Spending Their Inheritance?
Apparently, Baby Boomers have some ‘splainin to do.
Yes, after decades of being blamed for everything from the demise of defined benefit pensions to the price of housing, Boomers are now being castigated for something else: spending the money that their children were (apparently) counting on inheriting.
Indeed, there’s been a lot of talk about the so-called “Great Wealth Transfer” — and lately a fair amount of consternation that Boomers might actually spend some of that wealth before they die.
Turns out, for most, not all that much.
Back in 2011, researchers at Boston College’s Center for Retirement Research[i] took a specific look at that question. They estimated that about two-thirds of Boomer households would ultimately receive an inheritance.
And that median expected inheritance was ... (just) $64,000.
Now, $64,000 is certainly nothing to sneeze at. But neither is it the kind of generational windfall suggested by much of the current discussion about the wealth Boomers are now supposedly “obligated” to leave behind.
And remember that was the median among those expected to receive an inheritance.
Roughly one-third weren’t expected to receive any … at all.
An Inheritance ‘Average’?
Federal Reserve data[ii] provides some additional perspective.
Looking at inheritances received between 1995 and 2016 — a period during which many Boomers would have been receiving inheritances from their parents, btw — more than half, 55%, were worth less than $50,000. Another 30% were between $50,000 and $250,000.
Only about 6% exceeded $500,000, and just 2% topped $1 million. But those million-dollar inheritances accounted for roughly 40% of all the dollars inherited.
In other words, a relatively tiny number of enormous inheritances can make the overall inheritance “pie” look a whole lot bigger than the slice received by a typical family. And remember, even then they weren’t all that big.
So, what’s got everyone so stirred up?
As it turns out, Cerulli Associates — a credible source, but one whose projections often seem to run on steroids — recently estimated[iii] that an astonishing $124 trillion will transfer through 2048. Of that, $105 trillion is projected to go to heirs, while $18 trillion will go to charity.
Which means they estimate that nearly $100 trillion is expected to come from Boomers and generations older than them in what has been dubbed (drumroll, please) the “Great Wealth Transfer.”
But hold on a second. More than $62 trillion — half of that entire projected transfer — is expected to come from high- and ultra-high-net-worth households that comprise … just 2% of all households.
At this point you should be saying to yourself, “could this be (yet) another one of those situations where an enormous aggregate number tells us considerably less about the experience of a typical American than the click-baiting headlines suggest?
Great Expectations?
But wait — there’s more!
Not all that wealth is heading directly to Millennials and Gen X.
Cerulli further estimates that some $54 trillion will first transfer “horizontally” between spouses, with more than 95% of those assets going to women. Nearly $40 trillion is projected to move to widowed women in the Boomer and older generations before eventually moving on to heirs or charities.[iv]
Which means the Great Wealth Transfer isn’t really a single transfer at all. And it certainly doesn’t mean that there’s a $124 trillion check waiting to be divided among America’s children.
Yet that enormous number seems to have helped create some enormous expectations.
We’ve seen stories about “SKI” — Spending the Kids’ Inheritance — and Boomers “indulging” in travel, second homes and experiences rather than preserving their assets for their children. There’s even a growing presumption that parents should transfer wealth sooner, when their children can make better use of it.
Honestly, my wife and I have done some of that with our kids. But there’s something odd about treating an inheritance as though it were an obligation — particularly when the generation supposedly “shirking” that obligation largely built its own wealth without receiving anything remotely comparable.
To be sure, Boomers benefited from some extraordinarily favorable economic circumstances: decades of rising home values, a remarkable bull market in equities, relatively inexpensive higher education (RELATIVELY, mind you) and, for some (though not most, mind you), traditional pensions. Timing matters, and they (we?) had some pretty good timing.[v]
But they (we?) also saved, invested, paid mortgages, raised families — and accumulated much of the wealth we’re now discussing over decades. We did it despite wars, gas lines, stagflation. And let me point out, spending a fair amount of that on the kids now chomping at the proverbial bit of a potential inheritance.
Our parents generally didn’t leave us fortunes. Nor did we expect them to.
‘Will’ Power
None of this is an argument against leaving an inheritance.
Nor is it an argument against helping children or grandchildren while you’re still around to see the impact. Indeed, there are compelling reasons to do so if your circumstances and retirement security permit it.
But retirement planning has always had an awkward uncertainty at its core: You don’t know how long you’ll live, what markets will do, what inflation will be, or what health and long-term care might cost. And nobody wants to be a financial or physical burden on their kids if they don’t have to.
Telling retirees simultaneously that they must make their money last for an unknowable lifetime — and that they should feel guilty if there isn’t enough left over afterward — seems like an interesting, if conflicted, set of expectations.
So perhaps before criticizing Boomers for spending their children’s inheritance, we should remember how much inheritance most of them started with.
For a lot of them — most of them — the answer was pretty simple.
Not much.
An inheritance is a wonderful thing to receive.
It just shouldn’t be a retirement plan. And it shouldn’t undermine one, either.
- Nevin E. Adams, JD
[i] See How Important Are Inheritances for Baby Boomers? – Center for Retirement Research.
[ii] See Federal Reserve Board - How Does Intergenerational Wealth Transmission Affect Wealth Concentration? Accessible Data.
[iii] See https://www.cerulli.com/press-releases/cerulli-anticipates-124-trillion-in-wealth-will-transfer-through-2048
[iv] Wealth management practices, take note!
[v] Of course, they/we also lived through some pretty tumultuous market cycles.
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