Did You Screw up Your Retirement Planning?

Huge Potential Financial and Life Planning Impact

Why is this so important? Because our clocks are ticking.

As a financial advisor that discusses retirement (financial independence) planning with clients on a regular basis, I would be remiss if I didn’t bring up the potential impact of your parent’s finances.

There are two major ways our parent’s financial situation could have a great impact on our finances.

1. Our parent(s) may need our financial help in their later years. This is most often the case when illness related expenses melt away a parent’s savings.
2. Your parent(s) are likely to leave you a six or seven figure sum of money when both parents have passed away.

If you don’t know which position you may be in then it’s time to have that adult conversation with your parents.

“Have you had the talk“

Today, I want to focus on the potential impact of a future inheritance.  

Let me paint a scenario…

You and your spouse are in your fifties, working hard and saving what you can in your 401k. Lately, you’re starting to think about how much longer you’ll need to work/save your butt off.  Most 50 somethings are thinking about this.

While your specific retirement planning calculations can be quite sophisticated it really comes down to matching your expected income needs and resources to fund those needs. The income needs include all basic living expenses and ideally you’d also have money for fun desires such as dining out, travel, nice car, etc… MAKING A GOOD ESTIMATE OF INCOME NEEDS IS CRITICAL

Your resources include your saving and investment nest egg, social security and a pension if you’re fortunate enough to have one. 

Once you have these figures, you’ll want to project a growth rate for your investments and an inflation rate for your income needs.

This is what Certified Financial Planners (like me) do for their clients.

INHERITANCE FACTOR – when running your planning scenarios if you fail to include a future inheritance you may have seriously botched your plan and screwed yourself out of retiring sooner or spending way less money when you were in your early retirement year.

Circling back to our scenario: Let’s assume that based on your assumptions you will have a retirement nest egg worth $1,000,000 at age 67. I used age 67 because that’s when you will be eligible for your full Social Security benefit. At 67, you will retire (finally) and start drawing your SS checks ($30k/year) and follow a popular guideline for withdrawals by taking 4% or $40,000 per year ($1,000,000 x 4%) from your retirement savings. 

The real fear of outliving your money will keep you from dipping into the principal of your retirement savings if at all possible.

It kinda stinks that you didn’t spend (you saved) all that money when you were young and won’t get to spend and enjoy it (the principal). Not that living on $70,000/year is horrible especially if you don’t have a mortgage or expensive health issues.

Fast forward ten years into your retirement and your second parent dies and leaves you $1,000,000 which includes their investments, life insurance and the proceeds from their home sale. 

Now you’re 77 and have $2,000,000. Two million dollars you won’t be able to enjoy. You’re too damn old, have no debt, don’t travel much and you haven’t bought new clothes in years!

This is obviously not a tragedy, but it’s a shame you didn’t include the likely inheritance in your strategic plan.

What if you did include the inheritance as a future asset?

1. You wouldn’t necessarily need as a large a personal retirement nest egg

2.  You could quit current job sooner

3. You don’t need to save as much money (spend/enjoy more today while you are younger and healthy)

4. You could pursue a lower paying job (don’t need to save so much) that you may enjoy more or work less

5. You could spend a lot more money in retirement from day one knowing it will be replaced by the future inheritance

THESE ARE LIFE ALTERING FINANCIAL CHANGES

Why is this so important? Because our clocks are ticking!

We don’t know when our clock runs out or what our future health will look like.

As a financial advisor, I’m passionate to help people maximize the time they have left. It’s always a balance between living for today and planning for tomorrow.

Properly including an inheritance in your financial plan is prudent and can allow for life altering enjoyment of your future.