Until recently, I’ve always thought of the great wealth transfer as an industry trend to be mindful of. That changed for me when a close member of my husband’s family died this year, and it became a personal reality—in a small but clarifying way.
What is the great wealth transfer? It describes the transfer of assets from members of the Silent Generation, born between 1928 and 1945, and baby boomers, born between 1946 and 1964, who are either well into or approaching retirement. Their children and grandchildren stand to inherit up to $16 trillion by 2033, according to The New York Times.
In our case, we had no idea any money was coming. According to Cerulli, more than 40% of that $16 trillion is expected to go to those who reside in households that are already classified as high-net-worth and ultra-high-net-worth, categories to which I do not belong. I mostly thought that transfers came in the form of assets like real estate and private businesses—and while that’s broadly true, I wasn’t aware that they could come in the form of “other” things, too.
Upon our relative’s death, we received an unexpected gift of about $20,000. The money came from a lump sum invested in an annuity. Although not large by inheritance standards, the amount was certainly generous by mine.
What Should You Do With an Unexpected Inheritance?
I’m not an expert. I hope that sharing my experience about what we did might help you if you go through something similar. Here are the steps we took:
- Address emotional needs first. Death is hard and irrevocably shapes our outlook. The first thing we did was take some time to catch our breaths.
- Look at the legal language, and consider intent. Review the terms of the bequest. When the giver has spelled out wishes for how the money should be spent, that should take precedence. Some bequests carry a directive to the person who’s receiving it. In our case, there was none, so we did not have guidance on how to use it.
- Address any past-due debt. We looked at any immediate debts that the money should service. The reason our mind went there first is that, in a sense, paying down debts, especially those that are in collections or levy excessively high interest rates, is akin to locking in a guaranteed rate of return. Fortunately, we had no overdue debts like student loans or medical bills.
- Examine other critical needs that might have been delayed. Have you put off an important surgery or home repair that might stretch your budget? While there might not be a concrete rate of return on these investments, there may be tangible benefits that outweigh the uncertainty.
- Consider near-term goals. What are the big, imminent goals that the inheritance could help meet?
Paying down debt ahead of schedule is a common one. Again, it effectively locks in a guaranteed rate of return on your investment, which can be meaningful depending on the nature of the loan, the interest rate it charges, and the expected rate of return on the rest of your portfolio. Consider whether it’s best to take a snowball or avalanche approach, pay down a mortgage or credit card bill, or invest the money elsewhere and pay down debt at your previous schedule.
Saving for future expenses is another common one. This could include purchasing a home, continuing education, kick-starting a small business, or establishing an “emergency fund.” For short-term goals like these—typically less than two years—cash-type investments are typically the best option. For two to six years, a blend of cash and short-term fixed income typically will suffice. For goals in six to 10 years, it may be possible to invest up to 40% in diversified bonds. Given that interest payments from bonds in taxable accounts will be taxed at ordinary income rates, it may be worth looking into municipal bonds to help reduce the burden, especially considering the higher interest-rate environment we now find ourselves in.
- Reflect on what your family member might have wanted. Before the inheritance, we were already on track to do the things we want to do over the next couple of years with the investments that we have. (For a variety of reasons, we’ve decided a home isn’t in our near-term plans. The inheritance didn’t change much on that front.) If you have the luxury, it can be fruitful to reflect on what the gift and the giver mean to you before moving forward. And that’s what we did.
What We Ultimately Did: Invest for Retirement
Honoring someone’s legacy is a thorny thing. Inheritances lie at the intersection of two of the most complex relationships people have throughout their lives—those they have with their family and the one they have with money.
My husband’s family has our best interests at heart and gave us latitude with the inheritance. Once we had room to mourn, we decided we wanted to honor our relative’s life, even though we didn’t have insight into their exact wishes. We knew that we’d have more confidence to stick with our investments during rocky markets if we picked them with the long-term goal of trying to fulfill the intentions behind the gift.
Not everyone is so lucky. While unexpected gifts of money can be a lifeline, they can sometimes be freighted with other things besides generosity. (Call it the mo’ money clause.) In the case where the relationship was strained or the relative was distant, you may not want to take their aims into account.
Thankfully, in our case, the answer was simple because this relative led by example. Retirement allowed this person to spend time doing the things that they loved and take care of important people. It was clear that the best way to honor the gift was to invest it in a way that allows us to do the same.
We put the money in our long-term goal bucket, nestling it alongside our retirement savings in a stock-heavy portfolio. What that breathing room buys us down the line, if anything, is uncertain. Right now, that money is helping us to catch up with the recommended guidelines for saving for retirement, but that picture may change as our life unfolds. We may need the funds to help weather a financial storm with a better cushion or help someone else out of a bind. But for us, quality time with family is a luxury, and death reminds us that it is a fleeting one. Investing in that, to me, is the greatest wealth of all.
The views expressed here are the author’s.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.