By now, we’ve all heard that the biggest intergenerational wealth transfer in history is underway. A whopping $750B will be inherited by Canadian baby-boomers aged 50-75.
Inheriting a bunch of money at once can be a bit of a double-edged sword; you’re receiving a sum of money while also processing the loss of someone close. Ultimately, the best way for you to honour your inheritance and make it last is to use and save it – very wisely.
Here’s our top tips for making the best use of your newfound inheritance:
1) Take a step back
The key to turning this lump sum into something really fruitful for your financial future: smart choices. If you had a special relationship with the deceased, you’re likely struggling with the conflicting feelings of sorrow for your loss and also some excitement for the windfall of new money. It’s understandable if you’re too emotional to be strategic. Just stick the money in a money market fund for the next 90-120 days and don’t worry about it. You’ll be able to make smart, sound decisions soon enough.
2) Eliminate high-interest debt
The best thing about your inheritance is being able to buy yourself peace of mind. Those bills, credit card balances, personal line of credit and mortgage. Now you can make one of the best contributions to your financial future and be rid of debt (pending inheritance amount and debt balance). Prepaying your mortgage with just $10,000 on a $100,000 mortgage amortized for 25 years at 10%? You’ll save up to $52,223 in interest- not too bad!
3) Grow your fortune
Investing your inheritance, or a portion of it, in the right vehicles can seriously amp up your retirement fund to help you move smoothly through life’s milestones.
If you’re behind in saving for retirement, the option of investing your inheritance needs to be seriously considered. It’s hard to make up for lost time when your retirement savings have been insufficient, but a bump up from your inheritance can really help.
If your income is high and stable, you can invest some of your inheritance as well as pay down debts. The trick is to invest the right way.
4) Max out your RRSP
Find out how much RRSP contribution room you and your spouse have and start using it. Contribute a big chunk now, and then work with an accountant to determine when you should actually take the deduction to get the highest refund on your income tax. This will help save you from blowing your inheritance and ensure you’re set up for a peaceful and enjoyable retirement down the road.
5) Max out RESP contributions
Contribute to your kids’ education is a great option for your inheritance. It will:
a) Set them up for success
b) Provide you with a guaranteed 20% return
Twenty per cent is the amount the government provides on your contributions. Odds are you haven’t maxed out the $2,500 per child per year. Now, you can open up a family RESP and figure out what amount to contribute that will work best with your inheritance and your family’s future.
6) Set up an emergency fund
Buy yourself some peace of mind by setting aside the equivalent of about six month’s income for your new emergency fund. Put it away in a TFSA for things in life that you can’t plan for, like job loss or a health issue. You’ll feel more confident and peaceful knowing you’re financially protected for whatever life brings your way.
Using your inheritance to help others can make great sense if your retirement savings and debt are both in decent shape. Giving to charity also comes with some tax breaks, so you’ll get back some of those gifts in tax savings.
8) Treat Yourself
Remember all those things you wanted to, but couldn’t do before? You can do some of them now! We’re not going to tell you not to have any fun with your inheritance. If your debt is under control, your retirement savings are decent, and you’ve got sufficient and stable income, then there’s nothing wrong with spending some of that inheritance. For example, those home renovations you’ve been wanting to do to your home isn’t a bad idea as it’s going to increase the value of your place.
Just be careful what you do with your new money. Money tends to be absorbed into a spending plan as easily as water in a desert, so be sure to set some limits and save!