Pattie Lovett-Reid: How inheritances should affect your retirement planning
There are some who will be counting on a big lottery win or an inheritance to fund their retirement. But it is the wildcard that could prove to be lucrative or hugely disappointing.
The odds of winning the lottery are slim but the odds significantly increase if you are counting on an inheritance.
A new report out by Edward Jones highlights many Canadians do not expect to have an inheritance that will impact their future and 49 per cent said it is not part of their long-term financial future.
Those surveyed between 18 and 54 were the most optimistic about receiving a windfall from a family member. Interestingly, a person’s income doesn’t appear to make a major difference when it comes to inheritance expectations: 50 per cent of people whose income is less than $40,000 say they expect an inheritance, while a similar number 39 per cent of those earning a salary of over $100,000 say the same.
It isn’t always easy to have this conversation, but the conversation needs to be had. While children feel the inheritance might not be a lifestyle changer for them, six in 10 parents would disagree and believe they will be in position to provide a significant contribution to their loved one’s long-term financial plan. Sixty-one per cent of people 55-64 and 57 per cent of people over 65, say they plan on leaving a “significant contribution” to a family member.
Sharing details of your financial legacy with the next generation could be hugely beneficial as there a number of considerations including the tax implications for both parties, ensuring a equitable distribution – and it helps to manage expectations.
However, regardless of the conversation and good intentions, the inheritance you discussed may not materialize. Many parents are living longer than expected, healthcare costs could escalate, and lack of equity returns could erode their purchasing power along with taxes and inflation. In addition, if your parents are retired they may not have a good handle on their spending. That could alter the amount once thought to be passed along.
Moral of the story: for the nearly half of Canadians who do not expect to receive an inheritance, planning for the future is critical; however, it is also important for those anticipating an inheritance they too plan because things don’t always go according to plan.