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I have not seen any discussion on the topic of inheritance – either from or to. Even though most of us may not want to count on the potential financial benefit in our retirement planning, it is nevertheless a possible big factor affecting your nest egg. We are supposedly going into a stage of large wealth transfer between generations in the coming decades.

So are you taking into account the potential inheritance when planning your retirement?

Do you plan to leave a material estate to your heirs or die broke (in terms of number crunching)?
 

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I have not seen any discussion on the topic of inheritance – either from or to. Even though most of us may not want to count on the potential financial benefit in our retirement planning, it is nevertheless a possible big factor affecting your nest egg. We are supposedly going into a stage of large wealth transfer between generations in the coming decades.

So are you taking into account the potential inheritance when planning your retirement?

Do you plan to leave a material estate to your heirs or die broke (in terms of number crunching)?
My wife and I don't plan on an inheritance but we wouldn't refuse one! :)

We don't have any heirs at the moment.
 

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Such a great question!

Even though one day we will probably both come into a good sized inheritance the operative word in the sentence is probably.

My husband's brother's wife's Dad remarried someone half his age after her Mom died and the whole inheritance, including the family home and the family cottage went to this other woman. Inheritances are never for sure until you have them. For this reason, I don't count it as a part of our retirement plan .. but it sure will help if it does come to pass!

In terms of leaving money to our children, our plan is for our funds to last until we hit 105. If we die younger, they'll inherit. If we die older, we'll die broke.
 

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I don't plan on receiving anything from my parents. It'll be a pleasant surprise if I do. As for leaving anything behind, I don't plan on burning through everything as I have no idea how long I or my significant other will live for or what medical issues we will have. So chances are there will be something for the relatives.
 

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People! The intergenerational transfer of wealth is a major part of the personal planning process. Many individuals consider the financial plan as a continuum... the effect of inheritance, tax, life insurance, and actuarial issues should be everyone's concern
 

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Discussion Starter #6
yes I agree with Steve. we may not admit and only thinking of inheritance as 'icing on the cake', the reality is that as a whole we most likely will be part of the wealth transfer process. the whole point of estate planning / leaving a will is to do with the passing down side, but we seem to forget about the other side of the equation. You are richer than you think!
 

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We have no kids as yet. There's no money on my side of the family, but potential on the other. Even if there were an inheritance, we'd both be about 60 and long past any real need of the money I would think, based on our current progress. Overall, not something that needs any thought or planning on my part at this time.
 

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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):)
 

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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):)
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.
 

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Unless you come from a fairly wealthy family I don't think you should "plan" on receiving an inheritance as part of your financial planning. There are too many unpredictables.

Making an estate plan for distribution of your own estate is another question - that should be done.
 

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I expect we'll probably get the house proceeds of my wife's parents estate, maybe a couple hundred thousand, and nothing from my side. I certainly don't count on this, though, it's too far away (30-40 years, or more, hopefully), and there are too many variables that can change things. Her parents are comfortable, but not wealthy, what if one dies and the other needs 20 years of nursing home care? That type of expense could easily burn through the entire estate.
 

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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.
 

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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"
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.
 

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steve41 said
the effect of inheritance, tax, life insurance, and actuarial issues should be everyone's concern
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
 

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Point taken. I have, however, seen plans where the financials aren't simply focused on a single (current) generation, rather the plan spans more than one generation. The term 'financial planning' gets bandied about a lot, but most here seem to be reluctant to get their hands dirty. Current net worth, personal savings rate, 4% safe withdrawal rate... why is this stuff dumbed down? I don't get it, surely a detailed financial plan is one of the most important determinations you can make whether you are still working or already retired.
 

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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.
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! :eek:
 

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Naturally things change. When they do, you regroup, refresh your numbers and do another projection. Several times a year, if necessary. The alternative is to fly blind. If that's what you want to do, fine, but I don't think anyone would expect you to set a fixed PSR and retirement next egg target when you are thirty, and never re-visit it.

Each of you are sitting at a computer and consuming more computer cycles using this web browser than could be possibly envisaged even ten years ago. Surely you could commit a small chunk of computer power in order to actually plan.... "What should my budget be based on an expected inheritance of $x happening in 20xx?".... "What if it never comes to be?"
 

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Unfortunately, the more variables you put in, the less accurate it would be. Super computers were made to do long term weather forecast, but they failed miserably.

That said, for inheritance, it's very important to think about if you are very close to your parents. Since there's no gift tax in Canada, a lot of things can be arranged beforehand. Arranging things beforehand can usually avoid costly financial consequences and family feuds. Of course, only a lawyer can advise you exactly how to proceed.
 

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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.
 

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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.
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.
 
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