How can I stretch out a significant inheritance over my lifetime?
I'm 28 years old. I recently inherited $1,000,000, but after taxes, I'm guessing I will recieve around $500K. How can I make that money last without having to kill myself by working a 9-5 until I'm over 60 years old?
First of all, I would like to know more about why you think it will only be $500k after taxes. If the deceased didn't have over 5.49 million, then there is no estate tax. So the 1 million may not be taxable at all. If some of the assets are in a retirement plan, then you must follow certain rules about minimum required distributions (MRDs) as a beneficiary, which could either be over 5 years or over your life expectancy depending on the circumstances. Those distributions would be taxable as income to you at yoru tax rate including adding in the distribution. Also, there is usually no tax on life insurance proceeds. So it really depends on how the assets were titled and what type of assets they were, but you may have a lot less or even no tax to pay. If the deceased had well over the 5.49 million, then estate taxes are very high and if your portion is, in fact, the net of the million, then you would receive a much lesser amount. So you need to get with an advisor who understands estate taxes well to help guide you through this process & help you plan.
Having said all of that, how to invest the proceeds is another, separate question. Many advisors will give you a "pie chart" based upon your age, risk tolerance, and "station" in life and simply hold for all environments. I am an active advisor who doesn't subscribe to that philosophy 100%. You age and needs are important, but it is also very important to determine how much risk is in the markets or specific sectors, and those risks changes over time. For instance, with the specter of rising interest rates, bonds are riskier than they were just a couple of years ago. Stocks are also at least fully valued. Therefore, I believe you should invest but we have a sell discipline especially at these levels of valuation and interest rates. If you were investing after a major correction or bear market, my answer would be different and a buy-and-hold pie chart would carry a lot less risk than now.
Either way, you need education and research (not products) so you can decide for yourself. Whatever you do decide, you need to understand the strategy & philosophy, and it needs to make sense to you.
I hope this helps and wish you the best of luck, Dan Stewart CFA®
Congratulations. Although the circumstances under which you are receiving this lump-sum may carry some grief.
1. Sit with a trusted advisor to map out a plan for the money that meets your financial and life goals;
2. Stick with that plan, no matter what. That is not to say you cannot have changes in life or lifestyle, but don't lose the discipline of continuing to invest, save and spend wisely.
3. Remember that someone worked hard, and died for you to receive that. You've been entrusted with a "gift", honor their memory by doing right by them.
One additional point: You may want to hire a CPA for a tax consultation. Depending on how you received the money, you shouldn't have to pay that large a tax bill. I have limited details, so I cannot say that definitively.
If you need any guidance or assistance, feel free to reach out.
I hope that helps!
I’m sorry about your loss. Thus, managing your inheritance properly is one way to pay the respect to the loved one. Before you think what material possessions you have missed and need to purchase, you should first investigate where to find a trustworthy financial planner, who can guide you to prioritize your financial orders (pay down or pay off some debts, use leftover money to fund your retirement plans, or invest tax-efficiently in a brokerage account if you have already maxed out your 401k/IRA/HSA/529 plans, etc.). Do a comprehensive financial plan to see if the windfall really catapults you to reach the finish line early. Without a plan to allocate the money and to make it last, you will soon find yourself in the same place like the inheritance never happened. Best!
You are in a fortunate position. Remember one basic rule; spend income, but never touch your principal. You can arrange to invest in dividend paying stocks that will begin a small stream of income that will last a lifetime. If you select stocks with dividend yields between two and four percent you have a good chance of growth of principal in addition to the income you take out. Best of luck!
The receipt of these inherited funds is an excellent spring board for you to creatively begin thinking about your financial security now and after you stop pursuing your employment and/or entrepreneurship journey.
1. Take a good look at how your finances are structured right now. Do you have a current budget set up that includes income, expenses, short and long term spending objectives, savings and other investments? If so, think about determining a percentage of the inheritance proceeds that can supplement these strategies that are already in place.
2. On the issue of how hard you should push yourself professionally for the next few decades consider this- I do not know how you are currently employed, but if you have upward salary movement, bonuses, stock options, 401k matching and other incentives, it is worthwhile to look at these benefits as well. You should develop a budget and strategy on how to best direct the growth and savings in the workplace as one of the bullet points of your financial plan. That said, you can make periodic assessments of where you stand and develop a timeline for winding down work after maximizing your opportunities from working.
3. Another path you might want to consider is an investment in a real estate property. This potential purchase could do a few things for you- first, while real estate is subject to market conditions It is over the long term a good investment in most markets. You will own an appreciating asset for which you can claim whatever tax benefits are available and the equity that is built over time is in and of itself a form of savings. You will need to take care in identifying the condition of the property, making sure you are not taking on a continuing repair and improvement burden. If you choose to live in this property, you can control your living expenses a little better without being subject to changes in rent, lease or other related costs.
4. Look at either bolstering or establishing an investment portfolio with a good balance of performing assets. Take the time to make sure you understand the risks, benefits and tax consequences of your choices- choose a professional relationship where you feel comfortable asking questions and always review the performance of your investments on a regular basis.
Thinking creatively about maximizing income streams will help to set your financial path in the right direction.