It's a question many of us have wondered about: will my parents' estate be enough for me to retire on?
The short answer: no. For the long answer, read on.
Inheritance and retirement
Estate Planning and the proper distribution of assets after death is as important as planning for retirement.
However, I always recommend a carefully prepared financial and retirement plan based on personal circumstances, and leaving inheritance as an added financial bonus upon the passing of a loved one.
Alternatively, family members can (and should) participate in open discussions and intergenerational planning long before the need presents itself. Dealing with money while also dealing with grief is extremely difficult, but proper planning and supporting documentation helps.
How to save for retirement
There are 4 main factors to consider when saving for your retirement:
- Time remaining until retirement
- The amount of money that can be saved leading up to retirement
- Group or employer pension and savings
- Investment returns
Despite the fact that many people know and understand these main factors, there are many clients who come to me finding that their desire to save for their retirement isn’t proving as successful as they’d hoped it would.
The following are the some of the common hurdles to achieving a successful retirement:
1. Lack of time
In many cases, people do not start saving until later in life. As previously noted, people who start saving later in life may find there is not enough time to accumulate an adequate "nest egg" to fully fund a comfortable retirement.
2. Unexpected emergencies
Everyone will experience at least one emergency in their life, but most people do not have a contingency plan in place.
Job loss, premature death, life-altering injury or illness, prolonged sickness in a child or dependent resulting in a leave of absence from work, property damage, and legal battles are all emergencies that could either take a bite out of savings or require a large withdrawal from a retirement fund.
3. Self-employment
Self-employed individuals tend to not have benefits and group plans, so they will need to practise financial discipline to save for their retirement. An issue, however, is that most self-employed people put their additional cash flow back into their business to promote growth.
Why inheritance isn't a reliable way to fund retirement
The scenarios noted above are typical concerns and goals of most of my clients, but an unsettling circumstance is the number of people relying on an inheritance to fund their future retirement. While many people do have a goal of leaving an estate to their loved ones after they die, we need to be cognizant of a few determinants:
- Having a parent(s) with a long-life expectancy. We all want our parents to live a long life. However, the longer they live, the more of their savings they will use and the less you will inherit.
- Having a fear of market downturns. Some people are afraid of the market and as such invest their money in very conservative options. If they live long lives, and the growth rate doesn’t keep up with the rate of inflation, they will likely diminish the capital in the portfolio.
- High-risk investments. These can provide significant growth inside the portfolio and are beneficial as a portion of the retirement savings, but it should be understood that they can also suffer significant losses. Proper diversification ,including less risky investments along with close monitoring, will provide more protection during inevitable market downturns, and also ensure the funds are available to live the remainder of your life comfortably.
- Inflation and the cost of living. Bottom line, life is only going to get more expensive. You cannot base your financial projections on what the cost of living is now. You must base it on what it will be 10–20 years from now.
- Family communication. If your parents have not shared with you the contents of their Will and the plan for the distribution of their assets upon their death, then how can you possibly even consider planning for your future based on an inheritance whose value is unknown?
- Charitable giving. It is becoming more and more common for people to leave gifts to registered charities upon their death. Direct gifts are distributed prior to the residue of an estate that the beneficiaries are likely to inherit.
- Skipping a generation. With people living much longer lives now, some elders are seeing their grandchildren get married and having children of their own. Skipping a generation and leaving a portion of their financial legacy to their grandchildren is becoming more and more common.
- Trusts. A clever (and sometimes sneaky) way for parents to ensure that an inheritance avoids the payment of probate tax and quick spending by a beneficiary is to put the estate in a trust. The beneficiary has less control of their inheritance.
- Taxation. Multiple properties, different investments, and even trusts can come with some shocking tax implications upon a person’s death. Be sure to work with an accountant and lawyer to do some appropriate tax planning prior to your death.
Assumptions about a family inheritance can be fraught with misconceptions or resentment, but with a sound financial plan and open discussion, you can avoid stress and strain on your family relationship. Plan for your retirement without the thought of what money might come your way when your parents die. Let that inheritance mean something by receiving it and viewing it as an extension of your parents’ legacy and a celebration of their life.
