Choosing how to use your inheritance is a crucial decision that can affect your quality of life both now and for years to come. However, most people tend to spend their inheritance either immediately or within a few short years rather than investing it in their future.
Why don’t people spend more time planning for their Golden Years? Many Americans think Social Security checks will save them from destitution – or that they will inherit enough money from relatives to retire on. However, such hope often proves false, considering the cold, hard fact that nine out of ten Americans will inherit nothing at all from their families – making the inheritance issue moot for most. Of the remaining 10%, half will inherit less than $25,000, while just 1.7% of the population will inherit more than $50,000.
Whatever the size of the inheritance, people tend to spend it quickly because it is human nature to revert to our financial status quo – regardless of changes in our financial status. Individuals who don’t budget when they are earning a $4,000-a-month salary generally continue using the same “strategy” when they inherit $4 million. This reaction is often compounded by the grief and guilt people commonly feel upon a loved one’s death, which can lead to fiscal responses that are more emotional than rational.
It is therefore no surprise that most inheritors fail to consult a qualified financial advisor about how they can put their windfall to work in long-term investments. Instead, people often compulsively use inheritance money to buy big-ticket items, settle debts with creditors, rescue financially-strapped family members, or donate to their favorite charities.
The inheritance outlook for the Baby Boom generation (those born between 1946 and 1964) is slightly brighter than it is for the general U.S. population, but not by much. For instance, a 2006 study by the American Association of Retired Persons (AARP) Public Policy Institute found that only about one-fifth of Boomer households have received inheritances, and only 15% can still expect to receive one. A 2010 study by the Center for Retirement Research at Boston College estimated that, as a group, Boomers will inherit a grand total of $8.4 trillion over their lifetimes, with the median inheritance estimated at around $64,000 per inheritance-receiving Boomer.
This means that approximately half of all Boomer inheritors will receive less than $64,000, and half will receive more – with the top 10% inheriting around $335,000 each, and those in the bottom 10% receiving only about $8,000 each. For simplicity’s sake, let’s say you collect the median $64,000 inheritance. This may seem like a nice chunk of cash, but it’s nowhere near enough money to retire on – reinforcing the importance of investing some of that windfall for a rainy day instead of spending it all at once.
Boomers’ Retirement Prospects
The unique financial challenges Baby Boomers face in these economically uncertain times often make saving for retirement even more difficult than it was for previous generations of Americans. As Ron Lieber wrote in his 2008 New York Times article “8 Reasons You Should Not Expect an Inheritance,” “People in the latter halves of their lives now find themselves financing college tuition for grandchildren, chipping in when children or grandchildren graduate with five and six figures in student loan debt, supplying down payments in a tightening mortgage market and bailing the younger generations out of a host of other financial calamities.” These expenses, coupled with poor long-term financial planning, leave the average Boomer’s retirement savings severely underfunded.
Boomers may take heart in knowing that advances in modern science seem likely to make them the longest-lived generation, not only in American history, but in all of human history. But this longevity comes with a price – namely, in astronomical health care expenses. Even though Medicare covers more than half of the average elderly person’s medical expenses, a typical married couple in their mid-60s today will still need almost $300,000 to pay the balance. Such exorbitant costs can rapidly deplete a lifetime of savings, making wise investment of inheritance money all the more imperative.
When it comes to financial planning, too many people get caught up in “Lottery Thinking,” which is the belief that they’re somehow going to strike it rich someday without having to work for it – whether by winning the lottery or, say, inheriting a fortune. The reality is very different. There is no replacement for sound planning!
© 2012 John E. O’Grady