Author Topic: Planning FIRE around likely inheritance?  (Read 3383 times)

ryguy9090

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Planning FIRE around likely inheritance?
« on: February 22, 2017, 11:36:58 PM »
Hi all - long time lurker, first time poster.

My wife and I are both about 30, working towards FI, and hope to be there in the next 10 years. Up to this point we have been putting most of our FIRE savings towards maxing out 401ks and HSAs to get the tax benefits, since our income puts us well into the 25% bracket.

We've recently been thinking about shifting away from these Retirement accounts, taking the tax hit now, and instead putting our savings into something we can more easily access during FIRE years before age 60. We've been leaning towards the idea of saving cash each year to put towards real estate investing for some rental income during FIRE.

I'm familiar with the strategy of saving enough "old man" money in Retirement accounts and then shifting towards taxable/roth savings for FIRE purposes. However, part of me also thinks why not just put the money in 401ks and plan to pay the 10% penalty for early withdrawal during our FIRE years. Assuming we both have quit our day jobs, we would now be down in the 10-15% tax brackets, so at worst we are breaking even on our ultimate payment to the IRS, but have had the benefit of tax-free compounding interest up to that point.

Another factor that we've recently realized, and the true subject of this post, is that both my wife's and my parents will likely have a decent inheritance to pass on to us when they pass away. By the time we are 60 our parents will be in their 90s, so presumably we will receive a decent windfall in our 60s or 70s. While our instincts are to not count on any free money, and we've encouraged our parents to "live it up" during their well-deserved retirement, our parents have basically told us that we should still count on this inheritance.

So with these factors in mind, we're trying to plan things so that we can FIRE as soon as possible, even if this means a smaller initial nest egg, rather than waiting too long and ending up working years longer than we need to and having more money than we know what to do with after age 60.

Thoughts?  Has anyone else adjusted their FIRE plans based on expected inheritance?

Thanks for your input!


Edit:
I should probably clarify that I like to be very conservative in my FIRE estimates, and am the type of person that would probably work several years longer than necessary to ensure an insane amount of safety margin before FIREing. So please don't take this to mean that I would plan our FIRE strategy such that our stash would run down to $0 at age 60 in expectation of this windfall. We would just consider planning our numbers with a lower safety margin. Is this reasonable?
« Last Edit: February 22, 2017, 11:59:46 PM by ryguy9090 »

Villanelle

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Re: Planning FIRE around likely inheritance?
« Reply #1 on: February 22, 2017, 11:51:30 PM »
There may be ways to access the retirement money earlier without the penalty, so keep that in mind.

For the question at the heart of your post, it's a somewhat heated topic, and generally when it comes up around here, the consensus is "never count on an inheritance".  But I disagree somewhat with that.  You need to carefully evaluate your situation.  Is the family dynamic such that it's almost unthinkable you'd be disinherited?  Have the parents explicitly told you you will inherit everything (as opposed to giving some or all to charity, for example)?  Are you privy enough to their finances to know roughly what the amounts might be and whether there is any reasonable chance they could spend much of that down (long term care required, for example)?  Do they have good health insurance?  LTC insurance?  (Not a requirement, but one factor to consider when evaluating how certain the inheritance is.)

If you've looked at those things carefully, personally, I don't see anything wrong with keeping in mind an inheritance.  My parents have been very clear with my sibling and me on their will and their estate.  They have very solid medical insurance.  In their 70s, they still have positive cash flow (2 pensions, some consulting work, and a few other things).  Our relationships are rock solid.  They've made it very clear that they very much want to leave generous sums to Sibling and me, and in fact have a goal number in mind that they've shared with us, so it's clearly important to them to do this, meaning they are going to try damn hard to make sure it happens. Like you, I wish they would spend a bit more, but they are set in both their ways, and their desire to do this for their children.  I still don't take a specific number and insert it into our FIRE plans, but I do mentally consider it a cushion that will allow us to be less conservative about our plans.  We might push for a lower SWR, or a budget number with more wiggle room if that money wasn't in the back of our minds, so I guess in that sense, we have adjusted our FIRE plans based on this.  And again, my parents have encouraged this mindset, so I don't think it's greedy or presumptuous.  They've explicitly said they want to give us the ability to quite work earlier and/or travel more (our passion). 

Frankies Girl

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Re: Planning FIRE around likely inheritance?
« Reply #2 on: February 23, 2017, 12:00:25 AM »
DO NOT COUNT ON INHERITANCE

Super if you end up receiving one, but unless you have a crystal ball, you have no way of knowing you'll receive anything.

You might piss someone off, they might decide to leave it all to someone else or charity, they migh spend it all themselves having fun, or need every penny for medical or long term care and hospice.

And they might just live exceptionally long lives so they don't pass until you're in you 70s or older... not going to help much in that case if you didn't properly save/invest for your own living expenses to last out your early years and end up running out before receiving a dime.

Unless you have a vastly wealthy family with unbreakable trusts coming to you, pretend that inheritances don't exist.
« Last Edit: February 23, 2017, 12:36:56 AM by Frankies Girl »

Abe

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Re: Planning FIRE around likely inheritance?
« Reply #3 on: February 23, 2017, 12:06:56 AM »
In general, I would not make plans on something that is going to happen 20 years from now unless it's nearly guaranteed. People in general vastly underestimate the cost of their care in the last years of life. Unless your parents are millionaires, or oppose long-term care at the end of life for various reasons (as many health professionals do), they are at high risk of using their savings for those purposes and leaving less than planned to you all. Without details of their finances it is hard to provide any further advice other than don't bet on it, or at least have an alternative plan for your 60s if that doesn't pan out. Like all long term planning, it is mitigating as much risk as possible while accepting some for potential high payout.

My parents have sizable savings on top of very good pensions that will provide far in excess of their spending. This gives an almost 100% chance that I will inherit a large amount. Even then I am not including the inheritance 20 years out in my plans, and neither does my wife include her parents' planned savings.  We do that from an ethical standpoint where we do not want a potential conflict of interest subconsciously affecting our decisions on the parents' healthcare and such. We certainly would not retire early on that assumption.
« Last Edit: February 23, 2017, 12:08:42 AM by Abe »

begood

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Re: Planning FIRE around likely inheritance?
« Reply #4 on: February 23, 2017, 05:31:37 AM »
My parents had three rental properties and a cool million in mutual funds when my mother died in 2003. My dad was 83 at the time. Over the next twelve years, my dad sold the properties and spent $1,000,000+ on private home care. He was two weeks from going on Medicaid in a nursing facility when he died at age 95. He died with $7,000 in the bank.

Don't count on an inheritance.

Iplawyer

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Re: Planning FIRE around likely inheritance?
« Reply #5 on: February 23, 2017, 07:25:25 AM »
Mom dies, Dad marries a 30 year old, has another kid, whatever.  You cannot count on inheritance.  Many things can happen. 

catccc

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Re: Planning FIRE around likely inheritance?
« Reply #6 on: February 23, 2017, 07:36:04 AM »
The old adage "don't count your chickens before they hatch" applies here.  No, do not plan FIRE around this inheritance!

Car Jack

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Re: Planning FIRE around likely inheritance?
« Reply #7 on: February 23, 2017, 08:17:32 AM »
Another "Don't count on inheritance" vote.

In my and my wife's case, we each have only one remaining living parent, each with plenty to live on, gift to our sons (one in college, one in private high school) and are both mid 80's.  I know my mom has on the order of $1M and I have one sister.  She has houses in the north, near me and one in Florida, near my sister and each in the will to go to me and my sister.  Lots of annuities and retirement accounts with beneficiaries of my sister and me.  We count on zero.  Why?  .....  another story:

Our friends from college have only one parent left, in her mid 90s and in a nursing home.  Already blown through half a mil and they live in a state where nursing homes can go after kids for payment.  Medicaid has been saying no and they are paying a lawyer to hopefully, eventually get some medicaid payment.  I expect they'll be on the hook for half a mil by the time everything is said and done.

This could be YOU.  Where you were counting on inheritance, you instead get a half Mil bill.

Laura33

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Re: Planning FIRE around likely inheritance?
« Reply #8 on: February 23, 2017, 08:50:48 AM »
The way you laid it out, I think you are considering the inheritance appropriately -- i.e., not as the foundation for your FIRE plan, but assuming you'd FIRE at a level where you would be able to get by without the inheritance, and the inheritance if it comes provides a lovely bonus for more travel or whatever.

FWIW, we are doing somewhat of the same thing.  Officially, we are counting on zero inheritance (and both our mothers were *pissed* when we told them that -- "what, my money isn't good enough for you?"  It was really, really funny).  However, I do feel comfortable assuming that there will likely be *something* coming within about 10+ years after our target date.

If you were talking about "spend it down to zero by 60 because I will have this big pot of money coming in," then no, I wouldn't feel comfortable at all.  Too many bad things can happen.  In my own family:

- My step-grandmother was in assisted living for Alzheimers for more than 10 years before she died -- the mind gave out while the body was still wicked strong.  I have no clue what that cost, but it wasn't cheap; I think she must have had awesome insurance, because she still left a decent estate when she died.  Then again, I have no idea what the estate was before the Alzheimers hit.

- My stepdad was diagnosed with Parkinson's at 60 and was just getting to the point of probably requiring assistance soon when he died 10 years later of unrelated causes.  He had no LTC insurance, because he got the diagnosis when he was young enough that he was just getting around to thinking about stuff like that.  If he had lived as long as his mom, his care would have sucked all of his assets and likely much of my mom's as well. 

Unfortunately, the healthier and longer-lived your family is, the more likely they are to stick around longer and incur massive medical bills in the process.  My mom's family tends to live a long, long, long time, and she is still running 5Ks at 70; therefore the odds are she will make it to a very old age and also likely require some significant care in those final years.  So, yeah, I might inherit enough to provide some lovely extras, but no way on God's green earth would I count on that money for basics.

dividendsplease

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Re: Planning FIRE around likely inheritance?
« Reply #9 on: February 23, 2017, 08:59:02 AM »
When I was in college with one grandparent left alive but with dementia and failing slowly, I was foolishly expecting a windfall to pay my student loans. Half million dollar house and 700k in the bank got sucked dry by the assisted living facility over the years she was there. she passed with not a penny to her name.

oldladystache

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Re: Planning FIRE around likely inheritance?
« Reply #10 on: February 23, 2017, 09:25:07 AM »
My dad's 102. I'm 72 and still waiting for my inheritance. Glad I didn't count on it.

ryguy9090

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Re: Planning FIRE around likely inheritance?
« Reply #11 on: February 23, 2017, 10:33:46 AM »
Thanks for the replies, everyone.

My situation is very similar to Villanelle, and we will likely keep the inheritance in the back of our minds as we plan FIRE, but of course not actually count it as real number in any of our calculations. Everyone's warnings of long-term care expenses eating up assets is an excellent point that we will definitely consider. I agree that counting on zero inheritance is certainly the safest route.

At this point, our main decision is whether we want to shift away from saving in 401ks and move towards taxable accounts that we can more easily access during FIRE years, and our thought was just that perhaps this inheritance gives us a little more safety margin to start taking the tax hit now and moving towards taxable investing that is more liquid... But I guess the answer is that any presumed inheritance should not play any factor in this decision :)

That said, even counting on zero inheritance, I think it may be time for us to make this shift. Perhaps this warrants a more detailed breakdown of our situation in the Case Study forum...

Laura33

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Re: Planning FIRE around likely inheritance?
« Reply #12 on: February 23, 2017, 12:20:58 PM »
Thanks for the replies, everyone.

My situation is very similar to Villanelle, and we will likely keep the inheritance in the back of our minds as we plan FIRE, but of course not actually count it as real number in any of our calculations. Everyone's warnings of long-term care expenses eating up assets is an excellent point that we will definitely consider. I agree that counting on zero inheritance is certainly the safest route.

At this point, our main decision is whether we want to shift away from saving in 401ks and move towards taxable accounts that we can more easily access during FIRE years, and our thought was just that perhaps this inheritance gives us a little more safety margin to start taking the tax hit now and moving towards taxable investing that is more liquid... But I guess the answer is that any presumed inheritance should not play any factor in this decision :)

That said, even counting on zero inheritance, I think it may be time for us to make this shift. Perhaps this warrants a more detailed breakdown of our situation in the Case Study forum...

Do more research on this -- you can access 401(k) $ without penalties by rolling over into Roths -- you just need enough outside the 401(k) to get through the first 5 years.

TrMama

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Re: Planning FIRE around likely inheritance?
« Reply #13 on: February 23, 2017, 01:23:53 PM »
The problem on counting on an inheritance is that it ignores the very common problem of your parents getting just a little senile and making poor investment and spending decisions. They are still "with it" enough that you can't intervene, but they still manage to blow through a ton of money.

I'm part of another financial board where many of the members have had to step in to help manage their parents finances and this story is extremely common. Bad investments, a second vacation home and lots of consumer spending eat away at the stashes of many people before they ever get sick enough to start running up big medical bills.

My MIL was another example and I'm beginning to have suspicions about my parents too.

Paul der Krake

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Re: Planning FIRE around likely inheritance?
« Reply #14 on: February 23, 2017, 01:46:40 PM »
There is somewhat-significant wealth on both sides of our family, probably enough to insta-FIRE.

We pretend like it's not there. If it shows up on our doorstep one day, great. If not, shruggity shrug. We are already on track to have 4+ decades of retirement. I won't be mad if in hindsight we ended up working an extra 3-5 years that we didn't need to.

Your life plans should be free-standing and rely on a minimum of external assumptions. Not doing so begets disappointment and resentment.


redbird

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Re: Planning FIRE around likely inheritance?
« Reply #15 on: February 23, 2017, 01:48:07 PM »
Like others said - don't count on an inheritance.

The retirement accounts strategy is one. But that's not the only way to FIRE. I'm getting a pension, SS, and I have some other retirement accounts for when I hit old people age. But most of my stash is actually in taxable, normal investments. I have enough invested that quarterly dividends plus a slow drawdown is going to make my stash easily last until "regular retirement age" (though I most likely won't run out according to my calculations), and then I'll have those extra dollars I can start using from those regular retirement related accounts.

KungfuRabbit

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Re: Planning FIRE around likely inheritance?
« Reply #16 on: February 24, 2017, 03:46:41 AM »
My dad re married about 6 months before he died (suddenly and unexpectedly).  We had a rock solid relationship. He put her as the sole proprietor on his 401k (most of his worth), he paid off their house cash (under her name), and the other accounts were in her name as well. She got over a million and his pension and instantly retired at 55, I got zero.  I tried talking to her saying since she gets the pension (which is probably $4000 / month) if she could share some of the cash. Nope. She will put me in her will, for now, with her other 5 kids...and probably delete me well before she dies because she'll move on (they were married 6 months..). I went as far as talking to a lawyer, he said I had no chance at all.

there is a good reason people say don't count on it.  I don't care who you are or how good it looks now, A lot can happen.

Most I'd ever say is let it ease "OMY" syndrome and FIRE when the math says you can, instead of adding more years of work to cushion it.

BeanCounter

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Re: Planning FIRE around likely inheritance?
« Reply #17 on: February 24, 2017, 04:15:05 AM »
I really think it depends on the situation.
I have always operated on the idea that you should never, ever count on an inheritance. And I still think that way for the most part. But I've come to realize that this may create a situation where DH and I have worked for far more than we'll ever need and missed some opportunities along the way.
I'm an only child. My father is deceased. My mother is battling cancer. She has a $1M net worth and a long term care policy (that she probably won't need). She has already given me control of her liquid assets (still in her name) which is a little more than half of her NW. She has told me she wants to leave me everything but $100k she has marked for charity.
Meanwhile DH and I are closing in on $1M. Which with kids is close, but not quite enough to FIRE. It is so hard not to let that inheritance color my FIRE decisions.


Linea_Norway

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Re: Planning FIRE around likely inheritance?
« Reply #18 on: February 24, 2017, 04:21:42 AM »
My dad re married about 6 months before he died (suddenly and unexpectedly).  We had a rock solid relationship. He put her as the sole proprietor on his 401k (most of his worth), he paid off their house cash (under her name), and the other accounts were in her name as well. She got over a million and his pension and instantly retired at 55, I got zero.  I tried talking to her saying since she gets the pension (which is probably $4000 / month) if she could share some of the cash. Nope. She will put me in her will, for now, with her other 5 kids...and probably delete me well before she dies because she'll move on (they were married 6 months..). I went as far as talking to a lawyer, he said I had no chance at all.

This sucks. I'm sorry for you.

My parents also had a testament for the longest living. I have on paper inherited a quarter of his share after my father, but my mother may consume the money as she wishes during her life.
But luckily the will had a clause that I can claim my inheritance immediately if my mother decides to remarry. That is exactly to prevent these horrid situations.

 

Wow, a phone plan for fifteen bucks!