How to factor an inheritance into your retirement planning is a looming question for a growing number of people, given that an estimated US$84.4 trillion in savings, stocks and property will pass from baby boomers to their heirs and favoured charities by 2025 in the greatest transfer of generational wealth in history.
One married couple, Jonas* and Kathleen, in British Columbia are the sole beneficiaries to the estates of their parents and an aunt, and expect to inherit upwards of $1 million over the next 15 years. They are frustrated that inheritance planning isn’t typically part of the retirement planning process and that wealth calculators only make the process more difficult. Another issue they have is that talking about money and death remains taboo.
“It feels wrong, somehow immoral, to be talking about receiving a future inheritance,” Jonas said. “But these are important conversations that can remove some of the uncertainty about the future.”
Jonas, 55, and Kathleen, 49, would like to retire in the next five years. He would like to start working less in the next year or two, and they would like to spend at least five months a year living outside Canada when they do retire. If necessary, he can take on IT consulting projects in retirement, which could easily bring in about $50,000 a year.
Jonas’ current annual income is $110,000 before tax and Kathleen earns $20,000. Their investments generate about $7,200 in dividend income each year, which is automatically reinvested.
It feels wrong, somehow immoral, to be talking about receiving a future inheritance
The couple do not have children or beneficiaries, are debt free, own a home valued at $1.4 million and have a bit more than $1 million in savings. To this point, the couple has directed discretionary savings to maximize Jonas’ registered retirement savings plans contributions first (as of this year, he has eliminated any remaining contribution room) and then Kathleen’s tax-free savings account (TFSA). As a dual Canada/United States citizen, Jonas does not have a TFSA because it’s a taxable asset in the eyes of the Internal Revenue Service.
Their ultimate goal is to spend as much of their accumulated wealth as possible to ensure they fully enjoy their lives and then leave the remainder to charity.
Their family medical histories indicate they are not likely to live into extreme old age, so they’d like to create a retirement plan to age 85 for each of them, excluding long-term care costs.
The couple’s current monthly expenses are $4,650 and they would like to maintain a retirement net income of at least $5,000 per month (adjusted for inflation annually), preferably closer to $7,000 if possible. They plan to offer their home as a short-term rental when they travel, which should bring in anywhere from $300 to $400 per night.
A planner by nature and in his professional life, Jonas has worked out a few unconventional strategies to ensure he and Kathleen are able to enjoy and sustain the life they want in retirement based on reducing the equity in their home.
One strategy is to tap their $400,000 home equity line of credit since they are not against having liens put on their house that are not collectible until they both die. Another is to defer annual property tax payments (an option to residents aged 55 and over of B.C.). This will net them about $4,000 a year. Taking out a reverse mortgage might also allow them to access upwards of 50 per cent of the home’s value while living in it.
If for some reason they don’t receive the inheritances, Jonas and Kathleen can sell the house and downsize or rent.
“We don’t want to die with 100 per cent equity in the house because we don’t have anybody to leave it to,” Jonas said.
What the experts say
Jonas and Kathleen are in good financial standing to fully retire in five years with $7,000 a month in after-tax income and enjoy the lifestyle they envision, say the experts.
Based on B.C.’s tax rates and a net return of only three per cent after inflation over the next 25 years, and not including the inheritance, the professional planning software, which also integrates future CPP and OAS payments, illustrates they could create their higher preferred retirement income of $7,000 net per month in today’s dollars from when Jonas is age 60 to 75 and they are likely to be most active, said Eliott Einarson, a retirement planner with Ottawa-based Exponent Investment Management.
“After 75, they could still hit their target of $5,000 net per month in today’s dollars, leaving them no remaining investment accounts at age 91 for Jonas and 85 for Kathleen,” he said.
Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, said as long as the couple use their $400,000 line of credit to spend during retirement (“generally more effective than a reverse mortgage which, given their young age, will likely only provide 20 per cent to 40 per cent of their home’s value“) or invest (“this option would give them the highest retirement lifestyle”) and inherit at least $500,000 within 15 years, they are on track for their desired retirement.
To factor their inheritances into their retirement plan, Rempel recommends only including the amounts they are confident they will get.
“Use conservative estimates and include how many years from now you think you’ll receive it, with the understanding that it is not guaranteed,” he said.
If they don’t get their expected inheritances, Rempel said they will need about $700,000 from their home to live the retirement lifestyle they want. They could either downsize to a home half the value of their current home, or sell to rent for up to $2,500/month.
“Selling or even just downsizing the house at some point will be more than enough to keep them spending a lot more than they spend now, and well into their 90s,” Einarson said. “Their personal activity level will likely slow down long before their income levels need to be adjusted down.”
*Names have been changed to protect privacy.
Editor’s note: Worried about having enough for retirement? Need to adjust your portfolio? Wondering how to make ends meet? Drop us a line at firstname.lastname@example.org with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a story about it (we’ll keep your name out of it, of course).