smart spending

What to do with an inheritance

Don't act rashly

When someone inherits, Flurry says, "The temptation is to feel like you have to do something, but you really don't. Sit down and dream a little, then back into the numbers and ask, 'How can we do this with the least amount of risk?'" Acting too hastily can lead to trouble. Paying off your mortgage without thinking about future income in your old age, for example, could leave you living debt-free but in poverty. "If your house is paid for but you run through everything else, you can't use shingles to pay for groceries," Flurry says. "Then what do you do? You don't want to be in that situation."

If you've inherited a traditional IRA, for example, research the options available before making changes. If you're not a spouse, you can't roll the inherited IRA into your own. Nonspouses are required to take taxable minimum distributions every year based on life expectancy. Instead of treating the distribution as an annual windfall to be spent, make a plan to integrate it into your long-term strategy.

Dial down risk

Constructing a portfolio that generates passive income is the slow-and-steady approach that will lead to financial independence, but it's a step most people miss, according to Flurry.

He says creating a portfolio that throws off a steady stream of income is not as sexy as finding the next big investment, but it's a safer long-term strategy. To achieve stability and income growth, you'll need to mix together stocks and fixed-income investments, but don't speculate by sinking it all into volatile equities. "It's kind of a 'get rich slow' plan, but it works," Flurry says. "So many people take unnecessary risks."

On the other hand, depending on your age when you inherit, you might not necessarily keep the inherited investment portfolio as is because it may be too conservative to provide the growth that will get you to your financial goals in 20 years. The point is to make the money work for you without unnecessary risk.

Hire an expert

Consulting a financial planner, investment professional or tax accountant will help you develop a plan if you don't have one or maximize your current plan. If you know you'll inherit, you can begin planning ahead of time, but if the inheritance comes as a surprise, a professional can provide a better idea of your options.

"People will come out of the woodwork," Flurry says, with banks and insurance companies trying to sell products. "There's nothing wrong with that," he adds, but don't rely on sales representatives without first getting an objective opinion on your entire financial picture and a thorough understanding of your goals.

Complicated assets, such as a family business or an asset you've inherited with others such as a home, will probably require a professional to help sort out the options.

Though a master plan will help you keep and grow the assets you've inherited, it doesn't have to be perfect or static. It can and should change over time. "The average plan is better than no plan," says Flurry. "Stick to your goals, and that will provide your true north."


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