Inheritance Anyone?

steve41 said:

Remember, the financial services industry will not want to introduce the idea of your getting an inheritance. They would prefer you not to include the effect of a future windfall so as to convince you to start over-saving (perhaps) in order to maximize the dollars they get to manage. It is part of the 'you need a gazillion dollars to retire' myth.... "give us your money... forget that inheritance, your parents will live forever"

(not to sound cynical)

Click to expand...

As someone who works in the financial services industry I'd like to say that not all of us want people to overlook inheritances when doing their planning. That being said it's my experience that most people don't know how much money would be coming to them even if they did want to incorporate it into calculations. Others just don't like talking about a family members demise that will lead to financial gains.

I also think that some people like to know they were able to save enough to provide the life they want in retirement without relying on inheritances. If they do get one it just gives them the ability to help their children and grandchildren out more and also to do some extra things for themselves they wouldn't have cared to live without had the money not been there in the first place.

We will be getting nothing from my husband's side of the family. I expect we'll get something from my side as my father has life insurance, but there are five children, so the split amount probably won't be much more than $100K or so. And I am not counting on it, as anything could happen in the meantime - my father could die and my mother could get sick and require the entire insurance amount to live on.

As for my own child, yes we will definitely be leaving something behind. We both have life insurance, and as well are well on our way to having a large amount of money when we retire. Since we are also insured for long-term care, even an illness will not require us to burn through all our retirement savings before our time. We have set up a trust for her right now since she is just an infant, and have provided information about our wishes in our will to her trustee. Once she is older, we will change our will to reflect the fact that she will no longer need a trustee.

steve41 said:

Remember, the financial services industry will not want to introduce the idea of your getting an inheritance. They would prefer you not to include the effect of a future windfall so as to convince you to start over-saving (perhaps) in order to maximize the dollars they get to manage. It is part of the 'you need a gazillion dollars to retire' myth.... "give us your money... forget that inheritance, your parents will live forever"

Click to expand...

It would be pretty irresponsible for anyone to completely depend on an inheritance for their retirement plan unless they knew without any doubt that their future inheritance was 100% protected from unforseen events that would reduce that amount. But since these events are unforseen, I think this is impossible.

These events could include:

• re-marriage to another spouse and the will changing
• severe physical illness that requires care or treatment that drains the inheritance money
• a huge loss in investments (too much in the stock markets )
• their family business failing or going bankrupt
• a falling out that results in a change in the will
• a mental illness that results in bad investments or giving money away
• etc.

I think the only way a financial advisor can responsibly include an inheritance in a person's retirement plan is if he has also talked to the parents in question and has protected their retirement savings with the proper insurance, wills and other vehicles which ensure safe passage of their wealth to their heirs. And even then, nothing is guaranteed.

steve41 said

the effect of inheritance, tax, life insurance, and actuarial issues should be everyone's concern

Click to expand...

I have to disagree partially. I think the effect of inheritence should be ignored until it is money in the hand, although by that I mean the final event where funds are actually distributed. Not only because it's a bit repugnant to be hoping for a windfall from the loss of a loved one, but because it's not something you can budget for. It doesn't matter what you do, you get whatever portion of their leftovers they see fit to give you.

Tax ramifications, however, I agree, are best handled before death if you want to avoid probate fees and have family members you can trust to the death. Our family, for many generations back, has always put the next generation's executor on as a joint person on everything so taxes, fees, and hassles are eliminated.

Personally, my wife and I will not be having children, so at the moment have named my baby niece as our heir and my plan is to build up enough of a retirement fund that I can live off the interest/dividends, which would leave a very significant inheritence for my neice, which I consider fair trade since I'm hoping that when we're really old she'll pop by the nursing home my wife and/or I are at once every few weeks and make sure the nurses aren't treating us like Ben Stiller treated his nursing home residents in Happy Gilmore

http://www.youtube.com/watch?v=uPsbDUZvfFo&feature=related

Alexandra said:

It would be pretty irresponsible for anyone to completely depend on an inheritance for their retirement plan unless they knew without any doubt that their future inheritance was 100% protected from unforseen events that would reduce that amount. But since these events are unforseen, I think this is impossible.

These events could include:

• re-marriage to another spouse and the will changing
• severe physical illness that requires care or treatment that drains the inheritance money
• a huge loss in investments (too much in the stock markets )
• their family business failing or going bankrupt
• a falling out that results in a change in the will
• a mental illness that results in bad investments or giving money away
• etc.

I think the only way a financial advisor can responsibly include an inheritance in a person's retirement plan is if he has also talked to the parents in question and has protected their retirement savings with the proper insurance, wills and other vehicles which ensure safe passage of their wealth to their heirs. And even then, nothing is guaranteed.

Click to expand...

Most of the things from your list of factors would also impact a financial plan without an inheritance. Plans seems like a good idea and are supposed to work in theory, but in reality, it's inevitable something you've planned for won't turn out as you thought.

I'll make this much per year, save this much, inflation will be this, I'll sell this house when I'm x years old, I'll have $x in my pension, so much in my rsp, and I'll be prudent and only spend 3.2% per year, my return from stocks will be 5.6%, etc. etc. etc. Great. Then your employer goes under. Or you lose a bunch of money in the market. Or you get hit by a bus. etc.

Life is what happens when we're busy making plans.

In my opinion, inheritances like most things should be counted when they're in your hand. Until then, it's pure speculation. You might be the favorite child of wealthy parents, but they might leave the money to your kids. Ooops, now your children are richer than you!

Try submitting your T1 next year with a simple average tax rate based on the average of the last three years. Good luck with the CRA!

The weather analogy is poor. The fact is... high speed computers have improved long term weather forecasting. If you want to go back to looking out your window in the morning to see what the weather is going to do for the next 5 days, fine. I would rather rely on the computers' prediction, as uncertain as that might be.

Let's face it, the progressive taxation algorithm is pretty well cut and dried, the laws of compound interest and inflation, the rules governing CPP/OAS, pension... likewise. Why not use this pretty trivial math and build a forecast? Run it several times (hi/lo/med) or montecarlo the rates. It is much preferable than the 'dartboard' approach of PSR or 4% withdrawal rate.

Plus, if you don't incorporate these details in your plan, how in heck are you going to make determinations such as RRSP vs TFSA, should I pay down my mortgage or invest in my RRSP, or if I quit work 5 years early, how much will my retirement ATI be affected? You simply can't make these determinations unless your model contains all the details on taxes, clawbacks, etc.

steve41 said:

Try submitting your T1 next year with a simple average tax rate based on the average of the last three years. Good luck with the CRA!

The weather analogy is poor. The fact is... high speed computers have improved long term weather forecasting. If you want to go back to looking out your window in the morning to see what the weather is going to do for the next 5 days, fine. I would rather rely on the computers' prediction, as uncertain as that might be.

Let's face it, the progressive taxation algorithm is pretty well cut and dried, the laws of compound interest and inflation, the rules governing CPP/OAS, pension... likewise. Why not use this pretty trivial math and build a forecast? Run it several times (hi/lo/med) or montecarlo the rates. It is much preferable than the 'dartboard' approach of PSR or 4% withdrawal rate.

Plus, if you don't incorporate these details in your plan, how in heck are you going to make determinations such as RRSP vs TFSA, should I pay down my mortgage or invest in my RRSP, or if I quit work 5 years early, how much will my retirement ATI be affected? You simply can't make these determinations unless your model contains all the details on taxes, clawbacks, etc.

Click to expand...

Are you trying to predict your incomes when you are doing taxes? I hope not. None of the things you put on T1s are variables. They are constants. Try file taxes for the next 10 years based on your best guesses and see how CRA would like you.

5 days is not long term. Try 50 days and see how accurate it would be. How about 5 years?

None of the things you listed (taxes, CPP, clawbacks etc...) are variables. True, they might change, but more likely they will stay the same. Variables are things like short term investment returns and inheritance and when your parents will die. They are impossible to predict, thus there's no point guessing. Give me one single example how you would have acted differently if you expect your parents to die in 20xx and would leave you $x. I certainly wouldn't bet anything on that. It's fine if the weather forecast is wrong. I would get a bit wet. It wouldn't be fine if I suddenly realized that my parents wouldn't leave me anything and wished I had saved that extra $20,000 20 years ago.