Family retirement planning – case in point

So, just as Mike and Mary are thinking of their retirement, their children have children of their own.

Mike and Mary live until their 80s and both pass away while their children are in their fifties, passing an inheritance on. The grandchildren themselves are now in their twenties, so some of that inheritance will be used to pay off education debts and help them onto the housing ladder. The cycle of family life goes on and on, but does it?

It was obviously not like this in Mike and Mary’s grandparent’s time, so we might well ask for how many generations will this cycle continue? We may be on the verge of a new cycle but what will it mean for future generations? More importantly, what should their expectations be?

What if Mike and Mary both lived until their nineties and in their final years incurred large care bills diluting the inheritance. Not only is the inheritance much smaller but Mike and Mary’s descendants have had to survive almost a decade longer without it. The first lesson of life must be, never plan on receiving an inheritance.

Now let us change the scenario slightly. In their mid-forties, Mike and Mary divorced. Both marry again. Each now has children and stepchildren. Mike has another child with his new partner, Judy. What is more, Judy has a stepchild from a previous relationship. So, when Mike dies, he has other children and stepchildren, with two different mothers. He may also have numerous young children who referred to him as their Grandad.

When Mary dies, she has her own two children by Mike and two stepchildren.

For most people, the two main components of retirement wealth are pensions and housing. Mid-life divorce can disrupt the payment of mortgages and interrupt the accumulation of pension savings. Unless their new partners brought a comparable amount of wealth into the new relationships, they may struggle to be able to afford the retirement they may have expected before their marriage broke up.

The problem with the stereotypical cycle of family life is that it creates expectations about inheritances. How many in their early sixties, are expecting an inheritance to help to fund their retirement, only to watch their parents live much longer than expected and then see that inheritance depleted by care bills?

In the case of Mike and Mary, they are not together in their final years. Mike dies before Judy. Judy’s eldest children see their family wealth depleted by the care bills incurred looking after their stepfather. In some families, this could create friction especially if Judy contributed more to the family wealth. Similarly, problems could arise with Mary’s stepchildren who have had the same experiences.

What began as a stereotypical family of four with traditional solutions, now has a far greater number of players including Mary’s new husband, John. Some of the players may not be happy with the outcome of the new relationships.

To keep things simple, I have deliberately not mentioned what happens to Judy and John’s previous partners. If financially, things are going well then Mike and Mary’s stepchildren will not be too concerned about the above scenario. On the other hand, if they are struggling financially then they may feel hard done by.

Even in a traditional family unit, it is clear that individuals should not place too much reliance on receiving an inheritance. Care and other costs may mean a large proportion of the expected inheritance does not materialise.

As retirement approaches, Mike and Mary plan their retirement finances. As part of this, they should ensure they have wills that reflect their wishes are in place. Some big decisions will need to be made.

What will they leave to their partners, their children and their stepchildren? Often people leave everything to their partner, with everything passing to the next generation if the partner has predeceased them. But what if they leave everything to the partner and the partner remarries? Will the children and stepchildren receive anything?

Also, they should put in place Powers of Attorney, appointing someone they trust who will probably survive them to look after their finances and well-being.

Mike and Mary’s children and stepchildren, therefore, should plan their retirements on the basis that they are going to inherit next to nothing. Anything they do receive should be looked upon as a windfall. What this means for them is that if they are struggling to build sufficient pension savings, they will have to use their housing wealth to finance their own retirements.

We are living longer, meaning more will spend their final years in care. The traditional family cycle is becoming less common. Each time the family unit goes through change it results in a disruption to long-term financial planning.

Together it means that inheritances are likely to be smaller and received later. Also, a ‘typical’ customer seeking retirement advice will become less and less common. Advisers will be dealing with more complex family situations and scenarios and will need to employ a range of solutions and products in order to keep those families on the road they want to travel.

Complexity is here to stay.