According to a study by Accenture, $30 trillion of financial and non-financial assets is expected to pass from Baby Boomers to Generation X and Generation Y (Millennials) in North America over the next 30 to 40 years. If you’re like me, you have a difficult time trying to understand the magnitude of that number! However, I think we will agree there are significant opportunities and challenges associated with this level of assets being passed from one generation to the next.
So where should you begin if you find yourself as beneficiary of an inheritance? First, let me outline several things I think everyone should do when they receive an inheritance. Then’ I’ll share some practical financial planning strategies for you to consider.
This may seem like an awkward statement, but allow me to explain. I’ve encountered many people that simply don’t view an inheritance as their own. That is, they feel the assets are something they haven’t earned or saved themselves and, as a result, they struggle to consider them part of their own financial plan.
I’ve witnessed this lack of ownership create two extreme mindsets. First, I’ve seen people do nothing with their inheritance, leaving it invested exactly as it was when the previous owner was alive. Second, some people spend their inheritance without regard to how it may be used to help meet their long-term personal financial planning goals. Obviously, neither extreme may be prudent.
Let me assure you that whoever thought to name you as beneficiary of an asset would want you to take ownership of it when they’re gone! Be appreciative of, and reflect upon, the memories you have with the previous owner of the assets. But do your best to not let a lack of ownership prevent you from continuing their legacy.
Remember Your Goals
Think back to our discussion about setting financial goals. Goal-setting isn’t an exercise to be set aside once complete. It’s even more important to re-visit these goals when you receive an inheritance. After all, your inheritance may enable you to reach one or more of them immediately!
Was one of your goals to reduce your debt? Perhaps now is an opportune time to pay down some or all of your loans. Maybe you desire to have more money set aside for emergencies? An inheritance may allow you to take steps towards meeting this goal. Not saving enough for retirement? An inheritance may provide flexibility for you to increase your retirement plan contributions.
Regardless of your specific goals, it’s important to utilize the assets in a manner that you won’t regret later in life. Setting your goals in advance provides a blueprint for you to turn to to answer the question of “What to do with an inheritance?”.
Once you’ve taken ownership of your inheritance and re-visited your financial goals, it’s OK for you to spend some of the assets for your own personal benefit. Hear me out on this. I am not suggesting you immediately run out and spend ALL, or even a majority, of the assets. However, to go back to what I mentioned earlier, I truly believe whoever named you as beneficiary of the assets would also want you to enjoy them in a prudent manner.
There isn’t a black and white answer to the question of “How much?”, but perhaps now is the right time to create that memory you’ve wanted to pursue for quite some time (e.g. a family vacation). As long as you’re careful not to do something that’s inconsistent with your goals, and you don’t let your standard of living creep up, you should be fine.
Now that I’ve provided three things for you to consider when you inherit money, let me mention some practical items you may want to use the inheritance for.
1. Pay off high interest debt. Examples may include credit cards or personal loans with interest rates higher than your mortgage, auto, or student loan.
2. Build an emergency fund. I’m a firm believer that everyone should have at least 6 months of living expenses set aside in a liquid savings account to turn to in the case of job loss or another unforeseen life event.
3. Increase retirement plan contributions. For some, this may mean contributing to an employer provided retirement plan (e.g. 401k), which will also provide an employer matching contribution. For others, it may mean saving to a Roth IRA.
4. Set up a college savings fund. Opening a 529 account may be an appropriate step in starting to save for college.
Most of my discussion above has assumed you inherit liquid assets such as funds in a bank or investment account. However, sometimes it’s a piece of land, real estate or another, less liquid, asset that’s passed down. If you find yourself inheriting this type of asset, you should still consider the items I mentioned above to determine how to proceed with the asset.
Perhaps it’s rental property? Are the ongoing maintenance costs consistent with your personal financial goals? Or maybe it’s a family farm. Do you, or someone else in your family, desire to continue the necessary work and maintenance associated with farm ownership?
Regardless of what you inherit, it may be beneficial for you to seek professional counsel from a fee-only financial planner to help you understand your options and the potential tax consequences associated with your decision. An inheritance has the potential to reshape your long-term financial plan, but once it’s gone, it’s gone. Be sure to consider all of your options before taking action!