Counting on the Great Wealth Transfer to Fund Retirement? Why It May Not Pan Out the Way You Hope
Don't spend money you don't have. Learn why the Great Wealth Transfer might leave you with less than you think and how to plan around it.
Expecting an inheritance and think that means you don't have to save for retirement? Think again. You don't know for sure the timing or size of your windfall, or if you'll receive one at all.
Sure, the stock markets are sitting on record highs, and baby boomers hold $68 to $84 trillion in wealth they intend to pass down in what is known as the Great Wealth Transfer. But they are also living longer and spending more, which reduces the amount left for heirs.
"It's taking longer before our clients are receiving an inheritance," says Sarah Wotherspoon, managing director at Wealthspire. "The reality is, people don't know how long they will have to wait, and they also don't know how much they will receive."
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In the meantime, boomers are spending their money on luxury travel, longevity products, high-end retirements, healthcare and long-term care, says Wotherspoon.
They're also giving while living, paying for their adult children's homes, grandchildren's colleges and family vacations, she says.
That doesn't mean there won't be money left over if you are in line for an inheritance. It does mean you shouldn't bank on it. Here's what you should do instead.
Don't assume your inheritance amount
You may think you'll get $5 million because your mom and dad said so, but the reality could be vastly different when they pass. Even if the amount is accurate, there are taxes, legal fees and distributions that can change the inheritance outlook.
That's why it's important to have a conversation with your parents and their financial advisers about your inheritance. Without an accurate understanding, it's hard to plan.
After all, you may not need the money and want it passed on to your kids instead. This is something Wotherspoon says she is seeing more often.
If you aren't able to find out an exact amount, Wotherspoon says to cut your assumption by 50% or 60% and plan based on that. If your inheritance is more, you'll be happy; if it's less, you won't be caught off guard.
Don't treat your inheritance as your retirement plan
Just because you're getting an inheritance doesn't mean you won't need a retirement plan.
After all, taxes are a big part of estate planning, especially if the inheritance is large enough to push you into a higher income bracket. The goal should be to pay the least amount of taxes on your inheritance, and you can't do that without planning across all the generations that are in line to receive money.
Wotherspoon had one client who saved his money during his lifetime, so his son and grandson could receive substantial wealth at his passing. While he was living, he converted a large retirement account into a Roth IRA and took a big tax hit so that his heirs could avoid paying taxes later on.
His own account may not have enough time to recover from the tax hit, but his son's and grandson's accounts do. "An important part of this is tax planning," says Wotherspoon.
Don't spend an inheritance you don't have yet
You may expect a nice windfall later in life, but that's not permission to spend now and worry later. Don't blow off saving for retirement or accumulate debt just because you know cash is coming someday.
"We have clients who were tempted to make major life decisions because of an inheritance," says Wotherspoon, who advises against that. She has clients who want to buy third homes, retire early, take luxurious trips, and take on home renovations in anticipation of future inheritances.
Before they proceed, Wotherspoon asks them: What would happen if the inheritance were delayed a year, two years, or even five years? What would happen if they received less? Could they pay for whatever expense they wanted to incur?
Consider it an enhancement
Nothing in life is a guarantee, which is why your inheritance should be treated as an enhancement.
Plan for the tax consequences of your potential inheritance, but don't assume it will be there. Save as if it doesn't exist. That will prevent you from making any bad decisions that could harm your financial independence and retirement.
"That inheritance has to travel through taxes, the legal process, family dynamics, and market movements," says Brigette Engstrom, CEO of Blue Monarch Financial Services. "The amount can change, the timing can change, the way the assets are distributed can change. You are not ignoring the inheritance, you are refusing to depend on it until it actually becomes available."
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