How to Retire on 200k Inheritance
January 29, 2021Retirement Wealth
What is the best retirement plan you can undergo after receiving an inheritance of $200,000 and what are the possible outcomes you will face?
The best way to retire on a $200,000 inheritance is by investing in stocks and hiring a reputable financial advisor to help you with this. Other options are leaving it in a high yielding savings account and maxing out your IRA.
Receiving an inheritance from deceased relatives might be a blessing, however, if you are not careful with management, it can turn into a curse; people who suddenly come into a relatively huge amount of money sometimes encounter similar pitfalls as those who win the lottery.
The average retiree plans to leave their heirs an average of $177,000 but many of those beneficiaries don't know how to best leverage it and perhaps even pass it on to another generation. More than half of every inheritor experiences little or no change, some, even a decline in finances after receiving their inheritance.
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Is Leaving the Inheritance in the Bank Enough for Retirement?
But how can it be that people are reporting a dip in net worth after receiving a windfall in the same way that lottery winners or high paid athletes, find themselves in more financial trouble?
After striking it big, inheritors often overestimate the true value of what they have received, this results in wasteful spending on fancy cars, vacations, and other luxuries instead of putting that money to good use and spending a small portion.
An inheritance could potentially change your life forever, so you must properly allocate that capital.
Although you can get tempted to race out and purchase a new automobile or plan your next vacation, do not make any large purchases until after you have a plan in order
Upon receiving a large amount of money, it is hard to gauge how far it will go and how long it will last. For many, it is often much more than what they are used to handling.
Furthermore, if you have just lost a family member, that death can make it even more difficult to come up with sound decisions. You can take the option of keeping the money in the bank, preferably a savings account, aimed at a short period of time.
Letting the funds stay in the bank for some period of time will ensure you utilize that cash well since building because an emergency fund is one of the critical components of a stable financial future.
Having 3 to 6 months of expenditures and a bank savings account that will only be used for emergencies will prevent you from going into debt when unexpected expenses arise.
Is Investing an Inheritance Enough for Retirement?
Once you deposit money into an investment account, taking it out before the date you have originally planned is the last resort. This is because withdrawing from investment in retirement accounts can result in penalties, taxes, and losses from selling assets at the wrong time. Keeping cash reserves will allow you to sleep better at night and keep stress levels to a minimum.
If and when your income becomes reduced, consider whether or not it is worth paying off debt. With mortgage rates at record lows, many homeowners advocate investing any money that would be spent paying down their mortgage.
Earning an average rate of return in the stock market of 10% is higher than any interest rate a bank is charging for a home loan. However, the risk entailed with investing that money needs to be weighed against the guaranteed return you would receive by paying off debt.
Any high-interest loans, such as credit card debt, should be paid down immediately because more often than not, the interest rate charge is 20% or more. That is much more than the average investor will receive from the stock market.
Once you are debt-free you will have much more money to put towards other things. On the other hand, putting any money that would be spent paying down debt into investments will allow it to start compounding much quicker.
Investing is what is going to ensure the growth of your $200,000, and it will continue to provide for you and your family in the future. Simply setting aside money in the bank account or under the mattress will never be sufficient as the worth of that cash will be eaten away by inflation.
Many are not aware that the average rate of inflation is around three percent. In other words, in order for a dollar to maintain its buying power, it needs to be earning at least a three percent return, significantly more than the one percent interest most savings accounts are paying.
If you are not sure what to invest in, conduct your own research and do not listen to anyone who could be benefiting from you taking their advice. Be wary of any friends or family who attempt to convince you of their amazing opportunity or financial advisor who might not be looking for your best interests.
When it comes to your money, have it in mind that no one cares as you do. If you are completely lost, simply open an account with a reputable company like vanguard and invest at minimal costs.
About half of adults say they are playing catchup on retirement savings, so if you are lucky enough to get an inheritance, it is a perfect opportunity to catch up with the amount you are left with after building your savings and paying off high interest.
With an invested earning of a 10% annual return, your portfolio will double about every seven years. If you have 20 years from the time you will like to retire, that means your investments will double about three times, growing exponentially each year.
Other Options for the Inheritance
If your retirement is perfectly on track and you are on your way to surpassing your goals, it might be a good idea to set aside money for your children's education. There are a lot of ways you can find college expenses without depleting an inheritance. If you are behind on saving for education, costs funding an Education Savings Account is a good option.
Stepping over your retirement planning for your children's education might be well-intentioned but it is not always the best idea. Put your finances first because your children will have their entire life to plan for retirement and, on the other hand, your working years might be limited. Besides, making progress with your own finances puts you in a better position to help your children in the future.
Also, there is absolutely nothing erroneous with spending part of the $200,000. Actually, spending is also a very important aspect of having rigid financial planning. The reason for this is that if everything you are aiming at is to pinch every penny, delay gratification, and save for the future, burnout is common and likely people who get so sick of saving and being extremely careful with their finances sometimes snap and make a ridiculous purchase that erases the entirety of their progress.
Even more than that, once all of your obligations have been met, it is okay to splurge on a new car trip or home renovation, as long as there is plenty left to fund those expenses. Donating to a church charity or organization can also be done at this point. After all, the person who left you such a huge sum of money would probably want you to enjoy the money after rationing it responsibly.
If you are of the group of people lucky enough to receive an inheritance you should try to do everything you can to ensure it improves the lives of you and your family. Don't race out and spend it the day the money hits your bank account. Instead, consider how to make the most of it so that it can continue to enrich your life forever.
Five or ten years from now, you don't want to be wondering how all the money slipped through your fingers which can even be a sign of a bigger problem because poor financial habits will haunt you forever.
Also, consider paying off debt if there are any, and teach your children how to handle money so they can be able to make the most of the inheritance you will leave for them too.
What are the Best Retirement Investment Tips for Inheritance?
The first thing you want to make sure you are doing is investing in an account that is tax focused. Each type of retirement account has its own tax focus, some, you pay taxes upfront, while some you pay taxes when you retire.
So the first tip is to make sure you have the right type of retirement account.
The next investment tip for retirement is to make more of a contribution than you think you can. What you can do is schedule monthly payments of whatever you think you want to contribute. If you have a goal to put X number of dollars in there for the year or hit the max contribution, then of course you take $5,500 for Roth and traditional accounts and divide that by twelve.
If you think you are the type of person that wants to put a hundred dollars a month towards your retirement, that is fine, but when you choose to make that monthly contribution, set it to $120 or $130. Just do something a little bit more than you think you would because you have control over it. That $20 or $30 is going to add up over the years and get a chance to grow in this ever-rising market.
Finally, wherever you are, whatever your inheritance is, whatever type of retirement account you have, whoever is managing your retirement accounts, make sure they don't actually have access to your money.
We have technology these days that allow you to have a retirement account and just let somebody manage the investments and nothing else. They should not see your information, they should not be able to touch your money, and you should never mail a check to them.
If people control your money and have access to it, that means they control the fees that go inside and when you think you are not paying anything, you are actually paying a lot. But you won’t see it because they control the money and they can move it around however they want, and this is not illegal.
The best alternative is using a company that uses a brokerage firm that is not theirs. This might even be a brokerage firm of your choice, so it is your deal and the company can only manage the investments.
In this case, you will have control over any fee, transaction, or withdrawal that comes out of that account.
About THE AUTHOR
With multiple family members currently in senior living facilities, David is in the trenches every week, learning the ins and outs of nursing homes, assisted living, memory care, and general senior living.Read more about David Bolton
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