Preparing for retirement isn’t always about stashing a portion of your paychecks for your golden years. For some, it’s about accepting a windfall late in life and trying to make the money stretch.
among Americans 65 and over is just $88,488 — and the average balance is just $272,588 — your inheritance sets you up quite well, as that $420K is worth more than what many of your peers have saved for retirement.
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found 70% of wealthy families lose their money by the second generation.
That’s the potential bad news. But the good news is, with a few wise money moves, you can make sure your inheritance provides you with long-lasting security.
Choose a safe withdrawal rate
One of the best things you can do to make sure you don’t squander your inheritance is to invest it and withdraw small portions at a time. This will allow you to earn returns, protect the principal balance and keep your money working for you.
There once was a traditional rule of thumb that said you should withdraw 4% from your retirement savings in the first year of retirement and make annual inflation-based adjustments from there. Experts believed this would allow your money to stretch for 30 years or more.
suggests withdrawing 3.7% to ensure your financial situation remains stable. The proposed reduction in the safe withdrawal rate is because people are living longer, and experts don’t think investments are going to keep producing returns at the same rate as in the past.
A 3.7% withdrawal rate from a $420,000 inheritance would provide you with $15,540 in annual income, which is a reasonable sum that you could potentially combine with Social Security and other savings to help fund your retirement.
Since you are single and only have yourself to support, that $15,540 could help ensure that you can afford the necessities like healthcare and housing, while perhaps leaving you a little extra to enjoy in your golden years.
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Invest the money wisely
If you decide to invest your inheritance and make 3.7% withdrawals annually, you’re going to need to decide where to put the money. And that will depend on your current asset allocation, as well as how your retirement savings are structured.
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, which involves stashing money in three separate asset accounts:
You have options, but before you decide what strategy you want to use for allocating your assets, take a look at where your money currently sits. If you already have a lot of money in equities, for example, you may decide to buy bonds or add to your high-yield savings account with the money that your mom left for you.
As you make your decision, remember that there’s always a tradeoff between risk and reward:
When deciding where to put your $420,000 inheritance, think about how much you already have in equities, bonds and CDs. For example, if you are already heavily invested in the stock market in your retirement funds, you may want to use some of the inheritance to increase your liquid savings, or buy CDs so you have money to live on without having to sell stocks in case of a downturn.
By investing your money, making sure you have a good mix of assets and taking out the funds at a safe withdrawal rate, your inheritance can go a long way toward setting you up for financial security in retirement.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
