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The Globe and Mail

An inheritance should be a windfall, not a financial plan

I once met a guy who was banking on a large inheritance from his parents as his sole financial planning strategy. He had no savings, and spent frivolously to the point that he couldn't get any more credit extended because what he had was all maxed out. He didn't seem to find any problem with it since he knew he was getting a mid six-figure inheritance from his parents when they eventually died.

What a morbid thought: banking on the death of a loved one to salvage your inability to be self-sufficient.

And that basically sums it up in my mind. When you are in diapers, and perhaps for a few years after leaving home, you can expect varying levels of support from your family. Some households start charging rent at a certain age, either by necessity or on principle, and some are able and choose to help with postsecondary education. And after having left the nest, emergencies may have you applying for a loan, or loan guarantee, from the good ol' Bank of Mom and Dad. But always expecting your parents and their money to be there is a big mistake.

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This person was pretty open about his expectations. He recounted his estimations of the equity in his parents' house and the investment accounts. He roughly surmised that he would receive somewhere between $250,000 to $500,000 after all was said and done.

According to a recent survey by Investors Group, 53 per cent of Canadians are expecting an inheritance. For those who indicated that the believed they knew the size of their future inheritances, more than half further indicated it was expected to be over $100,000.

In the case of this individual, his parents' investment accounts are about half of what they used to be (and decreasing), and after tax on the registered accounts is paid on the death of the final survivor, there won't be much left over beyond the equity in the family home. And while that could grow, more and more it seems likely that it could just as well stagnate - or even decline, as real estate prices can also go down on occasion.

Here is just one of many flaws of incorporating an inheritance into your financial plan: the double edged sword of longevity risk. It's a risk to your plan if your parents live longer since not many people increase their net worth after stopping work. The longer they have to consume, the lower your inheritance. But you have to balance that with the fact that your financial plan's success is dependent on the death of a loved one.

Beyond that, factoring an inheritance into your plan without having discussed your parents' intentions is another mistake. How do you know they haven't decided to leave everything to your sister? Or to charity?

There are enough variables affecting your own financial success. Ideally, you shouldn't bank on an inheritance in your financial plan, but rather treat it as an unexpected windfall. Most people would rather give it up in exchange for having their parents back.

Preet Banerjee, B.Sc, FMA, DMS, FCSI, is a W Network Money Expert, and blogs at You can also follow him on twitter at @PreetBanerjee

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