I’m trying to think of an expression, like “counting your chickens before the eggs hatch” that applies to considering inheritance as part of your financial plan. Or maybe, with egg prices what they are, we are just hoping to inherit a healthy chicken coop.
Anyway, a topic of conversation that often comes up in planning is whether or not to count inheritance from a parent/relative in the retirement income plan. Some people are reluctant to use that money because it:
- a) feels creepy
- b) they have no idea what to expect and don’t want to talk to their relatives about it
- c) they have an idea of an amount, but don’t want to count on it
These are all legitimate concerns. However, when doing retirement planning, the results are only as good as the inputs (even though we make LOTS of assumptions in the process).
The arguments in favor of including a potential inheritance are:
- You may be able to spend or gift a higher amount in early retirement knowing there is money coming into your plan at a later date.
- You may even be able to retire earlier if the potential inheritance can support a few extra years of not working.
- You can make better estate planning decisions of your own.
- If combining assets with a partner is in the future, you are a strong candidate for a prenup or co-habitation agreement to keep inherited assets separate.
On the flip side, counting too heavily on an inheritance that doesn’t materialize can have serious consequences for your outcomes:
- A parent uses “your” inheritance for their own end-of-life medical care.
- A parent marries a new sweetheart and the estate plans benefitting you go out the window.
- A parent makes an investment decision that greatly reduces the size of your inheritance.
- The other heirs in the will interpret the division of assets differently than you expected and your part ends up much smaller than you thought.
So, what’s a person to do? Sometimes a client insists on not considering future inheritance at all and wants to plan to “make it on their own.” That’s fine to plan for a worst-case scenario.
If there is an inkling of a future windfall, I always like to see what would happen to the plan projections if, say, one-third of the potential assets were received much later than expected. This method may not change a client’s retirement date or spending significantly, but then again, it might.
It’s dangerous to pin all of your career and spending decisions on money that is not in your control. However, if there is transparency about assets between generations, it’s very helpful to consider this data when working with your financial planner.
