Can I factor in an inheritance when planning my retirement?

Yes, you can consider an inheritance as a supplement to your retirement plan, but it’s crucial to do so cautiously and realistically. Anticipating an inheritance can provide you with additional financial security and flexibility, but it should not be the sole basis for your retirement strategy.

How to Approach Inheritance Planning

1. Be Realistic: Don’t assume you’ll definitely inherit a specific amount or at a specific time. Consider the possibility that the inheritance may be smaller or delayed or may not come at all.
2. Estimate Conservatively: If you do factor in an inheritance, be conservative in your calculations. Use a lower amount than what you expect to inherit and adjust your spending and savings plans accordingly.
3. Have a Plan B: Prepare a retirement plan that is sustainable even without the inheritance. This will give you peace of mind and prevent you from relying solely on uncertain future funds.
4. Communicate with Benefactors: If possible, have open communication with your potential beneficiaries to understand their intentions and avoid misunderstandings or disappointment.

Calculating a Safe Withdrawal Rate

When calculating a safe withdrawal rate (SWR) for your retirement savings, factoring in an inheritance can be tricky. One approach is to use a flexible SWR that adjusts based on market conditions and the timing of the inheritance. This involves setting a lower SWR initially and then gradually increasing it as the inheritance becomes more likely or the market performs well.

Other Considerations

Tax Implications: Inheritances may be subject to estate taxes, which can reduce the amount you actually receive. Consider potential tax implications when planning.
Dependency: Depending on the nature of the inheritance, it may create a sense of dependency on the benefactors, which could impact your retirement plans and relationship dynamics.
Age and Health: Your life expectancy and health status can impact the value of an inheritance. Consider these factors when making financial decisions.

Overall, while considering an inheritance in your retirement planning can provide some advantages, it’s essential to approach it cautiously, be realistic, and have a comprehensive financial plan that is sustainable regardless of future inheritances.