08 Feb I’m getting an inheritance. Should I keep saving for retirement?

Q. I’m inheriting an IRA that’s worth about $1 million. I have about $500,000 of my own saved. How can I tell if I should keep saving in my 401(k) plan or if I have enough for retirement? I’m 54.
— Investor

A. An inheritance can make an important difference in someone’s retirement plan.

We’re glad you’re considering what strategies are smart for you going forward.

While this inheritance will help your retirement goals, you should continue saving in your 401(k) for many reasons, said Alex Vaccarella, a certified financial planner with Wealth Enhancement Group in Warren.

For starters, you didn’t say how much you expect to spend in retirement, which is one of the most important factors to determine how well prepared someone is for retirement, he said.

Vaccarella said if we look at this through the common “4% safe withdrawal rate” lens, you might expect to safely support $40,000 — 4% of the $1 million — of annual expenses before taxes.

But the question is whether that, in addition to Social Security and your own savings, enough to support your expected retirement goals, he said.

“With the high cost of living in New Jersey, for many of us that would not be enough,” Vaccarella said.

Given new laws around inherited IRAs, you probably have to take this money out of the account, and pay income taxes on distributions, over the next 10 years, he said. This means your taxable income will be much higher — maybe $100k per year more! — than normal, he said.

“Because your taxable income will be higher, you would benefit even more from maximizing before-tax contributions to your own 401(k), he said.

Another important consideration is what could happen if you get used to spending this money annually.

“If you don’t keep saving a portion of your income, either in or outside of the 401(k), you will of course spend it, which could contribute to lifestyle inflation, requiring an even larger nest egg to support your retirement spending goals,” Vaccarella said!

While this is a great gift that can certainly take some pressure off in retirement, be wary of letting this gift become a reason to relax your own progress toward your financial goals, he said.

“By continuing your own savings plan with the support of this inheritance you may be able to retire sooner, maintain more financial security during retirement and potentially giving a similar gift to the next generation,” he said.

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This story was originally published on Feb. 8, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.