Wednesday, May 30, 2007

Save money for retirement - avoid these pitfalls! Part III

As previously stated, due to an uncertain future of tax rates, health insurance costs, college costs for kids, changing government regulations, and increased life expectancies, I believe it is near impossible to predict how much we'll actually need to save for retirement. Therefore, the amount you need is A WHOLE LOT! That's all you need to know - you need A LOT. And if you need a large pile of money for retirement, you need to start saving now. The sooner you make the pile of money "sorta big," the bigger it will be upon retirement.

Here is the third pitfall that I believe you need to avoid on your road to retirement:

3. Counting on an inheritance

There is a danger in changing your current saving and investing behaviors because you think you may inherit some money. This is terribly dangerous - there are so many things that can happen that could reduce your prospective inheritance to zero. Your parents could get sick and be racked with medical bills, or even long-term care bills. (My grandpa paid $5,000/month to be in a nice long-term care facility. Ouch!). They could live to age 100 - I'd be 75 by that point! I'd better have my retirement secured all by myself by then! They may end up deciding, through dementia or not, that it's their money and they're going to spend it how they see fit. They could get scammed out of the money. They might decide to give some or all of their money to charity. And due to any of these above reasons, they could end up running out of money, which could potentially have you supporting them during their final years.

Wow, lots of ways to have that inheritance slip through your fingers, huh?

Here's my situation. My parents are in their early 60's. My dad is retired, while my mom works 4 days a week. They have about $1.5 million. My wife's dad died penniless (very long story, he had millions, bad things happened). Her mom has a few hundred thousand maybe, maybe half a million, and owns two houses outright. Beyond that, it's hard to pinpoint how much she has. My wife's aunt and uncle, neither of which had children, own two farms totalling 200 acres, and also own 5-10 rental properties, some outright and some with mortgages. They live very frugally and have done very well for themselves. Their money, along with my mother-in-law's money, would be passed down to my wife and her two brothers. My mother-in-law has a will, while I don't think the aunt and uncle do. The ownership structure of these farms and rental properties is unclear to me - they do not keep airtight books (nothing illegal, they just sort of fly by the seat of their pants).

We're talking about a few million bucks in play here. I hope I never inherit it, which means that everyone lives to a very ripe old age. But if some of them should die before me, I cannot tell a lie - it would be nice to inherit some of that money. My $210,000 net worth could use a shot in the arm, right? I have to admit that I think about it sometimes.

But it is nothing I can count on, and I know with my current plan, I can get to retirement without inheriting any money. Put together a plan that can do the same thing for you.


broknowrchlatr said...

Great point. My father is a mortition and he has learned that MOST people burn through all of their net worth in the last 5 years of their life. People who die late typically have health issues for a few years before dying. Maybe its long-term care, maybe its prescription drugs, maybe surgery.

My wife's grandmother is 70 and has been in fairly good health with retirement funds of around $500k-$600k. She just had 2 major sergeries and was in the hospital for 3 weeks. It cost them nearly $100k out of pocket. She is healthy now, but still has treatments and drugs that are quite costly. It is possible that either she or her husband may live 20 more years. With that, it is unlikely that they will pass on anything.

plonkee said...

And they could just leave it all to someone else.

My parents are likely to split their estates between us children, but there are several of us (more than average, not enough for a football team). That in itself probably won't give us a whole lot each. Add to that the possibility that they might leave it to a new significant other and you can see that I'll also be counting on a big fat zero.

alex said...

Q, you said in your April Net Worth post that your net worth is $330K, but here you say its $220K? Are you giving away $100K sums to strangers off the street, and if so, can I get in on that?

Q said...


Yeah, I am making it too confusing. As of yesterday, I have $210,000 or so in equities and real estate (not including my principal residence). This is the magic number, the one I'm working to get to $1 million. The $300+K number includes my principal residence, cars, and other meager belongings.

I should probably just report on the $210k number

Mr. Cheap said...

The other "cost" of counting on an inheritance is you have to kiss ass and try not to annoy the people you're hoping to get cash out of.

Too much work! You're basically a trophy wife at that point. I'd rather just work at work then work at trying to stay in someone's good graces. If they like you and leave you something, fine. If they don't and don't, fine too.

PF101 said...

This is something I teach in my classes. "Don't rely on anyone - Government, family, spouse, etc. - to fund your retirement. YOU are the only person who cares about your money so it's up to you to save it."

You hear all the time about people who thought they were coming into big bucks and then it didn't happen and now they have to scramble. Personally I don't expect to inherit - in fact, I expect to have to support my mom when she gets older. But even if she had money I'd want her to spend every penny instead of trying to save it for me.

Great series!

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