Personal Finance
You’ve Come Into Some Money: Four Smart Moves
The median inheritance is $55,000
You don’t need to win the Powerball to have some money fall into your lap.
A tax refund is in its way a windfall. The raise you just got, while hard-earned, is nonetheless a new ongoing windfall. And there’s inheritance.
An analysis by United Income of government data finds that about 20% of households receive an inheritance, with a median windfall of around $55,000.
New money requires a plan. Otherwise, we tend to engage in lifestyle creep — you make more, you spend more.
Depending on your circumstances, here are windfall strategies to consider:
Pay off high-rate debt. High-rate credit card balances, or a subprime car loan or costly personal loan, are the low hanging fruit of what to do with a windfall. You’ll be in good company. A team of researchers studied how more than 200,000 people, who over 11 years collectively pocketed $1.2 billion in shale oil royalties, used their windfalls. People who had a subprime credit score (<620) spent 77% of their windfall on debt repayment.
Get a great plan. For about $2,500, plenty of qualified financial planners who work on an hourly or project basis will take a deep dive into your current financial life, help you suss our future goals, and then produce a financial plan that will help you get from here to there. If you receive a big inheritance and aren’t sure how best to use the money, this is where a financial pro can be a huge value in helping you prioritize. Only use planners who’re fiduciaries.
Tidy up your retirement plan. Because of people’s increased longevity, according to the United Income analysis, the average age at which inheritances are received was 51 in 2016 (the most recent data available), compared to 41 in 1989. More than 25% of inheritances go to people who are at least 61 years old. So, not a lot of time to invest and compound the gains.
But a $55,000 inheritance could be just enough to help you wait until age 70 to claim Social Security, and then enjoy far bigger remainder-of-life benefits. The average Social Security annual benefit is around $18,000 this year. Waiting until 70 is among the smartest retirement moves you can make.
Smaller house, bigger down payment. Inheriting money when you are younger presents so many tantalizing possibilities. Buy a house that fits your needs, without going (too) large. That will translate into a smaller price, which will enable the windfall to be used for a bigger down payment. The smaller mortgage can easily help you build $500,000 in additional retirement savings.
Or pay for some furnishings that don’t have to go on a credit card. Or opt for the 15-year mortgage rather than the classic 30-year.
A well thought-out plan for how to deploy a small or big windfall is all about giving yourself plenty of great options to increase your financial security.