How to Help Clients Invest an Inheritance for Retirement

The aging of the Baby Boomer generation means that their children and grandchildren who are currently Gen Xers or Millennials. Some estimate this coming transfer of wealth to be in the $30 trillion range. If you are a financial advisor working with clients who suddenly come into a significant inheritance, how do you help them invest this money to ensure they have a solid retirement nest egg?

Those inheriting a significant sum of money should take a step back and come up with a plan for the money. As their financial advisor, you need to ensure that clients don’t rush into doing something ill-advised with this new found wealth. Does the client have debts to pay off? Are they on track with their savings for retirement and other life events such as college for their kids? This is the time to do a financial plan with the client to determine what their priorities are and how this money fits. (For more, see: Tips for Family Wealth Transfers.)

Retirement should be a priority for most clients. Given increasing longevity and the fact that defined benefit pension plans are fast becoming extinct, this will likely be a priority item for most clients who inherit money.

Beyond setting priorities there are issues such as tax planning and estate planning to consider. This isn’t to say some of the money shouldn’t be enjoyed - in fact spending some of it on some wants such as a car or that dream vacation might make the more mundane planning issues easier to handle for some clients.

There could be any number of tax and related issues. For example, all or part of the inheritance might consist of individual stocks or other investments held in a taxable account. When inheriting investments, the heirs are allowed a step-up in cost basis. This can eliminate most of the potential capital gains issues and allow all or part of the portfolio to be sold with the proceeds use to invest elsewhere if the client needs to do so to implement a more appropriate asset allocation for their financial and retirement planning needs.

As part of the planning process discussed above, each client’s situation will be different. Inheriting money in your 30s is different than if you are in your 50s. Each client’s life and financial situation will be different. (For more, see: Estate Planning Tips for Financial Advisors.)

They should start by looking at their overall financial situation. Do they have the basics like an emergency fund in place? Is there a lot of debt? Are they married with children? If so, where are they in terms of college savings? Most of all what are their financial priorities?

A client in their 40s, 50s or older is closer to retirement and an inheritance might be the final push to put them on track or even over the top in terms of building their retirement nest egg. In deciding how to invest some or all of this money towards retirement the client should look at their current retirement savings in their 401(k), IRA accounts and similar vehicles. Further, how much are they currently saving for retirement?

For younger clients, the inheritance can help for retirement in a couple of ways. The extra money can allow them to fully fund their 401(k) by upping their contributions to the maximum amounts allowed and using some of the inherited money to keep their monthly cash flow where it needs to be.

Should retirement be a client’s top priority when deciding how and where to invest an inheritance? While everyone’s answer will depend upon their own situation, the fact that there are no do-overs in retirement should be considered. For example, you might point out that there are many ways to fund a child’s college education. Once you hit retirement age their options are more limited. (For more, see: Advisors Should Monitor Millennial Inheritance.)

The right course of action will depend in part upon the size of the inheritance. A larger amount will allow the client to do more things with the money.

Just like those who win a prize in the lottery, recipients of an inheritance might be subject to many temptations in terms of how to spend their money. There might be pressure from family members and others to share some of the money with them. Certainly, many stock brokers and promoters of some “interesting” investment opportunities may come knocking on their door.

As their financial advisor, it is up to you to educate your client to avoid the temptations of easy riches or the guilt trips that might be laid on them by others who want a piece of their money. This isn’t to say that helping a friend or relative isn’t a good thing to do, but rather your client should do this because they want to and not for other reasons.

Receiving an inheritance can be a financial blessing for your clients. If invested well this money can leave them set for life, including retirement. Your advice and counsel is invaluable to clients in deciding how to make the most of an inheritance. (For more, see: How Inheritance and Estate Tax Waivers Work.)