I'm 65, inheriting $350,000 and have virtually no retirement savings. How can I make the most of this windfall?

Let's take a hypothetical situation of Mandy, 65, who's about to get a late life-changing sum.

At her age, Mandy already has a pretty clear picture of her retirement: Keep grinding at her part-time job, stretch every dollar and hope Social Security would cover the basics.

After decades of living paycheck to paycheck, she only has $1,000 saved for retirement and no real financial cushion.

And it's not all due to poor money skills. Mandy's life hadn't exactly been predictable.

In her early 40s, a diagnosis of fibromyalgia forced her to leave a stable full-time job as she sought help managing her condition. Unfortunately, this also meant medical bills piled up and she often resorted to using credit cards to cover daily expenses.

Then the unexpected happened.

A dear but distant aunt passed away, leaving Mandy a meaningful inheritance. Mandy suddenly found herself with about $350,000, more money than she had ever seen in one place in her life.

For someone who had spent decades calculating every grocery trip, all those zeros feel surreal. While it's not enough to just drop everything and fly to Hawaii, it could meaningfully change her golden years. That is, if she handles things wisely.

Sudden money, sudden questions​

First off, would Mandy actually get the full inheritance from her aunt, or will taxes slice it away like with a lottery win?​

Luckily for Mandy, U.S. code 26 (1) clearly states that inheritance isn't included in gross income. Therefore, Mandy doesn't have to worry about a federal inheritance tax for collecting these funds.

That being said, her aunt's estate may pay estate taxes before assets are distributed. So, there could be taxes to pay depending on the state Mandy is in and the types of assets involved (e.g., retirement accounts, property, or investments).

But let's say the $350,000 arrives mostly intact after legal and administrative costs. On the surface, this is a huge positive for someone who isn't prepared for retirement. Used thoughtfully, it could instantly zap high-interest debt and create a cozy emergency cushion.

But financial windfalls aren't without potential negatives.​

Someone who's spent their life living paycheck to paycheck won't have experience managing such large sums. Without a plan, it's easy for this money to slip away through high spending or making risky investments.

For instance, a study by Singapore Management University (SMU) (2) found that lottery winners squandered half their winnings in just one year. That led research authors to conclude,"People tend to consume a substantial portion of unexpected income, more than predicted by traditional economic theories."​

For anyone with a history of financial instability, the biggest challenge isn't receiving the money — it's keeping it.

And Mandy's precarious situation isn't unusual for those approaching retirement in the U.S.​

Recent data published by the National Institute on Retirement Security (NIRS) (3) showed that the median amount saved for retirement was $40,000 among American workers with a tax-advantaged defined contribution (DC) plan. However, if you removed the DC as a filter, the median savings dropped to $955.

According to Vanguard's research, about four in 10 Americans (4) are on track to maintain their current spending levels into retirement.

So, while Mandy is far from where she "should" be to enter retirement with confidence, her situation is relatable for many Americans.

Now the question is whether it's realistic for this $350,000 to make up for all that lost time for compound growth in the market (plus fewer working years and higher healthcare costs)?

What's the wisest way to put this money to use for the best odds of success?

A smart way to handle this second chance

The smartest move when someone gets a ton of unexpected money isn't to make a fast and rash decision. Instead, take a moment to pause and carefully reflect before making any decisions you'll later regret.

To start, put these funds in a few FDIC-insured high-yield savings accounts while building a plan. Since FDIC coverage is $250k (5), it's safest for Mandy to split the $350k across two accounts.