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Who We Are The BlueCollarDollar was designed as a personal finance center where you will find the complicated world of investing and financial planning explained. We take a common sense approach to the money you earn, your investments (mutual funds, bonds, mortgages), retirement planning (IRAs, 401(k)s, etc.), insurance, mortgages, and debt. We want you to have a financially stable retirement, that is both comfortable and healthy.
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Inheritances, Windfalls, and Money from Heaven: We all dream of holding a huge cardboard check with our names on it. We stand in line when the lottery reaches astronomical heights. We all see ourselves buying islands, never working again, or better yet, doing something worthwhile.
While those kinds of windfalls are rare just look at the odds of winning the PowerBall (the chances of getting all five numbers plus the powerball number are one in 80 plus million while the odds of winning a prize is 1 in 35), we still dream and we still buy tickets.
But the more likely chance of getting a huge sum of cash comes from an inheritance. Basically, an inheritance is the division of an estate's assets, a portion of which has been earmarked for you. Over 60% of people age 55 or older believe that their inheritance will be in excess of $125,000.
The problem with this sudden wealth lies in the fact that it often shows up with an enormous amount of emotional baggage attached. There is the realization that, during a person's life, they set aside something for you, a piece of their hard earned money to make your life better.
While the money often shows up well beyond the actual grieving stage, it still carries with it the name of the deceased. Calling it "your parentıs money²" or "Uncle Danıs money" might be comforting and seem to acknowledge the source, it is now your money and their only wish was that you use it.
Once the estate is settled, the cash will come to you. Now for those of you who feel financially well off, you can decline the inheritance leaving your portion to be divided up among the remaining heirs. But once you get it, you will feel the need to make the right decisions. Of course there is that overwhelming desire to splurge.
Spending the money of something foolish is your right. It is, after all, your money. But you will find regret at the end of that road. The first thing you need to do is put it away until you can make some decisions about it. A money market account or a certificate of deposit is the best short-term parking place for the money until you assemble your wits.
There are federal, state, and local tax considerations. While the estate will take off the taxes when everything is settled the 2006 ceiling is $2,000,000 and will rise to $3,5 million by 2010, you need to be sure that the money you received is not a taxable amount in the state or locale where you live. Check with your tax preparer. If you don't have one, ask a friend if they know of a good certified public accountant. Word of mouth is by far the best way to find one of these professionals. Take your time. The money, safely tucked away, will still be there when you make your decision.
The next thing you need to do is make a plan. Far too many of us have yet to make a plan for our current income let alone an inheritance. Now is the time to decide what you ant to achieve with the money.
The temptation to pay off the mortgage might be overwhelming. Instead, the best thing to do would be to use some of the money to improve your mortgage. If you have a mortgage with adjustable terms or creative financing, use some of the money to buy a better loan with a more traditional, fixed payment that can be easily budgeted. Homes still provide a good tax incentive for current income and unless the inheritance is extremely large, you will, in all likelihood, still need your day job. Three Things to Avoid
Ask yourself: Do I want to pay for the kid's college? Have I done enough to finance my retirement? Do I want to protect the money, invest it wisely, so I can leave some of it to my children and estate?
In the case of college, there are basically two ways to invest, pre-paid tuition or through a 529 plan. Those 529 plans however have a $200,000 maximum contribution level but the interest can continue to grow. The earnings are subject to federal tax in these plans if the child does not use the money for college.
In far too many instances, we are finding our retirement under-funded. In fact, the Employee Benefits Research Institute found that among those they surveyed recently, that only 44% have a $100,000 put away. Unless there is another source of guaranteed income, that amount of savings will not be enough to go the distance.
Putting it away for retirement is probably the best way to protect it for a future inheritance.
It is, right now, not a very favorable climate for your estate. Increasingly, as entitlement programs are whittled away, your tangible assets may be needed to cover a lengthy lifetime and any long-term care issues you may have. Putting the money away as an income source is the best way to protect your wealth. Whether you spend it all is your business. Having it there in case, is vitally important.
Here is a brief list of the three things you want to do with your sudden wealth:
Put the money in a safe place Let your emotions run their course. That money is yours and yours alone. It can be used as you see fit. Keep in mind, that once it is gone, it is gone for good. If you feel the need to splurge, go ahead but try to keep the spending spree at 20% of the total or less.
Invest it conservatively and using dollar cost averaging Allow your money market account to fund your retirement goals on a monthly basis. Use a total market index fund or an S&P 500 index fund to invest for your retirement but do it in a Roth IRA. A Roth IRA is different from a traditional IRA in that the money you deposit is yours for withdrawal without penalty. Only the earnings get taxed. But donıt rest on your laurels. Continue to fund your own 401(k) plan at work. Here is a list of three things to avoid:
Financial planners Unless you have a clear vision of where you are headed and how you would like to arrive financially, a planner/advisor/broker can't help. They will aid in the decision making process and be sure to use only a fee based professional but the soul searching is all yours. By taking time to think about your options, you will do yourself a service that far exceeds what a planner could do for you.
Avoid the stock market, bonds, or annuities If you are unsure how these markets work, educate yourself. But the best option remains in conservatism. Using a total stock market index fund or a balanced mutual fund (one that has a diverse blend of stocks and bonds) purchased by you from a major mutual fund company such as Vanguard or Fidelity is the best option hands down. Investing in stocks is not the best option for the majority of people. Unless you desperately need a steady income, avoid annuitizing your inheritance. It is just not worth the costs.
A couple of final notes on the subject: If you win the lottery, get yourself a tax attorney first. They can help guide you the best. All of the above information can be used for large insurance settlements as well or for the windfall that may come from the sale of a home.
And remember, that inheritance came by way of a will. This forward thinking legal document assures you that your possessions will go to the people that you want to own them. Revisit your will every five years or so unless you have a serious change in your financial status. As your children age, you may want to reassign executor-ship or the percentages that divide your estate.
In many states, the estate passes on to the surviving spouse. My wife and I reassess our will each time we travel together overseas.
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