What to do with an inheritance
Q – Mom recently passed away, and I’ll be getting a modest inheritance. I’m 45 and already on track for retirement. What should I do with the money?
A – Of course, first you need to confirm that you’re truly on track at 45. In the book, I give the example of driving from New York to Chicago for a wedding and considering the options of leaving early and driving most of the way or waiting until the last minute. Thus, enters the concept of risk – waiting too long increases risk. When you said you were on track, I hope that means you’ve crunched the numbers to know that; otherwise, there’s a risk you are behind and don’t know it. While you can also save too much for retirement, causing a host of other issues, I believe it’s best to err on the side of saving more for retirement whenever possible. More savings give you more options and cushion - a good place to be.
You didn’t say how the inheritance was provided: a retirement account, a bank account, or a house. The answer matters a lot because of taxes and future potential. The retirement account may have a 10-year window to withdrawal, while the house—could provide a free roof over your head. On the other hand, cash loses value by sitting in the bank. If after crunching the numbers you’re convinced that part of it could go into a meaningful, but more risky investment such as a small business, or vacation condo, just make sure you account for all the potential costs and risks of such a move. I like to remind people of liability risks, for example, what it would cost to recover from hurricane damage at your rental property. Would you have regrets from not following a dream when given the opportunity? So, you’ll have to ultimately decide what to do and how to split the money up.
Lastly, you didn’t mention if the inheritance was a house, stocks or a 401(k) which certainly makes a difference on what you do and when. Some inheritances come with costs and taxes you may not be expecting. While you probably don’t need to do something immediately with your good fortune (unless the roof is leaking), remember that in some cases you will have to do something by the 1-year point.