How to Invest a Large Inheritance


Investing an inheritance is different from investing income from work or sale of a house.  Some individual in your life has made a very generous gift to you in an effort to make your life better.  There is therefore a sacred trust that goes along with the money.

One would therefore like to use the money wisely.  One would like to preserve it such that the money can last.  Ideally the principle would remain and just the interest used to aid with expenses and purchases.  Given a large enough inheritance and prudent management, the money can last and benefit not just the primary beneficiary but heirs for generations to come.  For example, the money could be set up as a trust fund that pays for members of the family to attend college or buy their first homes.  Managed correctly, a substantial inheritance can last generations.  Managed poorly, it will not last out a decade.

If one is fortunate enough to receive such a gift, here are the steps to follow to make the money last:

1.  Never spend principle, only interest.  As long as the principle is never touched the amount will not decrease.  In general one can expect to withdraw about 8% each year without affecting the value of the account.  For example, if one receives $1 Million, one should expect to receive an income of up to $80,000 per year.  This assumes that the account is invested in stocks, which earn an average of 10-15% per year.  After withdrawing 8%, the remaining gain is used to battle the effect of inflation.

Another strategy, if one does not depend on the income, would be to withdraw nothing on years where the return is 10% or less and withdraw the total return minus 5% on years when the return exceeds 10%.  In this way money is only withdrawn when the return on the account is more than enough to make up for the withdrawals.

2.  Diversify.  The secret to preserving wealth is diversification.  By spreading money out into different types of investments, decreases in one type of investment will be offset be increases in another.  A smaller account (less than $500,000) should include stocks in several different sectors of the market including international stocks.   For example, buy index funds that include large caps, small caps, international stocks, bonds, and income producing stocks (think utilities).  Larger accounts should include some real estate as well, either directly or through the ownership of REITs.  One possibility would be to pay cash for a vacation house that is rented out most of the year.

3.  Invest in ways that beat inflation.  As mentioned in the first step, investment in common stocks and other inflation beating vehicles is needed.  Left in a money market account the funds will wither and decline with time.  Investments in hard assets such as gold will preserve the wealth but will not outpace inflation.  If you are planning to leave your wealth to your descendants five generations down the line with no one to care for the money, gold might be the answer.  Otherwise, stocks and real estate will do better.

With principle preservation, diversification, and investments that beat inflation, that inheritance can last your whole life and for many generations to come.

Please leave a comment or email  vtsioriginal@yahoo.com.  We’d love to hear from you.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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