Eric Sachetta
You’ve grieved your loss, waited patiently through the estate administration process, and you’ve finally received the inheritance a loved one left to you. Now what?
Whether it’s closer to $50,000 or $5 million, an inheritance presents a wealth-building opportunity. You can take what your parent or grandparent worked hard to create and add to it so you’re able to leave an even greater inheritance for the generations that follow you. But investing an inheritance unwisely can leave you in a worse financial position than you were before you received it—to say nothing of the regret that comes with blowing all that money in one fell swoop.
When you sit down with your investment advisors after receiving an inheritance, there are a lot of ways to approach investing that money. These are just some of the questions we might ask when working with a client who wants to invest their inheritance.
What does your current overall financial situation look like?
Naturally, financial advisors are going to make different recommendations about investing an inheritance to someone who’s living paycheck-to-paycheck than to someone who’s already wealthy. If you’re not already financially stable, using some of your inheritance to create that stability is probably going to be important. This might mean paying off students loans or other high-interest debt, and/or adding to your emergency savings fund.
The general rule of thumb says to have three to six months’ worth of living expenses in savings. But you might feel more comfortable keeping even more money in emergency savings, especially if you work in a volatile industry and worry about losing your job. (Your financial advisors can help you weigh your options for where to keep your emergency fund to maximize interest.) Some people might even set aside a portion of an inheritance to buy life insurance or some other kind of insurance policy to protect their family.
Or you might be debt-free and already have plenty of financial protections in place already. In which case you can afford to take some risks with investing your inheritance to grow your wealth.
Do you plan to invest any money in your kids or other loved ones?
Often someone who receives an inheritance from a family member elects to invest that money back into the family. That might mean contributing to a 529 account for a young family member or directly paying their school tuition. Using some of an inheritance to fund trusts is another way to spread the wealth within your family. Maybe you have a disabled family member with a special needs trust that you can contribute to, or you want to establish a new trust with your own kids as beneficiaries.
What’s your age and retirement timeline?
Your age, retirement timeline and existing retirement plans will play a role in the kind of suggestions your financial advisors will make about investing an inheritance. Someone in their 50s might want to use most or all of the money to increase their retirement savings. But if you’re in your 20s, you might want to use an inheritance to do something like open a restaurant, travel the world or have some other life experiences rather than heavily invest in retirement.
Or, you might be a financially cautious 20-something who wants to take advantage of the power of compound interest by putting an inheritance into a money market account and letting it grow year over year.
How comfortable are you with risk?
Risk tolerance is always an important factor when making investment decisions, no matter where the money came from. If you are comfortable with the idea of losing money if an investment doesn’t pay off, then you might be a good candidate for high-risk investments like IPOs. If not, you might be better off investing in things like mutual funds.
How you feel about the inheritance and the person who left it to you might factor in here, too. Some investors feel like an inheritance is “free money” that they can afford to play around with. But if your inheritance is the result of a beloved grandparent’s lifetime of scrimping and saving, you might not want to take any chances with risky investments.
Are there ways you can invest some money that feel personally fulfilling?
Receiving an inheritance can create an opportunity to do something meaningful that you might not otherwise be able to afford. Thinking about tax-advantaged strategies to save for retirement is important, but you can also think about ways to spend an inheritance that would be gratifying.
Maybe the grandparent who left you the money was an immigrant and business owner, so you want to “pay it forward” by being an angel investor for other immigrants who want to start businesses. Or maybe you crave more time with your extended family, so you invest the inheritance in a vacation property where everyone can gather every summer. Or you’ve always had a secret desire to start your own business but never thought it would be possible. If there’s something you’ve been daydreaming about doing with the money since you learned you’d be receiving an inheritance, talking to your advisors is an essential step.
Sachetta, LLC’s team of financial advisors work with clients at all ages and stages of life to meet their specific goals. Whether you’re a young adult who’s never managed money before or you’re already retired (or anywhere in between!), we’re here to help you evaluate all your options for investing an inheritance. Contact us today.
Eric Sachetta, ChFC®, CFP® is a Certified Financial Planner™ practitioner and focuses on financial planning and client relationship management. Eric believes that estate planning provides an opportunity to “look at all things that you value, see how they fit together, and make choices to balance everything and to maximize the things you want to do.”