Those who inherit money after a loved one's passing often face anxiety over what to do with it. It may be a once in a lifetime chance to get ahead but there's the perennial personal finance question of whether it's better to pay off debt with the money or invest it for retirement. It's especially relevant now, with baby boomers starting to pass their assets to their children in one of the biggest wealth transfers in U.S. history.
And that assumes recipients are doing the responsible thing — not splurging, or even worse, getting scammed. Unfortunately, half of all money inherited is spent or lost investing, according to one study.
While paying off all forms of debt may seem like the most common-sense move, you may want to think twice. First, just paying off any high-interest debt, like credit-card bills, without getting to the root of why you spent more than your income won't really do much to prevent you from doing it again. Studies of lottery winners and inheritors show little change in their wealth over time because they don't really become smarter about finances; they either splurge or make ill-considered investments.
In addition, the best thing for inheritors to do when paying off debt is to invest the money they had been paying each month. Here again, research shows that most people aren't disciplined enough to do that.
What about student debt, or mortgage debt, which has jumped in recent months? Both were likely investments that were planned to be paid out of current consumption and come with relatively low interest rates — unless there were an unanticipated situation, it's best to stick to the plan.
Some financial advisers say you shouldn't pay down debt if the interest rate on the debt is lower than what you can get in a relatively safe, well-diversified, low-fee stock or bond index fund. Hanging onto the debt is sound advice, but I think the more compelling argument is that paying it off won't help to avoid getting into debt again and spending down the inheritance.
