How to grow (and not blow) your future inheritance

• The Great Wealth Transfer will see trillions handed to heirs over the next two decades. But without a plan, many of those windfalls will quickly disappear
• Treat inherited wealth as long-term capital, not “bonus money”. That means using a tailored mix of growth and protection, like a Merton-style portfolio, and keeping spending at sustainable limits
• To make your inherited wealth last for your lifetime (and potentially beyond), keep your withdrawals low and flexible – especially after bad years.

Set aside the grief involved, and an inheritance hits a bit like winning the lottery. One day, the money’s not there. And the next, you’re making decisions that could alter your financial life for decades.

The Great Wealth Transfer – the biggest movement of money between generations in history – is under way. Over the next 20 years, life-changing sums will land in millions of bank accounts. And without a plan, even the biggest windfalls can vanish faster than you think.

The time to set that plan isn’t after the money arrives: it’s now. A good strategy sets the necessary guardrails in place: it prevents overspending, keeps you from making bad market-timing calls, and helps you avoid treating inherited wealth like “bonus money”.

This wealth transfer changes everything

In the US alone, as much as $84 trillion (£62 trillion) is expected to change hands by 2045 – almost three times the size of the country’s economy. Japan, meanwhile, is likely to see $5 trillion pass between generations in just the next five years.

Boomers have had an exceptional run of good fortune, with decades of relative peace, affordable home prices, and compounding returns. They’ve built wealth on a historic scale. And because they had fewer children than their parents did, their estates will be split among fewer people – for bigger lump sums overall.

What you can learn from looking back over time

History’s littered with fortunes that disappeared in a generation. The reasons are familiar: overspending, speculative bets, or simply ignoring the need for a plan. The Vanderbilts were America’s richest family from the late 1800s until the mid-1900s, amassing today’s equivalent of over $300 billion from railroads and shipping. But by the 1970s, their wealth was so dispersed and diminished that none of them ranked among the richest Americans. Lavish estates, unchecked spending, and a lack of disciplined investing drained their bank accounts.

It’s the same story in sport and entertainment. About 60% of NBA players run out of money within five years of retiring from professional basketball. Big paychecks alone can’t protect people from bad advice, bad bets, and living far beyond their means.

One common thread is psychological. Inherited or sudden wealth can feel like a windfall rather than hard-earned money – easier to risk, easier to spend, and seemingly infinite.

Some 86% of heirs fire their parents’ financial advisers soon after receiving an inheritance. In some cases, it’s about consolidating accounts. But in too many cases, it’s a quick decision without a long-term plan.

If you know a windfall is coming, define your investing principles before the transfer happens. Decide how you’ll invest it, how you’ll draw from it, and what boundaries you'll set around risky or speculative bets.

Here’s how I’d build a portfolio to last

Preserving wealth isn’t about hiding it away. It’s about finding the balance between growth and protection. For me, that starts with a globally diversified mix of stocks and inflation-protected bonds – then tailoring it using the Merton share framework.

The system – developed by Nobel laureate Robert C. Merton – determines the ideal share of stocks and other “risky” assets you should hold based on:

• Expected excess return. How much more you expect stocks to return over “safe” assets
• Volatility. How bumpy the ride will be
• Risk tolerance. How much you can stand to lose without panicking.

The formula looks like this:

Risky asset share = (expected return – risk-free rate) / (risk aversion × variance)

You don’t need to run the numbers yourself to get the point:

• Higher expected returns and lower volatility mean you can hold more risky assets
• If you can tolerate swings – or your spending needs are low – you can hold more, too
• More volatility or higher reliance on withdrawals means you hold less.

For long-term investors with their own professional income, the Merton share might suggest 70% to 80% in stocks. For those who will live off their inheritance, it might mean 40% to 50%. This isn’t guesswork – it’s tailored to you.

And it works. Economist simulations show that a Merton-style portfolio since 1900 would have earned 10% a year – slightly more than an all-stock portfolio – but with 30% less volatility. Over decades, that difference leaves far more wealth intact for you and your heirs.

Around this durable “core”, you can add satellite investments – thematic ETFs, sector leaders, or alternative assets. Momentum strategies – buying what’s already trending and exiting when the trend breaks – can work well in today’s faster-moving markets, complementing your core without taking over the portfolio.

But here’s the thing: no allocation formula survives perfectly intact in real markets. Models can guide you, but slavishly following them is a recipe for disappointment. The real key is matching a strategy to your temperament – and knowing what you’ll do when markets don’t behave like the spreadsheet said they would.

And how to spend without going broke

Withdrawing a modest fixed percentage of your starting balance each year – sounds neat. In reality, it often fails. If you’d started in 2000 with a 60/40 portfolio and pulled out just 5% a year, you’d have been broke by 2019. Even the more conventional 4% withdrawal fails in simulations a third of the time.

The fix is simple: you simply have to adjust your withdrawals (and your spending) as you go. So the amount you receive is based on your current balance – not the one you started with. That means tightening your belt after bad years so you don’t drain capital while it’s down. Think of it this way: if you started with $1 million, and your portfolio is now worth $1.2 million, you’re all good. You can draw down your usual amount and stay on track. But if your balance has slipped to $800,000, you’ll want to make sure you’re pulling out only 4% of that new, lower figure. This is the math that endowments use to keep money flowing forever.

A good rule of thumb is to spend well below your portfolio’s expected return. Economist modelling suggests a 4.1% expected return supports an optimal spending rate of about 2.4% a year. That might sound low – but it’s the trade-off between enjoying life now and keeping your wealth compounding for the long haul.

An inheritance can be the foundation of lifelong security – or just a brief bump in lifestyle. The difference comes down to preparation. I plan to have my strategy ready before the money arrives. That means using a Merton-style approach to size my risky bets, building a resilient core with room for high-conviction themes, and keeping my spending rate low enough to let compounding do its magic.

If you do the same, your windfall could last your lifetime – and may even outlive you.

Theodora Lee Joseph is an analyst at finimize.

ii and finimize are both part of Aberdeen.
finimize is a newsletter, app and community providing investing insights for individual investors.
Aberdeen is a global investment company that helps customers plan, save and invest for their future.