Most of the questions I receive are from readers in their twenties and thirties. Many of them are just starting out in life. But money issues nag everyone. Donald wrote the other day with the sort of question most of us have not yet faced. He’s getting near retirement, but doesn’t have much saved. He just inherited a bunch of money, and he wants advice about what he should do with it.

I am 55 and my wife is 57. We have been married 30 years. I make about $55,000 a year. My job is high stress but secure. We are not spendthrifts really, but to date we have not done a good job of saving for retirement. 

We recently got an inheritance of $175,000. An earlier inheritance was wisely invested in a down payment when the housing market was very low, and now are in a home worth about $275,000 on which we owe $120,000.  We have about $20,000 in credit card debt at a interest rate of about 6%. We also have a car loan that is nearly paid (six months to go) off, but it’s at 0.5%. Lastly, we have the afore-mentioned mortgage and second at a higher rate of about 7.5%.
 
We have a retirement plan at work, but I have only been there five years and we have only contributed the minimum so at this point, it will not yield much at when we retire. At this point in our lives, what should we do? We want to get on track and do what we can to secure our retirement.

First, I’d like to point out a very real option for Donald to consider, one that cuts through a bunch of complications and makes everything simple. I think it’s perfectly acceptable to take that $175,000 and place it in an investment account specifically designated for retirement. Put all the money there and don’t touch it. Don’t use it for a boat, don’t use it to pay down the mortgage, don’t use it for anything but retirement. Forget the money even exists.

Obviously, that probably won’t yield optimal results, but it might provide Donald with the best compromise between saving for the future and avoiding the temptation to spend.

What is optimal? It’s hard to say, but if I had inherited this money, here’s what I would do:

  • Pay off the $20,000 in credit card debt.
  • Continue to pay the last six months on the car.
  • Consider retiring the second mortgage (depending on the balance).
  • Take 1%-2% of the inheritance (about $1,500-$3,000) and use it for a family treat. (I call this the “one-percent windfall rule”.)
  • Temporarily put the remaining money into a high-yield savings account. Leave it there untouched for several months. This is probably the most important step to handling any windfall — you want to move slowly and allow the emotions to pass.
  • Get professional help. Hire a financial planner or find an accountant.

If I were in this position, I’d also be tempted to just pay off the mortgage and be done with it. (I’m torn over whether it’s best to prepay a mortgage — I think it depends on your goals and your risk tolerance.)

Really, though, I think the most important things for Donald to do are: park the money someplace for several months (or even several years) and obtain professional advice.

What would you do in a situation like this? For older readers, have you been through a similar situation in the past? How did you handle it? For younger readers, have your parents or other family members had to make these sorts of choices? What did they learn from the experience?

This article is about Ask the Readers, Choices, Planning  Friday, 29th August 2008 (by J.D. Roth)