Are you planning on using your inheritance for your retirement plan?

You can’t rely just on inheritance as a retirement plan

Canadians who believe they are going to receive some sort of inheritance from their parents should know that wealth transfers aren’t guaranteed.

Not everyone plans to leave money behind, and even when they do, the amount and timing can be uncertain. That shouldn’t be a surprise: retirees increasingly require more money as they live longer, and they’re also spending their savings on travel, health care and more during their golden years.

Inheritances can indeed have a significant impact on a financial plan, especially if you’re expecting to receive one and then don’t. Finding out now whether you’ll be getting a lump sum from your parents, and then figuring out how to incorporate it into a plan, is key. Here’s what you need to consider when thinking about an inheritance.

Talk to your parents

There’s only one way to find out if you’re receiving an inheritance: talk to your parents. It’s not often an easy conversation to have, but understanding what they plan to do with their estate is important in figuring out your own financial future.

It may very well seem that your family has funds they’re planning to pass down, but life can change, making it difficult to know how much may eventually come your way.

For instance, with Canadians living longer than ever before, the money they leave to the next generation might not arrive for decades.

Priorities may also shift: retired family members may decide to buy a second home in a warmer climate and spend more of their savings on vacations. More people over 65 are getting divorced and remarried, which could also affect how an inheritance is divided. And health care costs could also eat up a lot of their savings; assisted living facilities aren’t cheap, nor are the home renovations needed for aging in place. 

Have your own retirement plan

When you consider that your retirement may last decades, you want to make sure you aren’t putting all your financial eggs in one basket. Unless you’re guaranteed a life-changing amount of money before you retire (few people are), you need a financial plan that includes a diversified range of investments.

You can start the process by figuring out how much money you think you’ll need every month once you leave the workforce. If you’re able to pay off your house and other major expenses before you retire, this number might be more manageable than you think.

Even if you’re expecting an inheritance, it may not be as big as you’d imagined. Many Canadians  estimate they’ll need over $1 million  to live a comfortable retirement. Knowing what you’re getting will affect your plan, but you should still create a plan that doesn’t rely on an inheritance. That means knowing your various income streams in retirement such as the Canada Pension Plan, Old Age Security, workplace pension, Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) and other investments. You'll also want to determine how much you need to live on every month.

For most Canadians, making an automatic payment to an RRSP is the foundation of their retirement plan. An RRSP will allow your investments to grow tax-free until you withdraw the money in retirement. In the year you turn 71, you’ll need to mature your RRSP, which is most commonly converted into a Registered Retirement Income Fund (RRIF). This account requires you to withdraw a certain amount of your savings every year.

Spend your inheritance wisely

If it’s clear you’ll be receiving money, there are some things to think about related to your inheritance to ensure you’re ready. A good place to start is to figure out the tax implications that can accompany an inheritance. While there’s no inheritance tax in Canada, the estate itself will have to pay tax on any gains made on investments or income earned up until the day a person dies. A final tax return must be prepared on behalf of your benefactor once they are deceased. After the estate has settled taxes and any other outstanding debts, the remaining funds are distributed to the beneficiaries identified in the will.

The bottom line

It’s not uncommon for people to experience mixed emotions when they benefit financially from the death of a loved one. Having an open conversation with your parents while they’re still here might help you come to terms with some of these feelings, while giving you the insight you need to prepare properly for the future. It also provides a good opportunity to review or create a financial plan that will make sure you’ll be ready for your own retirement, with or without the help of anyone else’s money.