The odds that you'll win the Powerball jackpot are about one in 292 million. There's a better chance you'll receive a modest windfall at some point in your life, and with proper planning, you can transform that bequest into a tidy nest egg.
Two-thirds of baby boomers will receive an inheritance, according to the Center for Retirement Research at Boston College. The median amount is $64,000. The average inheritance, which reflects bequests from wealthy relatives, is $292,000, the Center found.
Managing an inheritance is a problem we'd all love to have, but it can be stressful. Family members and dubious friends will no doubt have plenty of suggestions for how to invest your money. You may be tempted to splurge on a big-ticket item you've never been able to afford.
That's why the most important first step you can take is to "hit the pause button," says Mark Beaver, a certified financial planner in Dublin, Ohio.
Inherited IRAs have rules of their own, but for other kinds of windfalls it makes sense to stash the money in a safe place, such as a bank account or money market fund. You won't earn much interest, but you'll give yourself time to assemble a financial team and come up with a long-term plan.
Your team should include a certified financial planner, a certified public accountant or enrolled agent, an attorney and, depending on the circumstances, an insurance professional. Work with your team to create a priority list for your money, says Ashley Bleckner, a CFP in Newport Beach, Calif.
If you have credit card balances or other high-cost debts, those should top the list because you'll get an immediate return of up to 15 percent or more by paying them off. Next, consider maxing out your retirement savings accounts, if you aren't doing it already.
With the bull market approaching its ninth year, investing in the stock market may be unnerving. But stocks (and stock mutual funds) have historically recorded the highest rate of long-term growth. And you don't need to shoot out the lights: A $292,000 investment that earns an 8 percent average annual return would be worth more than $1.4 million in 20 years.
If the idea of investing your entire windfall has you reaching for the nearest antacid, especially with the market at its current lofty levels, consider dollar-cost averaging. With this strategy, you invest a given amount on a regular schedule. Your fixed amount of dollars will buy more shares when prices are low and fewer when prices are high.
And if the market turns upside down, you'll have some money on the sidelines, which you can use to buy stocks at a discount.
Sandra Block is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org.