Planning for Retirement: Should You Consider a Future Inheritance?

When planning for retirement, many factors come into play, including savings, investments, and potential inheritances. While a significant inheritance can be a game-changer, it’s essential to consider various aspects before factoring it into your retirement plans. At O1ne Mortgage, we understand the complexities of retirement planning and are here to help you navigate these waters. Call us at 213-732-3074 for any mortgage service needs.

When You Should Consider a Future Inheritance in Retirement Plans

The Amount Is Large Enough to Impact Your Savings

According to a survey by Hearts & Wallets, most inheritances are less than $500,000. However, 13% are greater than that, and 1 in 20 are $1 million or more. If you expect a large inheritance, planning ahead with an experienced financial advisor is wise. They can help you build a retirement plan that includes this money. Tax planning is another consideration, as some states have inheritance taxes that could be as high as 20%. Estate taxes could also reduce your expected inheritance.

You’re Expecting Your Inheritance Before Retirement

Receiving a large sum of money ahead of retirement allows you to invest some or all of the proceeds, potentially growing your wealth even more in the years to come. This could change both your net worth and your retirement plans. Even if you inherit an asset like a home, you could sell it or rent it out to generate additional income. However, be aware that you might have to pay capital gains taxes if you profit from selling an inherited home.

Your Inheritance Is Locked In

If the person planning to leave you an inheritance has clearly communicated their plans, your inheritance might feel like something you can count on. For example, your parents may have already shared the details of their estate plan, which includes an inheritance. This might change your retirement vision if you’re expecting to inherit a large sum of cash or any valuable assets.

When You Shouldn’t Consider a Future Inheritance in Retirement Plans

It Won’t Have a Huge Effect on Your Nest Egg

An expected inheritance may not be enough to fund your entire retirement. In this case, it makes more sense to save for retirement and use the inheritance to supplement your income when you’re no longer working. Your inheritance could go toward things like:

• Emergency expenses
• Medical bills
• Vacations
• Charity
• Self-care splurges
• Investment opportunities

So how much should you save for retirement? In 2021, average annual expenses for people 65 and over totaled $52,141, according to the U.S. Bureau of Labor Statistics. Of course, your unique retirement goals will determine your savings target.

Your Inheritance Is Coming Near or After Retirement

More than half of the people who get an inheritance end up receiving it when they’re 55 or older, according to the Hearts & Wallets survey. It’s difficult to build a retirement plan around a potential late-in-life inheritance. If you are retired and still waiting for an inheritance, you may not have enough income to support your lifestyle. Making your own retirement plan is a safer bet. When your inheritance does come in, you can treat it like extra income.

Your Inheritance Isn’t a Sure Thing

It’s hard to build a retirement plan around something that isn’t guaranteed. By nature, inheritances can be unpredictable. Your loved one might:

• Live for a long time
• Spend some of that money on traveling or other lifestyle expenses
• Require assistance or medical care that eats into their savings
• Experience investment losses or income changes that affect their financial plan

If an inheritance feels up in the air, it probably isn’t best to factor it into your retirement plan.

Other Ways to Pad Your Retirement Savings

If you don’t want to count on an inheritance as part of your retirement plan, or you just want to ensure you’ll have enough, here are some other ways to boost your retirement savings:

Contribute Enough to Get an Employer Match

Many employers offer a 401(k) match, meaning they’ll contribute to your retirement account if you contribute a certain amount. It’s one way to supercharge your nest egg.

Gradually Increase Your Retirement Contributions

One rule of thumb is to save 15% of your income for retirement when you’re in your 20s and 30s, then dial it up to 20% in your 40s and beyond. Whether you’re meeting those benchmarks or not, you can build your savings by gradually increasing your retirement contributions. One simple approach is to bump it up by 1% every year until you reach your target.

Put Other Cash Windfalls Toward Retirement

Inheritances aren’t the only cash windfalls. You can also funnel money from tax refunds, work bonuses, raises, and side gigs directly into your retirement accounts.

Make Catch-Up Contributions

Those who are 50 and older can contribute more to certain tax-advantaged retirement accounts. Increasing your savings rate at this stage of the game can help you save more for retirement.

The Bottom Line

Coming into an inheritance certainly won’t hurt your retirement, but you’ll want to be intentional about planning ahead. In some cases, it may be best to build your own nest egg and let that extra money be more of a cherry on top—especially if there’s any uncertainty around your inheritance.

Whether you’re still working or getting ready to retire soon, there’s never a bad time to prioritize your financial health. At O1ne Mortgage, we are committed to helping you achieve your retirement goals. Call us at 213-732-3074 for any mortgage service needs. Let us help you secure a financially stable future.