We’re set to inherit $500,000, what should we do with it?

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My husband and I are in our mid-30s, with a baby due in the coming months. We own a modest home that we purchased two years ago. We have a $400,000 mortgage and no other debts. This year, we are set to inherit $500,000. We both work in highly casualised, precarious industries. I’m not eligible for maternity leave. We aren’t certain how to best use the inheritance. Our fixed low-rate mortgage has 12 months left. Should we pay off the mortgage and invest the rest? Our home is old, and needs renovations and repairs.

Thanks for your question, you’ve certainly got some challenging issues to deal with, but it’s also an exciting time with the new baby on the way. In my experience there’s often also some emotional baggage that comes with an inheritance which can add to the challenge of deciding the best course of action.

It can be confusing to know what to do when you receive a generous inheritanceCredit: Simon Letch

Owning your home mortgage free would put you in a great position and remove considerable financial stress. Crunch the numbers to be sure, but probably the best approach would be to let the fixed rate term run its course, and set aside the funds required to clear this debt in a term deposit. This is because current term deposits rates are higher than your fixed mortgage rate. Be sure to allow for tax payable on the interest on the term deposit.

That leaves $100,000. You mentioned the home needs renovations and repairs, so perhaps this is where those funds could be spent. You could also use some of this money as a form of maternity leave payment, drawing down a set amount each week in lieu of a wage.

Whilst perhaps not top of the priority list right now, give some thought to how you might boost your superannuation savings in the coming years. With no mortgage or rent to be paid, you could make regular contributions to superannuation to ensure that later in life you are financially secure.

My parents (both aged 62) have recently retired. They have sold the family business (diesel mechanic) and swapped the spanner with the map and are planning caravan trips, but are worried about running out of retirement funds. They are risk-adverse people wanting a visible, simple and easy to understand financial set-up. They have $1 million in cash from the business sale, $400,000 in super, and own their home. Ideally, they want to draw $1500 per week living expenses whilst not running down their principle too soon.

Congratulations to your parents on successfully building and selling a business, a great achievement. And now they get to enjoy the fruits of all that hard work.

Given the financial assets available, the level of income required, and the very reasonable requirement that they don’t burn through their money too quickly, it appears they need to earn somewhere around 6 per cent per year. That’s quite likely to be achievable, but clearly it won’t happen with the majority of their savings sitting in the bank.

Their solution likely lies in some combination of account-based pension and annuity. I’d imagine some of the cash currently in the bank would be added to superannuation to create a flexible tax effective income stream via an account-based pension. An annuity would complement this, providing a predictable and stable level of income.

Encourage your parents to meet with a financial planner. Given the sums involved here and the long-term impact of decisions to be made, obtaining professional assistance would be an excellent investment.

Paul Benson is a Certified Financial Planner, and host of the Financial Autonomy podcast. Send your questions to: [email protected]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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