How should I invest an inheritance?

Receiving an inheritance is something highly personal and often an emotional time, and therefore it is important to obtain advice that is tailored to your circumstances. The following article will outline the potential ways that you can manage your inheritance to assist you to grow your wealth.

What is an inheritance?

An inheritance can be described as the assets that an individual passes down to their family, relatives or loved ones once they have passed away. An inheritance can be comprised of cash, investments such as stocks, property, art, cars or other items of value. It has been estimated that around $1 trillion will pass to the next generation by 2025 and $3.5 trillion by 2035.

Inheritances can provide those receiving them with a life-changing opportunity, which is why it is important to be aware of all the options available to you.

What can I do?

Invest:

Inheritances can provide a significant investment opportunity depending on what and how much you receive. It has been suggested that 84% of the $1 trillion to be transferred by 2025 will be to Australians aged 65 and over. Investing the money you receive may be a viable option depending on your risk appetite and your other short, medium or long term goals which you may require the money for.

Whether investing is the right choice for you will also be contingent on your age, as the younger you are, the more time you have to ride out the volatility in the market. If you are older and in retirement, you may wish to invest the inheritance in a way that generates a fixed income and therefore exposes you to less risk. Engaging with a financial adviser to determine the correct course of action could be the difference between using the inheritance up within your lifetime or ensuring it continues growing for generations to come.

Debt:

Another option that may be suitable for those receiving an inheritance is to use it to pay off any debt they may have. It is important to distinguish between good and bad debt. Good debt refers to the debt associated with borrowing money to purchase an asset that is likely to increase in value over time or produce an income, such as an investment property. However, bad debt is often associated with spending outside of one’s means which does not assist their financial position in the future.

If you have any outstanding debt with an interest rate of 5% or higher, it may be advantageous for this to be paid off prior to investing. This is because 5% is a reasonable benchmark between the average rate of debt and the average rate of return if you were to invest. However, if you have debt with an interest rate below this, you may wish to direct your inheritance to other potential options such as investing or obtaining additional finance to further invest or fund the purchase of other assets.

The correct pathway for you will ultimately be contingent on your financial position outside of the inheritance, the value of the inheritance and your short-, medium- and long-term goals. Hence, it is important to have a clear understanding of these before making any financial decisions. To read more about whether to pay down your debt or invest, click here.

Super:

Depending on your age and where you are at in your working life, using inheritance to boost your super may be a viable option. Directing this money towards your superannuation can be a tax-effective way to increase your retirement income. There are certain contributions you can make into your super including concessional contributions up to $27,500 per annum (after tax) which you receive a tax deduction on. You can also make non-concessional contributions of up to $110,000 per annum which you do not receive a deduction on, however, it is taxed at 15% within your super.

Another option if you are under 65, and have less than $1.6 million in super is that you may be able to ‘bring forward’ up to three years’ worth of non-concessional contributions. This means that you can contribute up to $330,000 into your super in one go. It is important to note that from 1 July 2021, the total superannuation balance has been capped at $1.7 million. If you have reached this amount, you cannot make any more non-concessional contributions to your super.

If you would like to read more about the different contributions available to you, please click here.

Discretionary Spending

Another available option is to use your inheritance for some discretionary spending. When allocating some of your inheritance to leisure, travel or other activities it is important to keep in mind your short-, medium- and long-term goals. It is crucial that if you need the money to fund any large upcoming expenses, any ‘bad debt’ that you may have or you wish to invest it for the future, these contingencies should be considered prior to spending. A financial adviser is a valuable tool that can assist you with allocating your inheritance to these different financial goals and ensure that you have the appropriate strategies in place to achieve them.

Ultimately, how you use an inheritance will come down to some key factors:

  • How much you receive
  • Your current financial position
  • Your age
  • Your short-, medium- and long-term goals

If you have recently received an inheritance or are expecting one in the near future and would like tailored guidance on how to achieve your financial goals with this money, please click the link to organise a 20-minute complimentary meeting with an EPG Wealth adviser.

This information is purely factual in nature. Please do not rely on this information to make any financial decisions as this information has not been tailored to your personal. circumstances. If you would like financial product advice or services please let me know and I will set up an appointment for you. Any advice in this email is of a general nature only and has not been tailored to your personal objectives, financial situation and needs. Before acting on this advice, you should consider whether it is appropriate having regards to your personal objectives, financial situation and needs. Before making a decision to acquire a financial product, you should obtain and read a Product Disclosure Statement (PDS) relating to that product, it is important for you to consider these matters and to seek appropriate advice. The material contained in this email is based on information received in good faith from third party sources, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate. Past performance is not a reliable guide to future returns. Licensee EPG Wealth Pty Ltd 529273 – associated employees or agents may have an interest in or receive monetary or other benefits from the financial products and services mentioned in this email.

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