Can I retire after a $200,000 inheritance?

Getting a good chunk of change from an inheritance is a fun way to boost your retirement savings. But whether it will be enough to live on when you retire is a very personal question. If you’ve received about $200,000 and are wondering if your windfall will put you in the “I’m ready” category for retirement, you may need to check your math first. There are a number of strategies you can use to get yourself there too. These include investing, working with a financial advisor, maximizing your other retirement plans, and more. If you have questions about your retirement planning, consider working with a financial advisor.

What to do with your $200,000 inheritance

If you are lucky enough to have received an inheritance from a loved one, there are many things you can do with it. If you’re hoping to stretch it far enough, you’ll want to avoid spending it. Instead you can:

These options are not mutually exclusive and chances are you can pursue a combination of these strategies. Below are some key examples of what you can do with your money when you want to retire.

Investing in the stock market

If you want to see a serious long-term return on your inheritance and you don’t mind short-term risk, you should invest in the stock market. If you plan to invest yourself, you can do so through an online brokerage. This allows you to choose the securities in which you want to invest.

So what kind of returns can you expect? The average return on investing in the stock market is 10%. But since the market fluctuates much more than savings account APYs, you can experience both extreme growth and massive loss. Let’s be careful with our estimates.

Suppose you are 45 and plan to retire in 20 years. If you were to take your entire $200,000 and put it into an online brokerage, here’s what you’ll get in return with no additional contributions and a 4% return:

  • 1 year: $8,000

  • 10 years: $96,049

  • 20 years: $238,224

As you can see, investing in the stock market has more than doubled your original investment. When it comes time to cash out, you’ll have a total of $438,224.

Keep in mind that this method is on the lower end of the average. If, after 20 years of investing, you somehow achieved an average annual return of 10%, you could pay out $1,345,500. That’s more than sixfold your original $200,000 investment.

Please note that these figures are from earnings only and do not account for fees or other contributions you make to your account.

Work with a financial advisor

Not sure you can manage your own investments? Find a financial advisor in your area and let them take the wheel. Typically, an advisor only charges about 1% of your account value annually to manage your investments. And while it’s hard to pinpoint exactly how much added value an advisor can provide, research suggests you could earn an additional 1.5% to 4% annual investment return. Many advisors also offer financial planning services.

If you don’t want to work with a financial advisor, you can invest with a robo-advisor instead. They tend to be slightly cheaper, but you don’t get hands-on treatment and your money will likely be invested in a model portfolio based on your risk tolerance.

Maximize your retirement plans

Whether you have a 401(k) plan through work or an IRA you opened with a brokerage, it may be worth contributing to both, especially since you have the extra money to max them both out. utilize. For 2021, the pension plan contribution limits are:

  • 401(k) Contribution Limit (Traditional and Roth): $19,500

  • 401(k) catch-up contribution limit (more than 50): $6,500

  • IRA Contribution Limit (Traditional and Roth): $6,000

  • IRA catch-up contribution limit (over 50): $1,000

If you’re 50 and older, you can contribute more than $33,000 a year to both your work-sponsored retirement plan and your IRA. It would take you six years to max out your contributions with your $200,000 before you ran out of money to contribute.

The growth of your retirement accounts can vary based on your age, when you plan to retire, and the type of investor you are. But you can expect an average return of 5% to 8%, depending on market conditions. This is similar to your regular investment accounts.

Open a High Yield Savings Account

Maybe you don’t have the courage to put all your money in the stock market. And even if you do, some of your money should still be in cash. While the savings rate is currently low due to the COVID-19 pandemic, the best high-yield savings accounts in recent years offer around 2% annual return (APY). If you go this route, you can earn the following in interest only with no other contributions:

  • First year: $4,000

  • 10 years: $43,798

  • 20 years: $97,189

So if you’re 45 and plan to retire in 20 years, you’ve made almost $100,000 more in your inheritance through a high-interest account. However, keep in mind that APYs can go up or down and the lender you choose for your account may have different account minimums and fees. And also remember that inflation lowers part of the value of your savings interest.

It boils down

If you recently received an inheritance of $200,000, there is a chance that you can only retire with that money. It depends on how you invest it, what type of investor you are and when you plan to retire. The more aggressive you are, the more likely you are to earn higher returns, but that also means a higher level of risk in your portfolio. Also remember that the longer you retire, the longer your money will remain in the market with the potential to grow.

Retirement planning tips

  • Getting a sizable inheritance is nice, but if you’re not sure what to do with it, it’s a good idea to get the insights of a financial advisor. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisors for free to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Planning for your retirement can be difficult to do alone. Use SmartAsset’s retirement calculator to get an idea of ​​your chances of reaching your goals.

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