Many people occasionally imagine how life would change if they suddenly received a large sum of money.
“If I won the lottery…”
“If I received an inheritance…”
“If I just had a million dollars…”
While these thoughts can be entertaining, they are not a substitute for a thoughtful financial plan. Still, large inheritances do occur, and when they do, they often raise important questions.
Consider the example of a couple, let’s call them George and Lois, both in their late 50s. George recently inherited $1 million from a relative, and the news immediately raised several questions:
- Could they stop working and live off the money?
- Should they use some of it to upgrade their home, car, or lifestyle?
- How can they make thoughtful decisions about the money rather than reacting quickly?
These are common questions after receiving a financial windfall.
Step One: Take Time Before Making Major Decisions
One of the most important first steps after receiving an inheritance is simply to pause before making major financial decisions.
Sudden wealth can create pressure to spend, invest, or make lifestyle changes quickly. However, taking time to evaluate your financial picture- income needs, taxes, debt, retirement savings, and long-term goals- can help ensure decisions align with your broader financial plan.
For many households, an inheritance may strengthen retirement readiness rather than dramatically change day-to-day spending.
Can You Live Off the Income From a $1 Million Inheritance?
A common question is whether an inheritance can replace employment income.
In reality, the answer depends on several factors, including:
- Your current age
- Other retirement savings
- Expected spending needs
- Investment strategy
- Social Security benefits
- Longevity expectations
Some retirees use general guidelines that estimate withdrawing a modest percentage of savings annually to help support long-term sustainability. However, actual income may vary depending on market performance, taxes, and personal spending patterns.
For many households, an inheritance becomes one component of a broader retirement income plan that may also include Social Security, retirement accounts, and other assets.
Should You Spend Some of the Inheritance?
Many people understandably consider using part of an inheritance for meaningful purchases such as:
- Paying off debt
- Purchasing a home or vacation property
- Helping family members
- Funding travel or personal goals
What to Do After Inheriting Money: Financial Planning Steps for a Large Inheritance
However, it can be helpful to consider both the initial cost and the ongoing expenses associated with new purchases. For example, homes, boats, and vehicles often involve maintenance, insurance, and other long-term costs.
Taking time to evaluate how spending decisions affect long-term financial security can help ensure the inheritance supports both present enjoyment and future stability.
Coordinating an Inheritance With Retirement Planning
For individuals approaching retirement, an inheritance may create new planning opportunities.
For example, households may choose to use inherited assets to:
- Strengthen retirement savings
- Delay claiming Social Security benefits
- Reduce debt before retirement
- Build an emergency reserve
- Support long-term goals such as travel, charitable giving, or family assistance
The goal is not necessarily to make dramatic lifestyle changes, but to integrate the inheritance into a broader financial strategy that supports long-term priorities.
The Role of Professional Guidance
Receiving an inheritance often involves multiple financial considerations, including:
- Investment decisions
- Retirement income planning
- Tax implications
- Estate planning updates
- Risk management and insurance
Working with qualified professionals- such as financial planners, tax professionals, and estate attorneys- can help ensure decisions are evaluated within the context of your full financial situation.
Turning an Inheritance Into a Long-Term Plan
In the example above, George and Lois ultimately used their inheritance as an opportunity to strengthen their financial plan.
Rather than immediately retiring, they transitioned to work they enjoyed with more flexible schedules. They developed a long-term strategy that addressed:
- Monthly spending needs
- Retirement income planning
- Social Security timing
- Insurance coverage
- Estate planning goals
- Travel and family priorities
By integrating the inheritance into a comprehensive plan, they were able to approach retirement with greater clarity about their financial future.
Rich Dunn is a CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor based in West St. Paul, Minnesota. He works with individuals and families to help them think through complex financial decisions- including retirement planning, investment strategy, and life transitions such as receiving an inheritance.
If you would like to discuss your situation or explore how an inheritance might fit into your overall financial plan, you are welcome to schedule a conversation.
Frequently Asked Questions
What is the first thing you should do after inheriting money?
Many financial professionals recommend taking time before making significant financial decisions. Reviewing the inheritance within the context of your overall financial plan- including taxes, retirement goals, and spending needs- can help ensure thoughtful decisions.
Do you have to pay taxes on an inheritance?
In many cases, inherited assets are not subject to federal income tax when received. However, taxes may apply depending on the type of asset involved. For example, withdrawals from inherited retirement accounts may be taxable, and some states have inheritance or estate taxes. The Internal Revenue Service provides guidance on tax rules for inherited assets.
Can a $1 million inheritance fund retirement?
Whether an inheritance can support retirement depends on factors such as spending needs, other savings, expected longevity, and investment strategy. For many households, an inheritance becomes part of a broader retirement income strategy rather than the sole source of income.
This article is for informational purposes only and should not be considered investment, tax, or legal advice. Dunncreek Advisors does not provide legal or tax advice. Individuals should consult their own qualified professionals regarding their specific circumstances.