My 96-year-old grandfather just passed away, and I received $150,000 from his estate. My husband and I are about two to three years away from retirement, and we’re not quite sure what to do with the money. We think we’ll use about $50,000 on much needed home repairs, but beyond that we don’t want to make a mistake. We’re not really interested in putting the money into the market, so what should we do with it?
I’m sorry to hear about your grandfather, Lorraine. May his memory be a blessing.
Receiving an inheritance in any stage of life can be jarring to financial prudence, but receiving an inheritance in the few years preceding retirement can stoke some really strange decisions. In order to determine how susceptible you are to making a mistake here, simply examine your relationship with gift cards.
When my 10-year-old son receives a gift card, the world is on fire until the gift card is spent. He’s instantly online finding an item to match his vague desires, and the satisfaction in using the gift card comes in the acquisition of something new, not its actual utility. In other words, you don’t have to spend the gift card right away.
You don’t have to find the perfect use of the inheritance right now. You can simply put it in the proverbial junk drawer and let life shake-out a bit. Additional resources shouldn’t stoke artificial demand, like it does for a 10-year-old boy.
You should begin by understanding your relationship with financial certainty.
My gut tells me there’s more uncertainty in your financial life than you might realize. That’s not a criticism, by the way. You’ve signaled your reluctance to participate in market risk, and your target retirement date seems in flux. Additionally, you are planning to use $50,000 of the estate to make home repairs, which means you didn’t previously feel as though you were in the cash position to make those much needed repairs.
Based on these assumptions, your biggest area of need is likely your retirement emergency fund. As a working person, you can get away with an emergency fund consisting of three months worth of household expenses. That’s because if you use any of those funds, you can spend the next several months refilling your emergency fund with your income from work. This exact strategy will likely have served you for most of your career, but once you reach your early 50s, three months expenses isn’t really enough. That’s because life, and its emergencies, get a lot more expensive, the older you get.
Ideally a pre-retiree (someone two to three years from retirement) should have closer to 12 months worth of expenses set aside in an emergency fund. And just so we’re on the same page, this emergency fund is meant for emergencies. Car purchases, family vacations, and large, known home projects shouldn’t find their funding via your emergency fund. If 12 months’ expenses sounds like too much cash to have sitting off to the side doing nothing, then you may need to completely reevaluate how ready you are to retire in the first place.
Additionally, if you’re hesitant to put any money into this market, then you deem it to be too volatile for your liking. I’m not going to talk you out of that. Instead I’ll note that keeping additional cash positions off to the side allow you to derive your retirement income from the cash, as opposed to liquidating depressed equity positions, thus eliminating sequence of return risks.
Sequence of return risk is when the market is falling at the end of your work years or the beginning of your retirement years. This decline creates a major problem when you begin liquidating investments for retirement income. A giant pool of cash, like the $100,000 your grandfather left you, helps protect you from drawing-down your investments when they need time to recover.
I have one last (frank) note for you. Try to avoid the “grandpa would have wanted us to…” spending justifications. The situation you find yourself in calls for clarity, not emotion. It’s borderline lazy to seek validation for an extended family vacation to Europe, through the lens of grandpa’s love of family and fun.•
Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to email@example.com.