How to Manage an Unexpected Inheritance

Receiving an unexpected inheritance or windfall can be a pleasant surprise. However, research has found 90 percent of inheritance is often depleted by the third generation. Without proper financial planning and guidance, windfalls won’t last as long as you think. Here are some basic recommendations when receiving an unexpected inheritance or windfall:

  • Take control. Before you spend any money, make sure your financial house is in order. Do you have credit card debt? Paying it off will give you an immediate return of whatever interest rate you pay on the balance. Start by preparing a budget which is the critical starting point for making a solid plan for how you’ll use the money.
  • Start saving. Establish a rainy-day fund that will cover at least six months of living expenses. Even if it’s a few dollars a week as other resources go toward everyday expenses, get in the habit of regular savings now. Consider activating direct deposit to build those amounts automatically. If an inheritance happens, you will already have savings habits in place and account relationships set up to receive the money. Even if you’ve saved enough for retirement, increasing your retirement savings will boost the amount of income you’ll have to live on when you retire. You can invest more conservatively because you won’t need high returns, which require you to take more risk, to reach your savings goal.
  • Don’t quit your job. While the temptation is strong to quit your job, your inheritance will last a lot longer if you continue working. For example, if you make $50,000 a year, you’ll need to invest anywhere from $1 million to $1.5 million to earn enough to replace that income, depending on how old you are. And once you quit your job, you’ll stop earning income that contributes to our Social Security retirement benefits—which you may need if your investments turn sour.
  • Assemble an advisory team. If you are overwhelmed by putting together your financial goals and plans, you may decide to assemble a trusted financial team. Working with one or more of these financial professionals can help with wealth-preservation strategies so that you can meet your goals and plan for the future. To help you get the most from your financial good fortune, consider a certified financial planner, certified public accountant, certified credit counselor, and an attorney involved in trust or estate matters for your financial team. Before working with any financial professional, be sure to check their credentials. You may choose to ask your friends and family if they have any trusted financial partners that they recommend. Ask specific questions about their history and areas of expertise.
  • Be discreet. It’s not unusual for parents to leave different amounts to their children, so revealing the amount you’ve inherited could lead to family discord. Money can change people for better or worse. This is why you see so many troubling news stories about people who have an unexpected windfall. The best approach to sudden money is to go quietly and immediately into the planning phase – don’t make announcements on social media and involve only key loved ones who need to be part of the process. Discretion will also reduce the number of unwanted tips and investment pitches from friends and family members.
  • Be true to your legacy. Before blowing your inheritance, ask yourself, “If Mom and Dad or Grandpa or Grandma were next to me right now, what would they want me to do with their money?”
  • Take it slow. Finally, don’t go hog-wild and make any impulse decisions or major purchases until you’ve consulted with trusted advisors who will help you make sound decisions about your financial future.

    This information is intended to provide general information and should not be considered legal, tax or investment advice. It’s always a good idea to consult with a professional about your individual financial situation.