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Ask any credible and seasoned financial adviser, "How long will an inheritance last?" and you will get similar answers, ranging from abouttwo to four years. Yes, you read that correctly, and there are numerous studies to back it up.
Whether a person inherits $5,000, $50,000, or $500,000, most of that inheritance will be completely wiped out within a few years.
Why?
Typically,when one inherits money, a few things flow almost like clockwork.The person pays off debts (credit card, home, etc.); buys a NEW car (research shows within 19 days of receiving an inheritance a beneficiary will purchase a new car); goes on an expensive vacation, and remodels the kitchen, bathroom, etc.
Not that one shouldn’t do these things, but it's just part of the reason an inheritance goes fast. From there, the spending spree(s) can start: nicer clothes, a new watch, an "investment" tip from a brother-in-law or friend that goes south, and, voilà, one looks up a few years from the inheritance holding a bag — an empty one.
A few years ago, a co-worker of my wife Courtney inquired about my financial planning services. I met with her and her husband, a young couple in their 20s, and felt we had a lot in common and that we would work well together. On one of our visits, I noticed a tattoo on her husband’s wrist. He didn’t strike me as the tattoo type, and I didn’t notice any others, so I inquired about it.
He said the tattoo was the name of his brother. Along with his family, they were sitting still in traffic many years ago when another vehicle slammed into them on Interstate 35 going 75 mph. His brother, who was 10 years old at the time, was killed in the accident.
A legal settlement was ultimately awarded the family, and with the money (and the associated grief and trauma of losing a child), his parents spent the money as if it would never run out. Fast forward many years, and that’s what happened. In the novel The Sun Also Rises, Hemingway summed up perfectly on how one goes bankrupt — “Two ways. Gradually, then suddenly.”
Whether good or bad, money can create some painful lessons. It’s one thing to make (or have) money, and it’s another to keep it. Money can be both a blessing and a curse. Ronald Reagan said, “Money gives you options.”
Money can buy a new mattress for a parent with a sore back,pay for the funeral of a child, pay off the mortgage for an ailing parent, help pay for a grandchild’s wedding, take a trip that mirrored a honeymoon (60 years ago), buy a car for a long-term housekeeper who was struggling financially, or afford you the opportunity to give $100 a day for 10 days to random strangers who looked like they could use some help. All of these things various clients of mine actually did in 2023. It’s amazing what money in the right hands can do, and amazing how fast it can be spent if not managed prudently.
A common denominator in “sudden wealth” that ultimately vanishes is that almost none of these folks had a seasoned adviser they really trusted. For as long as I’ve had my website — almost 20 years — I have had on there a quote by Ralph Waldo Emerson: “When you have it [a great fortune], it requires 10 times as much skill to keep it.”
So, how does one minimize the inheritance going so fast? It's actually a very simple answer:work with a seasoned financial adviser.
Over the years, I have had multiple siblings inherit money. A few years ago, I knew three people — all siblings — who inherited more than $1 million after both parents had passed. I met with each of them separately and two became clients.
The other decided to do it on his own.
Long story short, my two clients, while having spent some of the inheritance, basically have what they started with. I was recently informed the do-it-yourselfer was potentially having his home foreclosed on and was “completely out of money.”
A common denominator of those running out of money is the lack of a competent financial adviser.
The captain of the Exxon Valdez, in his high school yearbook, had a quote, "It won't happen to me." Pretty much every inheritor thinks the same, but it does happen, and unfortunately, happen often. This often compounds a problem, as now the person not only has money worries, but also a feeling of guilt that often accompanies it — “How did I burn through all of Mom and Dad's inheritance already?"
Working with a credible financial adviser can provide guidance on prudent money decisions and making them in the most tax efficient manner.
John Loyd, CFP®, MBA, EA is founder of The Wealth Planner™. For over two decades he has been providing wealth management advice to small business owners and high-income professionals. Contact him at [emailprotected]. Securities & Advisory Services offered through LPL Financial, a Registered Investment Advisor. MemberFINRA/SIPC. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
