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Inheritances: How to Play It Smart

A recent study shows that most Americans expect that they will receive some sort of an inheritance. However, the reality is that only around half of retirees will be able to leave an inheritance. Meanwhile, about ⅔ of those anticipating an inheritance said they were counting on that money to at least partially fund their own retirement.

Obviously, it’s important to keep a clear head and not count your chickens before they hatch when it comes to anticipating an inheritance. Many retirees experience unexpected events, such as increases in cost of living, unplanned medical expenses, etc., which can impact their ability to leave an inheritance. Counting on a windfall is not a good long-term financial strategy.

Those who are lucky enough to receive an inheritance will benefit from a conservative approach to spending and saving. Financial planners recommend instituting a “cooling-off period” after receiving an inheritance, noting that one-third of inheritance benefactors will spend it all within a couple of years. Taking a few months to evaluate your financial situation is key in making wise financial decisions that will benefit you in the long run. Some things to consider:

  1. What are my financial goals? Where can I best utilize this windfall to reach those goals?
  2. How will this impact my taxes? Depending on the size of the inheritance, you may need to seek additional guidance from a CPA to ensure you plan accordingly.
  3. Am I prepared for emergencies? Funding an emergency account of three-months savings should be a top priority.
  4. Am I in debt? Paying down high-interest debt is always a good idea.
  5. Where do I stand in my retirement savings? If you haven’t maxed out your 401k, your inheritance could provide supplemental funds.

Of course, it doesn’t hurt to have some fun with your windfall. Advisors recommend budgeting some discretionary purchases into your financial goals so that you can evaluate if they are worth it. Many advisors agree that spending 5 to 10 percent of your inheritance is reasonable, as long as you’re careful not to make permanent lifestyle changes that aren’t financially sustainable.

For more on making wise choices with inheritances, check out this article:


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