How to Best Steward an Inheritance

Received an Inheritance? Here’s What to Do

Receiving an inheritance can be a life-changing event. It’s important to make wise decisions to honor your loved one’s legacy and secure your own financial future. Here’s a guide to help you navigate this process.

Year 1: Take a Breath

The first year after receiving an inheritance is a time for grieving and reflection. It is strongly recommended that you make no major life or financial changes during this time. This means avoiding things like:

• Paying off your house
• Changing schools
• Buying a new car (unless badly needed)

It’s okay to pay off credit card debt, funeral expenses, or any other high-interest debt. Your main focus should be on grieving. Optimizing your finances will come later.

Year 2: Plan for the Future

In the second year, it’s time to create a plan that sets you on the right track while allowing you to enjoy the journey. Do not let this inheritance change who you are. Think of it as an enhancement to your life or boost to the direction you were already heading instead of a drastic direction change.

• Secure your retirement: Consider using a lump sum from the inheritance to secure your retirement or give it a significant boost. While you should still save out of your own income for retirement, you might be able to save a smaller percentage of your income (e.g., 7% instead of the normal 20%).
• Maintain your lifestyle: It’s generally better to spend monthly income than to deplete assets at a young age. We’re just not psychologically built for that. Even retirees who have saved their whole life have a hard time making the mental shift to spending down assets and new fears and anxieties can come from that. So if possible, continue working, saving, and view this inheritance as a boost or support, not a replacement for your regular life.

How to Use the Inheritance

Think of the inheritance as a form of “bonus income”. A good strategy is to allow the lump sum to continue growing, while using a portion of the growth as bonus money.

• A balanced approach: Consider using no more than 25% of the investment growth each year for extra spending, like vacations or charitable giving, while allowing the remaining 75% to keep growing. Most often you can split that 25% to use each year between funds to use for you and funds to use for others. So 50% to a fun vacation and 50% to help a local charity.
  • Example: If your inheritance portfolio grew by $100,000 this year, you can give or spend $25,000 total (25% of the growth).
  • In some years, there might be no extra money to spend, which is why it’s crucial to maintain your lifestyle based on your regular income, not sporadic withdrawals from the inheritance.
• Create an investor policy statement: This will help you evaluate new opportunities, such as starting a business or investing in real estate or other alternative investments. Define your return targets and asset allocation percentages (e.g., limiting alternative investments to a certain percentage of your portfolio) so that you have a concrete way to determine the best ways to grow and invest your money wisely.
• Get Help: hiring an Advisor to help you make a plan, an investor policy statement, grow your gift and steward it well can be incredibly helpful. They can provide research, accountability, guardrails and encouragement as you navigate the endless options on how to grow, invest and spend these funds.

Remember, managing an inheritance wisely is a long-term process and can be emotionally charged. By taking a thoughtful approach, you can make the most of this gift from your loved one and create a secure financial future for yourself.