4 Reasons It’s a Bad Idea to Rely on an Inheritance To Support You in Retirement
Written by
Laura Bogart
Edited by
Kristen Mae
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Anyone who has ever seen a classic noir, or more than a few modern-day thrillers, knows how important an inheritance can be. Femme fatales, scheming stepkids, and an occasional wicked cousin work to knock off the family matriarch or patriarch to get their hands on the big bucks that should set them up for life.
Well, real life isn’t like the movies. If you were banking on an inheritance to cover you well into retirement, you might be in for a rude awakening. Yes, getting a sudden influx of cash can improve certain material aspects of your life, but it’s not something you can count on to last long-term — or even to materialize at all.
Before you stake your future on someone else’s wealth, here are four reasons to rethink relying on an inheritance:
1. You’re Putting Your Financial Future in Someone Else’s Hands
Remember the old adage, “Give a hungry man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime”? Turns out Lao Tsu’s wisdom applies to retirement planning too.
Relying on an inheritance is like getting handed a giant mackerel one time. You might satisfy some immediate needs, but before long, you’ll be back to square one — hungry, broke, or both.
More importantly, you don’t want to tie your financial stability to something as tragic as the loss of a loved one. Instead, plan for a sustainable retirement by contributing to a 401(k) or 403(b), opening a traditional or Roth IRA, and diversifying with stocks, bonds or alternative investments. This way, you’re taking charge of your own financial future — doing your own fishing, so to speak.
2. Taxes Could Be a Factor
While there’s no overarching federal inheritance tax, some states levy taxes on inheritances. Residents of Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania can be on the hook for inheritance taxes. Iowa is expected to phase out its inheritance tax by 2025, depending on factors like the size of the estate, the heir’s relationship to the deceased, or even the state where the deceased lived.
If your wealthy great-aunt lived in a state without inheritance taxes, you’d be in the clear. However, if you both lived in a state that imposed inheritance taxes, you might see a significant portion of your inheritance go to the government.
The standards for taxes and exemptions vary widely from state to state. Before you start picking out that fancy furniture — which, admittedly, your great aunt would have loved for you — you should check how much you might owe.
3. Wills Can Change
Despite what movies and pop songs suggest, love isn’t always forever. Sometimes, even familial relationships can sour. And when that happens, the will might be the first thing to change.
Peter Dunn, a financial expert and author, shared a cautionary tale in USA Today about a couple who did nothing to plan for their kid’s college fund or their own retirement. Why? They were planning on an inheritance from their parents to cover the costs.
“Fast forward. There was a falling-out, and the grandparents reneged on their commitment,” Dunn wrote. “Now, the middle-aged couple had no money for college, and no money set aside for retirement. That’s what happens when you make your life someone else’s responsibility.”
Dunn was blunt in his assessment of whose responsibility it is to plan for your retirement (spoiler alert, it’s you): “Your financial goals need your money, time and attention.”
4. The Amount You Receive Can Change
Ideally, you’d want your loved ones to live a long time. The good news is that modern medical technology often helps them do just that. The bad news? All this life-prolonging care, including long-term care or assisted living, can cost a lot of money.
As seniors live longer, they not only require more medical care, but they might also be eager to spend their money on themselves. Whether it’s paragliding in the rainforest or a beachfront getaway, their spending habits could reduce what’s left to pass on.
All of this means that even if you stay in their good graces, you might end up with a cool souvenir instead of a windfall capable of funding your retirement.
Relying on an inheritance is risky and leaves your financial future vulnerable to factors beyond your control. Instead, focus on building your own retirement plan — one you can rely on, no matter what.
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