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| The Basics | The $41 trillion inheritance: Will you get a piece?
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The flood of money headed toward baby boomers by mid-century averages out to about $1 million per head, researchers say. Here's how it should figure into your planning.
By Liz Pulliam Weston
Your retirement accounts are shrinking. Your expenses are on the rise. Your job prospects, so bright a couple of years ago, look much less certain. Wouldnt it be nice to think that a big, fat inheritance could bail you out and make saving for the future unnecessary?
The notion doesnt seem so far-fetched at first. After all, economists and researchers tell us that we are at the start of the biggest inheritance boom in history. The first estimate of the coming largesse, made by two Cornell University economists in 1990, was that $10.4 trillion would be handed down by mid-century.
Nine years later, two Boston College economists asserted the wealth transfer would be much, much bigger: somewhere between $41 trillion and $136 trillion.
If that bonanza were spread evenly among the nations 76 million baby boomers, each could look forward to an inheritance ranging from $539,474 to $1.8 million.
If you think that sounds too good to be true, youre right. And counting on an inheritance as part of your financial plan is, unfortunately, about as smart as depending on a lottery ticket.
Don't count on it
Heres whats wrong with the inheritance-boom picture:- Not all that money is going to the baby boomers. Many of the stories about the biggest ever wealth transfer somehow missed the fact that the researchers were looking at the next five decades.
By mid-century, most of the baby boom generation will have died, said John J. Havens, who with fellow Boston College economist Paul G. Schervish came up with the $41 trillion to $136 trillion figures. Some of (the wealth transfer) will be to the baby boomers, but much of it will be from the boomers.
Thats good news for todays kids and 20-somethings, not-so-good news for the 50-year-olds who just starting saving for retirement.
- Not all that money is going to individuals. A good chunk will go to charitable causes instead. The Boston College economists estimated that $6 trillion of their $41 trillion estimate would go to charity.
- None of that money may be coming to you. We may have more millionaires than ever before, but chances are still good your parents arent among them. Even if they are, you probably shouldnt count on an inheritance, for reasons Ill enumerate below.
Theres also been some quibbling about how Havens and Schervish came up with their figures. The low estimate is based on the assumption that the total wealth now in private hands, estimated by the Federal Reserve in 1998 at $37.4 trillion, will grow 2% a year and that saving and spending rates will resemble those of the past. The higher figure, meanwhile, assumes a 4% growth rate.
The two economists stand by their numbers and believe their estimates will stand up even through recessions, other economic setbacks and longer life spans.
If Im going to be wrong, I like to be on the conservative side, said Havens, who received his training in math, physics and economics at Yale University and Massachusetts Institute of Technology. Our lowball estimate is solid.
All this interest in inheritances, by the way, was prompted by research showing that todays retirees are the richest generation of seniors ever.
Several trends helped create that wealth. One was the GI Bill, which helped boost many from the working to the middle class by giving them access to college. Another was the significant run-up in real estate values during the 1970s, as well as the stock market booms of the 80s and 90s.
But much of the typical retired Americans wealth today comes from sources that will die when they do, say Jagadeesh Gokhale, an economic adviser at the Federal Reserve Bank of Cleveland, and Laurence J. Kotlikoff, a professor of economics at Boston University. Social Security, pensions and many annuities cant be transferred from one generation to another.
Havens and Schervish didnt count that wealth when they came up with their figures. But todays boomers should keep in mind that their parents might not have as much to pass on as they think.
Meanwhile, most of the wealth that will remain is likely to be transferred within a relatively small number of well-off families.
Only 20% of families, or one in five, report ever receiving an inheritance, according to Havens analysis of Federal Reserve figures. Most of those who did get money in recent years, say Gokhale and Kotlikoff, got less than $25,000, with just 1.6% receiving more than $100,000.
The idea that the wealthy get wealthier was underscored when Havens examined the net worth of those who got inheritances. Only 6% of those with no net worth prior to the inheritance had ever received a bequest, while 45% of those with net worth between $1 million and $10 million had been inheritors at some point.
For most people, the inheritance picture isnt rosy.
Your parents are spending your inheritance
Its not just a bumper sticker slogan. Typically, wealth peaks just as people reach retirement age, and it drops as retirees tap their nest eggs for living expenses, medical costs and long-term care.
Just look at the latest survey of consumer finances conducted by the Federal Reserve. Median net worth peaked at about $156,000 for 60- to 69-year-olds, according to a VIP Forum analysis of the 1998 figures. The next age bracket, 70- to 79-year-olds, had about 10% less.
By the time the householder was 80 or older, median net worth was down to $118,000. This trend held true even among the richest 1% of families: the median wealth of the oldest householders was half of that held by those in the 60-to-69 age range.
Your parents may need help, not offer it
Todays seniors are spending money -- and incurring debt -- at a much faster pace than their predecessors. Todays 60-somethings spend money at a faster clip than 30-somethings -- a complete reversal of the trend in the 1960s. Add to that the fact that most people are living longer, and you could see greater numbers of seniors running out of money before they run out of time.
No one really knows how many people may end up supporting their parents. Financial planner Glenn Kautt, president of The Monitor Group in Fairfax, Va., believes the number could be much higher than many boomers think. About 60% of Kautts clients -- typically well-heeled folks with net worths of over $1 million -- believe theyll have to support their parents financially someday.
Your folks might not feel that charitable about you
Just because your folks have money doesnt mean they have to leave it to you. Those who didnt inherit money themselves are often much more wary about bequests than those who are used to inherited wealth, said Blanche Lark Christerson, a director in the wealth-planning strategies group of Deutsche Bank Private Banking. Investor Warren Buffett is perhaps the most famous example of the self-made man who refuses to leave much to his kids.
The new wealth-holderswant to limit the amount they give to their children, Havens agreed. Some worry the money will turn their descendents into aimless trust-fund brats, while others have a rougher edged, nobody helped me, why should I help you attitude.
Researchers are finding evidence as well of what they call a declining bequest ethic. The percentage of people over 65 who believe it was important to leave an inheritance declined from 55.5% at the beginning of the 1990s, Gokhale and Kotlikoff said, to 46.8% by the end of the decade.
So, whats a boomer to do? Heres the advice of several financial planners:- Dont count on an inheritance. Plan and save for your goals as if the money isnt coming -- because it may well not. Kautt generally doesnt include inheritances in his financial plans unless the client is sure of what hes going to receive and the bequest is imminent.
- Clarify your own attitudes about bequests. If you want to leave money for your kids, youll need to spend less, save more and invest differently than if youre planning to die broke. For example, annuities, which can offer a guaranteed stream of income in retirement, could be a good solution for people who plan to spend what theyve got. For tax and other reasons, they may not be a good choice for those who want to leave a legacy.
- Talk to your parents about inheritances. This can be a tricky conversation to have, with the older generation reluctant to talk about money and the younger worried about appearing greedy.
Yet the conversation can have many benefits, said Myra Salzer, founder of The Wealth Conservancy, a Boulder, Colo., company that advises inheritors.If youre going to be financially supporting your parents, it would be good to know that as soon as possible so you can make appropriate arrangements. Likewise, if your folks want to leave you or your children a bequest, that can affect your own estate planning, Salzer said.
Theres so much better planning that two generations can do simultaneously than either can do separately, said Salzer. For example, wealthy boomers may prefer their parents generosity go primarily to the grandchildren, for estate-tax reasons.
Salzer recommends bringing up the subject by talking about your own estate plans.
You can say, Im making my estate plans, Salzer said, and the more I know about your plans, the better I can make my own.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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