Australians are set to inherit huge amounts of money. Here’s what to do with it
By Frances Howe
Wealth is set to rain down on Australians in the next decades as the pool of inherited cash accumulated by older generations is passed down.
The Productivity Commission notes $1.5 trillion was inherited between 2002 and 2021, and advisers say that for generations of Australians, managing inheritance will be a significant aspect of overall wealth management. But it won’t be as simple as buying a bunch of stocks in a couple of tech start-ups and waiting for the money to multiply.
Australians are set to inherit a huge pool of money in the next 20 years.Credit: Getty Images
Put the money in a high-interest account and wait
The worst thing you could possibly do after inheriting any amount of cash is to spend it quickly.
Dawn Thomas, a Perth-based financial adviser, says that often people feel an urgency to decide about what to do with money they inherit, and are often under the impression that not doing something is wasting it.
“Sometimes people feel that they have to make a decision really quickly when they receive an inheritance, but it’s OK for funds to stay in a bank account, in a high-interest bank account for 12 months to two years while you make up your mind,” she says.
“You would expect there’s some sort of emotion there as well because someone’s lost someone that they’ve loved, and that [might] not be the best scenario for you to actually be making financial decisions. Sometimes, time is your best friend in being able to actually understand what you want.”
Identify what you want and what you can live without
Though it seems obvious, Thomas says writing down your goals is an important first step when inheriting a large sum of money. The exercise carves out time to consider how satisfied you are in various parts of your life and size up how important each is to you.
“Do you like working where you are? Do you want money to change the trajectory of your career? Is it something you want to give to your kids?” she says.
Gold Coast-based financial adviser David Currie agrees, saying identifying what his clients want in life, beyond buying a sports car or taking a luxury holiday, is the first step in planning.
“We think about what their goals are. We think about do they need an emergency fund, do they have some bad debts that they need to get rid of? So then we tackle the hierarchy of bad debts. We look at emergency savings plans, and then once we’ve done that, we look at [if they are] family planning,” Currie says.
He says seeking advice from a financial adviser is useful, but it depends on the size of the inheritance. He suggests that more than $30,000 to $50,000 would justify professional advice.
Should you build an investment portfolio?
Although there may be a temptation to use newly inherited money to build an investment portfolio, it’s worth considering what else you should spend the money on and your capacity for risk.
“We talk a lot about risks as well, we talk about, yes, you’ve come into a lot of money, but we also don’t want to lose it. If your goal is capital preservation and growth, we always have to be diversified in our approach to investing that money,” Currie says.
“Their goal might be to grow a portfolio, it could be to pay off their mortgage, or it might be to buy an investment property. Or it could actually be a combination of all these things, and we need to figure out which one to do first – and that’s where strategic advice is really important.”
Thomas says inheriting a large sum of money doesn’t change your existing financial habits: “Gaining a lot more money is not going to change your financial outcome if your money management habits are poor,” she says. “You have to be really honest with yourself about how you’ve managed your money so far.”
There’s life before death
As a generation of parents lives longer and holds the largest pool of inheritance in Australian history, it’s becoming increasingly common for the bearers of those gifts to bestow them early. Leveraging a financial gift earlier than expected can be hugely beneficial for long-term growth, though often parents wait until they trust they will see the benefits of the money changing hands while they are still alive.
“Your parents don’t like seeing you go on holidays and then saying you don’t have any money,” Thomas says with a laugh. “I think they sometimes do get nervous. If you think about risk appetite in retirement, they probably have a lower risk appetite than someone who’s younger and goes, ‘I’ve got all this time.’”
Likewise, she says parents aren’t frequently thrilled about giving money to go straight into their children’s investment portfolio. Instead, she suggests talking to parents about gifting money for things such as private school fees for their grandchildren to free up cash to put towards building that portfolio.
“If you don’t have to pay for that schooling for your child, then that money can be diverted into setting up your own investments,” she says.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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clarification
An earlier version of this story included figures from UBS, which have been removed.