Should You Include Future Inheritances in Your Retirement Plan?

When You Should Consider a Future Inheritance in Retirement Plans

The Amount Is Large Enough to Impact Your Savings

Most inheritances are less than $500,000, according to a survey conducted by research firm Hearts & Wallets. However, 13% are greater than that—and 1 in 20 are $1 million or more. If you’ve got a large inheritance coming your way, it’s wise to plan ahead with an experienced financial advisor. They can help you build a retirement plan that includes that money. Tax planning is another consideration. 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

If you receive a large sum of money ahead of retirement, that gives you time to invest some or all of the proceeds—and potentially grow your wealth even more in the years to come. That 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. Just know that you might have to pay capital gains taxes if you profit from selling an inherited home.

Your Inheritance Is Locked In

The person who’s planning to leave you an inheritance may have clearly communicated their plans. For example, your parents may have already shared the details of their estate plan, which includes an inheritance. In this case, your inheritance might feel like something you can count on. That 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 whole retirement. In this case, it probably makes more sense to save for retirement—then 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. That means they’ll throw money into 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.

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