Inheriting a large sum of money can be extremely overwhelming. For the 20% of Americans affected by general wealth inheritance, the event can be life changing. Planning for a sizable inheritance surpasses typica financial planning in its complexity and brings unique challenges unseen in other wealth portfolios.
“Large inheritances can be daunting and easily mismanaged,” says Thane Stenner, author of the book True Wealth: An Expert Guide for High-Net-Worth Individuals (and Their Advisors). “Managing your newfound wealth in a responsible, lucrative and purposeful way requires a plan. Failing to secure the expertise to navigate your high-net-worth wealth could result in financial pitfalls and a poorly managed portfolio which will not serve you or your goals in the long run.”
According to research, people who receive high-net-worth inheritances (one million dollars or more) often lose the majority of that money within a few years. Studies attribute this to mismanagement—the result of pressure to splurge on expensive items like boats, cars and houses without any forethought and future wealth planning. Large inheritances are often accompanied by what many nickname the lottery curse, where people who receive life-changing sums of money lose their wealth within a decade.
A proper plan can mitigate financial mistakes and prevent impulsive spending for those who expect a large inheritance in the future. A plan that is devised and implemented well in advance of receiving the inheritance can lay the groundwork for a lucrative, healthy portfolio. Experts recommend doing the following when receiving a large family inheritance:
1. Remain at Your Day Job for the Time Being
It’s a natural reaction to use newfound wealth as a means for quitting the nine-to-five grind, but rushing into retirement without a plan leads to mistakes, mismanagement and ultimately loss of fortune.
Thousands of Americans grossly underestimate the funds required to properly retire. Those who retire by withdrawing earnings from an investment account should spend months, even years building up their portfolio before executing a retirement plan. Government taxes and fees can whittle down the available funds to a much smaller principle.
At the end of the day, experts recommend you remain at work while determining if you are financially able to retire. Remember that retirement should not be dependent on age but on your financial position and managing your wealth to live comfortably.
2. Pay Off Debts
If you have any remaining debts from college, mortgages, credit cards or cars, use your inheritance to pay off as much as possible. It is important to stay out of debt even after an inheritance and maximize the amount of return you receive on your investment portfolio.
In a recent study, a large number of millionaires who were surveyed said that they did not rely on debt to finance their lifestyle. Your best option for freeing up cashflow and maximizing returns comes from paying off debt. If you choose to live a life free of debt, you will be better positioned to enjoy your inheritance and build your wealth through proper investment.
3. Start Investing Now
Many heirs want to jump directly into spending their money, particularly after a very large inheritance. Because the number on their bank ledger is so high, they believe that spending extra money on the items they desire will not impact their futures. Nothing could be further from the truth.
Those with a large and sudden inheritance who are unable to control their instant gratification impulse may find themselves in tricky situations down the road. A large number of millionaires who found themselves on the brink of bankruptcy stated they hesitated to invest and instead spent their wealth, leaving their finances in shambles and no path toward a rich future based on sound investment strategies.
Investing now leaves room for enjoyment and smart spending while compounding the possibilities for continued wealth through investment. As with any major change, approaching a life-altering inheritance with the proper support and surrounded by experts means the difference between managing a portfolio and losing wealth. A rich and diverse wealth portfolio overseen by a high-net-worth specialist can provide excellent returns and maximize your inheritance.
4. Spend Thoughtfully
Understanding your wealth and your benefactor’s ultimate goals in gifting it to you will allow you to spend intentionally and with forethought, using that money for good. Beyond the purchases you wish to make is a greater plan to perpetuate wealth, create sound investments and ultimately contribute meaningfully.
Speaking to your financial advisor before making large purchases allows you to refocus and make choices based on the sound judgement and expertise of your wealth management team.
5. Seek Financial Guidance
Research shows that nearly 90% of those inheriting a fortune choose to switch financial planners after their windfall. In any case, it is important to look for a wealth advisor that has your best needs in mind and understands the complexities of your high-net-worth inheritance. Remember that it is perfectly acceptable to interview your wealth management advisor to ensure your needs align with their expertise. You have total control over when and where your money is deposited. Challenge your own ideas about wealth management by choosing an advisor who can manage your portfolio, balancing your goals with an informed, objective wealth management strategy. When hiring a wealth advisor, a history of success with generational wealth and large portfolios is preferred to finding the person who will simply agree with your ideas. Consider looking for financial advisors in your area, as they will likely have a better understanding of how to handle your assets given your geographic location. If you live in the San Ramon Valley, you should look for Danville financial advisors, as they will have more expertise in dealing with wealth management and investment opportunities in this specific area.
Inheriting a large amount of money is a lifechanging event that has the potential to improve your future or lead to destructive, unsustainable spending. Those who plan well and engage experts to advise them in their newfound wealth are on a path to financial security and future fiscal reward.