What Role Should Inheritance Play in Retirement Planning?

Quick Answer

Receiving a sizable inheritance can certainly change your retirement plans, but planning on an inheritance can be risky. Many variables can affect the size and timing of your inheritance, and most of these are out of your control. Consider making an independent retirement plan and using your inheritance as a supplement.

Woman seated at desk planning retirement funds.

Would an inheritance change your retirement plans? Chances are, it would. Inheriting a significant sum of money or a large asset like a home could add thousands—even millions—to your retirement portfolio.

But should an expected inheritance become the basis for your retirement planning? The answer to this question is murkier. The average inheritance is $46,200, according to the Federal Reserve. While $46,200 would be a welcome addition to anyone's retirement fund, it probably wouldn't generate a comfortable retirement all on its own, especially if you receive it later in life. Moreover, plenty of variables can stand between you and an expected inheritance. Even if you're anticipating an inheritance, you shouldn't rely on it solely in your retirement planning. Here's why.

Should Inheritance Factor Into Your Retirement Plan?

Receiving an inheritance can boost your retirement savings and even change the course of your retirement, depending on how much money is involved. Contributing money you inherit to a retirement fund (or an investment account earmarked for that purpose) can be a smart use for inherited wealth. However, there are good reasons why an expected inheritance shouldn't replace your retirement plan—or become the basis for it.

Inheritance is unpredictable. Your loved one may live a long time. Along the way, they may spend their hard-earned money on travel, life experiences, homes or cars. They may require medical care or assistance with daily living that depletes their savings. They may marry or remarry, survive a natural disaster, donate to charity, lose their investment gains—the list of possible surprises is long.

Knowing if and when you might receive an inheritance can be difficult, if not impossible. Meanwhile, there's no good way to rush someone into passing along their wealth.

Whether you hope to retire young or plan to work well into your golden years, you almost certainly want control over when you quit working. The way to maintain this control is to make your own retirement plan. You can always use inherited funds to augment your retirement savings—or buy a home, establish an emergency fund, start a business or pay off debt—when and if you come into the money.

How to Consider Inheritance in Retirement Planning

If you can, try not to count on inheritance as part of your retirement plan. Save up to take care of your basic needs in retirement and think of inherited wealth as a bonus. Meanwhile, here are a few ideas to help you consider an inheritance as part of your retirement planning without relying on it exclusively.

  • Learn what you can. Some grantors are open about what they plan to do with their money when they pass. If this is the case, consider asking—tactfully—about their plans. Adult children may also want to open a discussion with their aging parents about where their assets are in case they need to be accessed in an emergency.
  • Find a role for inherited assets. While you may not want to make an inheritance the centerpiece of your retirement plan, you can envision a role for any money or assets you expect to inherit. For example, consider planning to use inherited money to travel with your family, pay off what's left of your mortgage or shore up your savings.
  • Talk to a financial advisor. A trusted advisor can help you work out a retirement plan that doesn't rely on your inheritance. They can also advise you on how best to deploy any assets you do inherit.
  • Consider taxes and probate. The first $12.06 million of a deceased person's estate passes tax-free. After that, federal estate taxes apply; state estate taxes may also factor in. If the estate goes through probate, court costs and probate fees can eat into your inheritance.
  • Know the rules for inheriting retirement funds. Special rules may apply if you inherit retirement funds. For example, an inherited IRA may need to be depleted within 10 years. Also be mindful of annual contribution limits when transferring any non-retirement assets you inherit to retirement accounts: This could be a multiyear process.

3 Key Ways to Plan for Retirement

In the meantime, there's a strong case for building an independent plan for your retirement. Your retirement won't be contingent on someone else's life and finances. You can take advantage of tax incentives for retirement savings that allow you to grow your money tax-deferred or tax-free. And if you start early, regular contributions should be manageable. Here are a few basics:

Take Advantage of Tax-Advantaged Accounts

Retirement accounts offer tax benefits that can reduce your taxable income, allow your money to grow tax-deferred or tax-free, let you withdraw funds in retirement tax-free and help your retirement dollars go farther.

  • Consider maximizing your contribution to an employer-based 401(k) or 403(b) plan, especially if you're eligible for matching dollars. Employer matching is an immediate return on your investment.
  • Contribute up to $6,000 a year ($7,000 if you're 50 and older) to a traditional or Roth IRA. Traditional IRA contributions reduce your taxable income. Earnings and qualified withdrawals from a Roth IRA are tax-free.

Start Early

The earlier you start, the more time your money has to compound and grow—and the less you may need to contribute per month or per paycheck. If you contribute $300 monthly starting at age 25 and get an average return of 7%, you'll have more than $900,000 when you retire.

Set Goals

Check out savings milestones by age and calibrate your retirement savings to meet them. One frequently cited guideline suggests saving a year's salary by age 30 and 10 years' salary by age 67.

The Bottom Line

Receiving an inheritance can make your financial life easier, including saving for your retirement. But unpredictability makes planning on an inheritance potentially risky. If you can, keep your retirement planning and expectations for inherited money separate. Make an independent plan for funding your retirement and plan to use inherited assets to supplement it.