What to do With an Inheritance

Monday, November 25th, 2013

Last-Will-and-TestamentWhat to do With an Inheritance

Receipt of an inheritance represents a time of sadness which, depending on the closeness of the benefactor, can also be tinged with an element of joy. Hopefully the joy results not from the loss of the benefactor, but from the possibilities created by a sudden influx of cash.

It is common for beneficiaries to be close to retirement when an inheritance is received. For those who have spent a lifetime struggling to save or who have fallen on hard times, the temptation of spending a large lump sum that would otherwise not have been attainable is hard to resist. Suddenly, dreams can come true.

The last few years before retirement are the most significant ones from a financial point of view. It is during this time that the scene is set for the thirty or so retirement years to follow. Receiving an inheritance presents a dilemma. Should it be spent on making dreams come true, or should it be conserved for retirement? A safe strategy would be to calculate the lump sum required to provide sufficient income for retirement and set that amount aside in a long term investment portfolio. Any surplus cash or future savings can then be spent, safe in the knowledge that retirement is taken care of. A riskier strategy would be to spend part of the lump sum with the aim of replacing the spent funds by saving future income to provide for retirement. The problem with this approach is that late in your working life there are significantly greater risks of loss of income through health problems or redundancy.  Combine this with a poor track record of saving and the likelihood that spent funds will be replaced is low. Neither approach is right or wrong; it is simply a matter of understanding the consequences.

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