If you have recently received a bequest or are anticipating inheriting sizeable assets, here are some tips to help you manage those assets. Over half of American retirees expect to leave an inheritance for their loved ones, with an average value of more than $176,000.¹ Now is the time to plan.
• Wait and develop a strategy. Start by parking the money in the bank and take an inventory of your financial life. Are you on track for retirement? Do you have adequate insurance? Do you have significant debt? Are you supporting a family? If you tend to drag your feet on this type of planning, working with a Certified Financial Planner™ can help you become motivated to move forward.
• Pay down your high-interest debt. Near the top of your priority list should be eliminating consumer debt, especially high-rate credit card debt. But think twice about paying off your mortgage, unless owning your home outright is an important goal for you. Your mortgage interest rate is likely low, and the money may be better used elsewhere. The same goes for paying off college loans at low interest rates.
• Save, save, save. Next step should be to turn to your savings, which should include funding an emergency fund of about six months’ living expenses, putting aside money for retirement, and setting up accounts for your children’s education and other life expenses.
• Do not rush to spend. Ideally, the money should bring you closer to financial independence, but many heirs do not know how to handle a windfall. After a bout of uncontrolled spending, many end up no better off than they were before. Take small steps when making your decisions. Instead of quitting your job right away, consider working part-time. If thinking about purchasing a luxury sports car, try renting one first. The goal is to avoid making irrational decisions you might later regret.
• Do your research. If you have inherited a traditional IRA, research the options available before making changes. If you are not a spouse, you cannot roll the inherited IRA into your own. A Beneficiary IRA may be your best choice for continuing growth and deferring taxes. 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, plan to integrate it into your long-term strategy.
• Find a suitable long-term investment strategy. Constructing a portfolio that generates passive income is the slow-and-steady approach that will lead to financial independence. To achieve stability and income growth, you will need to mix stocks and fixed-income investments, but do not speculate by sinking it all into volatile equities or go too conservative by keeping it too heavily invested in cash or fixed-income securities. The point is to make the money work for you without unnecessary risk.
• Hire an expert. Managing an inheritance gets easier with professional financial help. Consulting a Certified Financial Planner™ will help you maximize your current plan or help you develop a plan if you do not have one. If you know you will inherit, you can begin planning ahead of time, but if the inheritance comes as a surprise, a professional can help you understand all your options. Be sure to get an objective opinion that is based on your entire financial picture and a thorough understanding of your goals.
This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual’s legal and/or tax situation is different. You should contact your professional advisors to discuss your personal situation.
¹ HSBC, “The Future of Retirement: Life after work?” December 2013.
The opinions expressed above are solely those of Kondo Wealth Advisors LLC (626-449-7783, [email protected]), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors LLC nor its representatives provide legal, tax or accounting advice.