“What you do with your inheritance money all depends on your individual financial commitments and future goals,” says Wilfred Moyo, Investment and Economic Strategist at Metropolitan.
Moyo outlines some scenarios of people at different life stages and advises how they could best spend an inheritance of R1 million.
The young professional
Dali is a young, unmarried, working professional. He has moderate debt - monthly vehicle instalments, retail clothing accounts and a furniture account.
“The first thing Dali should focus on is settling all outstanding debt,” says Moyo. “Start by repaying the most ‘expensive’ debt first, meaning the debt with the highest interest payable. For example, retail credit accounts often have higher interest rates than interest paid when financing a vehicle through a bank.”
Secondly, Moyo states that, as a young person, Dali must start saving for retirement early. “The sooner he starts investing towards retirement, the more he will benefit from the compounding effect over time. A retirement annuity (RA) is one option as it allows him to make regular or lump sum contributions until the age of 55. An RA also offers a tax advantage when compared to other forms of investment vehicles.”
Another good idea, suggests Moyo, is to use some of the money to pay a deposit on an investment property or starter home. “He will have built up equity in this property and would have acquired an asset.”
The middle-aged couple
Jeff and Sandy are a middle-aged couple who are both working full time. They have two children and have moderate to high debt levels – they are paying off a bond on their house and have other debt such as vehicle instalments and retail clothing accounts, among others.
“They are a little closer to retirement so they should consider topping up their retirement savings,” says Moyo. “Even though they belong to their employers’ retirement scheme, it’s wise to try to get a retirement annuity as well to cover the possible financial shortfall at retirement.”
Moreover, Moyo notes that as parents, Jeff and Sandy should invest in their children’s education. “It is important to start saving for high school and tertiary education while their children are still young. If they start saving early, they are more likely to reach their medium to long-term savings goals due to the compounding effect over time. Lastly, it’s best to build up an emergency fund of at least three months’ salary for rainy days.”
The couple nearing retirement
Mr and Mrs Khumalo are still working but are nearing retirement age. They have two children at university. For an older couple, they have moderate debt levels.
Moyo’s suggestion to the Khumalos would be that they should boost their retirement savings in order to maintain their standard of living in retirement. “They should aim to have a monthly retirement income of at least 75% of their last salary before retirement. They should also try to settle all their debt so they can retire debt-free. However, if this is not possible, they should at least settle the debt with the higher interest payable first.”
Lastly, says Moyo, the Khumalos should invest in a retirement home if they do not already own property.
In conclusion
Moyo points out that the suggestions set out in these scenarios should not be taken as “cookie-cutter” solutions for everybody. “Everyone’s situation is completely unique – my overarching advice would be to discuss your unique situation with a qualified financial adviser who can best guide you based on your individual circumstances.”
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