan is better than no plan," says Flurry. "Stick to your goals, and that will provide your true north."
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Number 1: Don not let anyone know you have this money. Do not use banks in your area for large transactions, these people are local and they do talk outside of the bank.
Number 2: Pay off all your debt, regardless of what above artice says, pay off all your debt.
Number 3: Do, as the above article says, make plans and set aside education money for your kids.
Number 4: Live in the house you have. Remodel some if needed.
Number 5: Go in debt for nothing. Cut up credit cards after paying them off.
Number 6: Continue working if you work and keep the same retirement plans you had for awhile. This
will allow time to think about what and where you want to do and live after retirement.
Number 7: Enjoy the money, it was left for you to enjoy. But don't waste it like a fool.
It depends how much that you inherit and what kind of return that you can get on it, at what level of risk.
Right now the 10-year T-note is at 1.4%, so for every million that you get, you can get $14K per year in interest, which isn't very good.
It used to be that municipal and utility bonds were pretty safe investments that paid somewhat better than T-bills, but these days it is anybody's guess whether these kinds of investments offer relative safety or not.
If the Dollar falls against major foreign currencies holding physical gold or silver might be a good investment, holding foreign currencies too.
Or, you can pay-off all of your high interest rate debt first, then your low interest rate debt, the buy a couple of new cars outright and maybe a decent but not overly-expensive vacation home to get away to also.
You can also donate $13K annually to your kids and separately to their spouses and even to their kids without having to pay gift taxes too.
Would you rather your taxes went to support the Feds or to support your favorite local charity?
If you inherit enough money you can start your own charity too.
If you want to get into some of the more-exotic investment possibilities such as Q-tip trusts and charitable remainder trusts, a limited amount of talking to a financial pro might be some good advice.
This time, lets' assume that like in terms of home ownership in this country, over 1/3rd of all home in this country are already paid off, and that same % would probably reflect those that have already gotten their entire future ........... including all worst case scenarios, entirely under control, that about 1 third have all contingencies covered!
Lets' guess that those whose parents were financially coordinated enough to live their lives to the end, without debt and STILL managed to escape the evil clutches of the tax man well enough to have money to inherit ............... might have trained their children well enough to actually be in line for the same FULLY DESERVED carefree, debt free, lifestyle that allows them to look far differently at this "found money" from a different perspective than the losers that are the main focus of this article!
Since these articles are written by investment types, WHY DO THEY NOT BRING UP THE FACT THAT SAVINGS BEYOND THE GRAVE ARE NOW BEING LOOKED AT AS SIMPLY ANOTHER SOURCE FOR GOVERNMENT FUNDING AND THAT NOT SPENDING THEM WILL SOON BE JUST GIVING THEM TO THE WORST FINANCIALLY PRUDENT PEOPLE ON THE PLANET .................. THE UNITED STATES FEDERAL GOVERNMENT ............... AND ........ NOT TO YOUR FAMILY MEMBERS?????
Unfortunately, I am speaking from experience.
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