I’m 50 and received an inheritance. What should I do?
Receiving an inheritance is often a very emotional and challenging experience, especially if you have been involved with managing the estate.
As the legal side of things ends you are often presented with a new challenge, making the most of the assets you are about to receive.
Many people spend years building wealth slowly through salary, superannuation and regular savings. Then, almost overnight, they find themselves responsible for a significant lump sum, which can be daunting.
Consider John’s and Cathy’s situation.
John and Cathy are both 50, earning strong incomes, $350,000 in home loan debt, raising two teenage children and beginning to think more seriously about retirement.
They recently received a $500,000 inheritance from John’s father.
Like many people in this situation, their questions came quickly:
- Should we pay down the mortgage?
- Should we invest it?
- Should we contribute to super?
- Should we help the kids financially?
- What does this mean for our retirement prospects?
They had plenty of ideas but were uncertain what was best for them.
The temptation to make a quick decision
One of the biggest risks I see is people feeling like they need to do something immediately.
In fact, taking time to consider your broader financial position is often one of the most valuable things you can do.
Why age 50 is different
An inheritance received at age 50 is very different to one received at age 30 or age 70.
At 50, many people are:
- In their peak earning years
- Thinking about retirement, their lifestyle and when it might be
- Carrying some remaining debt
- Supporting children
This creates opportunities that may not exist earlier or later in life.
Looking beyond the mortgage
John and Cathy had a mortgage of approximately $350,000.
Their first instinct was to pay it off immediately.
That would certainly have reduced interest costs and improved cashflow.
However, once we looked at the bigger picture, we realised the inheritance could potentially achieve several goals simultaneously.
Rather than focusing solely on debt reduction, we considered:
- Superannuation contributions
- Investment opportunities outside of superannuation
- Debt reduction
- Helping their children financially
The result was a more balanced strategy than simply eliminating the mortgage.
Helping the kids
One of the first questions John and Cathy asked was whether they should use part of the inheritance to help their children.
This is a common consideration, particularly when children are approaching university, looking to purchase a first home or beginning to establish their own financial future.
While providing assistance can be very rewarding, it is important not to compromise your own retirement in the process.
One of the realities I see regularly is parents sacrificing long-term retirement security to help their children sooner than necessary.
The best outcome is often finding a balance. Supporting children where appropriate, while ensuring your own goals remain on track.
This becomes much easier when proper modelling is completed and you can see how long your wealth is expected to last in your retirement.
Investment opportunities outside of superannuation
We discussed personal investments together and they did like the idea of access to capital, which superannuation doesn’t provide at this time. Ultimately once we discussed their true needs for access to capital and the benefits of debt repayments and superannuation contributions and investments they were happy to opt out of this strategy.
The role of superannuation
One of the opportunities available to many people in their 50s is using part of an inheritance to support superannuation contribution strategies.
In John and Cathy’s situation, they both had available carry-forward concessional contribution amounts.
John could contribute $50,000 into super as a concessional contribution.
He is on a marginal tax rate of approximately 39% (including Medicare):
- Personal tax deduction benefit: $19,500
- Contributions tax inside super at 15%: $7,500
- Net tax benefit: approximately $12,000
That is a significant outcome from a single contribution.
However, the contribution itself is only part of the equation.
A question that is often overlooked is:
What is the money invested in once it reaches super?
One of the most common mistakes I see is people focusing heavily on the contribution strategy while paying little attention to where the money is invested.
The appropriate investment strategy depends on:
- Your risk tolerance
- Retirement timeframe
- Retirement income needs
Putting money into super is not automatically a good outcome if the investments themselves are poor, or not appropriate for your circumstances.
Retirement may be closer than you think
One of the most valuable exercises we completed was financial modelling.
After modelling different scenarios, including debt reduction, super contributions and investing part of the inheritance, they could see retirement may be achievable several years earlier than originally expected.
Final thoughts
An inheritance at age 50 can be a powerful financial opportunity.
The question is rarely solely whether you should invest it, pay down debt, or contribute to super.
It is broader and considers:
How can this lump sum be used to improve my overall financial position, my family’s position and my future lifestyle?
When viewed as part of a broader plan, an inheritance can potentially reduce tax, improve retirement outcomes, reduce loan interest costs, help your loved ones financially and increase financial security.
Before making major decisions, it is often worth taking a step back and understanding how each option affects the bigger picture.
If you would like to know more about this, please reach out to me.
General Advice Warning: The information in this article and the links has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned in this article, consult a professional financial advisor to consider whether it is suitable and appropriate for you and your personal needs and circumstances. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product, together with the Target Market Determination (TMD).
