Inheritance Financial Plan

It can be uncomfortable or even distressing to make a financial plan that takes death into account. We don’t like to think that someone we care about may die before we do. However when couples plan their future finances, it’s prudent to think the unthinkable. They need to consider how each one would cope financially should the other one die first.

It’s less common to make a financial plan for inheriting from one’s parents (or perhaps from another close relative). There could be a number of reasons for this:

  • We don’t like to feel financially dependent on our parents.
  • The idea of waiting for our parents to die fills us with distaste.
  • We’ve no idea how long our parents will actually live.
  • We’re uncomfortable discussing the issue with our parents.
  • Our parents might spend all or most of their money later in life, perhaps on care.

All of these are valid concerns. Indeed, I’ve heard and read passionate advice that we should completely ignore any potential inheritance from our parents. We’re supposed to treat it as a windfall if and when it happens. I understand this point of view, but I disagree. We should dispassionately base our financial plan on reality, as best as we can.

This doesn’t mean we should treat a future inheritance as though it’s already money in the bank. But it can be an added factor to take into account in our plans.

Example 1: Single Person

It’s complicated even for a single person. If you outlive your parents, then you’ll eventually inherit from them. So you could plan for a modest increase in spending starting now, which you’ll probably eventually recover. If you die before your parents, that additional spending won’t hurt your finances since you’ll be dead! On the other hand, if just one of your parents lives to a ripe old age, there’s a risk that you could run out of money before inheriting anything. This means you still have to be careful about spending money you may never receive.

Example 2: Couple

For a couple, things are significantly more complicated. As an example, consider a married couple consisting of a 50-year-old husband and a 45-year-old wife. Suppose that the husband expects he’ll eventually inherit a sizeable sum from his 70-year-old mother. Let’s assume his mother is widowed. Suppose the married couple starts increasing their joint spending, banking on this inheritance. Then for the wife there’s a double financial risk:

  1. The husband’s mother may live to a ripe old age. This risk was also present in the single person example.
  2. The husband may die before his mother. In this case the wife would not expect to receive the inheritance.

One way of mitigating the second risk might be for the husband to take out life insurance. The point is though that balancing the risks can be complex.

Our Financial Plan Calculator

In the light of such complexity, little wonder that many feel it best to ignore inheritance altogether. Treating it like cash in the bank is certainly a bad idea. When we originally launched our financial plan calculator, we didn’t program it to explicitly handle inheritance. There was no safe way for plan members to anticipate inheritance using the tool.

Some other financial calculators have treated inheritance as a guaranteed lump sum at retirement. This may be considered a slight improvement, but it’s still risky. It’s clearly not guaranteed.

Following extensive research and trials, our own calculator now accepts details of one or more anticipated inheritances. Each inheritance can be from either one or two people. The application uses Monte Carlo simulation. It uses personal details (e.g. gender, date of birth) of the member(s) of the plan. It also uses similar details of any other people from whom they stand to inherit. Optimisation is done by means of a genetic algorithm. This balances out these and other competing uncertainties, to arrive at a viable spending strategy.

We believe that EvolveMyRetirement® is the first online financial plan calculator that treats inheritance in a realistic way.

Inheritance In Your Retirement Plan

4 thoughts on “Inheritance In Your Retirement Plan

  • 16th December 2020 at 2:04 pm

    I’ve posted this as a support message but haven’t heard anything back so thought I’d try a blog comment.

    I’m confused as to how EMR treats inheritance. I have entered inheritance from 4 different people (2 each for me and my wife) that I would expect to crystallise in different years going forward. However, EMR shows in the Assets and Liabilities bar chart and the Assets table that the sum total of the 4 inheritances is assumed to be available (I think!) in year 1 of the plan. This is despite the Major Events table showing 3 (?) inheritance values in different years (spanning 10 years from first to last). One of these values is not recognisable from any number I entered and the fourth value I entered appears to be missing.

    Could you explain what’s going on? I’m happy to share the plan I’m working on or screenshots if you would like to look into it.

    • 16th December 2020 at 2:30 pm

      Hi Ed, thanks for your query, and I’m sorry you didn’t receive a response. I did sent you 2 emails in response to yours: maybe they were sent to spam?

      The first point I’d make is that although an inheritance is shown as an asset from year 1, it can’t be used to fund cashflow until it’s actually inherited. At that point it changes to liquid assets in the chart. In the detailed tables, in the Net Worth section, you can see the net worth both including and excluding anticipated inheritances.

      As to why you only see 3 inheritance events rather than 4, I can think of 2 possible reasons (assuming you’re running an Average Scenario):
      1. Two of the inheritances are from people with the same life expectancy, and so are inherited in the same year.
      2. One of the inheritances is from someone with a life expectancy longer than the member(s) of the plan, and so is never inherited.

      Does this explain things? If not, please share your plan with on the Plan page, and I’ll take a look.

      • 16th December 2020 at 4:55 pm

        Thanks Nick for your prompt reply.

        I understand the first point around assets and funding cashflow.

        I don’t think (although happy to be proved wrong) that either reason explains the inheritances shown in the Major Events table. I’ll share the plan as you suggest and see if you can shed more light on it.

        Cheers for now.

  • 17th December 2020 at 7:31 am

    Thanks for sharing your plan Ed. Once I’ve looked into it, I’ll send you an email. Hopefully you’ll receive it this time.


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