How to Retire on a $200,000 Inheritance

Getting a hefty chunk of change from an inheritance is a nice way to boost your retirement savings. But is it enough to live off of when the time comes for you to retire? If you’ve received about $200,000 and you’re wondering if your windfall will put you in the “I’m set” category for retirement, you might need to check your math first. We’ll look at what to do with your inheritance, and how far it will take you in retirement.

What to do With Your $200,000 Inheritance

If you’re lucky enough to have received an inheritance from a loved one, there are many things you could do with it. If you’re hoping to stretch it far enough, you’ll want to avoid spending it. Instead, you could:

  • Find a financial advisor to manage your investments
  • Invest in the stock market yourself through an online brokerage
  • Put it in a high-yield savings account
  • Max out your retirement accounts

These options aren’t mutually exclusive, and there’s a good chance you can pursue a combination of these strategies. Here’s what your money could look like depending on what you choose.

Stock market investing

If you want to see serious, long-term returns on your inheritance, and you don’t mind a little short-term risk, you should be investing in the stock market. If you plan to take a do-it-yourself approach to invest, you could do so through an online brokerage. This lets you hand-pick the securities you want to invest in.

So what kind of returns can you expect? The average return rate on stock market investing is 10%. But since the market swings up and down much more than savings account APYs, you might experience both extreme growth and massive loss. Let’s be conservative with our estimates.

Say you’re 45 with plans to retire in 20 years. If you took your entire $200,000 and put it into an online brokerage, here’s what you’d get in return after no extra contributions and a 4% rate of return:

  • After 1 year: $8,000
  • After 10 years: $96,049
  • After 20 years: $238,224

As you can see, investing in the stock market more than doubled your original investment. When it comes time to cash out, you’ll have a total $438,224.

Keep in mind that this method is on the lower end of average. If you did somehow average 10% annual returns after 20 years of investing, you could cash out with $1,345,500. That’s your original $200,000 investment more than six-fold.

Note that these figures come from earnings alone and don’t account for fees or any other contributions you make to your account.

Work with a financial advisor

Not confident in your ability to manage your own investments? Find a financial advisor in your area and let them take the wheel. Typically an advisor will only charge around 1% of your account value annually to manage your investments. And while it’s hard to nail down exactly how much additional value an advisor can bring to the table, research suggests you could see additional annual investment returns ranging from 1.5% to 4%. Many advisors also offer financial planning services.

If you don’t want to work with a financial advisor, you could instead invest with a robo-advisor. They tend to be a little cheaper, but you won’t get hands-on treatment, and your money will likely be invested in a model portfolio according to your risk tolerance.

A high-yield savings account

Maybe you don’t have the stomach for stock market risk. And even if you do, some of your money should still be in cash. While savings rates are generally low, some high-yield savings accounts offer around a 2% annual percentage yield (APY). If you go this route, here’s what you could earn in interest alone with no other contributions:

  • In the first year, $4,000
  • After 10 years, $43,798
  • After 20 years, $97,189

So if you’re 45 and planning to retire in 20 years, you earned almost $100,000 extra dollars on your inheritance. But keep in mind that APYs can go up or down and the lender you choose for your account might have different account minimums and fees. And also consider that inflation will cut into some of the value of your savings interest.

Max out your retirement plans

Whether you have a 401(k) plan through work or an IRA you opened at a brokerage, it might be worth contributing to both, especially since you have the extra cash to max them both out. For 2020, retirement plan contribution limits are:

  • 401(k) limit: $19,500
  • Catch-up contribution: $6,500
  • IRA limit (traditional and Roth): $6,000
  • IRA catch-up contribution: $1,000

If you’re 50 years of age and older, you could contribute upwards of $33,000 a year to both your work-sponsored retirement plan and your IRA. It would take you six years of maxing out your contributions with your $200,000 before you ran out of money to contribute.

The growth on your retirement accounts can vary based on your age, when you plan to retire and the type of investor you are. But you can expect an average return rate of 5% to 8%, based on market conditions. This is on par with your regular investment accounts.

Bottom Line

If you’ve recently gotten a $200,000 inheritance, there’s a chance you could retire on that cash alone. It depends on how you invest it, what type of investor you are and when you plan on retiring. The more aggressive you are, the more likely you are to get a higher return, but that also means a higher level of risk in your portfolio. Remember, too, that the longer you put off retirement, the longer your money stays in the market with the potential to grow.

Tips for Investing

  • Getting a hefty inheritance is nice, but if you aren’t sure what to do with it, it would be a good idea to get the insights and advice of a financial advisor. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • If you’d like to get an idea of whether you’re going to be able to retire on $200,000 this calculator can give you a good idea of your prospects.