I’m 58 and just inherited $400,000 – Should I invest it all at once or play it safe?

Meet Tom, a 58-year-old marketer who recently inherited $400,000 in cash and taxable brokerage assets. This inheritance has effectively doubled his net worth, as he already had around $400,000 saved in his retirement and investment accounts. While this windfall should feel like a financial blessing, Tom is filled with anxiety. With the stock market hovering near all-time highs, he’s afraid of investing the entire inheritance at once, worried about a potential market downturn. Tom wants to make smart decisions with this new wealth but isn’t sure where to begin.

Tom’s situation is a common one for those who inherit significant sums, especially in volatile markets. Here’s how Tom can take a thoughtful, strategic approach to managing his new inheritance, and what steps others should consider in similar situations.

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1. Don’t Rush—Take Time to Assess the Situation

The first step for Tom is to take a deep breath and avoid making any hasty decisions. Receiving a large inheritance can be overwhelming, but there’s no immediate need to act. It’s essential to step back and take a holistic view of his overall financial picture.

Tom should evaluate his current savings, retirement plans, future income needs, and any outstanding debt. This assessment will give him a clearer understanding of how the $400,000 fits into his long-term goals and whether he needs to adjust his retirement strategy.

Given the complexity of managing a large inheritance, Tom could benefit from working with a financial advisor who can help him develop a strategy tailored to his specific situation. Finding a fiduciary financial advisor is crucial to ensure that the advice he receives is in his best interest, rather than influenced by commissions or product sales.

2. Consider Dollar-Cost Averaging

Given Tom’s fear of investing the entire sum in a market near its all-time highs, one potential solution is to use dollar-cost averaging (DCA). This strategy involves investing smaller, equal amounts at regular intervals—such as monthly or quarterly—rather than putting all the money into the market at once.

While historically, investing the entire lump sum all at once as produced the highest returns, sy spreading out the investment over time, Tom can reduce the risk of investing a large sum just before a market drop. Dollar-cost averaging can help smooth out the impact of market volatility, allowing him to buy more shares when prices are lower and fewer shares when prices are higher. While this strategy doesn’t guarantee gains, it provides a more measured approach to entering the market.

3. Maintain a Balanced Asset Allocation

Tom should revisit his asset allocation to ensure it reflects his current financial situation, risk tolerance, and retirement timeline. Now that his net worth has doubled, his original allocation may no longer be suitable. Given his age, Tom may want to strike a balance between growth and preservation of capital by diversifying his investments across stocks, bonds, and possibly alternative assets like real estate or commodities. Again, a fiduciary financial advisor could really help Tom in this area.

Diversification is critical in protecting against market volatility. Tom doesn’t need to invest the entire $400,000 in the stock market. Instead, a well-balanced portfolio that includes less risky assets like bonds can help mitigate potential market downturns while still allowing for growth.

4. Consider Holding Some Cash in Reserve

Another option for Tom is to keep a portion of the $400,000 in cash or liquid assets for flexibility and peace of mind. Keeping a cash reserve could allow him to take advantage of future investment opportunities or cover unexpected expenses without needing to sell his investments during a market downturn. This could also serve as part of his emergency fund or a bridge to retirement.

That said, Tom should be cautious about keeping too much in cash, as inflation can erode its value over time. The key is to find a balance between liquidity and long-term growth.

5. Revisit Tax Implications

Because Tom inherited taxable brokerage assets, he should be mindful of potential tax implications when selling or reinvesting. Typically, when someone inherits assets like stocks, they benefit from a step-up in cost basis—meaning that the value of the assets is “stepped up” to their market value at the time of inheritance. This could significantly reduce Tom’s capital gains tax if he sells those assets now.

However, Tom should consult with a tax advisor to ensure he fully understands how capital gains, dividends, and interest income from his investments might affect his tax liability. This is especially important if he plans to sell any inherited securities or reinvest the cash.

What Would You Do If You Were Tom? Tell Us in the Comments!

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