Question: “We are 74 years old and retired. We have an income of $3,400 a month and we still owe $250,000 on our home with a mortgage rate of 2.5%. We have no credit card debt or car payments and we have $100,000 in savings in CDs and high-yield savings accounts. We just received an inheritance of $150,000. What would you advise we do with this inheritance? Should we hire a financial adviser or an estate planning attorney to help us?”
Answer: The pros we spoke to had many thoughts on what to do with the $150,000 — but with a rate of just 2.5%, there’s not need to pay off the home, they say. And yes, a financial planner could be helpful. Pros recommend CFP Board and NAPFA to find one, and you can also use this free tool to get matched with financial advisers, from our ad partner SmartAsset.
First, set aside money for state taxes if you live in one of the few states that still imposes state-level taxes on inheritance, such as Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, says certified financial planner Mary Ann Sullivan at 395 Financial Planning. “Second, have a little fun with between 1% to 5% of the gross. Life is short, give yourself a little permission to have fun,” says Sullivan.
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Without knowing what your cash flow is and whether your $3,400 per month covers your necessary expenses, it’s hard to address exactly what you should do with the balance and how you should plan for larger goals. “If the money doesn’t cover expenses, build on your $100,000 to create a 5 to 7 year bond or CD ladder that matures each year with the amount that you need for your necessary expenses. Invest the rest, but no more than 60% in a low-cost index fund like VTI to hedge against inflation. Each year, if the market is up, sell VTI for your cash and reinvest your matured bond or CD to the end of your ladder. If the market is down, use the matured bond or CD for your cash,” says Sullivan.
If the $3,400 per month sustains your basic expenses, looking at your larger goals like deferred maintenance, new cars and long-term health can give you peace of mind, says Sullivan.
You may be tempted to pay down your mortgage, but you have a great mortgage rate that can easily outperform in CDs or high-yield savings accounts. While ordinarily a proponent of being debt-free in retirement, certified financial planner Joe Favorito at Landmark Wealth Management says if you’re capable of maintaining financial discipline and not spending down all the cash, it doesn’t make much sense to pay off the mortgage at this time. “The extra $150,000 just sitting in a savings or money market would currently pay at least 4.15%. The current rate minus the 2.5% interest gives you a positive delta of 1.65%, so until rates fall, it wouldn’t make much sense to wipe out that loan,” says Favorito.
For her part, Sullivan says you might as well keep your money working for you while interest rates are higher than 2.5%. “You can refine this for a tax-adjusted rate. Let’s say you pay 21% in state and federal taxes, then you’d want to be earning more than 3.16% to outperform your mortgage rate,” says Sullivan.
Considering the unknowns of healthcare expenses you could experience in retirement, certified financial planner James Daniel at The Advisory Firm says adding that inheritance to your nest egg would be advisable. “Since you don’t seem to have experience with riskier market investments, consider just adding additional CDs to lock in decent rates,” says Daniel.
Is a financial adviser or estate planning attorney best?
Your assets are relatively simple. “If your estate goals are simple, you probably don’t need an estate planning attorney. Simple means you want to transfer all of your assets at death to a few people. For your bank accounts and CDs, make sure to have your transfer on death beneficiaries and contingent beneficiaries named. Make sure to memorialize this and the transfer of personal effects in your will and communicate it with the person you designate as your executor after you both die,” says Sullivan.
Meanwhile, if your estate is somewhat more complicated, yes, an estate planning attorney could be smart. “Estate planning is also an important part of a financial plan and everyone should have their proper documents in place,” says Favorito.
Meanwhile, a financial adviser can reevaluate things to look at your overall picture. “A financial adviser is more equipped to discuss how to use the funds while an attorney can help with proper asset titling,” says Favorito.
Ultimately, a financial planner can help you decide which courses of action are best for you. “You would benefit from someone you pay by the hour to give you financial advice, but this person should also be able to teach you how to implement the advice. After you have your system set up, an annual check-in would be advised,” says Sullivan. For a frame of reference, hourly advisers tend to charge between $150 and $450 per hour depending on location and the scope of the work.
When looking for a financial adviser, seek out a fee-only fiduciary who is only paid directly by you, the client, and who puts their clients’ best interests ahead of their own at all times. Certified financial planners are the gold standard in financial planning, as they complete extensive education requirements, pass exams, perform thousands of hours of work-related experience and uphold a fiduciary duty to earn their designation. Pros recommend CFP Board and NAPFA to find one, and you can also use this free tool to get matched with financial advisers, from our ad partner SmartAsset.
Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.
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