Inheriting Money: 6 Do's and 3 Don'ts for Handling a Windfall Wisely

Inheriting a substantial sum can be both a blessing and a responsibility. It's a moment that calls for careful thought and thoughtful planning, not a rush to act. And it's about to become a lot more common: Cerulli Associates now projects roughly $124 trillion in wealth will change hands through 2048, with close to $100 trillion of that coming from baby boomers and older generations. If you're on the receiving end, here are 6 do's and 3 don'ts to help you make the most of it.

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Before you do anything with an inheritance, the smartest first move is often to pause, park the cash somewhere safe, and build a plan.

This episode is a guide for heirs. (Next week, we'll flip the lens and focus on the benefactors, most likely a retiree deciding how to pass wealth on.) The advice below draws from both practical planning and real conversations with clients navigating exactly this situation.

The Do's

1. Pause before you do anything. It's easy to get swept up in emotion, especially while you're grieving, so resist the urge to make impulsive decisions. Consider giving yourself a waiting period of three to six months (or longer) before making any big moves. If the inheritance is cash, park it somewhere safe and liquid, like a high-yield savings account or money market fund, many of which are paying in the neighborhood of 4% right now, while you figure out your plan.

2. Include your spouse. If you're married, treat the inheritance as a joint decision. Talking things through together tends to lead to better outcomes than deciding on your own.

3. Get your current finances in order. Use the windfall to build a stronger foundation, in this order: pay off high-interest debt first (credit cards, auto loans, personal loans), and cut up the cards if that's what it takes to avoid running the balances back up. Next, make sure you have a solid emergency fund of three to six months of expenses. Then consider tackling lower-interest debt like student loans or a mortgage.

4. Set your goals, short-term and long-term. Depending on the size of the inheritance, you have a real chance to shape the future you've always wanted, whether that's funding a child's education, paying off the house, or investing for retirement. If you aren't already maxing out your 401(k) at work or contributing to a Roth IRA, this could be your opening. For most of us, once the debt is gone, the best move is to save and invest for retirement and, if it applies, your kids' education.

5. Talk to a financial advisor (and a tax advisor). A second set of eyes is valuable, especially with larger sums, even if you're confident in your own financial know-how. A good advisor can take a holistic look at your finances and offer guidance on investments and long-term planning. It's also smart to consult a tax advisor about any tax implications, particularly if you inherited property.

6. Honor the person who passed. Assuming the inheritance follows the loss of a loved one, consider setting aside a portion to honor their memory. This can be a meaningful way to work through the emotional side of a windfall, whether it's a special family trip or another activity that brings everyone together. Those memories can be worth as much as the money.

The Don'ts

1. Don't spend without weighing the consequences. A small splurge is fine, but even a large inheritance can disappear as fast as it arrived. Just ask any lottery winner how quickly millions can vanish.

2. Don't quit your job, at least not right away. Even if you come into serious money, walking away from work too soon can leave you with too much free time and a much faster path to spending through your inheritance.

3. Don't be unrealistic. A windfall shouldn't dramatically change how you live. Buying a new car or taking a nice vacation may be perfectly reasonable if the inheritance is large enough. But quit your job and start living a life of luxury, and your money may not last nearly as long as you think.

Summary

An inheritance is a rare opportunity to shape your financial future while honoring the legacy of those who came before you. By taking a measured, patient approach, you can sidestep the pitfalls that so often follow sudden windfalls. This isn't about saying no to enjoying the present. It's about finding a balance that sets up you and your family for a more secure tomorrow. Whether you're in this position now or expect to be down the road, approach it with care, get advice when you need it, and make the most of the chance to protect your family's financial legacy.

Next Steps for Your Retirement

Ready to take the next step? I'd love to help you build a retirement plan, investment plan, and tax strategy.

Visit us at CapitalWealthGroupSC.com to see how we work with the 50-to-60 crowd. If you're ready to dive into your numbers, you can schedule a 30-minute Introductory Call right here.

Let's make sure you're on the right track for the retirement you want.

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Full Podcast Script

Welcome to the Retirement Guide Podcast. I'm your host, George Jameson, the owner of Capital Wealth Group, a fee-only advisory firm. Whether you're nearing retirement or already retired, join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

So let's get started. The do's and don'ts of inheritance. Inheriting a substantial sum of money can be both a blessing and a responsibility. It's a moment that calls for careful consideration and thoughtful planning. Recently, I had the privilege of meeting with a new client who found themselves in this exact situation. They hadn't previously engaged with a financial advisor, as their savings was primarily tied up in their 401k plans. However, the passing of a grandparent changed this landscape, leaving them with a significant inheritance. Their approach was smart. They recognized the need to make the most of this windfall for their future. This encounter inspired me to dedicate two episodes to this crucial topic. This episode is a guide for heirs, and next week we'll focus on the benefactors, most likely a retiree.

Too often individuals find themselves uncertain about how to navigate newfound wealth. In this episode, we'll explore the do's and don'ts when handling an inheritance, drawing from both practical advice and real-life experiences. The great wealth transfer has started, and between now and 2045, the baby boomer generation is expected to transfer more than $53 trillion to their heirs, according to Cerulli Associates.

Now imagine you just inherited a substantial sum of money. Before you rush into anything, take a moment to reflect. It's easy to get caught up in the emotions, especially if you're grieving. But it's crucial to resist the urge to make impulsive decisions. Consider setting a waiting period, maybe three months or maybe six months or more, before you do anything. During this time, if it's cash, park the money in a high-yield savings account or a money market fund. They're currently offering competitive rates, which is a good place for it to sit while you're figuring out your plan.

If you are married, make sure you include your spouse in the decision-making process. When you are married, I believe how you manage money, including an inheritance, should be a joint decision. It will lead to better outcomes when you talk things through together.

Now let's turn our attention to your current financial situation. If you've got high interest debt, like credit cards, auto loans, or personal loans, it's wise to tackle those first. Get them paid off, and if needed, cut those cards up. You don't want to pay them off, only to rack up the debt again. Next, make sure you've got a solid three to six month emergency fund tucked away. Then tackle lower interest debt, like student loans or even a mortgage. Getting your current financial picture in order sets you up for success down the line.

And next up, think about your immediate and long-term goals. Depending on the size of your inheritance, you have an opportunity to shape the financial future you've always dreamed of. Maybe you want to allocate some for a child's education, pay off your house, or invest for retirement. And if you're not maxing out your 401k at work or contributing to a Roth IRA, this could be your chance. Remember, the best thing most of us can do once our debt is out of the way is to save and invest for retirement and possibly our kids' education.

Next, you may want to talk to a financial advisor. Seeking advice from an advisor can be helpful, especially with larger sums of money. Even if you're confident in your financial know-how, a second opinion may be valuable. They can take a holistic look at your finances and offer guidance on specific investment options, as well as long-term planning. It's also a good idea to consult a tax advisor to understand any potential tax implications, especially if you're dealing with property.

And next, you may want to honor the person you inherited from. Assuming the inheritance is after a loved one has passed, consider setting aside a portion to honor the memory of the person who left you the inheritance. This can be a truly meaningful way to navigate through the emotional aspect of this windfall. It may be a special family vacation or another activity that brings your family together. Creating these memories can be incredibly valuable.

And now for a few do-nots. First, do not spend without thinking about the consequences. A little splurge is okay, but even a large inheritance can be spent as quickly as you receive it. Just ask all those lottery winners how easy it is to blow through millions of dollars.

Second, do not quit your job, at least not right away. Even if you do come into millions, quitting your job can give you too much free time and can cause all types of problems, not to mention you are more likely to spin through your inheritance more quickly.

And third, don't be unrealistic. Even if you inherit a large amount of money, it should not change how you live your life. It's okay to buy a new car or go on a vacation if your inheritance is large enough, but if you quit your job and are living a life of luxury, your money may not last as long as you think.

So in conclusion, in the grand scheme of things, an inheritance is a unique opportunity to shape your financial future. It's a moment to honor the legacy of those who came before us while ensuring the security and well-being of ourselves and our loved ones. By taking a measured approach, you can avoid the pitfalls that often accompany sudden windfalls. Remember, it's not about saying no to enjoying the present, but rather finding a balance that sets you and your family up for a prosperous tomorrow. So whether you find yourself in this position now or down the road, approach it with thoughtfulness, seek advice when needed, and make the most of this chance to secure your and your family's financial legacy.

And that wraps up today's episode. Hope everyone has a great day. Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe and leave a five-star review to help others discover the show. For questions, ideas, or to discuss your retirement plan, reach out to me, George Jameson, at Capital Wealth Group. If you'd like a free retirement review, visit our website at CapitalWealthGroupSC.com to learn more.

Thank you for listening. Stay tuned for more insightful retirement planning in future episodes.

And now for the disclaimer: The information discussed in this podcast is for general explanations and education only. It is not tax, legal, or investment advice. Before considering acting on any information heard here, first consult with your tax, legal, or investment advisor. Thank you and have a great day.