Can an Inheritance Be a Retirement Strategy?

Are you the scion of an ancient landowning family, the heir to thousands of hectares of real estate? Or, did your ancestors find a multi-billion-euro retail empire, with outlets in all the major capital cities? If so, you may be one of those people who think there’s little point in setting up a savings and investment plan for achieving a comfortable retirement. Your future seems secure, and all that’s left to do is wait and enjoy yourself until the money rolls in.

The examples above are extreme. However, the everyday world is beginning to witness the greatest-ever intergenerational transfer of wealth as “boomers”, born between 1946 and 1964, age and pass on their wealth. In fact, boomers are currently the wealthiest generation in all history, according to several estimates.

The most conservative estimate of the worldwide total they will bequeath to their heirs is USD 75 trillion. More optimistic forecasts range over USD 90 trillion, which is close to the world’s total wealth in 2021.

In light of this, many lucky heirs to this staggering amount of money simply expect a life-changing sum to be eventually passed on to them. Little do they realize that nothing can be taken for granted today, especially when it comes to life and money. On the one hand, “boomers” may live far longer than expected, delaying your inheritance until you’ve been retired for several years. Indeed, the worldwide total of centenarians has been rising steadily since the millennium; a trend that is expected to only accelerate sharply in the future.

Number of people aged 100 and older (centenarians) worldwide from 2000 to 2100 (in thousands)
Source: Statista

On the other hand, your inheritance might not be anywhere near as much as you expect. Your family’s business could go into decline; unexpected new taxes could eat into the value of their real estate; or they might spend more of their wealth than you had anticipated. This last concern could prove especially true if your parents require many years of long-term care in their old age.

In the most extreme scenario, although very unlikely in the current environment, your family’s wealth could even be expropriated in its entirety if your country were to experience the equivalent of the Russian Revolution of 1917, its Chinese counterpart in 1949, or the much more recent foundation of the Laotian socialist state in 1975.

Outlandish? Impossible? That is, of course, exactly what the well-born and wealthy middle classes thought in Tsarist Russia, Nationalist China, and pre-1975 Laos. These cases were definitely extreme, but they serve as a lesson, perfectly illustrating the wisdom of the old saying, popularly known as Murphy’s Law, which states “Anything that can go wrong will go wrong.”

Case Study: Will an Inheritance Be Enough for a Comfortable Retirement?

According to a 2023 survey in the UK, 36% of Generation Z (aged 18 to 25 years) and 29% of millennials (26 to 41 years) declare they have no interest in saving for their retirement, expecting to inherit money or property. The results are unlikely to be very different for the rest of Europe.

Such an attitude not only makes those heirs hostage to the long-term uncertainties of life and their inheritance, but it also denies them the opportunity to take control of their financial future. This opportunity is especially important for those who only expect to inherit a part of the total sum they will need in order to achieve a comfortable retirement, free from financial worries. So, the question is: How much is that total?

Recently, Moonshot did some research on this very question. Assuming your pension should be no less than CHF 81’000, and an annual yield of around 3%, that income would require an available capital of CHF 2.7 million. That’s about 3 times the already-established average boomer bequest of USD 1 million. The average heir has, therefore, some further planning to do if they are to truly enjoy their retirement.

What investment strategy will most effectively add the required USD 2 million to the average pension “pot”?

Truth be told, most bequests will likely be composed of securities, real estate, and cash. That means that as their heir, you will have the freedom to look beyond such traditional assets and, instead, seek something more out of the ordinary. Not only could this be more interesting and potentially more rewarding, but it will also diversify the risk profile of your inheritance portfolio rather than adding to it.

In short, this looks like the perfect opportunity for you to build exposure to private markets. They tend to offer better returns than the leading public markets, yet their volatility is lower. This will help to smooth out the combined total returns from your portfolio and inheritance. In any case, it’s highly unlikely that the bequest will include any unlisted securities, so your preemptive addition of them will help diversify the assets in your expected windfall, thereby reducing risk.

The chart below clearly demonstrates the better and less volatile performance of private equity, the most popular private market asset class among the ultra-wealthy. It’s also a fairer comparison of returns across public and private markets than most others because it tracks time-weighted returns (TWRs), rather than using unqualified data.

All private equity 10-year rolling TWRs (in %)
Source: Hamilton Lane

Many people assume that exposure to private markets should include real estate. That said, given the previous comment about the likely composition of a typical inheritance, investing in real estate for one expecting an inheritance would be highly unwise. Real estate tends to be, by far, the largest element composing most people’s wealth, so adding to that type of asset could create a significant portfolio imbalance.

Ultra-wealthy portfolio allocation (in %)
Source: Knight Frank

How to Gain Access to Private Equity Benefits?

The usual route is to invest in a private equity fund or funds. However, these funds are typically structured for professional investors, such as pension schemes or ultra-wealthy investors who can afford the substantial minimum investment required. This minimum is almost never less than CHF 1 million and, more often than not, is set at CHF 25 million or more.

One alternative you may have heard about is the European Long-Term Investment Fund (ELTIF), a new vehicle for investment in unlisted assets. First introduced in 2015, it complies with EU regulations for funds offered to the general public and requires no more than EUR 10’000 as an initial commitment. However, ELTIF regulations are still a work in progress, and very few of these funds have built a performance record, making it exceptionally hard to evaluate them and make a prudently researched choice. Moreover, they may be required to invest only 55% of their portfolios in unlisted assets, rather than the initially planned 70%, so their exposure could be substantially diluted.

Thankfully, none of these drawbacks affect Moonshot’s offerings in private markets. A one-time minimum commitment of CHF 10’000 is all it takes to gain access to a selection of private equity funds from seasoned managers. Alternatively, you can also invest in exclusive individual opportunities before they are made available to the general public.

Conclusion

While an inheritance can form part of your retirement investment strategy and is likely to be more than enough to provide a comfortable old-age income, it would be foolish to put all your eggs in one basket and count exclusively on what the generations that came before built. Uncertainties abound, so it’s best to assume the worst and make your own arrangements.