Turning a Windfall into a Long-Term Plan

Written by Rik Arendsen

Receiving an inheritance or financial settlement following the death of a loved one or a divorce can be both emotionally complex and financially significant. It often marks a turning point, offering new opportunities, but also requiring thoughtful decisions.

Many clients in this situation ask, “What should I do with this money?” While there’s no single right answer, there are a handful of strategies that consistently come up in these conversations. The key is to align your financial decisions with your goals, values, and circumstances.

Below are some of the common options to explore when receiving an inheritance or settlement:

Superannuation Contributions: Building Long-Term Security

Superannuation is one of the most tax-effective ways to build wealth for retirement. Contributing a portion of your funds to super can help you:

• Take advantage of the low tax environment. (15% tax on earnings vs. your marginal tax rate)

• Grow your retirement savings through compounding over time.

• Potentially reduce your taxable income, depending on the type of contribution made.

Depending on your age and circumstances, you may be eligible to make:

• Concessional contributions up to $30,000 p.a., including employer contributions, and potentially more with “catch-up” rules.

• Non-concessional contributions up to $120,000 p.a., or $360,000 using the bring-forward rule.

While funds inside super are generally preserved until retirement age, this can be a smart option if you’re looking to strengthen your long-term financial position and maximise tax efficiency.

Repaying Debt: Creating Breathing Room

Debt reduction is another common and practical use of a financial windfall. Many clients choose to use their funds to:

• Pay off high-interest debts like credit cards or personal loans.

• Reduce or clear their home mortgage.

• Finalise any residual liabilities from a divorce or estate.

Clearing debt doesn’t just reduce financial pressure - it can free up monthly cash flow, reduce stress, and increase flexibility in your lifestyle and financial planning. It also puts you in a stronger position to build wealth, since less of your future income is being directed toward interest payments.

Even partial repayments on a home loan can significantly reduce the total interest paid over time or help shorten the loan term.

Purchasing a Primary Residence: Establishing a Strong Base

For some, an inheritance or settlement makes it possible to purchase their first home or upgrade their current residence. Using a windfall for a property purchase can provide:

• Long-term stability.

• Elimination or reduction of rent or mortgage commitments.

• A physical asset that can be lived in and potentially passed on.

It’s important to factor in ongoing costs (rates, maintenance, insurance) and understand the implications for your overall financial position. That said, owning your home outright or with a smaller mortgage can be a powerful step toward financial independence.

Investment Property: Creating Passive Income or Growth

Others may look to property as an investment vehicle. Receiving a settlement or inheritance can be used as a deposit (or to purchase outright) a residential or commercial investment property.

Potential benefits include:

• Rental income to supplement your cash flow.

• Long-term capital growth.

• Tax advantages through negative gearing or depreciation. (depending on the property and structure)

That said, investment property also comes with responsibilities, including tenant management, upkeep, and exposure to market cycles. It’s important to assess whether the property fits your investment strategy or if other asset classes may be more suitable. We have generally found that this strategy is suitable for younger people, but less suitable for older individuals approaching retirement, because property typically doesn’t provide a great retirement income, and the old adage of “Asset Rich, Cash Poor” keeps coming up.

Building a Share Portfolio: Wealth with diversification and Liquidity

Some clients prefer to invest in shares or managed funds, either directly or by using a financial adviser to build a portfolio for them. This strategy offers:

• Flexibility and liquidity – especially beneficial towards retirement age.

• Diversification across industries and markets.

• The ability to start small and build gradually.

Investing in a diversified share portfolio may suit those seeking medium to long-term growth and who are comfortable with market movements. Depending on your risk profile and time horizon, this can be a powerful way to make your funds work harder over time.

You might invest via a personal account, family trust, or company, each with different tax and legal considerations.

Regardless of the Strategies Above, Review Your Estate Plan

For all, receiving a settlement or inheritance is also a timely reminder to update your own estate plan. If your financial position has changed, it’s important to revisit your:

• Will.

• Powers of attorney.

• Superannuation beneficiaries.

• Trusts or corporate structures.

Clear and current estate planning helps ensure that your assets are distributed according to your wishes and reduces potential complications for your loved ones in future.

In a closing thought, an inheritance is more than just a lump sum, it’s an opportunity to reset, realign, and plan for a more secure future. Strategies used or implemented can depend on your priorities and personal financial situation. The key aspect of receiving either an inheritance or a settlement is to take your time, seek advice, and create a financial plan that is tailored to your situation.

Article provided by Rik Arendsen – Senior Financial Adviser at Aspirations Wealth