HEIR TODAY, GONE TOMORROW

Don’t squander the money your relatives leave behind

The Wall Street Journal

It’s the last parental handout you’ll ever get. Make the most of it.

A new study has found that few baby boomers have inherited a significant sum, and even fewer reckon there’s money coming their way. Still, if you’re among the lucky minority, an inheritance could salvage your retirement dreams.

But will it? The danger: You squander the money by making one of two common financial mistakes.

While 81 percent of boomer households haven’t enjoyed an inheritance, 7.5 percent have received more than $100,000, according to AARP’s Public Policy Institute.

“If you inherit $100,000 or $200,000 at age 45, it could be a substantial amount at retirement and make up for your own mistakes,” says Charles Farrell, a financial consultant in Medina, Ohio. “To have enough at retirement, all you might need to do is take this money and make a few prudent choices.”

But will you be prudent? That brings us to those two common mistakes. The first pitfall: Treating an inheritance as a precious legacy that shouldn’t be touched.

That attitude might stop you from spending the money. It can also, however, make you reluctant to sell the assets you inherit.

To be sure, sitting tight might seem like the most conservative strategy. But in truth, it’s expensive to keep the family vacation home you never use, and it’s enormously risky to hang onto a portfolio that is concentrated in just one or two stocks.

While some folks see an inheritance as a legacy that shouldn’t be touched, others go to the other extreme, viewing the money as a windfall that puts them ahead of the game financially. Result: They suddenly feel like they can spend more and take extra investment risk. The danger, of course, is that the money is quickly frittered away, and with it the chance of a comfortable retirement.

So what should you do? Here are four pointers.

Pay down debt. That will definitely shore up your finances.

Before you start merrily spending the money, make sure you are on track to meet your retirement-savings goals. To that end, get a quick handle on your finances by playing with the “retirement planner” at www.dinkytown.net.

Immediately sell investments that don’t make sense as part of a well-diversified portfolio. That will trim risk. In addition, there should be little or no tax cost involved.

Assets in a taxable account get their “cost basis” stepped up upon the owner’s death, so there shouldn’t be any capital-gains tax owed if you sell right away. Meanwhile, as always, there is no tax bill triggered if you trade inside a retirement account.

Don’t rush to empty inherited individual retirement accounts. Instead, limit your withdrawals to the minimum amount required each year.

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