Australians are on the cusp of receiving a colossal financial boost, with a staggering amount of money set to be inherited over the next two decades. However, a significant pitfall awaits many recipients, a common mistake that could diminish the true value of this generational wealth transfer.
Research conducted in 2024 by JBWere paints a compelling picture: Australians are projected to inherit over $5.4 trillion in the coming 20 years. While the sheer scale of this figure is remarkable, financial experts caution that the amount itself is less important than how it’s managed.
Pete Brewster, a financial planner at Bridges Financial Services, highlights a pervasive issue: “Regardless of how much money is inherited, many Australians still make the same common mistake.” This mistake, he explains, is a failure to pause and strategically assess the inheritance. “Recipients act too quickly and don’t take the time to understand how it could benefit them both now and in the future,” Brewster states.
Beyond the immediate temptation to spend, another frequent misstep is simply holding the inherited funds in cash. This approach, while seemingly safe, can paradoxically erode the value of the financial windfall. With current interest rates on savings accounts typically lagging behind inflation, leaving money idle in a transaction account means it is effectively losing purchasing power over time.
“People are really hesitant to dig their toe in and make some big decisions because they haven’t got all the information and life can be uncertain,” Brewster observes. He reassures inheritors that “There’s no rush to make big decisions. They can certainly have some fun with it, but they could also consider how it benefits them in the future.”
Navigating a Financial Windfall
Brewster outlines several crucial decision points that can help individuals sidestep costly errors when receiving an inheritance. He stresses that there isn’t a one-size-fits-all solution, as the optimal strategy is deeply personal.
“Windfalls only come around every so often and it is human nature to feel the need to pop it in the balance, know it is there and see the balance,” he acknowledges. However, the circumstances of a 30-year-old with a mortgage will differ vastly from a 55-year-old nearing retirement. Individual income levels and existing investment portfolios further complicate the picture.
Managing Smaller Inheritances ($10,000 – $50,000)
For those receiving amounts between $10,000 and $50,000, Brewster’s primary recommendation is to focus on immediate financial relief. This could involve:
- Paying down high-interest debt: Eliminating credit card debt or personal loans with steep interest rates can provide significant long-term savings.
- Building an emergency buffer: Establishing or bolstering an emergency fund can free up future cash flow and reduce financial stress.
- Boosting superannuation: Even a small weekly contribution, such as $100, into your superannuation fund can yield substantial tax benefits for employed individuals.
Brewster also emphasizes the impact of individual goals on how this money is best utilised. For younger individuals, a $50,000 inheritance could provide much-needed breathing room. This might translate to:
- Placing funds into an offset account linked to a mortgage to reduce interest payments.
- Facilitating major life decisions, such as pursuing further education or making a career change.
“Career wise, do you want to change fields? Or do you just want to reduce stress for a rainy day? So it is important to reflect on what you want to do with (the money) and seek some financial advice as well,” Brewster advises.
For older, more established clients, even a similar sum can be life-changing, potentially enabling them to assist the next generation.
Strategic Approaches for Medium to Large Inheritances
Brewster suggests that inheriting a “medium-sized balance” of up to $120,000 necessitates a more strategic and potentially phased approach to mitigate risk. His advice includes:
- Utilising offset accounts: Temporarily parking funds in an offset account provides a safe haven while clearer plans are formulated.
- Gradual investment: Subsequently, amounts can be progressively moved into superannuation or diversified investment portfolios.
Inheritances exceeding $120,000 can genuinely be life-altering, potentially influencing significant decisions concerning housing, employment, and retirement. Brewster’s guidance for these larger sums includes:
- Transforming lump sums into income streams: Converting a large inheritance into a steady stream of income or ensuring long-term financial security, rather than leaving it idle.
- Managing family expectations: For older Australians, particularly those inheriting substantial amounts, it’s crucial to manage expectations regarding financial support for children or family members without compromising their own financial stability.
- Reviewing estate and succession planning: If the inheritance significantly alters an individual’s financial standing, it becomes imperative to review existing estate and succession plans to ensure they remain appropriate and effective.
