The great wealth transfer is underway.
Young Americans, of either the millennial or Gen Z generation, expect to inherit, on average, $335,000, according to a survey by Choice Mutual (1). Eight percent are expecting $1 million or more.
Imagine a 42-year-old named Jack is among the lucky few. His dad just died and he has inherited $3.5 million in stocks and $500,000 in cash and other assets. He has $100,000 left to pay on his mortgage and $25,000 in other debt.
What should he do with such a large windfall? Can he be set for life?
Four million is a life-changing amount of money to inherit, and he would have to be very careful about how he manages it if he wants to ensure it lasts. The survey found that savings and investments are the most common things Americans plan to spend their inheritance on, followed by housing or home improvements and paying off debt.
When you receive a large inheritance, the first thing to consider is the tax implications. Federal estate taxes don’t kick in until you inherit at least eight figures (the threshold in 2025 is $13.99 million), so you shouldn’t have to worry about that. Some states also impose an inheritance or estate tax (Maryland imposes both).
If you inherit assets you plan to sell, there’s good news. The step-up basis at death resets the cost basis for the inherited assets to the fair market value at the time of death. This usually helps reduce the amount of capital gains taxes you will owe.
Beyond the tax implications, you need to make a smart plan for how to make the money last. An often cited statistic from a 20-year study by The Williams Group of 3,200 families says that 70% of the time family wealth is lost by the second generation, and this number jumps to 90% for the third generation.
If you don’t want to become one of the majority who waste the funds, you should avoid jumping into spending the money or upgrading your lifestyle dramatically.
While it is probably a good idea to pay off your mortgage and other debt so you can avoid interest costs, you should refrain from doing things like immediately buying a bigger house or making other large purchases that eat away a big chunk of the money and require you to commit to higher ongoing expenses.
You should also avoid telling anyone other than your immediate family about the inheritance. If word gets out, you may find yourself targeted by people trying to get you to “invest” in their business venture, help them cope with “emergency” spending needs or any other excuse to access your funds.
The first thing you should do is pay off your debt and make sure you’ve built a sizable emergency fund, then invest every dollar, ideally in a mix of simple and safe investments.
You want to build a diversified portfolio, which means investing in a mix of different kinds of assets so you limit your risk of any one particular asset underperforming, and keep costs as low as possible.
Warren Buffett recommends that most people put 90% of their investment capital in an S&P 500 index fund, as this tracks around 500 of the largest U.S. companies and provides instant diversification since those companies are spread across all sectors of the economy. Buffett suggests putting the remaining 10% in short-term government bonds, which are fixed-income investments.
Financial advisors usually recommend owning a mix of different assets and including some geographical diversity as well. One popular rule of thumb says you should subtract your age from 110 to determine how much of your portfolio should be in equities. You can talk with a financial advisor about asset allocation, or what percentage of your portfolio should go into these different investments, or you can buy a target date fund that automatically invests your money into a mix of different assets based on your timeline for when you plan to take the money out.
Read More: Are you richer than you think? 5 clear signs you’re punching way above the average American
There are exchange-traded funds (ETFs) that track the performance of entire markets or sectors within them. For example, you could get broad exposure to a particular country or continent’s companies or bonds, or specifically focus on real estate, commodities, certain technologies or themes, like dividend-paying companies or small companies.
Are you thinking of early retirement? If you have $3.8 million in inherited funds after paying off your debt and follow the 4% rule, this would produce at least $152,000 in annual income for you.
With that income, you could potentially retire, but keep in mind the 4% rule only works to make a retirement portfolio last 30 years so your safe withdrawal rate will be much lower considering the life expectancy for U.S. males is 76. In 30 years, you would only be 72 and have a lot more retired years ahead of you. You might consider reducing your work hours and withdrawing responsibly from your savings. You may also want to keep some of the money for future generations. Talk to a financial advisor to figure out when it might be safe for you to give up working completely.
This simple guide can save you a lot of fees and hassle, allow you to enjoy your life with extra cash over time and help you preserve a large sum for your own future and for future generations. For more personalized advice and a detailed plan, consider talking with a financial advisor.
At Moneywise, we consider it our responsibility to produce accurate and trustworthy content people can rely on to inform their financial decisions. We rely on vetted sources such as government data, financial records and expert interviews and highlight credible third-party reporting when appropriate.
We are committed to transparency and accountability, correcting errors openly and adhering to the best practices of the journalism industry. For more details, see our editorial ethics and guidelines.
Choice Mutual (1)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
