Yahoo Finance Why relying on an inheritance to fund your retirement is risky
A woman who is 65 today will live to 87 on average, but there’s a 25% chance she’ll still be around at 94. If she’s a much-loved relative, you may well be crossing your fingers you’ll be able to celebrate her 94th birthday with her. But what about if you can’t afford to retire until she passes away?
Relying on an inheritance to fund your retirement causes all sorts of problems – not least the horrible idea of hanging on for the death of a loved one – so it’s worrying that our research has revealed that one in three people who expect to inherit say they need the money to pay for their retirement.
It’s not just the thorny issue of tying up the death of a loved one with your future happiness, there’s also an awful lot that can happen during their life which can mean you don’t get what you expect. In some cases, people will have saved their whole lives and want to spend their money enjoying themselves – rather than clinging onto every penny to hand down. In other cases, they may be forced to spend it all paying the astronomical cost of care.
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Equity release can also make a significant dent in someone’s wealth, as the interest rolls up and has to be repaid on death. If your loved one has released equity from their property without telling their family, they could end up leaving an estate that’s far smaller than anyone expected.
Then there’s the potential impact of finding love in later life. In 2020, almost 5,000 men aged 65 and over tied the knot. They may choose to leave their inheritance to their new spouse, or share it among a wider family. They may even neglect to make a will – in which case a significant portion of the estate passes automatically to their new spouse.
Some people are particularly reliant on an inheritance to fund retirement, so if it disappears it will cause particularly problems. This includes women, who tend to have smaller pensions and need to make up a shortfall. It also includes higher earners, which may be due to the fact they have become used to a better standard of living – which isn’t going to be covered by their pension.
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Given how unreliable inheritance is, if you expect it to play any part in your retirement, you need a robust Plan B. You have to be able to afford to retire if you get less than expected, it comes later than you initially thought, or you end up without one.
One sensible approach is to make sure you can cover your essential expenses regardless of whether you get an inheritance or not. This can come from a combination of your state pension, workplace and personal pensions, as well as any other savings or investments. You can then use any inheritance you receive to help make life more comfortable – or give you the lifestyle you want in retirement. If your pension savings will fall short without an inheritance, you need to consider how to make them stretch further. You may, for example, need to downsize your home, or work later in life.
None of these will be your ideal first choice for retirement, but making some compromises now will save you from a nasty surprise later. It means that if your 65-year-old great aunt goes on to be one of the one in 20 who will go on to celebrate their 100th birthday, you can celebrate with them – without having to worry about what it means for you.
Sarah Coles is head of personal finance at Hargreaves Lansdown and podcast host for Switch Your Money On.
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