If you have the good fortune to receive an inheritance of $1,000,000, congratulations! Celebrate with a good bottle of champagne and offer a toast of thanks to your benefactor. However, financial advisors recommend a cooling-off period before you start spending any of that money.
While it’s pretty difficult not to have an emotional response to getting that large of an inheritance, you need to take the time to carefully assess your overall financial picture, including your retirement goals, so that you can maximize your inheritance for your overall, long-term financial security.
While you’re developing your financial plan, protect your million in a high-yield savings account or a balanced mutual fund for several months or more until you figure out the best way to invest it. If you’re considering putting your money in a savings account, the maximum coverage for FDIC insured deposits is $250,000, so one option is to open accounts at four different institutions or have multiple accounts at one institution as long as they’re joint accounts.
If your goal is to make money with money, you’ll need to consider other investment vehicles as part of your financial plan that provide you with more opportunities to grow your money.
In order to determine how to invest $1,000,000, you’ve got to figure out what your goals are for the money. Consider honoring your benefactor’s legacy by donating to a charity of your choice in his or her name.
Create a list of financial goals. In addition, do a cash-flow analysis to determine how much money you need in the short- and long-term. First, consider funding an emergency account if you don’t already have one. You should have at least three to six months of living expenses in your emergency account that you can have access to at any moment.
Then, pay down any outstanding debt, such as student loans, credit cards, or your mortgage. For mortgage debt, consider the interest rate that you’re paying, and compare that to an expected investment return. If you have a low-rate mortgage, and you’re not close to retirement age, you’re better off investing that part of your inheritance.
The longer your “investment horizon” or the length of time your money can be invested is an important determiner of how to invest. If you’re still twenty or more years from retirement, consider building a low-fee, highly diversified portfolio of investments with a tilt towards growth assets such as stocks. If you are close or in retirement, consider investing in a more balanced low-cost portfolio with a combination of stocks and bonds.
A couple of caveats when investing that $1,000,000: max out tax-advantaged accounts when possible, such as 401(k) or 529 accounts, and diversify your investments.
Avoid making mistakes
When it comes to investing $1,000,000, you’ll want to consult with a financial advisor who can provide you with sound financial advice, who understands your needs, and will put together an investment portfolio to support your goals and all facets of your financial situation.
At Blankinship & Foster, fee-only financial planner in San Diego, we advise our clients about income and tax considerations, withdrawal strategies, and more. We manage your portfolio and will make changes if necessary, to rebalance it.
Contact us to learn more about our investment philosophy.