Suddenly, you find out, after your grandmother died at age 102, she left $300,000 to you, her only grandchild. You did not know that was coming. Let’s assume you have already figured out your retirement plans and you’ve retired, knowing that you had sufficient money to live comfortably for 30 years if needed. Plus, you have allowed for extra traveling.
Instantaneously, your life has changed. You can buy a bigger house, a fancy car, or that huge motor home you had wanted but decided it’s too expensive for your budget. What shall you do? The first thing you need to do is calm down and look at all your options.
Options you should consider:
1. Inheriting money after retirement, you already planned your retirement plan, so spend it
You may be tempted to spend it all. And there are so many things you can spend it on. If you plan to spend it all, consider your tax consequences with your accountant. Also, take into consideration the additional costs of your new purchase.
Keep in mind if you purchase that big motor home, you will need to allow for annual insurance, registration, maintenance, and gas for all your travels. This may put you at risk of falling short on your retirement.
A bigger house will increase your property tax, insurance, utilities, and possibly your maintenance. Wouldn’t it be better to downsize?
Moving to a different city or state, where costs are lower overall, could be an advantage. Before you do, check it out seriously. If possible, visit the city for a few weeks to see if you like it. Find out the normal winter and summer temperatures. Be sure that you have checked out all the taxes in that city, like property taxes, sales tax, and any other item that could be a surprise.
A new car probably won’t hurt your retirement, as long as you don’t go way overboard and buy the most expensive car you can find, fulfilling a dream you’ve had since high school, but have since decided it was unachievable. A new car will include increased registration, insurance, cost of maintenance, and repairs.
2. Save or invest most of it, giving yourself a cushion
Choose to do something that would make your grandma proud. This could mean purchasing something less expensive, like new appliances in your kitchen and laundry or an electric car, and investing/saving the rest.
Keeping the extra money could be a cushion in case you end up not having enough to last you until you die. You never know what the future holds. Gas and food prices could skyrocket. Tax laws could change and cost you more than you expected. Plus, you could live until 100.
If you use a financial planner to determine your ability to retire, you might want him/her to review your plan. Also, if you didn’t use a financial planner, this might be the time to hire one.
3. Or maybe a mixture
Instead of spending it all, or saving it all, you might want to do a mixture. That would mean saving/investing at least half of it and wisely spending the balance. Keep in mind, not all expenditures are wise.
Possibilities for the portion you are spending include remodeling your home, buying a newer/used car, or paying off your house. Paying off your home is something many financial planners frown on, especially if you have a low-interest rate. However, if it will make you feel more comfortable in retirement, it might be nice to eliminate that payment.
If you decide to move to a bigger house, you will have a realtor fee, title fees, etc. However, if instead, you remodel your existing house, you could save money. Adding a room, adding storage, changing a large bedroom into two, or even adding a screened-in back patio can make your home more livable for you.
Instead of buying a big motorhome, consider buying a vacation home. Rent it out most of the year to pay for the payments. This could end up being a small stream of income. Keep in mind you are only spending 1/2 of the inheritance and investing the rest. Please check with your financial planner, since he/she knows about your financial situation.
4. Be aware of your retirement needs and be able to change your plan as needed
Monitor your assets and be sure that you always are maintaining a balance that will last you through your lifetime. Something could change that will affect your finances, either up or down. This could be a cost-of-living increase that is higher than expected. Or a change in your health. Or as in the United States today, gas prices are sky-rocketing. And Russia has attacked Ukraine, leading to the possibility of World War III.
Currently, the stock market has been up and down. If most of your money is in the stock market, you may have lost a lot of money. Wouldn’t it seem like hanging on to grandma’s gift of money, would be a great idea? What if you had already spent it all? There is no turning back, so give this a lot of thought.
5. Inherited IRA
Inheriting an IRA will change things. If you cash out the IRA, you will pay taxes on the total amount. You may not be ready to do this. I recently inherited an IRA. It moved to my brokerage account as an inherited IRA. I now have ten years to take out all the money. That means I can take out a set amount each year or I can wait till the end and take it out then. Or $5,000 one year, $10,000 the next year, and $2,000 for the next few years. I only need to have it all out by 12/31, ten years after the original owner died. Keep in mind that you cannot add to this and you are not charged an early withdrawal fee.
If all the money you inherit is in an IRA, you can take your max amount out each year (per IRA rules) and put it into an IRA in your name. You can also take out money to spend on a new car, etc. If you have inherited an IRA, it is best to check with your accountant for the best way to withdraw the money in your situation.
Make your grandmother proud
No matter what you choose to do with the money, remember who it came from. Your grandmother thought well of you when she left the money for you. Honor her by making a wise choice with this money. Get financial help if needed.
What would you do if you inherited an unexpected sum of money? Post your answer below.
