Should I pay off all my debt at once with the inheritance money I am receiving?
I am 65 years old and retired. I have about $50,000 in debt from loans and credit cards. I am about to receive around $170,000 from my father’s estate. Should I pay off all my debt at once?
My condolences on the loss of your father. You're being blessed with this inheritance, and I would suggest you pay off all of the debt at once. If you were still working and earning a wage we could have debated the merits of investing the inheritance versus paying off the debt, but that's not your current situation. It will give you financial freedom and alleviate a potential source of stress. In the event you invested your inheritance and we experienced a bear market it would be much more negative emotionally if you still had the debt hanging over you.
Take care and good luck to you,
Matt Ahrens, CIMA®
Yes definitely you should pay off the debt from loans and credit cards. Being debt free, especially from high interest debt from credit cards and personal loans should be a goal for everyone. So you should definitely pay of the $50,000 in debt and which will leave you $120,000 to invest or use to benefit your life.
There are some questions that I would naturally ask to get a better sense of your overall situation but since you’re retired and the inheritance came from your father and not a spouse I’m assuming there won’t be any major changes in lifestyle in your immediate future.
When making the decision to either pay off debt or commit a large amount of money to savings, an investment or even a new business. You have to ask yourself will that investment guarantee you a better return than the annual interest you’re being charged on debt. If your debt is in the form of credit cards or personal loans then usually the interest will be upwards of 10-20%. For reference, the annual return for the S&P 500 stock index is just under 10% for the last 90 years, so in most cases it’s always advisable to pay off the debt.
Often with clients I address the emotional factors in decisions like this as well. When a loved one passes away it’s natural to want to use the money for something that will prosper or show some type of benefit that you can connect back to your loved one. However, getting rid of high interest debt is a major benefit that releases you from a burden that could hinder you during your retirement years. After you payoff your debt you can look forward to figuring out what’s best for the remaining part of your inheritance.
The simplest answer is yes. That would give you a clean slate for any new opportunities with remaining inheritance. Before incurring any new debts, start with a simple budget either on your own or with the help from a financial planner to track down your annual fixed expenses. The goal is to see your regular income from social security and/or pension, plus the new windfall, can last you a lifetime. Lastly, depending on which state you live in and what kind of inheritance you receive, there may be tax due. So, consult with a CPA to allocate enough estimated tax, if there’s any. Best!
With short-term interest rates rising, the interest expense to carry those loans is likely to continue rising as well.
One thing though. Once you pay off those debts, don't go back to the same habits that led to the creation of those debts. At 65, you are running out of time to pay off debts.
Hope this helps,
Without knowing the rest of your situation it's hard to definitively say yes, pay off all the debt. However, since you've mentioned it involves credit cards and likely very high interest rates, it would make sense to eliminate the debt.
I would also advise addressing what got you into the current debt though as well, as to avoid building up more credit card debt in the future. Credit cards should be used responsibly and paid off every month. If you're spending above your means and accruing a balance month after month, you should conduct a budgeting exercise, and also work to align your expenses with what you value most.