In this week’s case study, we look at a young couple in their early 30s who are coming into a large sum of cash through an inheritance. Their gut reaction, like many who receive a windfall, is to spend it fulfilling their dreams of traveling the world.
While many people would like to have the problem of suddenly receiving a large sum of money, there is actually a real issue of deciding whether or not they should actually spend the inheritance.
Like most average families, this couple is saving to their retirement plans at work and have additional savings in IRAs, as well as savings set aside for college expenses for the children. Even though they are on the right track by saving, they should first check if their savings are prioritized.
We have said it before, and it bears repeating: You or your children can borrow money for college expenses. You cannot borrow money for retirement. We first recommend investors take advantage of their employer-sponsored retirement plan if there is an employer match. You should first invest to take the full match your employer offers. That is free money that is being given to you, if you do your part by saving. After you receive the full match, you should consider a Roth IRA if you are eligible. Since a Roth IRA is funded with after-tax money, it grows tax free until retirement. Ideally, this should give you a mix of taxable and tax-free assets in retirement. You can contribute $5,500 to a Roth IRA in 2015. After the Roth IRA contribution is maxed, and you can afford to save more, we recommend going back to your 401(k). You can contribute up to $18,000 in 2015 if you are under age 50. Those 50 and older can make additional contributions of $6,000. Only after your retirement plans are maxed out should you start planning for college savings.
Regardless if you have followed the recommended saving pattern to a T, before you spend a dime of your inheritance, you should get a financial plan to figure out where you are with your savings for retirement. By developing your plan, you can determine how much you will need in retirement to live the lifestyle you desire. Generally once investors become mid- to late-30s, they can benefit from a detailed financial plan.
If you are in a position to leave a great inheritance for your heirs, you may consider setting up your portfolio for long-term growth as if it belonged to the beneficiary already. When running a financial plan, we also look at your current assets, and spending and saving patterns and project your maximum spending through age 92. If your maximum spending is considerably higher than your actual spending, you may consider taking those assets and investing them as if they were for those who will receive it through the inheritance.
If you have concerns about your savings and need a comprehensive financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
