If you are fortunate enough to receive an inheritance, buy a bottle of something nice and toast your benefactor. After that, initiate a cooling-off period before you start spending. A new car, vacation or kitchen renovation may be in your future, but make sure you carefully assess your financial picture and retirement planning goals so you can maximize the inheritance for your long-term financial security. A Lund university study suggests that an average inheritance is gone within five years as a result of financial mismanagement.¹ Instead, heirs should consider paying down debt, investing, or purchasing real property.

The first thing you should do is develop a well thought out plan. I find that this is a step that most people skip. Working with an experienced financial advisor can help you sort out your priorities. When I’m helping a client plan for their future it’s important to have a deep understanding of how much their desired lifestyle costs. Are you a home body with pretty simple interests? Or do you have expensive hobbies like boating? Dreams of international travel? Cars and ATVs? Your interests matter, so it’s important that your plan accounts for spending money on the things you like. After we’ve zeroed in on what you like, a good financial plan wouldn’t be complete without taking into account other factors like taxes, health care costs, and inflation.

Now that you’ve developed goals for the long-term, it’s time to look seriously at your goals in the short-term. Want to pay down debt? Home improvement? Want to upgrade to a better house? The list goes on. Does spending money on these things jeopardize your ability to achieve your long-term dreams? That’s an important question that I think often doesn’t get answered. Paying off your mortgage is great, but what is the opportunity cost of spending $250,000 to wipe out a 3.75% loan that gives you a substantial tax credit each year? Additionally, when someone understands the big picture they can decide which is more important to them? Retiring a little earlier or having a new $60,000 truck? Maybe you can do both, but don’t take these decisions lightly, they demand your careful attention.

Assess your retirement contributions. Make sure to contribute the maximum allowable amount to retirement accounts for the year. The amounts may be small compared to your overall inheritance, but retirement plans come with tax benefits that you’ll want to capture. With an employee-sponsored plan like a 401(k), you are limited to contributing from your salary, so increase your contributions to the limit, or even up to the amount where your employer will provide a matching contribution. You can also contribute up to $5,500 for yourself and another $5,500 for your spouse, if married, into a tax-deferred IRA account.

I could go on, but here’s the bottom line.

Some of the richest families in the world, have had their vast fortunes squandered by future generations. Benefactors and heirs of lesser fortunes would do well to learn from their mistakes and those of other families with similar stories. A little planning, care and common sense can go a long way toward taking care of not only the second generation but perhaps the third, and fourth generations as well.

1)The Effect of Unexpected Inheritances on Wealth Accumulation: Precautionary Savings or Liquidity Constraints?, pg. 13.