Instant Retirement: Transform Your Inheritance or Windfall into Your Retirement Dreams
Is there an argument for simply spending the lot? Should it be used to supplement retirement income? Or does it make financial sense to gift the money to younger family members? The main reason for people downsizing in the first place is often to improve their quality of life, so there is certainly an argument for spending some of the capital.
Likewise, a relatively small inheritance might allow you to spoil yourself in retirement with that dream holiday. This comes with one big caveat: that you have given serious consideration to your long-term needs — Sofat recommends assuming a lifespan of age A cash-flow analysis drawn up by a qualified financial planner should help you ascertain whether your cash remains surplus to requirements. The top priority should be to ensure a secure lifestyle for you — both now and in the future.
Do you therefore need the capital to improve your income stream, meet long-term care costs or put aside for a rainy day?
In the case of the latter, this should remain in cash, but if you are looking to boost your retirement income or fund care costs, Sofat advocates investing the money to stand the best chance of achieving inflation-beating returns. Look to utilise all available tax breaks: the best option will depend on your age and personal circumstances, including whether you have started drawing your pension assets.
Managing a windfall
However, many retirees will find the ability to fund their pension severely restricted. You can, however, carry forward unused pension allowances from the previous three tax years. This could be an attractive option for some of your windfall. Adrian maintains being aggressive with saving in the early years will eventually make life easier.
However, he also acknowledges the importance of balancing this out with enjoying a decent quality of life today.
Sudden Money: How To Manage A Financial Windfall
He points out that equities generally reward investors over the long term, even if they are quite volatile over shorter periods. He believes a combination of tax-efficient investments makes sense. Claire Hares, 39, has always planned to retire early and is working hard to turn this into a reality with her husband, Rob, The couple have always had one eye on the future.
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When they received an inheritance about 15 years ago, they invested in a buy-to-let house. They have cleared the mortgage on this property, which forms a central part of their long-term income generation plans. The difficulty is estimating how much will be needed in the future. Claire stresses the key is to strike the right balance between enjoying today and thinking about tomorrow.
1. Work with a Financial Advisor
Mr Modray suggests holding a mix of funds that invest in company shares, fixed interest and commercial property. Unless you come into a windfall, achieving the dream of retiring early requires extreme savings habits and a willingness to make short-term sacrifices, according to financial adviser Martin Bamford, managing director of Informed Choice. Mr Bamford believes there is a simple rule of thumb: If you can save 25 times your annual expenditure, then you can probably afford to retire. The magic figure Moneywise.
If you need a cash injection then read our guide on how to boost your income…and have some fun along the way. Below are 10 key steps that can help you maximize your newfound money and put you on more secure financial footing. Put your windfall funds aside temporarily.
Put the money into a relatively safe short-term account savings account , money market account , or CD while you determine the best strategy for your windfall. Sitting on the money for a few months can help clear your head of any temptation to spend it, and will help give you the time you need to develop a financially sound plan. In most cases, you will owe a portion of your windfall in taxes. Eliminate any consumer debt. Pay off any costly, high-interest consumer debt like credit card debt or student loan debt.
However, there are certain kinds of debt that may not be beneficial to pay off in full, as they can carry a tax benefit. Make sure you have an emergency fund equivalent to six months of expenses.
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Talk to a financial professional. A Financial Consultant can also help you avoid pitfalls when transferring inherited assets into your name, as some types of assets such as inherited retirement accounts have different rules than other types of inherited money. If your investment strategy thus far has been to grow your portfolio as much as possible to accumulate wealth, you may want to reassess your growth strategy and shift to one that focuses more on portfolio preservation and buffering against potential market downturns.
Decrease your tax liability through charitable giving. You have many options when it comes to giving. You can give directly to a foundation or charity, or invest through a donor-advised fund which provides an immediate tax benefit. Talk to a Financial Consultant and potentially also to a CPA or estate planning attorney about the pros and cons of charitable-giving vehicles to find the right options for you.
If you have pre-college-age children, consider investing in plans or other college savings plans to take advantage of tax-deferred growth potential and ease the future burden of college tuition. Qualified distributions from these plans are typically tax-free as well.