When a person thinks about inheritance, it's such a wonderful thing right? There are many people who envy those who are left with a hefty inheritance! Leaving a sum of money for your loved ones is indeed a fabulous gift. It gives your beneficiaries a head start and a potentially more comfortable retirement.
All of the above mentioned is the good aspects of leaving a legacy behind. However, an inheritance can also provide a false sense of windfall and cause people to overlook their retirement inadequacies.
Also, believing that inheritance money is sufficient for retirement can also create very indifferent attitudes in people towards wealth accumulation solutions. Ever wondered what sort of spillover effect does this have on the third generation? Would one squander the wealth and leave their children with nothing? More importantly, what sort of financial education would kids growing up under parents who relied on inherited money for their retirement receive?
Background
I've only met 2 such persons who openly admitted that they intend to rely on their inheritance for their retirement and even protection planning. For this article, I'd like to disclaim that my belief that a certain group intends to rely on inheritance money arises from the blasé attitude some people have towards their wealth accumulation. Usually, upon further probing, you will discover that their family backgrounds are fairly well to do. Even for those from modest family backgrounds, these individuals do not belong to the sandwich class and parents are self sufficient without their support. They usually only need to look after themselves and their own families (if any).
Many times, these individuals are fairly well educated and are well-placed to climb the corporate ladder. This is why, I feel they rationally know the importance of growing their surplus cash. If they willfully decide to only save the money in the bank and disregard this need, I'm betting that this behavior is a result of rationalizing that they have a safety net to fall back on. Of course, it is usually coupled with optimistic belief that this rough estimate of their inheritance (even if shared) is sufficient to last them through their entire retirement.
So is it really wrong to rely on inheritance?
Frankly, it's someone's (usually parents or grandparents) hard-earned money. They are free to allocate it however they like. If they wish to give their children a worry free life, it's perfectly fine. My concern lies with certain unintended consequences I foresee happening.
1. Overestimating the power of their inheritance
I've had a friend tell me before she doesn't see the need to buy insurance because she has an inheritance which is placed in an investment vehicle with the bank. She believes this figure is sufficient to deal with health issues. She does not even have hospitalization coverage.
In terms of sufficiency, is it enough or not I've no clue. It probably also depends on the quality of care she intends to seek - whether it's at a private or public hospital. Also, it really depends if this inheritance is sufficient to finance her loss of income if any and whether the illness happens at the start or the tail end of her career.
Aside from protection coverage, people relying on their inheritance to finance their retirement also need to be sure their wealth inherited can finance their expenses inclusive of inflation.
The Straits Times article today mentioned that "almost 80% of Singaporeans underestimated how much money they would need at retirement" and they even brought up the example that the impression of having $500,000 in the bank account may give the false impression that people have substantial savings hence continue to be spending at an unsustainable rate.
This is one of the potential risk of depending on inheritance. Firstly, people who decide to use their inheritance as their safety net may neglect calculating if the figure they have is sufficient. They will just conveniently assume it's a lot of money because they see a sudden influx of cash going into their bank accounts. Secondly, being so uncaring about their finances may result in an erosion of wealth and mismanagement of finances. It also breeds ignorance to the current competitive financial solutions in the market.
Of course, the worse consequence is realising that the funds are insufficient when the money runs low and the need is immediate. It'll be too late to do anything then.
2. Not financially educating their children the right way
Financial literacy goes a long way when it starts from young. One potential unintended consequence that may result from a generation relying on inheritance money is how they bring up their kids.
When the parents grow up not having to care about wealth management, it's unlikely they know how to grow their inherited wealth. They naturally won't know how to teach their children about the importance of wealth management as well. You can imagine the type of attitudes towards money their kids might grow up to develop.
Sometimes growing up in privilege may not necessarily be a good thing especially if money management values are not inculcated from young. Imagine growing up thinking that they need not focus on wealth management and the second generation wealth runs out...
The third generation will be the ones suffering.
3. Focusing on preserving their lifestyle but not wealth
As I interact with individuals who give me the impression that their retirement plan is their inheritance, I find myself silently hoping their mindset will change as they get older. Even if their inheritance is hefty, it's always good to ensure that this inheritance can continue to be passed on to the next generation instead of simply stopping at one generation.
If these individuals have long developed a lack of interest in managing their personal wealth, it's unlikely they will suddenly develop an interest in managing the wealth they inherited. Assuming their intention is to drawdown on the money left behind by the earlier generation or even worse if this is already a second generation wealth, what's left might not be enough for their own children's generation. Should this happen, then their children would be starting from ground zero. This is a big pity considering the head start the earlier generations left them. Is this uncommon? No... that's why there's this Chinese saying, "wealth does not last beyond three generations."
A better way would really be to take an interest in managing wealth. Inheritance can serve as a good head start. However a sound retirement plan is always one that generates an income to fund expenses instead of directly drawing from the well of supply. This is where an interest in wealth management comes in handy when it comes to preserving and prolonging the funds left behind.
Summary
As a financial planner, legacy planning is one of the key components of wealth management. By right, leaving an inheritance behind for loved ones is a wonderful gesture. It leaves the next generation better off than the previous generation. However, should this gesture lead to an unintended consequence where the money is taken for granted and the beneficiaries decide that they can be exempted from learning how to manage wealth, then it can become a big waste. This is frankly the mildest of consequence. A bigger consequence is the implications it has on the beneficiaries' younger generation. The right money management principles may not be taught and this lack of wealth management awareness may also relegate the next generation back to ground zero as though there's no inheritance in the family to begin with.
If you would like to explore ways in which you can preserve your wealth or generate an income from your available funds, please speak with a trusted advisor. You can also drop me a message if you would like me to help you with it.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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