I just received an inheritance. What should I do?

When someone comes into an inheritance, they oftentimes view it as a short-term financial windfall. While that’s true, if handled properly that short-term gain can be part of a successful long-term retirement strategy.

Following these five steps will help any heir make smart decisions:

  1. Take your time. Receiving a lump sum of cash may feel like it warrants immediate action but, practically speaking, the opposite is true. Deposit the money into a cash bank account and really think through next steps.
  2. Reconcile your emotions. The circumstances surrounding the inheritance may be emotionally charged, inviting the possibility of making some rash decisions. Instead, acknowledge the part feelings play in impulsive actions and choose to wait it out – days, weeks, months – whatever time it takes to restore rational thought and provide objectivity about financial decisions.
  3. Pay down debt with higher interest rates first. Depending on the inheritance amount, it may be tempting to pay off big-ticket items first, like a house or vehicle. However, smaller account balances with higher interest rates – think credit cards – may actually be a better option. Interest paid on this debt quickly eats into money that could otherwise be saved or applied toward some other budget item.
  4. Improve your retirement position. Should money remain after making selective payoffs, determine if putting the balance toward the future results in a better retirement situation. If so, think about doing it. If there’s not an appreciable impact, consider using the discretionary income to finance a child’s or grandchild’s education, if applicable, or another similar commitment.
  5. Seek personalized advice from a financial professional. There is absolutely no shame in asking for help. Financial advisors are trained and uniquely qualified to evaluate individual circumstances, offer personalized advice and structure financial plans that provide the best opportunity for a confident retirement.

Receiving an inheritance can free up some money in your budget, and free you up to make some decisions about your retirement – like making larger contributions to your 401(k), or perhaps adjusting your investment strategy to be more aggressive or conservative knowing you have the inheritance supplement. There are a number of choices to make related to an inheritance and its implications for your retirement. The first one – the best one – you should make is to get some objective financial advice. Contact us online or give us a call at 800.236.7400.

Nicholas Crary, CPFA - Financial Services Representative - nccrary@pai.com - 800-236-7400 x3381

Nick is a subject matter expert on 401(k), retirement savings, participant advice, small business 401(k), investments, education on options.