How I’d Structure a $1 Million Inheritance Before Retirement

 Receiving a $1 million inheritance just a few years before retirement can be life changing. But it can also leave you with a big question: what should you do with the money? 

Recently, I spoke to a prospect who was 62, still working and planning to retire within around two years. They had just received a $1 million inheritance and weren’t sure where to start. 

Their situation was roughly: 

•$300,000 mortgage•$40,000–$50,000 in savings•$10,000–$20,000 in shares•Combined super of around $800,000 as a couple•Both still working and earning around $100,000 each

The inheritance was going to significantly change their financial position. So, what could they do with it? 

Importantly, this is general advice. Everyone’s circumstances are different, and personal financial advice is important before making decisions about an inheritance. 

1.Clear the mortgage

The main priority would be to get rid of the debt. 

If the goal is to retire within the next couple of years, carrying a $300,000 mortgage into retirement may not be ideal. Paying off the mortgage would immediately remove that debt and provide greater certainty heading into retirement. 

From the $1 million inheritance, around $300,000 could therefore be used to clear the mortgage. 

The couple could also retain some cash as a buffer for unexpected expenses and leave some money available for things they want to enjoy, such as a holiday or renovations. 

2.Look at making additional super contributions

The next question is: where should the remaining money go? 

For someone still working in their early 60s, super can be an attractive place to invest, particularly because of its tax environment. 

In this situation, both partners had less than $500,000 in super individually. That created an opportunity to make additional concessional contributions using the carry-forward contribution rules to catch up on unused contribution limits from previous years. 

They could potentially contribute around $50,000–$60,000 each as concessional contributions. 

The benefit is that this can potentially reduce their personal tax bill. In the example discussed, the strategy could save around $30,000–$35,000 in personal tax, although the super fund would pay tax on the concessional contribution. 

The exact benefit depends on individual circumstances and needs to be assessed as part of personal advice. 

3. Consider non-concessional contributions 

After paying off the mortgage and making concessional contributions, there could still be a significant amount of the inheritance remaining. 

That's where non-concessional contributions could come into consideration. 

For this couple, the strategy could potentially involve contributing around $390,000 for one partner and $120,000–$130,000 for the other, depending on their circumstances and eligibility. 

Unlike concessional contributions, there is no tax deduction for making a non-concessional contribution. However, the money can move into the super environment without creating an additional tax liability simply because it was contributed. 

This could allow a large portion of the inheritance to be invested within super while the couple is still working. 

What could the final structure look like? 

In round figures, the $1 million inheritance could potentially be allocated along these lines: 

• $300,000 – pay off the mortgage 

• $50,000–$100,000 – cash, holidays, renovations or other lifestyle needs 

• Around $600,000 – potentially moved into super through a combination of concessional and non-concessional contributions 

The exact amounts would depend on their individual circumstances, contribution caps, available carry-forward amounts and other super rules. 

The key idea is to have a plan for the inheritance rather than allowing the money to simply sit in cash or gradually disappear. 

Why super can be attractive before retirement 

While the couple is still working, investments held within super are generally taxed at a maximum rate of 15% on earnings, which can be lower than their personal marginal tax rates. 

Then, once they retire and meet the relevant conditions, the tax treatment can become even more attractive. For many people over the relevant preservation age, investment earnings in a retirement-phase pension can be tax-free, and eligible super pension payments can also be tax-free. 

That means moving money into super before retirement can potentially provide a more tax-effective environment for investing the inheritance. 

The important part: have a plan 

So, is this exactly what everyone should do with a $1 million inheritance? 

No. 

The right strategy depends on your mortgage, income, super balances, age, retirement plans, spending needs and broader financial position. 

But this example demonstrates the importance of having a plan. 

A significant inheritance can provide an opportunity to eliminate debt, strengthen your retirement savings and potentially invest in a more tax-effective environment. 

With a major wealth transfer happening between generations, more Australians may soon find themselves in a similar position. The important thing is to take the time to understand your options and get personal advice before making major decisions. 

A $1 million inheritance can change your life. Having a plan can help make sure it changes your retirement for the better.