What If You Get a Big Inheritance? How to Think About Windfalls

Your parents are in their 80s and reasonably well-off. You've never asked about their finances (because who does that?), but you suspect there might be something there when the time comes. Should you factor that into your retirement planning?

Here's the short answer: kind of, but not really.

Whether it's an expected inheritance, a possible stock windfall, or even a distant relative who mentioned you in passing conversations, windfall money occupies a strange space in retirement planning. It's real enough to think about, but uncertain enough that you can't build your future on it. Let's talk about how to handle this psychological and financial tightrope walk.

Let's start with some uncomfortable math. Studies show that people consistently overestimate inheritance amounts by significant margins. That $500,000 estate you're picturing? Here's what typically happens:

• Healthcare costs devour savings: The average couple needs $315,000 for healthcare in retirement (Fidelity, 2024). Long-term care can cost $100,000+ annually.
• Your parents might live longer: A 65-year-old today has a 50% chance of living past 85, and a 25% chance of reaching 90. That's potentially 25+ years of spending.
• Family dynamics shift: Remarriages, new grandchildren, charitable giving, or sibling needs can reshape estate plans.
• The estate gets divided: That $500,000 split three ways becomes $166,000 per person, minus estate settlement costs.

Beyond the numbers, there's another reason to be cautious: building your retirement plan around someone else's money creates a perverse incentive structure. You're essentially hoping your parents don't live too long or spend too much, which is a terrible emotional space to occupy.

Here's the smarter way to think about potential windfalls: create two parallel retirement plans.

Your Base Plan (Plan A): This assumes zero inheritance or windfall money. It's built entirely on what you control: your savings, your 401(k), your IRA contributions, your Social Security benefits. This plan needs to work on its own. If you'd have to work until 68 to make the numbers work without any inheritance, then that's your real plan.

Your Opportunity Plan (Plan B): This models what happens if you receive the windfall. Maybe you could retire at 65 instead of 68. Perhaps you could afford that lake house. Or you might simply have a much larger safety cushion for healthcare costs. This is your 'what if' scenario, and it serves an important purpose: it helps you make smart decisions quickly if the money actually arrives.

The key insight? Plan A is your commitment. Plan B is your daydream with a spreadsheet. You save and invest according to Plan A. You might casually model Plan B once a year to stay prepared, but you never let it influence your actual financial decisions today.

Let's say it happens. You receive an inheritance, an unexpected bonus, a legal settlement, or your company stock option pays off. You've got $200,000 sitting in your checking account. Now what?

First: Do almost nothing for six months. Move the money somewhere safe (a high-yield savings account or money market fund), take a breath, and let the emotional dust settle. Grief, excitement, guilt, and relief are all normal feelings around windfall money, and none of them produce great financial decisions.

During those six months, here's what you should do:

• Understand the tax implications: Inheritances themselves aren't taxable as income (good news!), but inherited IRAs have Required Minimum Distribution rules. Inherited assets sold for gains trigger capital gains taxes. Consult a CPA before making moves.
• Pay off high-interest debt: Credit cards charging 20%+ interest? That's your first stop, no question.
• Don't tell everyone: Seriously. Windfall money attracts requests, advice, and suddenly everyone's a financial expert. Keep it quiet while you figure out your plan.
• Interview financial advisors: If the amount is substantial (over $100,000), consider hiring a fee-only financial planner. Look for CFP certification and fiduciary duty.

After your cooling-off period, here's a balanced approach to deploying unexpected money in your 50s or 60s:

The 50-30-20 Windfall Split:

50% to Retirement Security: Max out your IRA and 401(k) contributions (you can make up to $30,500 in 401(k) contributions if you're 50+ in 2024). Consider funding a taxable brokerage account with a simple three-fund portfolio. If you're behind on retirement savings, this money can compress 10 years of catching up into one moment.

30% to Lifestyle Enhancement: This is your permission slip to improve your life now. Home repairs you've been postponing? That's legitimate. A meaningful trip? Absolutely. The goal is to avoid both extremes: neither squandering everything nor living like nothing changed. You received this money, make some of it count now.

20% to Flexibility Fund: Keep this in accessible savings for the unexpected stuff: a new roof, a grandchild's education, helping an adult child, medical costs not covered by insurance. Life happens, and having liquid reserves means you won't derail your retirement plan when it does.

These percentages aren't magic, they're a starting framework. Your situation might call for 70% to retirement if you're seriously behind, or more to lifestyle if you're already on track. The point is to make an intentional choice across multiple goals rather than letting the money drift away or sit paralyzed in a checking account.

Inherited IRAs: The rules changed in 2020. Most non-spouse beneficiaries must empty inherited IRAs within 10 years. This creates tax planning opportunities (spread distributions across low-income years) and traps (don't wait until year 10 and take a massive taxable distribution). Work with a tax professional on this.

Inherited property: You get a 'step-up in basis' to the fair market value at death, which can eliminate capital gains taxes if you sell relatively soon. But also consider: do you want to be a landlord? Can siblings agree on timing and price? Sometimes the 'free' house costs more in family drama than it's worth.

Stock windfalls (RSUs, options, IPOs): These are often overconcentrated in one company. Your first move should be diversification, even if it means paying capital gains taxes. Too many people ride a single stock down after a windfall because they don't want to 'lose' money to taxes. You know what's worse than paying capital gains taxes? Watching your windfall evaporate.

Legal settlements or bonuses: These are typically taxable as ordinary income, so set aside 25-35% for taxes immediately. Don't spend money you'll owe to the IRS next April.

Here's something nobody talks about: expecting an inheritance can damage your relationship with your parents and your own financial independence. It creates a weird dynamic where you're simultaneously hoping they're careful with money (so there's something left) but also hoping they enjoy their retirement (which costs money).

Some healthier approaches:

• Have the conversation, maybe: Some families can discuss estate plans openly. Others can't. If your parents bring it up, listen. But don't push if they're private about finances.
• Focus on what you can control: Your savings rate, your career moves, your spending decisions. These determine 95% of your retirement outcome anyway.
• Consider the gift of time: Some parents prefer giving money while alive, watching their children benefit. If they offer help now (with a home down payment, grandchildren's education), that might be more valuable than waiting for an inheritance.
• Prepare for unequal distribution: Many estates don't split evenly. A sibling with special needs or financial struggles might receive more. Decide now if you're okay with that, because anger after the fact helps nobody.

Whether you're expecting a windfall or just thinking through possibilities, here's what you should do now:

This week: Run your retirement numbers assuming zero inheritance or windfall money. Does your plan still work? If not, what needs to change in your savings rate or retirement age? That's your real plan.

This month: If you want, create a simple 'what if' scenario. If you received $X, how would it change your retirement timeline or security? Write it down, then put it away. This becomes your decision framework if the money arrives.

Ongoing: Focus on what you control: maximizing your 401(k) match, increasing your savings rate by 1% annually, understanding your Social Security benefits, and managing investment costs. These boring, controllable factors will determine your retirement outcome far more than any windfall.

Remember, the best financial position is not needing the inheritance. If it comes, wonderful, it accelerates your plans or adds security. If it doesn't, you're still fine because you built a solid plan on what you control.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. fidser. is not a certified financial planner, and the content provided should not be considered a substitute for professional advice tailored to your individual circumstances. Inheritance and windfall planning involves complex tax considerations, legal requirements, and personal factors that vary by situation. Always consult with a qualified financial advisor, tax professional, or estate planning attorney before making significant financial decisions. Past financial outcomes are not indicative of future results.