How can I make my $250,000 inheritance last for retirement?
I am inheriting $250,000. I have no savings or retirement at 54 years old. How can I invest this money to make it last?
Here's some advice I would give, based on limited knowledge of your situation:
1. Act like you don't have it. Don't spend it, don't tell your friends. You are most likely behind the ball saving for retirement so putting this to work is crucial.
2. Call a professional. Preferrably a Certified Financial Planner or some type of fidicuary who puts your interests ahead of their own.
3. I would not try to navigate the investment world on your own. With no savings at your age, you probably would not be best served starting to manage it now.
You say that you are 54 and have no savings. The first thing you should do is get a handle on your day-to-day budget. You haven't been doing a very good job of that. Work out a budget that will allow you to save a little out of each paycheck and add it to your inherited nest-egg. With some prudent investments (I might suggest something like 75% equities, 25% preferreds or bonds) and a steady stream of additions going forward, you might see the amount double by the time you are ready to retire. Then, you can withdraw about $20-25,000 per year to supplement your Social Security income. (DO NOT touch it until then!!) I grant you this is not a lot, but it sure beats being broke and trying to live on SS alone. Good luck.
I would first take care of debts, so you have no ongoing interest-charged loans hanging over your head. Then, I set aside a 12-month emergency fund based on your fixed expenses (utility, tax, healthcare, etc.). Now, you can decide what to do with remaining inheritance.
Just because you haven’t set up anything for retirement, it doesn’t mean you can’t start it now. Try the 3% of salary deferral to your 401k first, then gradually increase that, 1% every year. If your boss does not offer the 401k, contribute to an IRA. Roth is the best unless you want the tax deduction.
Either way, you need to work with a planner who can guide you and set up both short- and long-term plan before any impulses on the windfall. Best!
Fortunately, if your inheritance is all cash, you’re under the federal inheritance tax threshold, so you shouldn’t be taxed on it. However, before you make any investments, you should consider meeting with a fiduciary financial advisor – specifically a Certified Financial Planner, who is trained in advising on complex financial situations like yours. Stay focused on your goal of saving for retirement, even though you might be tempted to use the inheritance for a short-term expense.
Ultimately, your risk appetite and time horizon will determine which investment vehicle or vehicles makes the most sense for your situation. Are you planning to work another 10 years? 20 years? More? Once you’ve determined that, you’ll need to strike a balance between growth and risk management to ensure you have a strategy that helps you catch up but stay comfortable over time.
You didn’t mention having enough cash on hand to cover any emergencies. Start by saving enough cash to cover 3-6 months of living expenses. This will help keep you financially “safe” in the unfortunate event of an emergency or job loss.
Meeting with a fiduciary financial advisor can help you determine how much growth you might need to achieve once you decide upon your risk tolerance.
Here's a quick calculation to let you see what living off of $250,000 may look like in retirement. My assumptions are a 5% growth rate, 2.5% inflation, and 1% fees. Also, I assumed retirement begins at age 70 and ends at age 100. Using these assumptions, one could withdraw $12,675 annually starting at age 70. Money runs out at age 100.
Factor in your Social Security benefits to see if you could live off of that combined income. Keep in mind your expenses will increase during retirement (look at how expenses changed in the last 30 years).
You'll need to work with a CFP® professional in person for specific investment advice. Ask for options using mutual funds, bonds, and annuities with guaranteed payouts. When comparing proposals, review the assumptions. When planning for retirement, I prefer keeping growth rates conservative.