Five Reasons Not to Count on An Inheritance in Your Retirement Plan

One of the most common myths of retirement is “Plus, I’m going to get an inheritance.”

You: For you, maybe. My parents still love me.

It has nothing to do with love.

You: Sure it does.  If it didn’t, I wouldn’t let half my relatives in my house.

That’s not a good ratio.

You: Tell me about it; I was being generous at 50%.

It’s a mistake to count on an inheritance in your retirement plan.

You: Even a little bit?

Even a little.

You: Why?

Reason 1: Your Parents Might Not Have as Much as You Think (or Hope) They Do

You: My folks have a lot of money.

Do you know that for a fact or are you basing your comment on how they live?

You: What do you mean?

Have your parents sat you down and told you how much money they have or do you just think they have a lot of money because your parents earned a lot of money, live in a very nice house, drive nice cars, and go on exotic vacations?

You: More of the latter.

Which means you know nothing.

You: Excuse me?

While your parents are still your parents, if you haven’t had the “money talk,” you’re flying blind.  It’s no different than your utter lack of understanding of your neighbors’ or co-workers’ true financial picture; just because they might drive a nice car doesn’t mean they don’t have credit card debt up their eyeballs.

Reason # 2: Your Parents Might Have a Lot Less Money Compared to Two Years Ago

As The Wall Street Journal reported this week in Baby Boomers to Kids: Kiss Your Inheritance Goodbye, many retires and pre-retirees got crushed, like the rest of us, as the stock market tanked.  With very few years to make up the losses via additional savings and investment gains, many are doing what they can to preserve their ability to generate some sort of cash-flow for the duration of their retirements.  To do so, annuities and reverse mortgages are becoming more popular.  Those choosing such a path essential file for “Chapter Heaven” (a cute phrase from the article) by taking their wealth with them to the grave.

You: Why? How? What?

The typical annuity means a large lump sum payment in exchange for a series of smaller payments for the rest of life (or lives) of those making the payments. When the purchaser(s) (annuitant(s)) die, it’s over. No money is paid from that annuity for the descendants.

Reason # 3: Your Parents May Live a Lot Longer

Longevity is another reason why you shouldn’t count on your parent’s inheritance to help you in retirement.  Studies have shown that if you have two parents who live to age 65, at least one is likely to live until age 90.   Not only is that a huge drain on their savings, but you also won’t actually get the inheritance until they pass away. How old will you be when the younger of your folks turns 90?  Is that when you want to begin retirement or do you hope to already be retired by that point?

Reason # 4: Your Parents May Grow Old

If either one or both of your parents were to ever require assisted living and doesn’t have a top-notch long-term care insurance policy, even a potential inheritance of several hundred thousand dollars can disappear rapidly.  The cost of a nursing home is absolutely tremendous and absent the insurance, they’ll be paying for it. Medicaid only steps in when they’re financially wiped out, leaving you with nothing.

Reason # 5: You Have Siblings

Remember your brother or sister?  You can remember both? Great.  They’re blood relatives too and they’re likely to get an equal cut of whatever is left.  So divide it by two, three, or more.

Retirement is not about an inheritance. It’s about planning.  It’s one reason I discuss Retirement planning extensively here and why I guide the Retirement Planning site at About.com.  It’s also the reason I save aggressively in my IRA and my SEP-IRA. It’s why I saved as much as possible in my 401(k) when I was an employee. It should be the reason you’re saving – today.

What role does an inheritance play in your retirement plan?

Tags: inheritance, long term care, medicaid, retirement planning