I Received a $516K Inheritance. Now What?

Ask an Advisor is a series in which people receive complimentary, personalized feedback from a Citizens Bank Wealth Advisor.The following financial advice is for informational purposes only and doesn’t take into account personal or financial information not submitted to the Financial Advisor.

I unexpectedly came into some cash, and now I need guidance on how to manage it. I'm a 46-year-old teacher who, for a variety of reasons (the great recession, a bankruptcy, and a divorce), hasn’t accumulated very much wealth. Until recently, I thought I would depend on my pension for retirement, but a relative passed away and left me what feels like a small fortune. I suddenly have over $516,000 to invest and secure for my retirement.

How would you go about managing this $500,000 windfall?

How do I stand and what should I do next?

I should add that, on the debt side, I’m mostly good. My car is almost paid off, I don't have a credit card balance from month to month (I pay it in full), and I rent, so I don't have a mortgage to worry about.

A windfall of any size often carries with it a lot excitement — plus a good measure of confusion on next steps — so we’re happy to provide some advice, Michelle.

The good news is that, with your lack of debt, you should be in a strong position to focus on saving for retirement. To illustrate, let’s start by making a few assumptions about spending in retirement, Social Security, and your pension:

• You need 80% of your pre-retirement income each year in retirement
• You’ll receive a monthly benefit from Social Security that will start at your full retirement age
• You’ll receive a $20,000-per-year pension
• You’ll retire at 65

As you might have suspected, without the inheritance, your probability of achieving your income need is relatively low. But, if you earmark the entire inheritance for retirement and use a moderate asset allocation, you improve your probability of success to 90%. (These probabilities are calculated by Citizens’ proprietary software, which takes into account a variety of factors to produce the statistical likelihood of reaching a selected financial milestone.)

The story gets even better if you take advantage of your workplace savings plans. As a teacher, you most likely have access to a 403(b) plan through your employer. You’re allowed to contribute up to $19,000 per year and, in many instances, there’s an employer match. Consider maxing out your contributions to this plan on a post-tax (Roth) basis. The benefit to this type of account is that the growth and income are tax free.

Now, let’s move on to your $516,000 windfall and the question of what to do with it, in addition to a few other items I’d like to address.

Since you may be new to investing, I would recommend you speak with an advisor to zero in on the allocation that meets your risk tolerance. There are other avenues you could take, such as signing up with a brokerage firm or using what’s called a robo-advisor, but speaking with a professional may be a smart first step. Regardless, taking advantage of the next 19 years until retirement by having a diversified portfolio of stocks, bonds, and cash is going to be important.

In looking at your financial snapshot, it looks like you have about $15,000 in cash. While that’s not a small amount, it might not be enough to cover a long-term emergency, such as a job loss. Many financial experts believe that an emergency fund amounting to at least three to six months’ worth of expenses in a separate account is an adequate cushion. Consider earmarking a portion of the $516,000 to deposit in a separate account, like a savings account.

A powerful way to save for retirement is through a health savings account (HSA). The account allows for pre-tax contributions as well as tax-free growth and distributions. If your employer provides you with access to a high-deductible health plan, you can enroll in an HSA and contribute up to $3,500 per year on a pre-tax basis.

If you use the HSA for qualified medical expenses, it gets distributed tax free. On the other hand, if you allow the account to grow, you can use it in retirement to pay for any current or historical medical expenses you accrued throughout your life. That’s because post-age 65, you can take the funds out penalty and tax free for any purpose (not just health), making an HSA another great way to save for retirement.

You didn’t mention a spouse or close relatives like siblings or nephews and nieces, but now that you have a sizable asset base, it might make sense to explore creating a will and basic estate planning documents. These documents are intended to give you some peace of mind with respect to how your personal items and assets will be distributed.

With a net worth — not counting the present value of your pension — of over $519,000 in your early 40s, you’re in a good situation relative to many American households, as you can see from the scale below sourced from the 2016 Survey of Consumer Finances*:

Net Worth Comparison
Age 40-49

*Sponsored by the Federal Reserve Board in cooperation with the Department of the Treasury, the Survey of Consumer Finances (SCF) collects financial data — including income, liabilities, and assets — of families in the United States. Survey results are typically released every three years.

Michelle asked an advisor for guidance on how to manage a sizable and unexpected inheritance. Do you think your financial future could benefit by consulting with a wealth advisor, too? If so, request a call back to get started.